NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Maximizing Seignorage Revenue During Temporary Suspensions of Convertibility: A Note

Michael Bordo, Angela Redish

NBER Working Paper No. 4024 (Also Reprint No. r1837)
Issued in March 1992
NBER Program(s):   DAE   ME

This note extends the theory of the revenue maximizing rate of monetary growth to the case of a temporary suspension of convertibility. It also suggests a methodology for the interpretation of monetary behavior during historical periods of inconvertibility. First we analyze the case of a government with a monopoly over currency issue. The government maximizes seignorage revenue by generating an inflation, but the terminal condition of a return to convertibility implies that the price level must drop at the point of suspension of convertibility, so that there is no discontinuity at the date of resumption. We then consider the behavior of a private banking system whose monetary liabilities are temporarily inconvertible. The model is then used to interpret monetary behaviour during the suspension of convertibility by U.S. banks in 1837/8.

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Document Object Identifier (DOI): 10.3386/w4024

Published: Oxford Economic Papers, , Vol 45., pp. 157-168 (1993)

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