Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-18T02:28:51.483Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank-Specific Default Risk in the Pricing of Bank Note Discounts

Published online by Cambridge University Press:  14 November 2011

MATTHEW JAREMSKI
MATTHEW JAREMSKI*
Affiliation:
Assistant Professor, Department of Economics, Colgate University, 13 Oak Drive, Hamilton, NY 13346. E-mail: mjaremski@colgate.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

Bank notes were the largest component of the antebellum money supply despite losses as high as 5 percent in some years. Using a comprehensive bank-level panel of note discounts in New York City and Philadelphia, I explain this contradiction by showing that the secondary market reduced losses by accurately discounting notes based on their individual risk of default. Note discounts were almost exclusively sensitive to those factors which increased a bank's probability of default: specie suspensions, falling bond prices, and undiversified portfolios. Thus, by accounting for a bank's composition and environment, the market protected noteholders and allowed notes to circulate throughout the economy.

Type
ARTICLES
Information
The Journal of Economic History , Volume 71 , Issue 4 , December 2011 , pp. 950 - 975
Copyright
Copyright © The Economic History Association 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ales, Laurence, Carapella, Francesca, Maziero, Pricila, and Warren, E. Weber. “A Model of Banknote Discounts.” Journal of Economic Theory 142, no. 1 (2008): 5–27.CrossRefGoogle Scholar
Appletons’ Railway and Steam Navigation Guide. New York: D. Appleton & Co., 1856–1859.Google Scholar
Avery, Robert B., Belton, Terrence M., and Michael, A. Goldberg. “Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets.” Journal of Money, Credit, and Banking 20, no. 4 (1988): 597–610.CrossRefGoogle Scholar
Aydemir, Abdurrahman, and George, J. Borjas. “Attenuation Bias in Measuring the Wage Impact of Immigration.” Journal of Labor Economics 29, no. 1 (2011): 69–112.CrossRefGoogle Scholar
The Bankers’ Magazine, and State Financial Register. Baltimore, MD: J. Smith Homans, 1846–1849.Google Scholar
Black, Fischer, and John, C. Cox. “Valuing Corporate Securities: Some Effects of Bond Indentures.” Journal of Finance 31, no. 2 (1976): 351–67.CrossRefGoogle Scholar
Bodenhorn, Howard. “Quis Custodiet Ipsos Custodes?” Eastern Economic Journal 24, no. 1 (1998): 7–24.Google Scholar
Bodenhorn, Howard. State Banking in Early America: A New Economic History. New York: Oxford University Press, 2003.Google Scholar
Bongini, Paola, Claessens, Stijn and Ferri, Giovanni. “The Political Economy of Distress in East Asian Financial Institutions.” Journal of Financial Services 19, no. 1 (2001): 5–25.CrossRefGoogle Scholar
Cagan, Philip. “The First Fifty Years of the National Banking System: An Historical Appraisal.” In Banking and Monetary Studies, edited by Carson, Deane, 15–42. Homewood, IL: Richard D. Irwin, 1963.Google Scholar
Dillistin, W. H. Bank Note Reporters and Counterfeit Detectors, 1826–1866. Numismatic Notes and Monographs, no. 114. New York: American Numismatic Soc., 1949.Google Scholar
Dwyer, Gerald P. Jr., Hafer, R. W., and Warren, E. Weber. “Weekly U.S. and State Bond Prices.” Historical Methods 32, no. 1 (1999): 37–42.CrossRefGoogle Scholar
Economopoulos, Andrew. “Free Bank Failures in New York and Wisconsin: A Portfolio Analysis.” Explorations in Economic History 27, no. 4 (1990): 421–41.CrossRefGoogle Scholar
Fishlow, Albert. American Railroads and the Transformation of the Ante-Bellum Economy.Cambridge, MA: Harvard University Press, 1965.Google Scholar
Flannery, Mark J., and Sorin, M. Sorescu. “Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983–1991.” Journal of Finance 51, no. 4 (1996): 1347–77.Google Scholar
Gorton, Gary. “An Introduction to Van Court's Bank Note Reporter and Counterfeit Detector.” The Wharton School, University of Pennsylvania. Unpublished Manuscript, 1989.Google Scholar
Gorton, Gary. “Ante Bellum Transportation Indices.” The Wharton School, University of Pennsylvania. Unpublished Manuscript, 1989.Google Scholar
Gorton, Gary. “Reputation Formation in Early Bank Note Markets.” Journal of Political Economy 104, no. 2 (1996): 346–97.CrossRefGoogle Scholar
Gorton, Gary. “Pricing Free Bank Notes.” Journal of Monetary Economics 44, no. 1 (1999): 33–64.CrossRefGoogle Scholar
