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Working Paper

The National Banking System: The National Bank Note Puzzle

The era of the National Banking System (1863-1913) has been a puzzling one for monetary theorists and economic historians for well over a century. The puzzles associated with this period take various forms. Despite calculations of high profit rates on note issue for certain periods of the era, national banks never fully utilized their note-issuing powers. Relatedly, the behavior of interest rates during the period is also puzzling given the regime of bank note issuance put in place by the National Bank Acts. On the surface, it appears that an arbitrage condition is broken. The observed inelasticity in aggregate national bank note issue also is puzzling, particularly given the behavior of interest rates. This paper examines many of the puzzles of the national banking era and provides a summary of the current attempts to explain those puzzles. This paper represents a preliminary chapter from a forthcoming monograph on the period of the National Banking System. Other chapters of the monograph appear in the Federal Reserve Bank of Cleveland’s working paper series as working paper 07-19R and working paper 07-23R.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Champ, Bruce. 2007. “The National Banking System: The National Bank Note Puzzle.” Federal Reserve Bank of Cleveland, Working Paper No. 07-22.