Working Paper 584

Lessons From a Laissez-Faire Payments System: The Suffolk Banking System (1825–1858)

Arthur J. Rolnick | Senior Vice President and Director of Research, 1985-2010
Warren E. Weber | Retired Economist
Bruce D. Smith

Revised November 1, 1997

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.

Published In: Quarterly Review (Vol. 26, No. 4, Fall 2002)
Published In: Quarterly Review (Vol. 22, No. 3, Summer 1998, pp. 11-21)

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