Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 234 Abstract:
Current approaches to monetary theory and policy owe much to the "quantity theory of money." However, recent theoretical developments suggest that the manner in which money is introduced is more important, even for price level movements, than the quantity of money. Colonial American experience provides a laboratory for discriminating between these views. It is shown here that the nature of backing, rather than the quantity of money, determined its value. Large secular inflations were ended by changing the nature of backing despite the continuance of large note issues (and despite the absence of a metallic standard). Extremely large note issues and note withdrawals are shown not to have produced inflation (currency depreciation) or deflation (currency appreciation).
Keyword: Quantity theory, Colonial America, Fiat money, and Currency Subject (JEL): E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 245 Abstract:
Recent developments in monetary economics stress the nature of monetary injections, emphasizing that these have implications for the relationship between money and prices. In constrast, traditional approaches posit stable money demand functions that are independent of how money is injected. The former approach implies that certain proportionality relations between money and prices need not obtain. This permits the two approaches to be empirically distinguished, but only if an appropriate "experiment" is conducted. The colonial period is one such experiment. Colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply.
Keyword: Value of money, Monetary injections, Sargent-Wallace theory of money, and Quantity theory of money Subject (JEL): E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913