We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.
We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries.
With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.
This paper examines two different clearing arrangements for bank liabilities. One was a profit-maximizing private entity, the Suffolk Banking System. It cleared notes for New England banks between 1827 and 1858. The other was a nonprofit collective, the clearinghouses organized in many cities beginning in 1853. The paper examines how well these arrangements prevented bank failures and acted as lenders of last resort. It finds the Suffolk system had fewer failures but acted less like a lender of last resort. It argues that these differences can be explained by the different incentives facing the Suffolk Bank and the members of clearinghouses.
Prior to 1861, several U.S. states established bank liability insurance schemes. One type was an insurance fund. Member banks paid into a state-run fund that paid bank creditors’ losses. A second scheme was a mutual guarantee system. Member banks were legally responsible for the liabilities of any insolvent bank. This paper’s hypothesis is that the moral hazard problem was controlled under a scheme to the degree that member banks had the power and incentive to control or modify others’ risk-taking behavior. Schemes that gave member banks both strong incentives and power were able to control the moral hazard problem better than schemes in which one or both features were weak. Empirical evidence on bank failures and losses on banks’ asset portfolios is consistent with this hypothesis.
We construct a random matching model of a monetary economy with commodity money in the form of potentially different types of silver coins that are distinguishable by the quantity of metal they contain. The quantity of silver in the economy is assumed to be fixed, but agents can mint and melt coins. Coins yield no utility, but can be traded. Uncoined silver yields direct utility to the holder. We find that optimal coin size increases with the probability of trade and with the stock of silver. We use these predictions of our model to analyze the coinage decisions of the monetary authorities in medieval Venice and England. Our model provides theoretical support for the view that decisions about coin sizes and types during the medieval period reflected a desire to improve the economic welfare of the general population, not just the desire for seigniorage revenue.
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 welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.
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 interpreted as optimal responses to changes in fundamentals. Further, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.
Prior to the Civil War there were three major differences among states in how U.S. banks were regulated: (1) Whether they were established by charter or under free-banking laws. (2) Whether they were permitted to branch. (3) Whether the state established a state-owned bank. I use a census of the state banks that existed in the United States prior to the Civil War that I recently constructed to determine how these differences in state regulation affected the banking outcomes in these states. Specifically, I determine differences in banks per capita by state over time; bank longevities (survival rates) by state, size, and type of organization; and bank failure probabilities also by state, size, and type of organization. In addition, I estimate the losses experienced by note holders and determine whether there were systematic differences in these depending on whether or not a bank was organized under a free banking law.