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Resolving the Puzzle of the Underissuance of National Bank Notes

  • Charles W. Calomiris
  • Joseph R. Mason

The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a "pure arbitrage" strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope between note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements.

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File URL: http://www.nber.org/papers/w10951.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10951.

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Date of creation: Dec 2004
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:10951
Note: DAE
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  1. Charles W. Calomiris & R. Glenn Hubbard, 1987. "International Adjustment Under the Classical Gold Standard: Evidence for the U.S. and Britain, 1879-1914," NBER Working Papers 2206, National Bureau of Economic Research, Inc.
  2. Kuehlwein, Michael, 1992. "The National Bank Note Controversy Reexamined," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 111-26, February.
  3. Tao Zhu & Neil Wallace, 2004. "Float on a note," Econometric Society 2004 Far Eastern Meetings 743, Econometric Society.
  4. Bruce Champ & Neil Wallace & Warren E. Weber, 1992. "Resolving the national bank note paradox," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-21.
  5. Calomiris, Charles W, 1994. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 344, April.
  6. Duggar, Jan Warren & Rost, Ronald F., 1969. "National Bank Note Redemption and Treasury Cash," The Journal of Economic History, Cambridge University Press, vol. 29(03), pages 512-520, September.
  7. Tao Zhu & Neil Wallace, 2004. "Float on a Note," 2004 Meeting Papers 342, Society for Economic Dynamics.
  8. 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.
  9. 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.
  10. Tao Zhu & Neil Wallace, 2004. "Float on a Note," Econometric Society 2004 North American Summer Meetings 538, Econometric Society.
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