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Explaining the demand for free bank notes

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  • Arthur J. Rolnick
  • Warren E. Weber
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    Abstract

    This paper explains why the risky notes of banks established during the Free Banking Era (1837–63) were demanded even when relatively safe specie (gold and silver coin) was an alternative. Free bank notes were demanded because they were priced to reflect the expected value of their backing. The empirical evidence supports this explanation. Specifically, in New York, Wisconsin, and Indiana the expected value of backing was sufficient for free bank notes to circulate at par, which they did. In Minnesota the backing for notes was very poor: they exchanged well below par, being treated as small-denomination securities.

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    File URL: http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=378
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    File URL: http://minneapolisfed.org/research/sr/sr97.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 97.

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    Date of creation: 1992
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    Publication status: Published in Journal of Monetary Economics (Vol.21, n.1, January 1988, pp.47-71)
    Handle: RePEc:fip:fedmsr:97

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    Related research

    Keywords: Free banking ; Bank notes;

    This paper has been announced in the following NEP Reports:

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    1. Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-67, May.
    2. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-91, December.
    3. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
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