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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: [email protected].
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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

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