Working Paper #2012-08 – Chronic Species Scarcity and Efficient Barter: The Problem of Maintaining an Outside Money Supply in British Colonial America

Department of Economics
University of Delaware
Working Paper #2012-08

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

Farley Grubb

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.
 

JEL Codes: , B22, B31, D61, E41, E42, E52, F11, F41, F54, N11, N21, N41

Keywords: Adam Smith, barter, Benjamin Franklin, bills of credit, colonial America, currency substitution, endogenous money, fiat currency, gold and silver money, inside money, money scarcity, outside money, paper money, quantity theory of money, specie money, specie-flow mechanism, transaction cost.