The White-Selgin Model - A Brief Analysis

This paper provides an overview of the model proposed by Professor White and further developed by professor Selgin and an analysis of the possibility of its implementation as a reform of the current monetary system. Research has shown that the proposed system is somewhat similar to the monetary system during the classical gold standard, between the years 1880-1913 and assumes that the money in circulation is convertible. Their amount depends on the existing bank reserves, so that an important factor in the decision of banks to issue banknotes will be the desire of the public to hold them. If the public trusts a particular bank, it will increase the demand for its banknotes so that the bank will record a surplus towards other banks in the clearing sessions and, as a result, it will have excess reserves, which will be used to grant new loans and gain market share. The model is based on fractional reserves and assumes they have no optimal level, but instead they fluctuate, depending on the velocity of circulation of money. Regarding the market's ability to correct imbalances in the absence of strong institutions (in this case, central banks) that can provide the necessary solutions, the model appears to be perhaps a little too permissive. Also, the only rule imposed by the authors, the convertibility of money, though it is strong, cannot provide by itself a satisfactory efficiency of a system based on this model.