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Private Money Creation and the Suffolk Banking System

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  • Smith, Bruce D
  • Weber, Warren E

Abstract

Many have argued that private provision of close currency substitutes may lead to large scale indeterminacies and excessive economic fluctuations. Others argue that money creation can be "left to the market." Adherents of this viewpoint often point to the Suffolk Banking System as an example of a well-functioning system of private money creation. We provide a framework for analyzing these notions, and for modeling the monetary consequences of the Suffolk System. This system resolves some, but not all indeterminacies. It also can raise steady state welfare, but may substantially enhance volatility. The model's predictions are consistent with historical evidence.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 31 (1999)
Issue (Month): 3 (August)
Pages: 624-59

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Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:3:p:624-59

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
  4. Stacey L. Schreft & Bruce D. Smith, 1995. "The effects of open market operations in a model of intermediation and growth," Working Papers 562, Federal Reserve Bank of Minneapolis.
  5. Arthur J. Rolnick & Warren E. Weber, 1988. "Explaining the demand for free bank notes," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 21-35.
  6. 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.
  7. 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.
  8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  9. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  10. Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-67, May.
  11. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1998. "Lessons from a laissez-faire payments system: the Suffolk Banking System (1825-58)," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-21.
  12. Rolnick, Arthur J. & Weber, Warren E., 1988. "Explaining the demand for free bank notes," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 47-71, January.
  13. Rolnick, Arthur J. & Weber, Warren E., 1984. "The causes of free bank failures : A detailed examination," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 267-291, November.
  14. Thomas J. Sargent & Neil Wallace, 1983. "A model of commodity money," Staff Report 85, Federal Reserve Bank of Minneapolis.
  15. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  16. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-91, December.
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