A common currency: Early US monetary policy and the transition to the dollar

Financial History Review

Volumn 13, Issue 1, 2006, Pages 97-122

  Rousseau, Peter L ^a  

^a VANDERBILT UNIVERSITY   (United States)

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EID: 33645555188     PISSN: 09685650     EISSN: 14740052     Source Type: Journal    
DOI: 10.1017/S0968565006000072     Document Type: Review

References (64)

1. See, for example, R. Sylla, 'US securities markets and the banking system, 1790-1840', Federal Reserve Bank of St. Louis Review, 80 (1998);
2. P. L. Rousseau and R. Sylla, 'Emerging financial markets and early US Growth', Explorations in Economic History, 42 (2005) and Working Paper No. 7448, National Bureau of Economic Research (1999);
3. R. E. Wright, The Wealth of Nations Rediscovered (Cambridge, 2002).
4. See the discussion in E. J. Ferguson, 'Currency finance: an interpretation of colonial monetary practices', William and Mary Quarterly (1953), pp. 153-4.
5. L. V. Brock, The Currency of the American Colonies, 1700-1764: a Study in Colonial Finance and Imperial Relations (New York, 1975);
6. Brock, 'The colonial currency, prices, and exchange rates', Essays in History, 34 (1992);
7. Ferguson, 'Currency finance';
8. E. J. Perkins, American Public Finance and Financial Services, 1700-1815 (Columbus, OH, 1994).
9. C. W. Calomiris, 'Institutional failure, monetary scarcity, and the depreciation of the continental', Journal of Economic History, 48 (1988).
10. See also R. E. Wright, Origins of Commercial Banking in America, 1750-1800 (London, 2001) for commentary on the under-monetisation of the colonial economy based on historical letters and other qualitative evidence.
11. Farley Grubb, 'Creating the US dollar currency union, 1748-1811 : a quest for monetary stability or a usurpation of state sovereignty for personal gain?' American Economic Review, 93 (2003).
12. R. Michener and R. E. Wright, 'State "currencies" and the transition to the dollar: clarifying some confusions', American Economic Review, 95 (2005).
13. Brock, Currency of the American Colonies, p. 532.
14. A. Bezanson, Prices and Inflation During the American Revolution: Pennsylvania 1770-1790 (Philadelphia, 1951), p. 10.
15. R. A. Lester, 'Currency issues to overcome depressions in Pennsylvania, 1723 and 1729', Journal of Political Economy, 46 (1938), p. 326.
16. J. J. McCusker and R. R. Menard, The Economy of British America: 1607-1789 (Chapel Hill, NC, 1985).
17. Farley Grubb, 'The circulating medium of exchange in colonial Pennsylvania, 1729-1775: new estimates of monetary composition, performance, and economic growth', Explorations in Economic History, 41 (2004).
18. A. H. Jones, Wealth of a Nation to Be: the American Colonies on the Eve of the Revolution (New York, 1980);
19. R. Michener, 'Fixed exchange rates and the quantity theory in colonial America', Carnegie-Rochester Conference. Series on Public Policy, 27 (1987), p. 258.
20. B. D. Smith, 'The relationship between money and prices: some historical evidence reconsidered', Federal Reserve Bank of Minneapolis Quarterly Review, 12 (1988), p. 29. Smith also includes a summary of other estimates of the colonial money supplies and the conceptual problems associated with each.
21. McCusker and Menard, 'Colonial paper money', pp. 264-5.
22. Michener, 'Fixed exchange rates', pp. 278-9,
23. and 'Money in the American colonies', EH Net Encyclopedia (2003), discusses various inconsistencies that he finds in McCusker and Menard's calculation.
24. The British government did, however, as a matter of policy, ship specie to the colonies to pay troops stationed there.
25. B. D. Smith, 'Some colonial evidence on two theories of money: Maryland and the Carolinas', Journal of Political Economy, 93 (1985).
26. Michener, 'Fixed exchange rates', p. 237.
27. A. J. Rolnick, B. D. Smith and W. E. Weber, 'In order to form a more perfect monetary union', Federal Reserve Bank of Minneapolis Quarterly Review, 17 (1993) argue instead that the colonies operated under flexible exchange rates and that the desire to eliminate them was the main reason why the US Constitution forbade state currency emissions.
28. Bills of credit in circulation for Pennsylvania are from Brock, 'Colonial currency', table 6, as corrected by Michener. For New Jersey they are from Brock, Currency of the American Colonies, table 6, p. 93, for 1724-52, and from Brock 'Colonial currency', table 5, for 1753-74. The amount of outstanding bills for New York is available on an annual basis after 1747 from Brock, 'Colonial currency', table 5.
29. From 1709-47, Brock, Currency of the American Colonies, pp. 66-73, includes records of emissions, anticipated redemptions and many actual redemptions. There are also a few benchmark estimates of the overall stock of bills. Using this information and linear interpolation for missing years in the time paths of individual issues and their retirements, I approximated the stock of bills for New York during this period.
30. Colonial populations are from US Bureau of the Census, Historical Statistics of the United States: from Colonial Times to 1970 (Washington, DC, 1975), p. 1168, series Z-9, Z-10, and Z-11, and use constant growth rates to interpolate between decadal observations. Sterling exchange rates are annual averages of local currency per £
31. sterling from J. J. McCusker, Money and Exchange, in Europe and America, 1600-1775: a Handbook (Chapel Hill, NC, 1978), table 3.5, pp. 163-7 for New York; table 3.6, pp. 172-3 for New Jersey; and table 3.7, pp. 183-8 for Pennsylvania. I use linear interpolations to fill in between occasional missing observations.
