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Resolving the puzzle of the underissuance of national bank notes

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  • Calomiris, Charles W.
  • Mason, Joseph R.

Abstract

Much of the puzzle of underissuance of national bank notes can be resolved for the period 1880-1900 (the period when detailed, bank-level data are available) by disaggregating, taking account of regulatory limits, and considering differences in banks' opportunity costs cross-sectionally and over time. Banks with poor lending opportunities issued more, within regulatory limits. Banks tended to issue more when bond yields (the backing for notes) were high relative to lending opportunities. The profitability of note issuance was insufficient to attract entrants primarily or mainly for the purpose of note issuance. The observed lack of a general relationship between note issuance and reserve demand is inconsistent with the view that redemption costs from note issuance explain low note issuance in general. However, some variation in the propensities of urban banks to issue notes is associated with variation in reserve demand costs associated with the note issues of those banks. Generally, however, note issuance enjoyed economies of scope with deposit banking, including reduced costs of reserve requirements.

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Bibliographic Info

Article provided by Elsevier in its journal Explorations in Economic History.

Volume (Year): 45 (2008)
Issue (Month): 4 (September)
Pages: 327-355

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Handle: RePEc:eee:exehis:v:45:y:2008:i:4:p:327-355

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Web page: http://www.elsevier.com/locate/inca/622830

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Keywords: National bank Bank notes Scope economies;

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References

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  1. Cagan, Phillip & Schwartz, Anna J, 1991. "The National Bank Note Puzzle Reinterpreted," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 293-307, August.
  2. Duggar, Jan Warren & Rost, Ronald F., 1969. "National Bank Note Redemption and Treasury Cash," The Journal of Economic History, Cambridge University Press, vol. 29(03), pages 512-520, September.
  3. Calomiris, Charles W, 1988. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 719-50, December.
  4. Tao Zhu & Neil Wallace, 2004. "Float on a note," Econometric Society 2004 Far Eastern Meetings 743, Econometric Society.
  5. Tao Zhu & Neil Wallace, 2004. "Float on a Note," Econometric Society 2004 North American Summer Meetings 538, Econometric Society.
  6. Bruce Champ & Neil Wallace & Warren E. Weber, 1992. "Resolving the national bank note paradox," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-21.
  7. James, John A, 1976. "The Conundrum of the Low Issue of National Bank Notes," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 359-67, April.
  8. Charles W. Calomiris & R. Glenn Hubbard, 1998. "International Adjustment Under the Classical Gold Standard: Evidence for the U.S. and Britain, 1879-1914," NBER Working Papers 2206, National Bureau of Economic Research, Inc.
  9. Kuehlwein, Michael, 1992. "The National Bank Note Controversy Reexamined," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 111-26, February.
  10. Tao Zhu & Neil Wallace, 2004. "Float on a Note," 2004 Meeting Papers 342, Society for Economic Dynamics.
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Cited by:
  1. Stephen Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta.

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