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    The Note Issue Paradox in the Free Banking Era

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    Note Issue Paradox in Free Banking Era (708.4Kb)
    Date
    1996
    Author
    Bodenhorn, Howard
    Haupert, Michael
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    Abstract
    In recent years a number of papers have appeared offering explanations of the long-noted, long-unresolved note issue paradox in both the free and national banking eras. Some have argued that previous profit calculations overstate the true cost of note issue because they fail to account for risks and costs that are not easily modeled. Others have argued that profit calculations are reasonably accurate and demonstrate that the bankers acted irrationally in failing to reap easily gathered profits. Yet another approach radically modified the basis of the calculation and found potential profits to be quite small. This note offers an explanation overlooked by most previous studies: that although note issue was profitable, a more profitable avenue existed. Because of legal and institutional restrictions, banks found it more profitable at the margin to create deposits rather than issue notes in extending credit.
    Subject
    free banking era
    note issue paradox
    Permanent Link
    http://digital.library.wisc.edu/1793/46084
    Citation
    The Journal of Economic History, vol. 56 (1996)
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    • UW-L Faculty Publications

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