Money and Debt in the Structure of Payments

Freeman (1996) formulates a model in which arrangements based on intermediated debt that is settled using money achieve higher welfare that direct money payment achieves. A monetary authority can sometimes further improve welfare and achieve efficiency by participating in a secondary market for debt; and a private intermediary can also achieve efficiency by means reminiscent of clearinghouses. These results are derived here in a simplified version of Freeman's model. This analysis clarifies that ordinary private agents in the model are capable of assuming the role of central bank or clearinghouse. An artificial agent, posited solely to play such a role and endowed with special capabilities for it, is unnecessary. The features of institutional governance required for either a central bank or a clearinghouse to achieve efficiency, particularly features related to central bank independence, are discussed informally.

Central banking and the economics of information

This article concerns the potential relevance of information technology to three aspects of central banking: setting the objectives of monetary policy, ensuring the integrity and security of financial system infrastructure, and maintaining the transparency of decision-making. Regarding integrity and security of infrastructure, a revised role for central banks may be appropriate. However, recent innovations in technology and advances in learning confirm the wisdom of central banks' efforts to control inflation and maintain their own transparency.Payment systems ; Monetary policy

Bailouts

Despite the cogent criticism that "bailing out" insolvent firms creates moral hazard, bailouts often occur in the aftermath of bank runs and other financial crises. In an environment where it is economically efficient to make illiquid investments, and where investors have private information regarding their respective liquidity risks, the investment contract must satisfy an incentive constraint. Limited liability tightens this constraint under laissez faire. In principle, government bailouts of insolvent firms might undo this adverse effect of limited liability. A theoretical example is constructed in which bailing out an insolvent corporate sector in some states of the world is essential to implementing efficient investment in a limited-liability regime. This example illustrates the beneficial constraint-relaxation effect of a bailout but abstracts from the moral hazard problem against which it must be weighed.Monetary policy ; Inflation (Finance) ; Financial institutions ; Moral hazard

Economic perspective on the political history of the Second Bank of the United States

The Second Bank of the United States was an institution of first-rank importance, both politically and economically, during the early nineteenth century. This article uses recent contributions to theory on industrial organization and monetary economics to argue tentatively that conflict between debtors and creditors may have played a larger role in the bank's fortunes than previously thought.Banks and banking, American

On the emergence of parliamentary government: the role of private information

The way many dictators have been deposed in the 20th century resembles the way a parliamentary form of government emerged in 13th-century England. This medieval example is worth examining because the features that led to its political reform are particularly clear. Despite what many think, that reform cannot be understood simply as a shift in military power from ruler to subjects. Rather, understanding the reform requires understanding that the English king had recently acquired private information crucial to his subjects. Such private information became important after England lost Normandy to France, just before the king issued the Magna Carta (and publicly agreed to consult his subjects before taxing them). Under circumstances like these—when a threat to a society arises and significant private information about the threat develops—the society may need an arrangement for communication like parliament in order to attain economic efficiency.Great Britain ; Political science