The Optimal Supply of Bank Money

This thesis examines the fluctuations in the money stock of Upper Canada in the 1830s, and in doing so contradicts the existing interpretation of the monetary events, and also sheds further light on the operation of the early specie standard. The model of the monetary system used, incorporates the potential for currency substitution and expectations to affect monetary behaviour.;Banking in Upper Canada is characterized by a system of three colluding, chartered banks, which attempted to maximize profits in a small open economy. These banks were legally constrained by usury laws and the requirement that notes be redeemable in specie on demand. They operated on a demand curve determined by the utility maximizing choices of individual agents, whose decisions reflected the perceived stability of the banking system and the utility obtained from the characteristics offered by bank money, in comparison to those of the competitive money, specie (coins) and the utility obtained from goods.;The model is employed to analyze monetary behaviour in Upper Canada during the financial crises of the late 1830s. The results suggest that the American suspension of specie payments in May 1837 affected the Upper Canadian economy only indirectly, causing expectations of similar behavior in Upper Canada, and not, as the literature suggests, directly through an external drain.;During the subsequent suspension by the Upper Canada banks there was a dramatic increase in the stock of bank money. The model is modified to allow for the issue of temporarily non-redeemable bank money stock. The explanation for the doubling of the bank notes in circulation lay not in the suspension of convertability, but in the coincidental influx of foreign exchange resulting from expenditures by the British Army in 1838/9

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• The economic crisis of 1837–1839 in Upper Canada

  Open Access•Angela Redish•Explorations in Economic History•1983

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