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Private Money Creation and the Suffolk Banking System

Bruce D. Smith and Warren E. Weber
Journal of Money, Credit and Banking
Vol. 31, No. 3, Part 2: The Role of Central Banks in Money and Payments Systems (Aug., 1999), pp. 624-659
DOI: 10.2307/2601080
Stable URL: http://www.jstor.org/stable/2601080
Page Count: 36
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Private Money Creation and the Suffolk Banking System
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Abstract

Many have argued that private provision of close currency substitutes may lead to large scale indeterminacies and excessive economic fluctuations. Others argue that money creation can be "left to the market." Adherents of this viewpoint often point to the Suffolk Banking System as an example of a well-functioning system of private money creation. We provide a framework for analyzing these notions, and for modeling the monetary consequences of the Suffolk system. This system resolves some, but not all indeterminacies. It also can raise steady-state welfare, but may substantially enhance volatility. The model's predictions are consistent with historical evidence.

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