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Maximizing Seignorage Revenue During Temporary Suspensions of Convertibility: A Note

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  • Michael Bordo
  • Angela Redish

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.

Suggested Citation

  • Michael Bordo & Angela Redish, 1992. "Maximizing Seignorage Revenue During Temporary Suspensions of Convertibility: A Note," NBER Working Papers 4024, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4024
    Note: DAE ME
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    References listed on IDEAS

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    Cited by:

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    2. Patrick K. O’Brien & Nuno Palma, 2019. "Danger To The Old Lady Of Threadneedle Street? The Bank Restriction Act And The Regime Shift To Paper Money, 1797-18211," Working Papers 0082, Utrecht University, Centre for Global Economic History.
    3. António Portugal Duarte & João Sousa Andrade, 2012. "How the Gold Standard functioned in Portugal: an analysis of some macroeconomic aspects," Applied Economics, Taylor & Francis Journals, vol. 44(5), pages 617-629, February.
    4. Elisa Newby, 2007. "The Suspension of Cash Payments as a Monetary Regime," CDMA Working Paper Series 200707, Centre for Dynamic Macroeconomic Analysis.
    5. João Sousa Andrade, 2004. "Régimes Monétaires et Théorie Quantitative du Produit Nominal au Portugal (1854 1998)," Notas Económicas, Faculty of Economics, University of Coimbra, issue 20, pages 63-88, December.
    6. Newby, Elisa, 2012. "The suspension of the gold standard as sustainable monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1498-1519.
    7. Jagjit S.Chadha & Elisa Newby, 2013. "'Midas, transmuting all, into paper': the Bank of England and the Banque de France during the Napoleonic Wars," Studies in Economics 1315, School of Economics, University of Kent.
    8. Tunçer, Coşkun, 2012. "Monetary sovereignty during the classical gold standard era: the Ottoman Empire and Europe, 1880-1913," Economic History Working Papers 44725, London School of Economics and Political Science, Department of Economic History.
    9. Ali Coskun Tunçer, 2013. "The Black Swan of the Golden Periphery: The Ottoman Empire during the Classical Gold Standard Era," Working Papers 8, Department of Economic and Social History at the University of Cambridge.
    10. P.Antipa, 2014. "How Fiscal Policy Affects the Price Level: Britain’s First Experience with Paper Money," Working papers 525, Banque de France.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913

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