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Money, credit, banking and payments system policy

  • Marvin Goodfriend

The evolution and structure of the payments system is explained by efficiency gains from substituting claims on particular institutions for commodity money. Information-intensive lending and payments services have been provided jointly by the same set of institutions, i.e., banks, because systems to evaluate credit, monitor and enforce loan agreements, and extend credit on short notice are productive in originating loans to nonfinancial customers and in managing lending to support an efficient provision of payments services. Monetary policy protects the payments system in a way that private arrangements could not. In contrast, Fed discount window lending matters because pledging rules favor the Fed over private lenders. Pre-Fed clearinghouses suggest that daylight overdrafts and Fed limits on direct access to the payments system are efficient in principle. Deposit insurance is viewed as one substitute for unrestricted branching as a means of diversifying nontraded loans. Pre-Fed clearinghouses suggest a tough exclusion principle to run deposit insurance more efficiently. Narrow banking is an unnecessarily costly alternative. ; A version of this work was published in the Federal Reserve Bank of Richmond's Economic Review, 1991 Vol. 77, No. 1

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 89-03.

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Date of creation: 1989
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Publication status: Published in Federal Reserve Bank of Richmond's Economic Review, 1991 Vol. 77, No. 1
Handle: RePEc:fip:fedrwp:89-03
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  1. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  2. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  3. White, Eugene Nelson, 1981. "State-Sponsored Insurance of Bank Deposits in the United States, 1907–1929," The Journal of Economic History, Cambridge University Press, vol. 41(03), pages 537-557, September.
  4. Watts, Ross L & Zimmerman, Jerold L, 1983. "Agency Problems, Auditing, and the Theory of the Firm: Some Evidence," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 613-33, October.
  5. Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Working Paper 88-01, Federal Reserve Bank of Richmond.
  6. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  7. Gary B. Gorton & Joseph G. Haubrich, 1987. "The paradox of loan sales," Proceedings 151, Federal Reserve Bank of Chicago.
  8. Bennett T. McCallum, 1982. "The Role of Overlapping-Generations Models in Monetary Economics," NBER Working Papers 0989, National Bureau of Economic Research, Inc.
  9. Williams, Jeffrey C, 1984. "Fractional Reserve Banking in Grain," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 488-96, November.
  10. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  11. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
  12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  13. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-49, June.
  14. George J. Benston & George G. Kaufman, 1988. "Risk and solvency regulation of depository institutions: past policies and current options," Staff Memoranda 88-1, Federal Reserve Bank of Chicago.
  15. Garbade, Kenneth D. & Silber, William L., 1979. "The payment system and domestic exchange rates: Technological versus institutional change," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 1-22, January.
  16. King, Robert G. & Plosser, Charles I., 1986. "Money as the mechanism of exchange," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 93-115, January.
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