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Resolving the National Banking System note-issue puzzle

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  • Bruce A. Champ
  • Neil Wallace

Abstract

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 market rate of interest.

Suggested Citation

  • Bruce A. Champ & Neil Wallace, 2003. "Resolving the National Banking System note-issue puzzle," Working Papers (Old Series) 0316, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0316
    DOI: 10.26509/frbc-wp-200316
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    References listed on IDEAS

    as
    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. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    3. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
    4. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    5. Bruce A. Champ & Scott Freeman & Warren E. Weber, 1999. "Redemption costs and interest rates under the U.S. National Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 568-595.
    6. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
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    Cited by:

    1. Asaf Bernstein & Eric Hughson & Marc D. Weidenmier, 2008. "Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed," NBER Working Papers 14422, National Bureau of Economic Research, Inc.

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    Keywords

    Bank notes; National banks (United States);

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