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Lessons from a laissez-faire payments system: the Suffolk Banking System, 1825-58

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  • Arthur J. Rolnick
  • Bruce Smith
  • Warren E. Weber

Abstract

A classic example of a privately created interbank payments system was operated by the Suffolk Bank of New England (1825?58). Known as the Suffolk Banking System, it was the nation?s first regionwide net-clearing system for bank notes. While it operated, notes of all New England banks circulated at par throughout the region. Some have concluded from this experience that unfettered competition in the provision of payments services can produce an efficient payments system. But another look at the history of the Suffolk Banking System questions this conclusion. The Suffolk Bank earned extraordinary profits, and note-clearing may have been a natural monopoly. There is no consensus in the literature about whether unfettered operation of markets with natural monopolies produces an efficient allocation of resources. ; Reprinted in Quarterly Review, Fall 2002 (v. 26. no. 4)
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Suggested Citation

  • Arthur J. Rolnick & Bruce Smith & Warren E. Weber, 1998. "Lessons from a laissez-faire payments system: the Suffolk Banking System, 1825-58," Review, Federal Reserve Bank of St. Louis, issue May, pages 105-116.
    • Handle: RePEc:fip:fedlrv:y:1998:i:may:p:105-116
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    References listed on IDEAS

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    Cited by:

    1. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    2. David C. Mills, Jr, 2008. "Imperfect Monitoring And The Discounting Of Inside Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 737-754, August.
    3. Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October.
    4. Bruce Smith & Warren E. Weber, 1999. "Private money creation and the Suffolk Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 624-667.
    5. Salter, Alexander William & Young, Andrew T., 2018. "A theory of self-enforcing monetary constitutions with reference to the Suffolk System, 1825–1858," Journal of Economic Behavior & Organization, Elsevier, vol. 156(C), pages 13-22.
    6. Young, Andrew T. & Dove, John A., 2013. "Policing the chain gang: Panel cointegration analysis of the stability of the Suffolk System, 1825–1858," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 182-196.
    7. Berentsen, Aleksander, 2006. "On the private provision of fiat currency," European Economic Review, Elsevier, vol. 50(7), pages 1683-1698, October.
    8. Catherine Karyotis, 2008. "Histoire de la compensation: de la monnaie aux titres," Revue d'Économie Financière, Programme National Persée, vol. 91(1), pages 77-95.
    9. Stephen F. Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta, vol. 93(4).
    10. Arthur J. Rolnick & Bruce Smith & Warren E. Weber, 2000. "The Suffolk Bank and the Panic of 1837," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Spr), pages 3-13.
    11. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 211-234, December.
    12. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 245, European Central Bank.
    13. Norman, Ben & Shaw, Rachel & Speight, George, 2011. "The history of interbank settlement arrangements: exploring central banks’ role in the payment system," Bank of England working papers 412, Bank of England.

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