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Lessons from a laissez-faire payments system: the Suffolk Banking System (1825–1858)

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

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Abstract

The classic example of a privately created and well-functioning interbank payments system is the Suffolk Banking System that existed in New England between 1825 and 1858. This System, operated by the Suffolk Bank, was the first regionwide net-clearing system for bank notes in the United States. While it operated, notes of all New England banks circulated at par throughout the region. The achievements of the System have led some to conclude that unfettered competition in the provision of payments services can produce an efficient payments system. In this paper, we reexamine the history of the Suffolk Banking System and present some facts that call this conclusion into question. We find that the Suffolk Bank earned extraordinary profits and that note clearing may have been a natural monopoly. There is no consensus in the literature about whether unfettered operation of markets in the presence of natural monopolies produces an efficient allocation.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 584.

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Date of creation: 1997
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Publication status: Published in Quarterly Review (Vol. 26, No. 4, Fall 2002)
Handle: RePEc:fip:fedmwp:584

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Keywords: Suffolk Banking System;

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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. 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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  2. Arthur J. Rolnick & Warren E. Weber, 1998. "The Suffolk Banking System reconsidered," Working Papers 587, Federal Reserve Bank of Minneapolis. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
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  4. 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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  5. 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)
  6. 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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  7. 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)
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(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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