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A New Approach to Solving the Colonial Monetary Puzzle: Evidence from New Jersey, 1709-1775

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  • Farley Grubb

Abstract

The market value of colonial New Jersey's paper money is decomposed into its real asset present value and its liquidity premium. Its real asset present value accounted for over 80 percent, whereas its value as money per se accounted for under 20, percent of its market value. Colonial paper money was not a fiat currency. Its liquidity premium was driven by the quantity of paper money in circulation and the method of injection. The quantity theory of money performs poorly when using prices and exchange rates, but performs well when using real asset present values, to measure paper money's expected value.

Suggested Citation

  • Farley Grubb, 2014. "A New Approach to Solving the Colonial Monetary Puzzle: Evidence from New Jersey, 1709-1775," NBER Working Papers 19903, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19903
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    File URL: http://www.nber.org/papers/w19903.pdf
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    References listed on IDEAS

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    1. Alvin Rabushka, 2008. "Introduction to Taxation in Colonial America," Introductory Chapters,in: Taxation in Colonial America Princeton University Press.
    2. Officer, Lawrence H., 2005. "The quantity theory in New England, 1703-1749: new data to analyze an old question," Explorations in Economic History, Elsevier, vol. 42(1), pages 101-121, January.
    3. 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.
    4. Sumner, Scott, 1993. "Colonial Currency and the Quantity Theory of Money: A Critique of Smith's Interpretation," The Journal of Economic History, Cambridge University Press, vol. 53(01), pages 139-145, March.
    5. 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.
    6. Rousseau, Peter L., 2006. "A common currency: early US monetary policy and the transition to the dollar," Financial History Review, Cambridge University Press, vol. 13(01), pages 97-122, April.
    7. Thayer, Theodore, 1953. "The Land-Bank System in the American Colonies," The Journal of Economic History, Cambridge University Press, vol. 13(02), pages 145-159, March.
    8. 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.
    9. 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.
    10. Hanson, John R, II, 1979. "Money in the Colonial American Economy: An Extension," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 281-286, April.
    11. Grubb, Farley, 1988. "The Auction of Redemptioner Servants, Philadelphia, 1771–1804: An Economic Analysis," The Journal of Economic History, Cambridge University Press, vol. 48(03), pages 583-603, September.
    12. 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.
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    Cited by:

    1. Farley Grubb, 2015. "Colonial New Jersey's Provincial Fiscal Structure, 1709-1775: Spending Obligations, Revenue Sources, and Tax Burdens in War and in Peace," NBER Working Papers 21152, National Bureau of Economic Research, Inc.
    2. Farley Grubb, 2012. "Is Paper Money Just Paper Money? Experimentation and Variation in the Paper Monies Issued by the American Colonies from 1690 to 1775," NBER Working Papers 17997, National Bureau of Economic Research, Inc.
    3. Farley Grubb, 2016. "Colonial Virginia's Paper Money Regime, 1755-1774: Value Decomposition and Performance," NBER Working Papers 21881, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913

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