A Free Market Central Bank
It is a fact, almost never recalled, that there once existed an American private bank that brought order and convenience to a myriad of privately issued banknotes.
Further, this Suffolk Bank restrained the over-issuance of these notes.
In short, it was a private central bank that kept the other banks honest.
As such, it made New England an island of monetary stability in an America contending with currency chaos.
Chaos was, in fact, that condition in which New England found herself just before the
Suffolk Bank was established.
There was a myriad of banknotes circulating in the area's largest financial center,
Boston.
Some were issued by Boston banks, which all in Boston knew to be solvent, but others were
issued by state-chartered banks.
These could be quite far away, and in those days such distance impeded both general knowledge
about their solvency and easy access in bringing the bank's notes in for redemption into
Thus, while at the beginning these country notes were accepted in Boston at par value,
this just encouraged some far-away banks to issue far more notes than they had gold to
back them.
So country bank notes began to be generally traded at discounts to par of from 1% to 5%.
Citibanks finally refused to accept country bank notes altogether.
This gave rise to the money brokers mentioned earlier in this chapter.
But it also caused hardship for Boston merchants, who had to accept country notes whose real
value they could not be certain of.
When they exchanged the notes with the brokers, they ended up assuming the full cost of discounting
the bills they had accepted at par.