(A version of this work was published in the Federal Reserve Bank of Richmond's Economic Review, 1991 Vol. 77, No. 1 )
The evolution and structure of the payments system is explained by efficiency gains from substituting claims on particular institutions for commodity money. Information-intensive lending and payments services have been provided jointly by the same set of institutions, i.e., banks, because systems to evaluate credit, monitor and enforce loan agreements, and extend credit on short notice are productive in originating loans to nonfinancial customers and in managing lending to support an efficient provision of payments services. Monetary policy protects the payments system in a way that private arrangements could not. In contrast, Fed discount window lending matters because pledging rules favor the Fed over private lenders. Pre-Fed clearinghouses suggest that daylight overdrafts and Fed limits on direct access to the payments system are efficient in principle. Deposit insurance is viewed as one substitute for unrestricted branching as a means of diversifying nontraded loans. Pre-Fed clearinghouses suggest a tough exclusion principle to run deposit insurance more efficiently. Narrow banking is an unnecessarily costly alternative.