IDEAS home Printed from https://ideas.repec.org/a/fip/fedmqr/y1988isump18-32nv.12no.3.html
   My bibliography  Save this article

The relationship between money and prices: some historical evidence reconsidered

Author

Listed:
  • Bruce Smith

Abstract

This article describes a debate about the validity of the quantity theory of money and offers further evidence against it. The evidence is primarily from the North American colonies of Virginia, New York, and Pennsylvania and regards the issue of measuring the money supply. Studies have shown that changes in colonial money and inflation are inconsistent with the quantity theory. Some have argued that those studies measure money wrong: specie belongs in the measure because the colonies were on a fixed exchange rate system with Britain; changes in colonial paper money were offset by specie flows. When specie is counted, the quantity theory stands. This study responds with evidence that the critics are wrong: the colonies had no such fixed exchange rate regime, and movements in the stock of colonial paper currency cannot have been offset by specie flows. ; Reprinted in Quarterly Review, Fall 2002 (v. 26, no. 4)

Suggested Citation

  • Bruce Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Sum), pages 18-32.
    • Handle: RePEc:fip:fedmqr:y:1988:i:sum:p:18-32:n:v.12no.3
    as

    Download full text from publisher

    File URL: http://minneapolisfed.org/research/qr/qr1232.pdf
    Download Restriction: no
    File URL: http://minneapolisfed.org/research/qr/qr1232.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bordo, Michael D., 1986. "Explorations in monetary history: A survey of the literature," Explorations in Economic History, Elsevier, vol. 23(4), pages 339-415, October.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(1), pages 47-68, March.
    4. 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.
    5. 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.
    6. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters, in: Money in Historical Perspective, pages 78-109, National Bureau of Economic Research, Inc.
    7. Neil Wallace, 1983. "A legal restrictions theory of the demand for \\"money\\" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 7(Win).
    8. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 207-222.
    9. Bruce Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 8(Win).
    10. Preston J. Miller, 1983. "Higher deficit policies lead to higher inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 7(Win).
    11. Bordo, Michael D. & Marcotte, Ivan A., 1987. "Purchasing power parity in colonial America: Some evidence for South Carolina 1732-1774 a comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 311-323, January.
    12. 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.
    13. Riley, James C. & McCusker, John J., 1983. "Money supply, economic growth, and the quantity theory of money: France, 1650-1788," Explorations in Economic History, Elsevier, vol. 20(3), pages 274-293, July.
    14. 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.
    15. Richard A. Lester, 1938. "Currency Issues to Overcome Depressions in Pennsylvania, 1723 and 1729," Journal of Political Economy, University of Chicago Press, vol. 46(3), pages 324-324.
    16. Hanson, John II, 1980. "Small notes in the American colonies," Explorations in Economic History, Elsevier, vol. 17(4), pages 411-420, October.
    17. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    18. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peter L. Rousseau, 2010. "Monetary Policy and the Dollar," NBER Chapters, in: Founding Choices: American Economic Policy in the 1790s, pages 121-149, National Bureau of Economic Research, Inc.
    2. Paul De Grauwe & Magdalena Polan, 2014. "Is Inflation always and Everywhere a Monetary Phenomenon?," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 14, pages 357-382, World Scientific Publishing Co. Pte. Ltd..
    3. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gary Pecquet & Clifford Thies, 2010. "Money in occupied New Orleans, 1862–1868: A test of Selgin’s “salvaging” of Gresham’s Law," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 111-126, June.
    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, 2003. "Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence," Working Papers 03-03, University of Delaware, Department of Economics.
    5. 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.
    6. Michael Sproul, 1998. "Backed Money, Fiat Money, and the Real Bills Doctrine," UCLA Economics Working Papers 774B, UCLA Department of Economics.
    7. Michael Sproul, 1998. "The Quantity Theory versus the Real Bills Doctrine in Colonial America," UCLA Economics Working Papers 775B, UCLA Department of Economics.
    8. Preston J. Miller & William Roberds, 1992. "How little we know about deficit policy effects," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 16(Win), pages 2-11.
    9. Peter L. Rousseau, 2010. "Monetary Policy and the Dollar," NBER Chapters, in: Founding Choices: American Economic Policy in the 1790s, pages 121-149, National Bureau of Economic Research, Inc.
    10. Highfield, Richard A. & O'Hara, Maureen & Smith, Bruce, 1996. "Do open market operations matter? Theory and evidence from the Second Bank of the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 479-519.
    11. 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.
    12. Gary M. Pecquet & Clifford F. Thies, 2006. "Texas Treasury Warrants, 1861-1865: A Test Of The Tax-Backing Of Money," Eastern Economic Journal, Eastern Economic Association, vol. 32(2), pages 191-203, Spring.
    13. 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.
    14. Cutsinger, Bryan P. & Rouanet, Louis & Ingber, Joshua S., 2023. "Assignats or death: The politics and dynamics of hyperinflation in revolutionary France," European Economic Review, Elsevier, vol. 157(C).
    15. David Laidler, 1991. "The Quantity Theory is Always and Everywhere Controversial—Why?," The Economic Record, The Economic Society of Australia, vol. 67(4), pages 289-306, December.
    16. Bordo, Michael D., 1986. "Explorations in monetary history: A survey of the literature," Explorations in Economic History, Elsevier, vol. 23(4), pages 339-415, October.
    17. Sargent, Thomas J, 1982. "Beyond Demand and Supply Curves in Macroeconomics," American Economic Review, American Economic Association, vol. 72(2), pages 382-389, May.
    18. P. Antipa & C. Chamley, 2017. "Monetary and Fiscal Policy in England during the French Wars (1793-1821)," Working papers 627, Banque de France.
    19. Farley Grubb, 2016. "Is Paper Money Just Paper Money? Experimentation and Variation in the Paper Monies Issued by the American Colonies from 1690 to 1775," Research in Economic History, in: Research in Economic History, volume 32, pages 147-224, Emerald Group Publishing Limited.
    20. Farley Grubb, 2014. "A New Approach to Explaining the Value of Colonial Paper Money: Evidence from New Jersey, 1709-1775," Working Papers 14-08, University of Delaware, Department of Economics.

    More about this item

    Keywords

    Economic history; Money theory;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedmqr:y:1988:i:sum:p:18-32:n:v.12no.3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kate Hansel (email available below). General contact details of provider: https://edirc.repec.org/data/cfrbmus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.