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The Enforceability of Private Money Contracts, Market Efficiency, and Technological Change

62 Pages Posted: 7 Jan 2008  

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: March 1991


The period prior to the U.S. civil War saw the introduction and rapid diffusion of the railroad. It was also the Free Banking Era (1838-1863) during which some states allowed relatively free entry into banking. Banks in all states issued distinct private monies, called bank notes, which circulated at discounts from face value in secondary markets at locations away from the issuing bank. This paper proposes a pricing model for bank notes, and then, using a newly discovered data set of monthly bank note prices for all banks in North America, studies the secondary market for privately issued bank notes during the American Free Banking Era, 1838-1859. To test the model, the durations and costs of trips from Philadelphia to other locations are constructed from pre-Civil War travelers' guides in order to measure improvements resulting from the diffusion of the railroad during this period. The results suggest that the note market accurately priced risk. Systematic wildcat banking was not possible. The transportation costs of note redemption explain only part of bank note discount variation. Bank default risk was differentially priced and such risk premia varied cyclically.

Suggested Citation

Gorton, Gary B., The Enforceability of Private Money Contracts, Market Efficiency, and Technological Change (March 1991). NBER Working Paper No. w3645. Available at SSRN:

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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P.O. Box 208200
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National Bureau of Economic Research (NBER)

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