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Maximizing Seignorage Revenue During Temporary Suspensions of Convertibility: A Note

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Michael Bordo
Angela Redish

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Abstract

This note extends the theory of the revenue maximizing rate of monetary growth to the case of a temporary suspension of convertibility. It also suggests a methodology for the interpretation of monetary behavior during historical periods of inconvertibility. First we analyze the case of a government with a monopoly over currency issue. The government maximizes seignorage revenue by generating an inflation, but the terminal condition of a return to convertibility implies that the price level must drop at the point of suspension of convertibility, so that there is no discontinuity at the date of resumption. We then consider the behavior of a private banking system whose monetary liabilities are temporarily inconvertible. The model is then used to interpret monetary behaviour during the suspension of convertibility by U.S. banks in 1837/8.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4024.

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Date of creation: Jan 1994
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Handle: RePEc:nbr:nberwo:4024

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
N11 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: Pre-1913

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. Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 846-56, July-Aug.. [Downloadable!] (restricted)
  2. Bordo, Michael D. & White, Eugene N., 1991. "A Tale of Two Currencies: British and French Finance During the Napoleonic Wars," The Journal of Economic History, Cambridge University Press, vol. 51(02), pages 303-316, June. [Downloadable!]
  3. Gregor W. Smith & R. Todd Smith, 1988. "Stochastic Process Switching and the Return to Gold, 1925," Working Papers 723, Queen's University, Department of Economics.
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  4. Michael D. Bordo & Eugene N. White, 1991. "British and French Finance During the Napoleonic Wars," NBER Working Papers 3517, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Calomiris, Charles W, 1994. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 344, April.
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  6. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September. [Downloadable!] (restricted)
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  7. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland. [Downloadable!]
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  8. Auernheimer, Leonardo, 1983. "The Revenue-Maximizing Inflation Rate and the Treatment of the Transition to Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 368-76, August. [Downloadable!] (restricted)
  9. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November. [Downloadable!] (restricted)
  10. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January. [Downloadable!] (restricted)
  11. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June. [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. Elisa Newby, 2007. " The Suspension of Cash Payments as a Monetary Regime," CDMA Working Paper Series 0707, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  2. António Portugal Duarte & João Sousa Andrade, 2005. "How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects," Method and Hist of Econ Thought 0505002, EconWPA. [Downloadable!]
    Other versions:
  3. Newby, E., 2008. "The Suspension of the Gold Standard as Sustainable Monetary Policy," Cambridge Working Papers in Economics 0856, Faculty of Economics, University of Cambridge. [Downloadable!]
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