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