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The National Bank Note Puzzle Reinterpreted

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  • Cagan, Phillip
  • Schwartz, Anna J

Abstract

We previously calculated the profit in issuing notes by national banks to be quite attractive after the late 1890s until all notes were retired in 1935. Yet the banks took until the 1920s to approach the maximum quantity allowed. Proposed explanations in the subsequent literature of this slow response were that redemption costs made note issues unprofitable or that banks had more attractive alternative investments. We show that these explanations are not satisfactory, and that a reinterpretation of the puzzle is why banks did not bid up the market prices of the eligible bonds to reflect their value in securing note issues. Copyright 1991 by Ohio State University Press.

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  • 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.
    • Handle: RePEc:mcb:jmoncb:v:23:y:1991:i:3:p:293-307
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    Cited by:

    1. Champ, Bruce & Wallace, Neil & Weber, Warren E., 1994. "Interest rates under the U.S. national banking system," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 343-358, December.
    2. 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.
    3. Gary Gorton & Tyler Muir, 2016. "Mobile Collateral versus Immobile Collateral," NBER Working Papers 22619, National Bureau of Economic Research, Inc.
    4. Leo Ferraris, 2002. "Money and credit in random matching models of money," Working Papers in Public Economics 59, University of Rome La Sapienza, Department of Economics and Law.
    5. 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.
    6. Warren E. Weber, 2015. "The efficiency of private e-money-like systems: the U.S. experience with national bank notes," FRB Atlanta CenFIS Working Paper 15-2, Federal Reserve Bank of Atlanta.
    7. Jaremski, Matthew, 2017. "Privately Issued Money in the US," Working Papers 2017-05, Department of Economics, Colgate University, revised 20 Sep 2017.
    8. 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.
    9. Gary Gorton & Toomas Laarits & Tyler Muir, 2022. "Mobile Collateral versus Immobile Collateral," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1673-1703, September.
    10. Bruce A. Champ & Neil Wallace & Warren E. Weber, 1992. "Resolving the national bank note paradox," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 16(Spr), pages 13-21.

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