A New Approach to Solving the Colonial Monetary Puzzle :

The views expressed in the Working Paper Series are those of the author(s) and do not necessarily reflect those of the Department of Economics or of the University of Delaware. Working Papers have not undergone any formal review and approval and are circulated for discussion purposes only and should not be quoted without permission. Your comments and suggestions are welcome and should be directed to the corresponding author. Copyright belongs to the author(s). 1 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. The British North American colonies were the first western economies to emit sizeable amounts of colony-specific paper money, also called bills of credit. These bills were emitted directly by their respective colonial legislatures and not by banks. No specie-based commercial banks issuing paper banknotes exchangeable for specie on demand existed in British North America in this era. 2 Explaining how colonial paper money regimes performed has proven controversial. Scholars have found that the statistical relationships between the quantity of paper money in Colonial legislatures had paper money printed and placed in their respective colonies' treasuries. They directly spent this money on soldiers' pay, military provisions, government salaries, and so on. In some cases, they loaned it out on interest to their respective subjects who secured these loans by pledging their lands as collateral. This legislature-issued paper money formed an important part of the circulating medium of exchange in many 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. 2 Banks successfully emitting paper banknotes backed by fractional specie reserves would not appear in English-speaking North America until near the end of the American Revolution. The first joint-stock specie-based bank was the Bank of North America chartered by Congress and by …