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Colonial Virginia's paper money, 1755–1774: value decomposition and performance

  • Farley Grubb (a1)

Colonial Virginia's legislature introduced an inside paper money into its domestic economy that was, at that time, primarily a barter economy without any government or bank-issued inside paper monies in circulation. I decompose Virginia's paper money into its expected real-asset present value, risk discount and transaction premium. The value of Virginia's paper money was determined primarily by its real-asset present value. The transaction premium was small. Positive risk discounts occurred in years when monetary troubles were suspected, namely worries that the government would not redeem the paper money as promised. Counterfeiting, however, was not one of these worries. The legislature had the tools and used them effectively to mitigate the effects of counterfeiting on the value of its paper money. Colonial Virginia's paper money was not a fiat currency, but a barter asset, with just enough transaction premium to make it the preferred medium of exchange for local transactions. It functioned like a zero-coupon bond and traded below face value due to time-discounting, not depreciation.

Corresponding author
F. Grubb, Professor and NBER Research Associate, Economics Department, University of Delaware, Newark, DE 19716, USA. Email: Website:
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Preliminary versions were presented at Vanderbilt University, October 2015; NBER Cambridge, MA, July 2016; Washington DC Area Economic History Seminar at American University, March 2017; and the 8th World Congress of Cliometrics, Strasbourg, France, July 2017. The author thanks the participants and anonymous referees for helpful comments. Research assistance by Changqing Mu and editorial assistance by Tracy McQueen are gratefully acknowledged.

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