The singleness of onchain money 

In early-1800s Boston, dollars issued by banks outside of the city were referred to as “foreign money.”

There was a lot of it. Boston ran a persistent trade surplus with its surrounding countryside, so foreign money was constantly flowing into the city as payment for the goods constantly flowing out. It’s estimated that more than half of the notes circulating in 19th-century Boston were “foreign.”

The city’s banks did not appreciate it. The extensive circulation of notes issued by “country banks” (any bank outside of Boston) was displacing their own notes from everyday transactions, they believed, thereby reducing the profits they earned from their core business: creating money.

In 1803, Boston’s banks therefore colluded to stop accepting foreign notes. They hoped this would make them unusable. Instead, it spawned a new industry of “bank-note brokers” who bought foreign money from merchants in Boston (at a discount to par) and then travelled into the countryside to redeem the notes for their full value in specie ($1 worth of gold or silver coin for a $1 note).

Recognizing their strategic error, Boston banks quickly reversed course and became note brokers themselves. This drove the city discount on notes issued by country banks down to about 3%.

It was not a very good business, considering the cost of sending someone miles outside the city — as far as Maine, sometimes — to redeem the notes.

So, in 1824, the Suffolk Bank of Boston led a coalition of local banks in another attempt to drive foreign money out of the city. The allied banks dedicated $300,000 to continually buying up foreign notes and immediately sending them into the countryside for redemption. Their idea was that returning the notes so quickly would drain the country banks of specie. That, they thought, would stop them issuing so many notes — or put them out of business entirely even.

But the notes kept circulating — even in Boston — and within a year, the coalition gave up fighting them.

They decided to manage them instead. The coalition agreed that Suffolk Bank would become a central clearinghouse for participating banks — accepting their notes at par and settling them through a system of "net clearing.” Settling only the net balances between banks meant that far less specie had to travel back and forth between them. 

The “Suffolk Bank System” became the first regionwide clearing system for bank notes in the United States. By the early 1830s, the vast majority of the roughly 300 banks in New England had become members, which meant that the vast majority of bank notes in the region exchanged at par — no questions asked.

It was the monetary union of New England.

Suffolk functioned as a proto-central bank. In return for accepting all notes at par, Suffolk imposed its own banking standards on the region. Member banks were required to leave a substantial deposit with Suffolk (interest free) and agree to maintain a minimum amount of reserves — a minimum set by Suffolk.

Banks didn’t like it, but it worked.

New England’s banks were far less likely to fail than those in other regions. It was easier for banks to sell debt and equity to investors. They were able to issue more notes and hold lower reserves, expanding the local supply of money. More money meant faster economic growth.

Perhaps most importantly, the Suffolk Bank System established a “singleness of money” that benefited everyone in the region. Spared the mental burden of constantly evaluating which bank notes were worth what, merchants and industrialists were freed to evaluate business opportunities instead. 

Today, the primary purpose of banking law is to achieve the same result. The Federal Reserve clears all bank deposits, always at face value. Deposits are guaranteed by the FDIC. Banks receive special treatment in bankruptcy so that even a failing bank’s deposits are accepted at par.

All this ensures that US dollars are “informationally insensitive”: no one ever has to ask how many cents their $1 bill might be worth. The answer is always 100.

Unless, however, the dollar is onchain, where money becomes sensitive to information again.

To hold USDC, for example, you have to know something about Circle. To hold USDT, you have to know something about Tether. To switch from one to the other, you have to go to an exchange, where the prices might not be precisely 1:1.

Crypto people don’t mind this. It’s part of the fun, even.

But business people probably will.

This, I think, is why a consortium of the largest US banks is planning to launch a tokenized deposit network. 

Banks want the onchain economy to use their deposits, of course — stablecoins are a threat to their cheapest source of funding.

But the Federal Reserve is not (yet) onchain so there’s no guarantee that bank-issued onchain dollars will be accepted at par. As a result, tokenized deposits begin to resemble country bank notes of the 19th century: JPMorgan, Citi, and Wells Fargo onchain dollars would not be perfectly interchangeable the way they are offchain.

The banks’ proposed network looks like a private-sector solution to that problem. By creating a common clearer for tokenized deposits, it aims to establish the singleness of money onchain. 

A Suffolk Bank System for the blockchain economy.

— Byron Gilliam

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