Gorton, Gary, and Anthony, M. Santomero. “Market Discipline and Bank Subordinated Debt.” Journal of Money, Credit, and Banking 22, no. 1 (1990): 119–28.CrossRefGoogle Scholar
Gorton, Gary, and Warren, E. Weber. “Quoted Discounts on State Bank Notes in Philadelphia, 1832–1858.” Research Department, Federal Reserve Bank of Minneapolis. http://minneapolisfed.org/research/economists/wewproj.html, accessed 2009.Google Scholar
Homer, Sydney and Sylla, Richard. A History of Interest Rates, 4th edition. Hoboken, NJ: John Wiley & Sons, Inc., 2005.Google Scholar
Jaremski, Matthew. “Estimating Antebellum Passenger Costs: Applying a Hub-and-Spoke Approach to Note Redemption Networks.” Unpublished Manuscript, Vanderbilt University, 2010.Google Scholar
Jaremski, Matthew. “Free Bank Failures: Risky Bonds vs. Undiversified Portfolios.” Journal of Money, Credit, and Banking 42, no. 8 (2010): 1565–87.CrossRefGoogle Scholar
King, Robert G. “On the Economics of Private Money.” Journal of Monetary Economics 12, no. 1 (1983): 127–58.CrossRefGoogle Scholar
Merchants’ Magazine and Commercial Review. 1848–1861.Google Scholar
Meyer, Paul A., and Howard, W. Pifer. “Prediction of Banking Failures.” Journal of Finance 25, no. 4 (1970): 853–68.CrossRefGoogle Scholar
Mihm, Stephen. A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States.Cambridge, MA: Harvard University Press, 2007.CrossRefGoogle Scholar
Petersen, Mitchell A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” The Review of Financial Studies 22, no. 1 (2009): 435–80.CrossRefGoogle Scholar
Pettaway, Richard H., and Joseph, F. Sinkey Jr. “Establishing On-Site Bank Examination Priorities: An Early Warning System Using Accounting and Market Information.” Journal of Finance 35, no. 1 (1980): 137–50.Google Scholar
Rockoff, Hugh. “The Free Banking Era: A Reexamination.” Journal of Money, Credit, and Banking 6, no. 2 (1974): 141–67.CrossRefGoogle Scholar
Rolnick, Arthur J., and Warren, E. Weber. “The Causes of Free Bank Failures: A Detailed Examination.” Journal of Monetary Economics 14, no. 3 (1984): 269–91.CrossRefGoogle Scholar
Rolnick, Arthur J., and Warren, E. Weber. “Banking Instability and Regulation in the U.S. Free Banking Era.” Federal Reserve Bank of Minneapolis Quarterly Review 9, no. 3, Summer 1985.Google Scholar
Rolnick, Arthur J., and Warren, E. Weber. “Explaining the Demand for Free Bank Notes.” Journal of Monetary Economics 21, no. 1 (1988): 47–71.CrossRefGoogle Scholar
Sylla, Richard, Wilson, Jack, and Richard, E. Wright. “Early U.S. Securities Prices.” http://eh.net/databases/early-us-securities-prices, 2005.Google Scholar
Taylor, George R. The Transportation Revolution. White Plains, NY: M. E. Sharpe, Inc., 1951.Google Scholar
Temin, Peter. The Jacksonian Economy. New York: W. W. Norton & Company, 1969.Google Scholar
Wallis, John J. “What Caused the Crisis of 1839?” NBER Historical Working Paper No. 133, Cambridge, MA, April 2001.Google Scholar
Wallis, John J, Sylla, Richard, and Arthur Grinath, III. “Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839–1843.” NBER Working Paper No. W10753, Cambridge, MA, September 2004.CrossRefGoogle Scholar
Weber, Warren E. “Quoted Discounts on State Bank Notes in New York, Selected Dates, 1827–1858.” Research Department, Federal Reserve Bank of Minneapolis. Available online at http://minneapolisfed.org/research/economists/wewproj.html, accessed 2009.Google Scholar
Weber, Warren E. “Listing of All State Banks with Beginning and Ending Dates.” Research Department, Federal Reserve Bank of Minneapolis. Available online at http://research.mpls.frb.fed.us/research/economists/wewproj.html, 2005.Google Scholar
Weber, Warren E. “Were U.S. State Banknotes Priced as Securities?” Federal Reserve Bank of Minneapolis, Research Department Staff Report #344, 2005.Google Scholar
Weber, Warren E. “Balance Sheets for U.S. Antebellum State Banks.” Research Department, Federal Reserve Bank of Minneapolis. Available online at http://research.mpls.frb.fed.us/research/economists/wewproj.html, 2008.Google Scholar
Weber, Warren E. “Bank Liability Insurance Schemes Before 1865.” Research Department, Federal Reserve Bank of Minneapolis Working Paper #679, 2010.Google Scholar
Whalen, Gary. “A Proportional Hazard Model of Bank Failure: An Examination of Its Usefulness as an Early Warning Tool.” Federal Reserve Bank of Cleveland, Economic Review 27 (1991): 21 31.Google Scholar
Wheelock, David C., and Paul, W. Wilson. “Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency.” Review of Economics and Statistics 77, no. 4 (1995): 689–700.CrossRefGoogle Scholar