Good Morning Ted and Jody:
In my constant search for more information about the sources of money and the impact of various levels of supply of money on the economies in the American Colonial and early Republic, I ran across something entirely new to me the other day. (re: my democratizemoney blog here on WordPress) Specifically, in the Colonial and early Republic periods (say to the 1830s) accounts were generally kept in Pounds/shillings/pence while transactions were made in terms of dollars, or other non-British and later non-US currencies and bills of credit (before the adoption of the Constitution) and other paper money. Since one of the major attributes of money is that is a way to keep account, that we used one monetary system for keeping the books and other monetary systems for actual transactions, says to me that the source of a medium of exchange is not terribly important. What was important was that there was a method of clearing obligations—getting debts off the book. I did know that credit was a major source of “payment” for goods and services at the time of an actual exchange. What I did not know was how those credit accounts were cleared (paid off).
It turns out that the books, from that era often show people paying off credit accounts with barter—a flock of chickens, or bushels of grain—when the creditor needed chickens or grain. There is evidence of labor clearing some accounts, even to the extent that if I owed you £10 for a bolt of cloth and you owed a farmer £11 for milk delivery over a year, you would get me to do labor on the farmer’s fence to clear the debt for the cloth and he in return would get the debt for milk delivery cleared. What is striking about this example is the £1 of debt unaccounted for across the three sets of books. I am speculating that the use of one monetary system for keeping accounts and the use of other means for clearing accounts, the flexibility so to speak, allowed more off the books transactions that would leave a £1 here and there dangling and whisked out of existence. It also highlights the somewhat arbitrary nature of the value of credits and debts.
It is dangerous to speculate about the impact of these bits of evidence in a more general manner. However, always the risk taker, it strikes me that since there was no central tax authority (this is prior to the national income tax) this flexibility covered up more economic activity than an examination of the money supply and its velocity would “explain.” (Explain in the sense that explanation is a postdictive statement based on a model). This has me thinking the tax man has a more varied impact on economic activities than even the most rabid fiscal conservative would have us believe (but not necessarily all bad as he or she would have us believe). Regardless, it is for sure this begins to explain why money supply data is so difficult to tease out of the historical records and simply does not really exist before a central tax authority gained some prominence. I will chew on this for a while.
Warmest regards, Ed