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Explaining the demand for free bank notes

Author

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  • Arthur J. Rolnick
  • Warren E. Weber

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.

Suggested Citation

  • Arthur J. Rolnick & Warren E. Weber, 1992. "Explaining the demand for free bank notes," Staff Report 97, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:97
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    References listed on IDEAS

    as
    1. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
    2. Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-167, May.
    3. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-1091, December.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Free banking ; Bank notes;

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