A long-standing but unsettled controversy concerning monetary
experiences in colonial America has recently been reopened with considerable
vigor. Ignoring doctrinal aspects, the main substantive issue concerns the
relationship between money holdings and price levels during episodes in which
various colonial governments issued paper currency (bills of credit) in large
amounts. In several instances, large and rapid increases in the stock of
outstanding paper currency led to negligible changes in price levels. But
alternative interpretations are possible, since colonial money included
specie as well as paper currency. According to the "quantity theory" or
classical hypothesis, total money stock magnitudes did not rise sharply
during the disputed episodes; instead, the sharp paper currency increases led
to corresponding losses of specie--as suggested by standard commodi ty-money
analysis. According to the "backing theory" or anti-classical hypothesis, by
contrast, there was little specie present so money stock magnitudes could and
did rise sharply (in percentage terms). This fundamental factual
disagreement has eluded resolution because data on both stocks and flows of
specie are almost nonexistent.
The present study develops and applies a strategy for circumventing the
unavailability of specie data by exploiting conflicting implications of the
two hypotheses regarding magni tudes of real per capi ta holdings of paper
currency, relative to normal real money balances, at dates of maximum paper
issue. A major feature of the analysis is a new method for the estimation of
normal real money holdings, one that relies on paper currency data for a few
inflationary episodes.
*Published:
Journal of Political Economy, Vol. 100, No. 1, pp. 143-161, (1992).
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