The British North American colonies were the first western economies to emit sizable
amounts of colony-specific paper money, called bills of credit. In 1709, New Jersey became the
third colony, along with Connecticut, New Hampshire, and New York, to begin experimentations
with paper money. Massachusetts was the first in 1690, and South Carolina was the second in
1703. These bills were emitted directly by their respective colonial legislatures and not by banks.
No specie-based commercial banks existed in America in this era. Colonial legislatures had
paper money printed and placed in their respective colony’s treasury. Then they directly spent it
on soldier’s pay, government salaries, prison construction, etc. In some cases, they loaned it out
on interest to their respective subjects who secured these loans with mortgages on the respective
subject’s lands. Once initiated, colonial legislatures, with irregular frequency, continued to make
periodic emissions of new paper money. New Jersey’s longest span of authorizing no new
emissions was from 1765 to 1775. This legislature-issued paper money formed a significant part
of the circulating medium of exchange in many British North American colonies.
Explaining how colonial paper money regimes performed has proven controversial. The
Colonial monetary puzzle has remained unsolved. Economists have found that relationships
between data on money in circulation, prices, and exchange rates are not easily explained by
standard monetary models, which in turn has sparked heated debates over what models best fit
colonial monetary behavior. Often heroic efforts are required to make sense of colonial paper
money performance. Some of this controversy comes from a failure to recognize the functional
differences between colonial and modern paper monies. More importantly, the colonial data are
often inaccurate and incomplete, gathered from outdated and poorly documented sources. Poor
data leads to erroneous statistical estimates and, thus, poor modeling performance.
For example, the most recent compilation, and current go-to place, for colonial paper
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money in circulation is Historical Statistics of the United States: Earliest Times to the Present,
Millennial Edition. The data therein was compiled by John J. McCusker. For New Jersey, this
data shows no paper money in circulation between 1709 and 1724. McCusker relied on Brock
who gathered his data in 1941. Brock reported that New Jersey emitted paper money between
1709 and 1724, but then listed no New Jersey bills in circulation before 1724. Brock stated, “It is
impossible to follow the retirement of the early issues with precise accuracy.” Because he could
not figure out the amount of bills redeemed, he could not calculate the amount of bills left in
circulation, thereby leaving the erroneous impression that no bills were in circulation before
1724. This erroneous impression was carried over into the Historical Statistics of the United
States: Earliest Times to the Present, Millennial Edition. Therefore, scholars using this source
will have incomplete and inaccurate data, operating under an impression that no New Jersey
paper money was in circulation before 1724. The forensic accounting exercise here corrects this
oversight.
New Jersey paper money has not been systematically analyzed in the modern era. The
last efforts to study New Jersey paper money quantitatively were between 1939 and 1956. After
these efforts, a more complete compilation of colonial New Jersey laws became available. This
makes colonial New Jersey a promising candidate for updating and improving the data on its
paper money regime. The focus here will be on data reconstruction and assessment, largely
abstracting from the political history of paper money in New Jersey.
New Jersey was also chosen for this data reconstruction exercise because it printed the
face value equivalence of New Jersey pounds to silver plate on the face of each bill. This action
established the specie value of the nominal face value of a New Jersey bill at redemption. With
the exception of post-1764 Maryland paper money, other colonies did not print the specie value
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on the face of their paper monies. Knowing with certainty the specie value of bills upon
redemption is important for estimating the time path of their true present value.
The first section of the paper presents the forensic accounting exercise that reconstructs
the data on colonial New Jersey’s paper money regime, providing a more complete and nuanced
accounting of that regime than what has been done previously for any British North American
colony. Three components comprise this quantitative history, namely new emissions,
redemptions for the purpose of retirement, and the amounts currently outstanding, i.e. in
circulation. These three components are further separated into the amounts initially legislated
and planned, and the amounts actually executed. Redemptions for the purpose of retirement
entailed removing paper money from circulation with it being subsequently destroyed. New
emissions and redemptions are taken from original sources. The amounts outstanding are derived
by subtracting redemptions from new emissions. Occasionally the amounts outstanding were
mentions in the original sources, which in turn served as an alignment check on this procedure.
These new data are substantial revisions and improvements over that reported previously in the
literature. An appendix provides a complete comparison of these estimates with that previously
reported.
The last section of the paper will introduce a new method for determining what governed
the value of colonial New Jersey paper money. This method relies on the distinctive nature of
colonial paper money as bills of credit rather than as just another fiat currency. It is shown that
New Jersey paper monies were designed to perform like a zero-interest bearer bond. With the
new data information on emission and redemption structures, the discounted present value of
New Jersey paper money, under the assumption of certainty of redemption, is calculated at each
point in time. This is the real asset value of the bills as a barter good as opposed to its unique
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value as money. This real asset value is compared with the market value of the bills as measured
by their exchange rate to pounds sterling. How much of this market valuation is explained by the
real asset value is then estimated.
More formally, a paper money's market value (MV) equals it is real asset value as just a
barter good under certainty (AV), plus its unique value as a medium of exchange, i.e. its
"moneyness" or excess liquidity premium (LP), minus any risk discount (RD) attached to the
uncertainty in the asset valuation of the bills. MV = AV + (LP - RD). I measure MV and AV and
thus [MV - AV] = [LP - RD]. Setting RD = 0 for the moment, means that I can measure the
value of the "moneyness" component (LP) of colonial New Jersey paper money. Preliminary
estimates indicate that 93 percent of MV is explained by AV leaving at most only 7 percent
explained by LP. Colonial paper money was treated primarily as a negotiable or barter bond and
not as "money" in the modern fiat money sense. There was little "moneyness" value to colonial
paper money. This finding, if it holds up for other colonies, solves the colonial monetary puzzle.
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