Policing the chain gang: Panel cointegration analysis of the stability of the Suffolk System, 1825–1858

Andrew Young () and John Dove

Journal of Macroeconomics, 2013, vol. 37, issue C, 182-196

Abstract: Conventional monetary theory suggests that a closed system banking regime may lead to in-concert overexpansions of circulation by its banks. However, Selgin (2001, 2010) argues that this is unlikely as long as there are enough banks to ensure (i) routine interbank settlement and (ii) no collusion amongst banks refraining from redeeming one another’s notes. Banks effectively form a “chain gang” where in-concert expansion requires coordination that is prohibitively costly in a system with many banks. In order to test this conjecture, we examine state-level data on circulations and reserves from the Suffolk Banking System (1825–1858) in New England. In addition to narrative evidence on the stability of the Suffolk, panel cointegration tests provide evidence of a long-run relationship between state-level circulations and total reserves. The estimated error-correction mechanisms suggest a deviation half-life of about 2years. We argue that a cointegrating relationship between circulations and reserves, along with rapid error-correction, supports the Selgin hypothesis.

Keywords: American free banking; Suffolk System; Panel data; Cointegration; Error-correction; History of banking; Adverse clearings (search for similar items in EconPapers)
JEL-codes: C33 E42 E51 N11 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:37:y:2013:i:c:p:182-196

DOI: 10.1016/j.jmacro.2013.05.003

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