The author is Associate Professor of Economics, University of Virginia, Charlottesville, VA 22901. He wishes to thank Charles Calomiris, Joseph Ernst, and the participants of the Virginia macro workshop for comments, and Claudia Goldin for numerous editorial improvements.

¹ A clear statement of the theoretical basis for the backing theory is Sargent, Thomas J., Dynamic Macroeconomic Theory (Cambridge, 1987),Google Scholar chap. 8. The idea stems from Wallace, Neil. “A Modigliani-Miller Theorem for Open-Market Operations,” American Economic Review, 71 (06 1981), pp. 267–74.Google ScholarWaldo, Douglass points out some of the limitations of the Sargent and Wallace model in “Open Market Operations in an Overlapping Generations Model,” Journal of Political Economy, 93 (12 1985), pp. 1242–57.CrossRefGoogle Scholar

² See Smith, Bruce D., “American Colonial Monetary Regimes: The Failure of the Quantity Theory and Some Evidence in Favor of an Alternative View,” Canadian Journal of Economics, 18 (08 1985), pp. 531–64;CrossRefGoogle Scholar“Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas,” Journal of Political Economy, 93 (12 1985), pp. 1178–1211;Google ScholarWicker, Elmus, “Colonial Monetary Standards Contrasted: Evidence from the Seven Years' War,” this JOURNAL, 45 (12 1985), pp. 869–84;Google ScholarCalomins, Charles W., “Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental” this JOURNAL, 48 (03 1988), pp.47–68.Google Scholar

³ The argument sketched here is developed in detail in my paper “Fixed Exchange Rates and the Quantity Theory in Colonial America,” Carnegie-Rochester Conference Series on Public Policy, 27 (Autumn 1987), pp. 233–308.Google Scholar Maryland, unlike other colonies, adopted a traditional backing scheme, and backing probably mattered in Maryland. In the same volume see Bordo, Michael D. and Marcotte, Ivan A., “Purchasing Power Parity in Colonial America: Some Evidence for South Carolina 1732–1774”, pp. 311–24;Google ScholarLaidler, David, “ Wicksell and Fisher on the ‘Backing’ of Money and the Quantity Theory,” pp. 325–34.Google Scholar Many of the arguments in my paper were anticipated by Leslie V. Brock, “The Colonial Currency, Prices, and Exchange Rates,” Brock papers, Alderman Library, University of Virginia. See also Bernholz, Peter, “Inflation, Monetary Regime and the Financial Asset Theory of Money,” Kyklos, 41 (Fasc. 1, 1988), pp. 5–34.CrossRefGoogle Scholar

⁴ Specie outflows were mentioned as a possibility by Wicker, , “Colonial Monetary Standards Contrasted”, p. 878. Smith discussed the possibility at length and dismissed it; “ American Colonial Monetary Regimes”, p. 538; “Some Colonial Evidence,” pp. 1185–86. The case for offsetting specie flows is made in Michener, “Fixed Exchange Rates,” pp. 275–94, and Brock, “The Colonial Currency”.Google Scholar

⁵ Smith, , “Some Colonial Evidence”, p. 1187.Google Scholar

⁶ Ferguson, E. James, The Power of the Purse (Chapel Hill, 1961), pp. 30–31.Google Scholar

⁷ Ibid. p. 31. Harlow, Ralph V., “Aspects of Revolutionary Finance,” American Historical Review, 35 (10 1929), p. 50.Google Scholar

⁸ Calomiris, , “Institutional Failure,” pp.65–66.Google Scholar

⁹ Smith, , “Amercian Colonial Monetary Regimes,” p. 562; “Some Colonial Evidence,” pp.1192–93.Google Scholar

¹⁰ Table 2 and figure 1 of Calomiris's article use data derived from Bullock for the period up to December 1779. Bullock's figures do not give the current paper/specie exchange rate. They measure, instead, “the highest rate of depreciation found in any of the States two months after the resolve of Congress authorizing the issue.” See Bullock, Charles, “The Finances of the United States From 1775 to 1789, With Special Reference to the Budget,” Bulletin of the University of Wisconsin, 1 (06 1895), pp. 134–35. Bullock realized that paper money did not go into circulation on the day it was authorized, and he guessed that the process of printing, signing, and transporting took about two months. Calomiris, not realizing what Bullock had done, represents Bullock's numbers as estimates of the current price of specie, and assumes money entered circulation on the day it was authorized. The specie prices Calomiris uses for the period after December 1779 are not time shifted, because they come from a different source. Splicing these two series together causes a slight but noticeable discontinuity in the specie price in Calomiris's table 2.Google Scholar

