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Private Money Production without Banks

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  • Gary B. Gorton

Abstract

I test the Dang, Gorton, and Holmström (2018) (DGH) theory that the optimal design of private money is debt backed by debt. I do this in the context of English inland bills of exchange (where all parties to the bill were in England), which were used as a medium of exchange during the Industrial Revolution in the north of England in the eighteenth and first half of the nineteenth centuries. These bills circulated via indorsements, committing each indorser’s personal wealth to back the bill. A sample of bills from the period 1762-1850 is studied to determine how frequently they changed hands (liquidity/velocity) and to determine how their credibility was established. Some bills were backed by banks and others by the joint liability of indorsers only. I test the DGH theory by asking: Were bank-backed bills more liquid than the joint liability-backed bills?

Suggested Citation

  • Gary B. Gorton, 2020. "Private Money Production without Banks," NBER Working Papers 26663, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26663
    Note: AP CF ME
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    References listed on IDEAS

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    1. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 33-64, August.
    2. James, John A., 2012. "Panics, payments disruptions and the Bank of England before 18261," Financial History Review, Cambridge University Press, vol. 19(3), pages 289-309, December.
    3. Cuadras-Morató, Xavier & Rosés, Joan R., 1998. "Bills of exchange as money: sources of monetary supply during the industrialisation of Catalonia, 1844–741," Financial History Review, Cambridge University Press, vol. 5(1), pages 27-47, April.
    4. Chapman, Sydney J., 1904. "The Lancashire Cotton Industry," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number chapman1904.
    5. Santarosa, Veronica Aoki, 2015. "Financing Long-Distance Trade: The Joint Liability Rule and Bills of Exchange in Eighteenth-Century France," The Journal of Economic History, Cambridge University Press, vol. 75(3), pages 690-719, September.
    6. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    7. Bryer, R. A., 1993. "The late nineteenth-century revolution in financial reporting: Accounting for the rise of investor or managerial capitalism?," Accounting, Organizations and Society, Elsevier, vol. 18(7-8), pages 649-690.
    8. Andrew Popp, 2007. "Building the market: John Shaw of Wolverhampton and commercial travelling in early nineteenth-century England," Business History, Taylor & Francis Journals, vol. 49(3), pages 321-347.
    9. Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 346-397, April.
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    Cited by:

    1. Michael D. Bordo & William Roberds, 2022. "Central Bank Digital Currencies: An Old Tale with a New Chapter," FRB Atlanta Working Paper 2022-18, Federal Reserve Bank of Atlanta.
    2. Michael D. Bordo & William Roberds, 2024. "Central Bank Digital Currencies: An Old Tale with a New Chapter," Working Papers 323, Princeton University, Department of Economics, Center for Economic Policy Studies..

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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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