Creating the U.S. Dollar Currency Union, 1748-1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?

The desirability of politically creating currency unions among otherwise sovereign states is an ongoing debate. The benefits of the U.S. currency union and the benefits of other politically manufactured currency unions are assumed to be obvious, namely a reduction in monetary instability and exchange rate transaction costs within the union thereby stimulating long-run economic growth. Price indices, exchange rates and market-generated transaction data from 1748 through 1811 are used to determine when the market moved from state currencies to the U.S. dollar and to assess the non-wartime performance of prices, exchange rates, and purchasing power parity before versus this transition. The British North American colonies were the first modern western economies to experiment with large-scale government issuance of flat paper money. Colonial legislatures backed their paper money by linking it not to specie but to future taxes and mortgage payments designed to withdraw it from circulation in a timely fashion. The only continuous data for evaluating colonial/state monetary performance are price indices. Stability of prices is the hallmark of a well-managed monetary regime. New issues of state currency were constitutionally prohibited after 1787 and enough old state currency would be taken out of circulation through tax redemption by the early 1790s that the paper-money medium fell to banknotes by default.