32. A. H. Cole, Wholesale Commodity Prices in the United States, 1700-1861: Statistical Supplement, Actual Wholesale Prices of Various Commodities (Cambridge, MA, 1938), pp. 31-2.
33. R. Cameron, 'England, 1750-1844', in R. Cameron, O. Crisp, H. T. Patrick and R. Tilly (eds.), Banking in the Early Stages of Industrialization: a Study in Comparative Economic History (New York, 1967).
34. I obtained this estimate by multiplying the sterling equivalent of £0.4 in 1750 by the 6.15 per cent total increase in English consumer prices between 1750 and 1900, converting to 1900 US dollars using the exchange rate of $4.87/£1, and multiplying the result by the 18-fold increase in US prices that occurred between 1900 and 2004. I built a continuous index of English prices using Historical Statistics by ratio-splicing the Schumpeter-Gilboy index for 1750-1819 (table 14.1.0, pp. 719-20) with Rousseaux's index for 1820-45 (table 14.3, p. 722) and the Sauerbeck-Statist index for 1846-1900 (table 14.4, p. 725).
35. Bills of credit for the New England colonies are from Brock, 'Colonial currency', table 1. Populations are from Historical Statistics, p. 1168, series Z-3, Z-6, Z-7, Z-11, and use constant growth rates to interpolate between decadal benchmarks. Sterling exchange rates are annual averages of local currency per £
36. sterling from McCusker, Money and Exchange, table 3.1, pp. 138-45.
37. Rolnick, Smith and Weber, 'More perfect monetary union', pp. 2-3.
38. I constructed the sterling value of outstanding bills for North and South Carolina from records of issues and likely redemptions in Brock, Currency of the American Colonies, pp. 108-29.
39. Populations (including slaves) are from Historical Statistics, p. 1168, series Z-15 and Z-16, and use constant growth rates to interpolate between decadal benchmarks. Sterling exchange rates are annual averages of local currency per 100
40. sterling from McCusker, Money and Exchange, table 3.11, pp. 217-9, and table 3.12, pp. 222-6. Linear interpolations between missing exchange rates were used if they facilitated additional observations for the sterling equivalent currency stock. Dashed lines connect endpoints of gaps in data. The plotted series for South Carolina excludes observations of £3.14 in 1712, £2.78 in 1713, £1.84 in 1714 and £1.71 in 1716.
41. The value of exports to and imports from England by New York and Pennsylvania are from Historical Statistics, series Z217-Z220, p. 1176. The foreign commerce of New Jersey was carried on through the New York and Philadelphia ports (Brock, 'Colonial currency', p. 13).
42. See Figures 7, 8 and 9 below for a comparison of exports and imports for the mid-Atlantic colonies, the New England colonies and the Carolinas, respectively.
43. See Figure 9 below for a comparison of exports and imports for the Carolinas. The value of exports to and imports from England by North Carolina and South Carolina combined are from Historical Statistics, series Z223-Z224, pp. 1176-7.
44. See, for example, R. King and R. Levine, 'Finance and growth: Schumpeter might be right', Quarterly Journal of Economics, 108 (1997);
45. P. L. Rousseau and P. Wachtel, 'Financial intermediation and economic performance: historical evidence from five industrialized countries', Journal of Money, Credit and Banking, 30 (1998).
46. Grubb, 'Creating the US dollar'.
47. P. L. Rousseau and R. Sylla, 'Financial systems, economic growth, and globalization', in M. Bordo, A. Taylor and J. Williamson (eds.), Globalization in Historical Perspective (Chicago, 2003), pp. 374-5.
48. See W. Rothenberg, 'The emergence of a capital market in rural Massachusetts, 1730-1838'', Journal of Economic History, 85 (1985).
49. Calomiris, 'Institutional failure';
50. Perkins, American Public Finance;
51. Michener and Wright, 'State "currencies"'.
52. Perkins, American Public Finance, pp. 97-8.
53. Bezanson, Prices and Inflation, p. 346.
54. See Perkins, American Public Finance, especially ch. 6.
55. Sylla, 'US securities markets'.
56. Appendix A of the NBER working paper version of Rousseau and Sylla, 'Emerging financial markets' (1999) describes the data and methods used to construct the annual series for the US money stock. See also Peter Temin, The Jacksonian Economy (New York, 1969).
57. I computed the times series mean of bills of credit for the Carolinas using only actual observations rather than including the interpolated values in Figure 6.
58. Foreign trade is the sum of total exports and imports from Historical Statistics, series U1 and U8, pp. 865-6.
59. Rousseau and Sylla, 'Emerging financial markets', pp. 6-10.
60. R. Levine and S. Zervos, 'Banks, stock markets, and economic growth', American Economic Review, 88 (1988);
61. P. L. Rousseau and Wachtel, 'Equity markets and growth: cross country evidence on timing and outcomes, 1980-1995', Journal of Banking and Finance, 24 (2000).
62. T. S. Berry, 'Production and population since 1789: revised GNP series in constant dollars', Bostwick Paper No. 6 (Richmond, VA, 1988).
63. C. A. Sims, J. H. Stock and M. W. Watson, 'Inference in time series models with some unit roots', Econometrica, 58 (1990).
64. Augmented Dickey-Fuller tests show that the four series that I consider are indistinguishable statistically from unit root processes. Tests described in S. Johansen, 'Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models', Econometrica, 59 (1991), with a constant and trend in the specification indicate that the two systems that I estimate are (cointegrated, which points to running the VARs in levels form.