Resolving the puzzle of the underissuance of national bank notesCoauthor(s): Joseph Mason.
Much of the puzzle of underissuance of national bank notes can be resolved for the period 1880–1900 (the period when detailed, bank-level data are available) by disaggregating, taking account of regulatory limits, and considering differences in banks' opportunity costs cross-sectionally and over time. Banks with poor lending opportunities issued more, within regulatory limits. Banks tended to issue more when bond yields (the backing for notes) were high relative to lending opportunities. The profitability of note issuance was insufficient to attract entrants primarily or mainly for the purpose of note issuance. The observed lack of a general relationship between note issuance and reserve demand is inconsistent with the view that redemption costs from note issuance explain low note issuance in general. However, some variation in the propensities of urban banks to issue notes is associated with variation in reserve demand costs associated with the note issues of those banks. Generally, however, note issuance enjoyed economies of scope with deposit banking, including reduced costs of reserve requirements.
The PDF above is a preprint version of the article. The final version may be found at < http://dx.doi.org/10.1016/j.eeh.2008.01.001 >.
Source: Explorations in Economic History
Calomiris, Charles, and Joseph Mason. "Resolving the puzzle of the underissuance of national bank notes." Explorations in Economic History 45 (September 2008): 327-355.
Date: 9 2008