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Explaining the Demand for Free Bank Notes

Staff Report 97 | Revised May 1, 1987

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photo of Arthur J. Rolnick

Arthur J. Rolnick Senior Vice President and Director of Research, 1985-2010

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.


Published In: Journal of Monetary Economics (Vol 21, No. 1, January 1988, pp. 47-71) https://doi.org/10.1016/0304-3932(88)90045-1

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