“If credence is given to colonial writers.” Revisiting the Colonial Money Puzzle

Chronic Specie Scarcity and Efficient Barter: The Problem of Maintaining an Outside Money Supply in British Colonial America

Farley Grubb (grubbf@udel.edu), University of Delaware (United States)

URL: http://d.repec.org/n?u=RePEc:dlw:wpaper:12-08.&r=his

Abstract: Colonial Americans complained that gold and silver coins (specie) were chronically scarce. These coins could be acquired only through importation. Given unrestricted trade in specie, market arbitrage should have eliminated chronic scarcity. A model of efficient barter and local inside money is developed to show how chronic specie scarcity in colonial America could prevail despite unrestricted specie-market arbitrage, thus justifying colonial complaints. The creation of inside fiat paper monies by colonial governments was a welfare-enhancing response to preexisting chronic specie scarcity, not the cause of that scarcity.

Review by: Manuel Bautista González

Farley Grubb

“Assuming money rather than explaining it allows economists to do money-price-output analysis without caveats” – Grubb 2012: 22

This paper distributed in NEP-HIS 2012-05-22 embeds institutional, regulatory and market constraints within a transactions cost model to account for the chronic specie scarcity affecting British colonial America. In so doing, Grubb offers interesting insights on how to tackle problems in the history of commodity money systems.

The model offered in this paper is part of Grubb’s project to assess what has been called “the colonial money puzzle”, a heated scholarly controversy on the applicability of the quantity theory of money in explaining monetary phenomena in colonial America.

In this paper, Grubb pertinently asserts the importance of measuring the dimensions and exchange mechanisms of the market sphere vis-à-vis the natural sphere of the economy, a distinction thoroughly explored by Alphons Dopsch (1930). Grubb advances the concept of efficient barter: whereas barter is understood as a very costly and inefficient way to exchange goods, efficient barter refers to the intricate structure of “store book-credit accounts with goods priced in common units of account”, either commodity-based or imaginary monies, which allowed the inhabitants of colonial America to carry business transactions in the face of specie scarcity (Grubb 2012: 16).

The concept of efficient barter allows the author to elaborate a model that accounts for the widespread complains of colonial actors about specie scarcity and their pleas for adopting paper money. Grubb’s model asserts that since individuals had an incentive to “export their specie to purchase imported goods”, a process of currency substitution made up for the lack of metallic money to conduct transactions through the adoption of efficient barter. (Grubb 2012: 28). It follows then that paper money worked as a means “to capture the value of the imported goods that only specie could buy, while also being able to efficiently execute domestic transactions”, hence increasing social welfare (Grubb 2012: 32).

Grubb’s paper is one of several works written by economic historians attempting to describe the monetary past with a more complex approach than that normally assumed by economists. “The history of money has been full of plurality until recent times” (Kuroda 2008: 7): monetary economists and historians are to portray this diversity in their models. In the light of the financial crisis of 2008, it seems relevant that monetary theory accounts for better explanations of the behavior of both endogenous and exogenous money: scholarship, theory and policy will be the main beneficiaries.


– Dopsch, Alphons. Naturalwirtschaft und Geldwirtschaft. Viena, L. W. Seidel, 1930.

– Kuroda, Akinobu. “What is the Complementarity Among Monies? An Introductory Note”. Financial History Review 15, 1 (2008): 7-15.

This entry was posted in Money & Banking, USA and tagged , , , on by .

About Manuel Bautista-González

I am a doctoral candidate in United States History at Columbia University in the City of New York. I specialize in American economic, business, entrepreneurial, financial, banking and monetary history. For my dissertation at Columbia, I study the concurrent use of domestic and foreign currencies as means of payment and their relationship with interregional and external trade circuits and financial markets in antebellum New Orleans. I am also interested in Mexican and Latin American history, global history, the history of economic thought, the history of economics as discipline and profession, the methodology of economics and economic history, as well as the broader relationship between history, economics and other social sciences.

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