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

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Author Info
Arthur J. Rolnick
Bruce D. Smith
Warren E. Weber

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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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Publisher 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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Charles W. Calomiris & Charles M. Kahn, 1996. "The efficiency of self-regulated payments systems: learning from the Suffolk System," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 766-803.
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  2. 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. [Downloadable!] (restricted)
  3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
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  4. Arthur J. Rolnick & Warren E. Weber, 1998. "The Suffolk Banking System reconsidered," Working Papers 587, Federal Reserve Bank of Minneapolis. [Downloadable!]
  5. Aaron S. Edlin & Mario Epelbaum & Walter P. Heller, 1995. "Is Perfect Price Discrimination Really Efficient? Welfare and Existence in General Equilibrium," University of California at San Diego, Economics Working Paper Series 95-32, Department of Economics, UC San Diego.
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  6. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Papers 591, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  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. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
  4. Nilssen,T., 2000. "Risk externalities in a payments oligopoly," Memorandum 10/2000, Oslo University, Department of Economics. [Downloadable!]
  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.). [Downloadable!]
    Other versions:
  6. Cornelia Holthausen & Cyril Monnet, 2003. "Money and payments: a modern perspective," Working Paper Series 245, European Central Bank. [Downloadable!]
  7. 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. [Downloadable!]
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