Policing the Chain Gang: Panel Cointegration Analysis of the Stability of the Suffolk System, 1825-1858

38 Pages Posted: 17 Nov 2010 Last revised: 13 May 2013

See all articles by Andrew T. Young

Andrew T. Young

Texas Tech University - Rawls College of Business

John A. Dove

Troy University - Manuel H. Johnson Center for Political Economy

Date Written: May 1, 2013

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 to 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 two years. 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

JEL Classification: C33, E42, E51, N11

Suggested Citation

Young, Andrew T. and Dove, John A., Policing the Chain Gang: Panel Cointegration Analysis of the Stability of the Suffolk System, 1825-1858 (May 1, 2013). Journal of Macroeconomics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1710042 or http://dx.doi.org/10.2139/ssrn.1710042

Andrew T. Young (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

John A. Dove

Troy University - Manuel H. Johnson Center for Political Economy ( email )

Bibb Graves Hall
Troy, AL 36082
United States

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