Working Paper: NBER ID: w26663
Authors: 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?
Keywords: No keywords provided
JEL Codes: E02; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank-backed bills (G21) | increased liquidity (E41) |
| Joint liability-backed bills (H81) | decreased liquidity (G33) |
| Bank-backed bills (G21) | increased velocity of circulation (E41) |
| Joint liability-backed bills (H81) | decreased velocity of circulation (E41) |
| Bank-backed bills (G21) | reduced risk of default (G33) |