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The relationship between money and prices: some historical evidence reconsidered

  • Bruce D. Smith

This article describes a debate about the validity of the quantity theory of money and offers further evidence against it. The evidence is primarily from the North American colonies of Virginia, New York, and Pennsylvania and regards the issue of measuring the money supply. Studies have shown that changes in colonial money and inflation are inconsistent with the quantity theory. Some have argued that those studies measure money wrong: specie belongs in the measure because the colonies were on a fixed exchange rate system with Britain; changes in colonial paper money were offset by specie flows. When specie is counted, the quantity theory stands. This study responds with evidence that the critics are wrong: the colonies had no such fixed exchange rate regime, and movements in the stock of colonial paper currency cannot have been offset by specie flows. ; Reprinted in Quarterly Review, Fall 2002 (v. 26, no. 4)

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1988)
Issue (Month): Sum ()
Pages: 18-32

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Handle: RePEc:fip:fedmqr:y:1988:i:sum:p:18-32:n:v.12no.3
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  1. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  2. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters, in: Money in Historical Perspective, pages 78-109 National Bureau of Economic Research, Inc.
  3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  4. Bordo, Michael D., 1986. "Explorations in monetary history: A survey of the literature," Explorations in Economic History, Elsevier, vol. 23(4), pages 339-415, October.
  5. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  6. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  7. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
  8. Hanson, John R, II, 1979. "Money in the Colonial American Economy: An Extension," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 281-86, April.
  9. Preston J. Miller, 1983. "Higher deficit policies lead to higher inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  10. Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 47-68, March.
  11. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  12. Hanson, John II, 1980. "Small notes in the American colonies," Explorations in Economic History, Elsevier, vol. 17(4), pages 411-420, October.
  13. Smith, Bruce D, 1985. "Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1178-1211, December.
  14. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
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