The National Bank Note Puzzle Reinterpreted

Phillip Cagan and Anna Schwartz

Journal of Money, Credit and Banking, 1991, vol. 23, issue 3, 293-307

Abstract: We previously calculated the profit in issuing notes by national banks to be quite attractive after the late 1890s until all notes were retired in 1935. Yet the banks took until the 1920s to approach the maximum quantity allowed. Proposed explanations in the subsequent literature of this slow response were that redemption costs made note issues unprofitable or that banks had more attractive alternative investments. We show that these explanations are not satisfactory, and that a reinterpretation of the puzzle is why banks did not bid up the market prices of the eligible bonds to reflect their value in securing note issues. Copyright 1991 by Ohio State University Press.

Date: 1991
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