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Working Paper
The National Banking System: the national bank note puzzle
The era of the National Banking System (1863?1913) has been a puzzling one for monetary theorists and economic historians for well over a century. The puzzles associated with this period take various forms. Despite calculations of high profit rates on note issue for certain periods of the era, national banks never fully utilized their note-issuing powers. Relatedly, the behavior of interest rates during the period is also puzzling given the regime of bank note issuance put in place by the National Bank Acts. On the surface, it appears that an arbitrage condition is broken. The observed ...
Working Paper
Costly banknote issuance and interest rates under the national banking system
The behavior of interest rates under the U.S. National Banking System is puzzling because of the apparent presence of persistent and large unexploited arbitrage opportunities for note issuing banks. Previous attempts to explain interest rate behavior have relied on the cost or the inelasticity of note issue. These attempts are not entirely satisfactory. Here we propose a new rationale to solve the puzzle. Inelastic note issuance arises endogenously because the marginal cost of issuing notes is an increasing function of circulation. We build a spatial separation model where some fraction of ...
Working Paper
Resolving the National Banking System note-issue puzzle
Under the National Banking System, 1863-1914, national banks that deposited sufficient collateral could issue notes provided they paid a tax on notes in circulation: 1 percent per year before 1900 and 1/2 percent thereafter. Because note issue was far below the allowed maximum, an arbitrage argument predicts that short-term nominal interest rates should have been bounded above by the tax rate. They were not. That is the note-issue puzzle. Our resolution takes the form of a model in which notes play a role, but in which the profitability of note issue is not tied to anything that resembles a ...
Working Paper
The National Banking System: a brief history
During the period of the National Banking System (1863?1913), national banks could issue bank notes backed by holdings of eligible U.S. government securities. This paper presents an overview of the legal and financial history of this period. It begins with the reasons the National Banking System was created. It also examines the rules of operation for national banks as established by the National Banking Act and its subsequent revisions. Furthermore, the paper serves as a brief financial history of the period, examining the various forces that shaped the environment in which national banks ...
Working Paper
The National Banking System: empirical observations
This paper provides a summary of the main features of U.S. financial and banking data during the period of the National Banking System (1863?1914). The purpose of the paper is to provide an overview of the stylized facts associated with the era, with an emphasis on those impinging on national bank behavior. The paper takes a detailed look at key elements of national bank balance sheets over time, over the seasons, and during panic periods. The interesting and puzzling patterns of interest rate movements during the era also are examined. The paper introduces a new set of disaggregated data on ...
Working Paper
Resolving the puzzle of the underissuance of national bank notes
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 ...