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Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence

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  • Farley Grubb

    () (Department of Economics, University of Delaware)

Abstract

The purported failure of the classical quantity theory of money in the colonial economy is shown to be a failure of data and not a failure of theory. When new data on the quantity of specie in circulation is added to the current data on paper money and prices, and econometrically estimated in both short- and long-run monetary models, the long-debated anomaly regarding the performance of the classical quantity theory of money in the colonial economy disappears. How paper money was backed and could be exchanged for specie was important, but not in the way theorists assert.

Suggested Citation

  • Farley Grubb, 2003. "Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence," Working Papers 03-03, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:03-03
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    References listed on IDEAS

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    1. 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.
    2. McCallum, Bennett T, 1992. "Money and Prices in Colonial America: A New Test of Competing Theories," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 143-161, February.
    3. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters,in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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    6. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-1014, December.
    7. Farley Grubb, 2003. "Creating the U.S. Dollar Currency Union, 1748–1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?," American Economic Review, American Economic Association, vol. 93(5), pages 1778-1798, December.
    8. Sheridan, Richard B., 1960. "The British Credit Crisis of 1772 and The American Colonies," The Journal of Economic History, Cambridge University Press, vol. 20(02), pages 161-186, June.
    9. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    10. West, Robert Craig, 1978. "Money in the Colonial American Economy," Economic Inquiry, Western Economic Association International, vol. 16(1), pages 1-15, January.
    11. Bruce D. Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 18-32.
    12. Wicker, Elmus, 1985. "Colonial Monetary Standards Contrasted: Evidence from the Seven Years' War," The Journal of Economic History, Cambridge University Press, vol. 45(04), pages 869-884, December.
    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. Bruce D. Smith, 1985. "American Colonial Monetary Regimes: The Failure of the Quantity Theory and Some Evidence in Favour of an Alternative View," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 531-565, August.
    15. Grubb, Farley, 2004. "The circulating medium of exchange in colonial Pennsylvania, 1729-1775: new estimates of monetary composition, performance, and economic growth," Explorations in Economic History, Elsevier, vol. 41(4), pages 329-360, October.
    16. Calomiris, Charles W., 1988. "The Depreciation of the Continental: A Reply," The Journal of Economic History, Cambridge University Press, vol. 48(03), pages 693-698, September.
    17. Michener, Ron, 1988. "Backing Theories and the Currencies of Eighteenth-Century America: A Comment," The Journal of Economic History, Cambridge University Press, vol. 48(03), pages 682-692, September.
    18. Michener, Ronald, 1987. "Fixed exchange rates and the quantity theory in colonial America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 233-307, January.
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    Cited by:

    1. Rousseau, Peter L. & Stroup, Caleb, 2011. "Monetization and growth in colonial New England, 1703–1749," Explorations in Economic History, Elsevier, vol. 48(4), pages 600-613.
    2. Grubb, Farley, 2004. "The circulating medium of exchange in colonial Pennsylvania, 1729-1775: new estimates of monetary composition, performance, and economic growth," Explorations in Economic History, Elsevier, vol. 41(4), pages 329-360, October.
    3. Ronald W. Michener & Robert E. Wright, 2006. "Miscounting Money of Colonial America," Econ Journal Watch, Econ Journal Watch, vol. 3(1), pages 4-44, January.
    4. Farley Grubb, 2006. "Theory, Evidence, and Belief—The Colonial Money Puzzle Revisited: Reply to Michener and Wright," Econ Journal Watch, Econ Journal Watch, vol. 3(1), pages 45-72, January.

    More about this item

    Keywords

    Money; Economic History;

    JEL classification:

    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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