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Lessons from a laissez-faire payments system: the Suffolk Banking System (1825-58)

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  • Arthur J. Rolnick
  • Bruce D. Smith
  • Warren E. Weber

Abstract

A classic example of a privately created interbank payments system was operated by the Suffolk Bank of New England (1825–58). Known as the Suffolk Banking System, it was the nation’s first regionwide net-clearing system for bank notes. While it operated, notes of all New England banks circulated at par throughout the region. Some have concluded from this experience that unfettered competition in the provision of payments services can produce an efficient payments system. But another look at the history of the Suffolk Banking System questions this conclusion. The Suffolk Bank earned extraordinary profits, and note-clearing may have been a natural monopoly. There is no consensus in the literature about whether unfettered operation of markets with natural monopolies produces an efficient allocation of resources. ; Reprinted in Quarterly Review, Fall 2002 (v. 26. no. 4)

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1998)
Issue (Month): Sum ()
Pages: 11-21

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Handle: RePEc:fip:fedmqr:y:1998:i:sum:p:11-21:n:v.22no.3

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Keywords: Suffolk Banking System ; Payment systems;

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References

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  1. Aaron S. Edlin & Mario Epelbaum & Walter P. Heller, 1998. "Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium," Econometrica, Econometric Society, vol. 66(4), pages 897-922, July.
  2. Arthur J. Rolnick & Warren E. Weber, 1998. "The Suffolk Banking System reconsidered," Working Papers 587, Federal Reserve Bank of Minneapolis.
  3. Lake, Wilfred S., 1947. "The End of the Suffolk System," The Journal of Economic History, Cambridge University Press, vol. 7(02), pages 183-207, November.
  4. Kroszner, Randall S, 1996. "Comment on the Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 798-803, November.
  5. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  6. Ware, Roger, 1984. "Sunk Costs and Strategic Commitment: A Proposed Three-Stage Equilibrium," Economic Journal, Royal Economic Society, vol. 94(374), pages 370-78, June.
  7. Kyle Bagwell & Garey Ramey, 1996. "Capacity, Entry, and Forward Induction," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 660-680, Winter.
  8. Sharkey,William W., 1983. "The Theory of Natural Monopoly," Cambridge Books, Cambridge University Press, number 9780521271943.
  9. Calomiris, Charles W & Kahn, Charles M, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 766-97, November.
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Citations

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Cited by:
  1. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer, vol. 10(3), pages 211-234, December.
  2. Gary Gorton & Lixin Huang, 2002. "Bank Panics and the Endogeneity of Central Banking," Center for Financial Institutions Working Papers 02-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Catherine Karyotis, 2008. "Histoire de la compensation: de la monnaie aux titres," Revue d'Économie Financière, Programme National Persée, vol. 91(1), pages 77-95.
  4. Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Papers 591, Federal Reserve Bank of Minneapolis.
  5. David C. Mills, Jr., 2007. "Imperfect monitoring and the discounting of inside money," Finance and Economics Discussion Series 2007-58, Board of Governors of the Federal Reserve System (U.S.).
  6. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 0245, European Central Bank.
  7. Young, Andrew T. & Dove, John A., 2013. "Policing the chain gang: Panel cointegration analysis of the stability of the Suffolk System, 1825–1858," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 182-196.
  8. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 2000. "The Suffolk Bank and the Panic of 1837," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-13.
  9. Stephen Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta.

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