¹¹ The $40 million listed in table 2 of Calomiris for “January and May, 1779” refers to a $50 million authorization. Congress authorized some of this money to replace the counterfeited emissions dated May 20, 1777 and April 11, 1778. “These two issues amounted to $10,000,000,” wrote Bullock, “and accordingly we have placed the new issue at $40,000,000.” Bullock, , “The Finances of the United States,” p. 135,Google Scholar fn. 1. But Bullock made a subtle error in assuming that only $10 million was intended for this purpose. Although only $10 million was issued on these two dates, Congress reused the plates, and a total of $41.5 million was issued at various times bearing the two dates. This is the sum Congress intended to exchange, although only $15,230,898 was actually exchanged. Robinson, Edward F., Continental Treasury Administration, 1775–1781: A Study in the Financial History of the American Revolution (Ph.D. dissertation, University of Wisconsin, 1969), table 1, pp. 323–26.Google Scholar Whether the $26 million authorized for the exchange but never used for this purpose got into circulation is a matter of speculation. Congress implicitly claimed it did not, for it maintained that only $200 million was issued in total, a sum which is correct if the entire $41.5 million is excluded. Some historians count the residual $26 million as having been put into circulation. Ferguson, , Power of the Purse, p. 30. In the following, I exclude the entire $41.5 million.Google Scholar

¹² Robinson, , Continental Treasury Administration, p. 118.Google Scholar

¹³ Bezanson, Anne, Prices and Inflation during the American Revolution (Philadelphia, 1951), appendix table 3, p. 344.Google Scholar

¹⁴ Webster, Pelatiah, Political Essays on the Nature and Operation of Money, Public Finances … and other Subjects (Philadelphia, 1791), p. 142.Google Scholar

¹⁵ See McCusker, John J. and Menard, Russell R., The Economy of British America, 1607–1789 (Chapel Hill, 1985), pp. 338–39;Google Scholar and Rockoff, Hugh's estimate of the money supply, 1774–81, in Drastic Measures (Cambridge, 1984), table 2.1, p. 25.CrossRefGoogle Scholar But Hamilton greatly overestimated the quantity of colonial currency outstanding. See Michener, , “Fixed Exchange Rates,” pp. 278–79.Google Scholar

¹⁶ Webster, Pelatiah, Political Essays, p. 6 fn.Google Scholar

¹⁷ McCusker, and Menard, , The Economy of British America, p. 338, fn. 14.Google Scholar

¹⁸ Philip Mazzei: Selected Writings and Correspondence, edited by Marchione, Margherita, (Edizioni del Palazzo, 1983), vol. 1, p. 325.Google Scholar

¹⁹ Webster, Noah, A Collection of Essays and Fugitive Writings (Boston, 1790), p. 133.Google Scholar Lord Sheffield wrote that “The cash or specie of the American States, previous to the Non-importation act, which took place in 1775, is computed to have been between two and three millions.” Sheffield wrote in Great Britain, so this is two or three million pounds sterling, equivalent to 8.6 to 12.9 million dollars. Lord (John Baker Holroyd) Sheffield, , Observations on the Commerce of the American States (Dublin, 1784), pp. 170–71.Google Scholar

²⁰ “Report of the Committee on the Expediency of a Continental Paper Currency,” American Archives, 4th series, vol. 2, p. 1262. Italics are in the original.Google Scholar

²¹ Webster, Noah, Collection of Essays, p. 133. See also p. 191. Italics are in the original.Google Scholar

²² Bullock, Charles, “The Finances of the United States From 1775 to 1789, With Special Reference to the Budget,” Bulletin of the University of Wisconsin, 1 (06 1895), p. 191.Google Scholar See also Jefferson's statement cited in Schuckers, J. W., A Brief Account of the Finances and Paper Money of the Revolutionary War (Philadelphia, 1874), p. 16.Google ScholarBezanson, , Prices and Inflation, pp. 14, 29, 35.Google Scholar

²³ Bezanson, , Prices and Inflation, pp. 29–30;Google ScholarRobinson, , Continental Treasury Administration, p. 74, fn. 6.Google Scholar

²⁴ Bezanson, , Prices and Inflation, pp. 29–30, 35. See also “Letter from a Farmer” in Independent Chronicle and the Universal Advertiser, a Boston newspaper dated Aug. 10, 1780. I am indebted to Joseph Ernst for this latter reference.Google Scholar

²⁵ Bullock, Charles, “The Finances of the United States From 1775 to 1789, With Special Reference to the Budget,” Bulletin of the University of Wisconsin, 1 (06 1895), p. 14.Google Scholar See also Webster, , Collection of Essays, p. 191;Google ScholarSchuckers, , A Brief Account, p. 16.Google Scholar

