A New Approach to Solving the Colonial Monetary Puzzle: Evidence from New Jersey, 1709-1775
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.
Previously circulated as "A New Approach to Explaining the Value of Colonial Paper Money: Evidence from New Jersey, 1709-1775." Preliminary versions were presented at Harvard Law School, National Bureau of Economic Research (NBER) Summer Institute program on the Development of the American Economy, Cambridge, MA, 2014; Wake Forest University, the Paris School of Economics, University of Delaware, and the 2013 meetings of the American Studies Association. The author thanks the participants for helpful comments. Research assistance from Changqing Mu and Lucero Pizano and editorial assistance from Tracy McQueen are gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Farley Grubb, "Colonial New Jersey Paper Money, 1709-1775: Value Decomposition and Performance," Journal of Economic History, 76, no. 4 (Dec. 2016), pp. 1216-1232.