No abstract available.

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 Suffolk Banking System to be specious. The System was owned and operated solely by the Suffolk Bank. It was operated not to promote a common currency or any other public purpose, but to serve the private interests of the Suffolk Bank’s shareholders, which it did quite successfully.

Before the establishment of federal deposit insurance, the U.S. experienced periodic banking panics, during which banks suspended specie payments and reduced lending. There was often a corresponding economic slowdown. The Panic of 1837 is considered one of the worst banking panics, and it coincided with a slowdown that lasted for almost five years. The economic disruption was not uniform across the country, however. The slowdown in New England was substantially less severe than elsewhere. Here we suggest that the Suffolk Bank, a private bank, was one reason for New England’s relative success. We argue that the Suffolk Bank’s provision of note-clearing and lender of last resort services (via the Suffolk Banking System) lessened the effects of the Panic of 1837 in New England relative to the rest of the country, where no bank provided such services.

The purpose of this paper is to begin a reevaluation of the Free Banking Era by developing and examining individual bank information on the population of banks which existed under the free banking laws in four states. This information allows us to determine the number of free banks which failed and to estimate the resulting losses to their note holders. While the new evidence suggests there were problems with free banking, it presents a serious challenge to the prevailing view that free banking led to financial chaos.

This paper establishes the stylized fact that medieval debasements were accompanied by unusually large minting volumes and revenues. This fact is a puzzle under the commonly held view that metallic coins are commodity money and exchange by weight. An existing explanation is that debased coins were used to reduce the real burden of nominally denominated debts. This explanation is logically flawed: nothing prevents agents from renegotiating contracts and avoid incurring minting costs. The paper also establishes other facts about monetary mutations, which altogether pose a challenge to monetary economics.

The analyses of fiscal and monetary policies that the Congressional Budget Office (CBO) provides Congress tend to be biased, encouraging the use of activist stabilization policies. The CBO’s virtual neglect of economic uncertainties and its emphasis on very short time horizons make active policies appear much more attractive than its own model implies. Moreover, the CBO’s adoption of the macroeconometric approach fundamentally biases its analyses. Macroeconometric models do not remain invariant to changes in policy rules and are mute on the implications of alternative policies for efficiency and income distribution. The rational expectations equilibrium approach overcomes these difficulties and implies that less activist and less inflationary policies are desirable.

Prediction interval tests are applied to the reduced forms of two quarterly models of the U.S. (the "old" FRB-MIT model and the Michigan model). The results illustrate the range of tests one can perform on an estimated simultaneous equation model. In particular, the tests determine whether ex post forecast errors can be attributed to structural deficiencies of the models. The paper examines confidence regions and other aspects of forecast distributions-comparisons between mean forecasts and nonstochastic forecasts, comparisons between, forecast variances from multiperiod endogenous simulations and those from one period simulations, and comparisons between forecast variances and residual variances.

As the CD market has become an important source of bank funds, it has also become an important market for policymakers to understand. But so far model builders have not recognized the significance of assuming that new and old CDs are perfect substitutes. Therefore, they have misused the assumption, discarded relevant data, and ignored evidence inconsistent with perfect substitution. This study shows that models of the CD market should not treat new and old issues as perfect substitutes and that they should not drop observations when market rates are above the Regulation Q ceiling.

The classic example of a privately created and well-functioning interbank payments system is the Suffolk Banking System that existed in New England between 1825 and 1858. This System, operated by the Suffolk Bank, was the first regionwide net-clearing system for bank notes in the United States. While it operated, notes of all New England banks circulated at par throughout the region. The achievements of the System have led some to conclude that unfettered competition in the provision of payments services can produce an efficient payments system. In this paper, we reexamine the history of the Suffolk Banking System and present some facts that call this conclusion into question. We find that the Suffolk Bank earned extraordinary profits and that note clearing may have been a natural monopoly. There is no consensus in the literature about whether unfettered operation of markets in the presence of natural monopolies produces an efficient allocation.

Our study examines whether there is a systematic relationship between the monetary standard under which a country operates and the rate of inflation it experiences. It also explores whether there are other properties of inflation, money, and output that differ between economies operating under a commodity standard and economies operating under a fiat standard. The basis for our study is price, money, and output data for 15 countries that have operated under both types of monetary standards. For each of these countries the data cover 80 years, and for most the data cover more than 100 years. With these data we are able to establish several facts about the differences in inflation, money growth, and output growth between economies operating under commodity standards and those operating under fiat standards. Specifically, we find that the following facts emerge when comparing commodity standards to fiat standards: inflation, money growth, and output growth are all lower; growth rates of monetary aggregates are less highly correlated with each other; growth rates of monetary aggregates are less highly correlated with inflation; and growth rates of monetary aggregates are more highly correlated with output growth.

This paper was written for the National Bureau of Economic Research Macro Conference to be held July 7 and 8, 1983, Cambridge, Massachusetts.

The claim that bad money drives out good is one of the oldest and most cited in economics. Economists refer to this claim as Gresham’s law. Yet despite its seemingly universal acceptance, this claim does not warrant its status as a law. We find it has no convincing explanations and many overlooked exceptions. We propose an alternative hypothesis based on the costs of using a medium of exchange at a nonpar price: small-denomination currency undervalued at the mint tends to disappear from circulation while large-denomination currency usually circulates at premium. Examining a variety of historical episodes when market and legal prices were different, we find our “law” can explain history much better than Gresham’s.

This paper explains why the risky notes of banks established during the Free Banking Era (1837–63) were demanded even when relatively safe specie (gold and silver coin) was an alternative. Free bank notes were demanded because they were priced to reflect the expected value of their backing. The empirical evidence supports this explanation. Specifically, in New York, Wisconsin, and Indiana the expected value of backing was sufficient for free bank notes to circulate at par, which they did. In Minnesota the backing for notes was very poor: they exchanged well below par, being treated as small-denomination securities.

In this paper we propose and test a new explanation of bank behavior during the Free Banking Era, 1837–63. Arguing against the view that free bank failures were due to fraud, we claim that they were caused by exposure to term structure risk. Testing this new explanation with a new and extensive body of data, we find strong support for it: periods of falling bond prices correspond to the periods with most of the free bank failures. The new data do not support the view that fraud caused the failures.