²⁶ Specie scarcely circulated, but did serve in a limited way as a store of value. See Adams, Charles, Familiar Letters of John Adams and his Wife Abigail Adams, during the Revolution (New York, 1876), pp. 361, 365. I thank Joseph Ernst for this reference.Google Scholar

²⁷ British counterfeiting is discussed in Bolles, Albert S., Financial History of the United States From 1774 to 1789 (New York, 1892), pp. 150–57.Google Scholar

²⁸ Robinson, , Continental Treasury Administration, pp. 109–110.Google Scholar

²⁹ Ferguson, , Power of the Purse, pp. 53–55.Google Scholar

³⁰ Bolles, , Financial History, pp. 260–61.Google Scholar

³¹ Robinson, , Continental Treasury Administration, table 9, p. 342. According to Bolles, the total issued was $68.2 million. Financial History, p. 264.Google Scholar

³² See Ferguson, , Power of the Purse, pp. 57–64.Google Scholar

³³ Bullock, Charles, “The Finances of the United States From 1775 to 1789, With Special Reference to the Budget, ” Bulletin of the University of Wisconsin, 1 (06 1895), p. 63.Google Scholar

³⁴ Bullock, Charles, “The Finances of the United States From 1775 to 1789, With Special Reference to the Budget, ” Bulletin of the University of Wisconsin, 1 (06 1895), p. 65.Google Scholar

³⁵ Calomiris, , “Institutional Failure,” p. 59.Google Scholar

³⁶ Ferguson, , Power of the Purse, p. 66.Google Scholar

³⁷ Robinson, , Continental Treasury Administration, table 8, p. 340.Google ScholarBullock, concurs. Finances of the United States, p. 138. Ferguson, however, believes that there is no way to be sure how many new bills were actually issued. Power of the Purse, p. 66, fn. 28.Google Scholar

³⁸ Alter the depreciation had largely run its course, bills were accepted in taxes at a small fraction of face value, counted, and destroyed. See Robinson, , Continental Treasury Administration, pp. 154–55 and p. 238, fn. 33. By 1785, more than $150,000,000 in continental currency had been collected and burned.Google Scholar

³⁹ Calomiris, , “Institutional Failure,” pp. 55–56, fn. 17, 20.Google Scholar

⁴⁰ For example, Pennsylvania authorized 1,516,667 in state currency in 1780 alone, worth approximately $45,000,000 continental dollars. Robinson, , Continental Treasury Administration, p. 328;Google ScholarBezanson, , Prices and Inflation, table 4, p. 345.Google Scholar

⁴¹ Before depreciation commenced, interest-bearing emissions generally did not circulate as a medium of exchange. See Michener, , “Fixed Exchange Rates,” pp. 242–44;Google ScholarBolles, , Financial History, p. 260;Google ScholarFranklin, Benjamin, “Remarks and Facts Relative to the American Paper Money” in The Works of Franklin, vol. 2, Sparks, Jared, ed. (Boston, 1858), pp. 352–53;Google Scholar and the letter of Baker, Jerman to Rose, Duncan, 02 15, 1764, reproduced in The William and Mary Quarterly, 12 (04 1904), pp. 240–41.Google Scholar

⁴² Webster, Noah, Collection of Essays, p. 191.Google ScholarWebster, Pelatiah, Political Essays, p. 75Google Scholar fn. cited exactly the same causes as Noah Webster. The account of Lord Sheffield differs only in details. Lord (John Baker Holroyd) Sheffield, , Observations on the Commerce, pp. 170–71.Google Scholar See also Bezanson, , Prices and Inflation, pp. 46–47, 49; Philip Mazzei: Selected Writings, vol. 1, pp. 329–30; and The Works of John Adams (Boston, 1852), vol. 7, p. 359.Google Scholar

⁴³ Price controls and legal tender acts are discussed in Bolles, , Financial History, chaps. 12–13; and in Rockoff, , Drastic Measures, chap. 2.Google Scholar

⁴⁴ The best discussions of the role of credit and bookkeeping barter in the colonies are contained in Soltow, James H., The Economic Role of Williamsburg (Charlottesville, 1965), pp. 128–55;Google Scholar and in Baxter, William T., The House of Hancock (Cambridge, Mass., 1945), pp. 11–36.CrossRefGoogle Scholar

⁴⁵ From a letter of Henry Laurens to Rutledge, John, 09 10, 1777,Google Scholar published in Burnett, Edmund C., ed., Letters of Members of the Continental Congress (Washington, D.C., 1923), vol. 2, pp. 490–91.Google Scholar