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NOTE 14. A Free Market “CENTRAL BANK”

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A Free Market Central Bank

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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.

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Further, this Suffolk Bank restrained the over-issuance of these notes.

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In short, it was a private central bank that kept the other banks honest.

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As such, it made New England an island of monetary stability in an America contending with currency chaos.

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Chaos was, in fact, that condition in which New England found herself just before the

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Suffolk Bank was established.

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There was a myriad of banknotes circulating in the area's largest financial center,

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Boston.

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Some were issued by Boston banks, which all in Boston knew to be solvent, but others were

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issued by state-chartered banks.

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These could be quite far away, and in those days such distance impeded both general knowledge

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about their solvency and easy access in bringing the bank's notes in for redemption into

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Thus, while at the beginning these country notes were accepted in Boston at par value,

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this just encouraged some far-away banks to issue far more notes than they had gold to

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back them.

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So country bank notes began to be generally traded at discounts to par of from 1% to 5%.

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Citibanks finally refused to accept country bank notes altogether.

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This gave rise to the money brokers mentioned earlier in this chapter.

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But it also caused hardship for Boston merchants, who had to accept country notes whose real

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value they could not be certain of.

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When they exchanged the notes with the brokers, they ended up assuming the full cost of discounting

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the bills they had accepted at par.