Resolving the National Banking System Note-Issue Puzzle

17 Pages Posted: 2 Nov 2007

See all articles by Bruce A. Champ

Bruce A. Champ

Federal Reserve Bank of Cleveland

Neil Wallace

Pennsylvania State University, College of the Liberal Arts - Department of Economic

Date Written: December 2003

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.

Keywords: bank notes, National Banking System, interest rates, random matching model

JEL Classification: E42, N11

Suggested Citation

Champ, Bruce A. and Wallace, Neil, Resolving the National Banking System Note-Issue Puzzle (December 2003). FRB of Cleveland Working Paper No. 03-16, Available at SSRN: https://ssrn.com/abstract=1026263 or http://dx.doi.org/10.2139/ssrn.1026263

Bruce A. Champ (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Neil Wallace

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
814-863-3805 (Phone)
814-863-4775 (Fax)

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