Monetary Policy and the Dollar
In this essay I propose that the adoption of the U.S. dollar as a common currency shortly after the ratification of the Federal Constitution and the accompanying transition from a fiat to specie standard was a pivotal moment in the nation's early history and marked an improvement over the monetary systems of colonial America and under the Articles of Confederation. This is because the dollar and all that came with it monetized the modern sector of the U.S. economy and tied the supply of money more closely to the capital market and the provision of credit -- feats that were not possible in an era when colonial legislatures were unable to credibly commit to controlling paper money emissions. The switch to a specie standard was at the time necessary to promote domestic and international confidence in the nascent financial system, and paved the way for the long transition to the point when the standard was no longer required.
The author thanks Michael Bordo, Douglas Irwin, Richard Sylla, and participants at the NBER's conference on "Founding Choices: American Economic Policy in the 1790s" for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Monetary Policy and the Dollar, Peter L. Rousseau. in Founding Choices: American Economic Policy in the 1790s, Irwin and Sylla. 2011