Resolving the national bank note paradox
AbstractDuring the 1882_1914 period, U.S. national banks could issue circulating notes backed by specified government securities. Earlier attempts to explain yields on those securities by costs of note issue discovered a paradox: yields were too high. We point out two previously ignored sources of costs: idle notes and note redemptions that were highly variable, thereby exacerbating the problem of managing reserves. We present data on idle notes and estimate, from partial data on redemptions, the uncertainty due to redemptions. We also present a semiannual time series of an upper bound on the average additional return on equity a national bank would earn by fully using its note issue privilege. Since the median of this series is 0.5 percent and since this upper bound does not include the average costs stemming from the exacerbated reserve management problem, we conclude that the specified government securities did not have paradoxically high yields.
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Bibliographic InfoArticle provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.
Volume (Year): (1992)
Issue (Month): Spr ()
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- 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.
- 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.
- Calomiris, Charles W. & Mason, Joseph R., 2008.
"Resolving the puzzle of the underissuance of national bank notes,"
Explorations in Economic History,
Elsevier, vol. 45(4), pages 327-355, September.
- Charles W. Calomiris & Joseph R. Mason, 2004. "Resolving the Puzzle of the Underissuance of National Bank Notes," NBER Working Papers 10951, National Bureau of Economic Research, Inc.
- Charles W. Calomiris & Joseph R. Mason, 2005. "Resolving the puzzle of the underissuance of national bank notes," Working Papers 05-19, Federal Reserve Bank of Philadelphia.
- Eugene N. White, 2011. "“To Establish a More Effective Supervision of Banking”: How the Birth of the Fed Altered Bank Supervision," NBER Working Papers 16825, National Bureau of Economic Research, Inc.
- Antoine Martin & Cyril Monnet & Warren E. Weber, 2000. "Costly banknote issuance and interest rates under the national banking system," Working Papers 601, Federal Reserve Bank of Minneapolis.
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