This study is an interesting blend of banking history and theoretical analysis. It represents a continuation of a long series of papers by Gorton and coauthors (cited in the paper) on the endogenous formation of bank clearinghouses and how they can perform many of the functions of a central bank.

The historical analysis is largely based on a comparison of the Canadian and U.S. experience. In the United States, the central bank's function as lender of last resort (liquidity provider) grew out of and imitated private bank clearinghouses. These private clearinghouses entered into coalitions to provide liquidity in anticipation of and during bank panics. They cross-guaranteed, issued private money, and monitored the risk exposure of their members. As discussed in the study, these private arrangements successfully thwarted some—but not all—U.S. bank panics. However, the likelihood of panics, and thus the role of clearinghouses, depends on the industrial organization of banking. In this respect, Canada was and is quite different from the United States. If banks are small and poorly diversified (as they were, historically, in the United States), then panics and failures are more likely, ceteris paribus, than if banks are large and well diversified (as they were and are in Canada). In sum, private bank clearinghouses were not much needed in Canada, but badly needed in the United States.