MAKING THE LITTLE GUY PAY: PAYMENTS-SYSTEM NETWORKS, CROSS-SUBSIDIZATION, AND THE COLLAPSE OF THE SUFFOLK SYSTEM

Howard Bodenhorn

The Journal of Economic History, 2002, vol. 62, issue 1, 147-169

Abstract: In the early nineteenth century, the Suffolk Bank established a regional banknote clearing network. Despite the benefits offered, many of the system's member banks were unhappy with it and quickly affiliated with an alternative clearing network as soon as it appeared. The reason for the quick abandonment of the Suffolk system was that it failed to price its network clearing services efficiently. Pressured by large Boston banks to shift the costs of the system to small country banks, the Suffolk engaged in inefficient cross-subsidization. Once a competitor emerged that priced efficiently, it drove the Suffolk from the market.

Date: 2002
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