The National Bank Note Controversy Reexamined

Abstract

During the period 1888-1907, national banks proved reluctant to devote the maximum allowable fraction of their capital to the issue of national bank notes. John A. James (1976) attributes this to note issue being less profitable than direct loans. This paper demonstrates note issue was the more profitable investment. Their scarcity is instead attributed to the riskiness of the government bonds required to back them. Tests of a mean-variance model of bank note determination indicate national banks were concerned with both risk and return. Further tests reveal the variance of government bond returns significantly eclipsed that of direct loans. Copyright 1992 by Ohio State University Press.

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