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Bank-Specific Default Risk in the Pricing of Bank Note Discounts




Bank notes were the largest component of the antebellum money supply despite losses as high as 5 percent in some years. Using a comprehensive bank-level panel of note discounts in New York City and Philadelphia, I explain this contradiction by showing that the secondary market reduced losses by accurately discounting notes based on their individual risk of default. Note discounts were almost exclusively sensitive to those factors which increased a bank's probability of default: specie suspensions, falling bond prices, and undiversified portfolios. Thus, by accounting for a bank's composition and environment, the market protected noteholders and allowed notes to circulate throughout the economy.

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  • Jaremski, Matthew, 2011. "Bank-Specific Default Risk in the Pricing of Bank Note Discounts," The Journal of Economic History, Cambridge University Press, vol. 71(04), pages 950-975, December.
  • Handle: RePEc:cup:jechis:v:71:y:2011:i:04:p:950-975_00

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    Cited by:

    1. Chabot, Benjamin, 2017. "The Federal Reserve’s Evolving Monetary Policy Implementation Framework: 1914-1923," Working Paper Series WP-2017-1, Federal Reserve Bank of Chicago.
    2. Jaremski, Matthew & Mathy, Gabrial, 2017. "Looking Back On the Age of Checking in America, 1800-1960," MPRA Paper 78083, University Library of Munich, Germany.

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