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Journal Article
Resolving the national bank note paradox
During the 1882_1914 period, U.S. national banks could issue circulating notes backed by specified government securities. Earlier attempts to explain yields on those securities by costs of note issue discovered a paradox: yields were too high. We point out two previously ignored sources of costs: idle notes and note redemptions that were highly variable, thereby exacerbating the problem of managing reserves. We present data on idle notes and estimate, from partial data on redemptions, the uncertainty due to redemptions. We also present a semiannual time series of an upper bound on the average ...
Working Paper
Coin sizes and payments in commodity money systems
Commodity money standards in medieval and early modern Europe were characterized by recurring complaints of small change shortages and by numerous debasements of the coinage. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that changes in the size of the small coin affect ex ante welfare. Further, the optimal ratio of coin sizes is shown to depend upon the trading opportunities in a country and a country's wealth. Thus, coinage debasements can be ...
Journal Article
Lessons from a laissez-faire payments system: the Suffolk Banking System (1825-58)
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 ...
Working Paper
Costly banknote issuance and interest rates under the national banking system
The behavior of interest rates under the U.S. National Banking System is puzzling because of the apparent presence of persistent and large unexploited arbitrage opportunities for note issuing banks. Previous attempts to explain interest rate behavior have relied on the cost or the inelasticity of note issue. These attempts are not entirely satisfactory. Here we propose a new rationale to solve the puzzle. Inelastic note issuance arises endogenously because the marginal cost of issuing notes is an increasing function of circulation. We build a spatial separation model where some fraction of ...
Working Paper
The Suffolk Banking System reconsidered
The best-known example of a privately created and well-functioning interbank payments system is the Suffolk Banking System. Operating in New England between 1825 and 1858, it was the first regionwide net-clearing system for bank notes in the United States. Some historians portray the System as being owned and managed by a coalition of large Boston banks in order to achieve a public purpose. They argue that while the System was not particularly profitable, it maintained par circulation of bank notes throughout the region. We reconsider this history and find the public-purpose view of the ...
Report
Coin sizes and payments in commodity money systems
Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is ...
Report
Interest rates under the U.S. national banking system
According to previous studies, the demand-liability feature of national bank notes did not present a problem for note-issuing banks because the nonbank public treated notes and other currency as perfect substitutes. However, that view, when combined with nonbindingness of the collateral restriction against note issue, itself an implication of the fact that some eligible collateral was not used for that purpose, implies that the safe short-term interest rate is pegged at the tax rate on note circulation. Since evidence on short-term interest rates is inconsistent with such a peg, that view ...