A theory of self-enforcing monetary constitutions with reference to the Suffolk System, 1825–1858

Abstract

We develop a theory of self-enforcing monetary constitutions. A monetary constitution is the framework of rules within which money-providing and money-using agents interact. A self-enforcing monetary constitutions is upheld by the agents acting within the system; it thus does not require external enforcement. We describe how the institutional technology of polycentric sovereignty applies to monetary constitutions, and show how the 19th century Suffolk banking system was characterized by polycentric sovereignty, rendering its (de facto) monetary constitution self-enforcing. We conclude by briefly discussing the implications of our analysis for the role of the state in maintaining healthy money and banking systems.