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Policing the chain gang: Panel cointegration analysis of the stability of the Suffolk System, 1825–1858

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  • Young, Andrew T.
  • Dove, John A.

Abstract

Conventional monetary theory suggests that a closed system banking regime may lead to in-concert overexpansions of circulation by its banks. However, Selgin (2001, 2010) argues that this is unlikely as long as there are enough banks to ensure (i) routine interbank settlement and (ii) no collusion amongst banks refraining from redeeming one another’s notes. Banks effectively form a “chain gang” where in-concert expansion requires coordination that is prohibitively costly in a system with many banks. In order to test this conjecture, we examine state-level data on circulations and reserves from the Suffolk Banking System (1825–1858) in New England. In addition to narrative evidence on the stability of the Suffolk, panel cointegration tests provide evidence of a long-run relationship between state-level circulations and total reserves. The estimated error-correction mechanisms suggest a deviation half-life of about 2years. We argue that a cointegrating relationship between circulations and reserves, along with rapid error-correction, supports the Selgin hypothesis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 182-196

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Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:182-196

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: American free banking; Suffolk System; Panel data; Cointegration; Error-correction; History of banking; Adverse clearings;

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References

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  1. Charles W. Calomiris & Charles M. Kahn, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning From the Suffolk System," NBER Working Papers 5442, National Bureau of Economic Research, Inc.
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  3. Smith, Bruce D & Weber, Warren E, 1999. "Private Money Creation and the Suffolk Banking System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 624-59, August.
  4. Peter L. Rousseau, 2000. "Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837," Vanderbilt University Department of Economics Working Papers 0004, Vanderbilt University Department of Economics, revised Jun 2001.
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  13. Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, vol. 45(02), pages 277-283, June.
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  15. Selgin, George, 2001. "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 294-300, May.
  16. Bodenhorn, Howard, 2002. "Making The Little Guy Pay: Payments-System Networks, Cross-Subsidization, And The Collapse Of The Suffolk System," The Journal of Economic History, Cambridge University Press, vol. 62(01), pages 147-169, March.
  17. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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