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Explaining the demand for free bank notes
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.
Keywords: Free banking; Bank notes;
Status: Published in Journal of Monetary Economics (Vol.21, n.1, January 1988, pp.47-71)
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Staff Report
Publication Date: 1992
Number: 97