The Efficiency of Private E-Money-Like Systems: The U.S. Experience with State Bank Notes

Warren E. Weber

CenFIS Working Paper 15-01
March 2015

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In the United States prior to 1863, each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes—a privately issued currency system with multiple issuers—functioned with respect to ease of transacting, counterfeiting, safety, overissuance, and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was widespread, bank notes were not perfectly safe, and notes of different banks did not exchange at par and rates of exchange were volatile. The paper also examines how bank notes were regulated and supervised and how that regulation and supervision affected the functioning of the system. The U.S. experience with state bank notes suggests that a privately issued e-money system can operate efficiently but only with appropriate government intervention, regulation, and supervision to minimize counterfeiting and to promote safety and par exchange.

JEL classification: E41, E42, E58

Key words: Bank notes, E-money, financial services


The author thanks Ben Fung, Gerald Stuber, and participants at a seminar at the Bank of Canada and at the Conference on the Future of Payments for useful comments on earlier versions of this paper and Kim Huynh for help with the VARs. The views expressed here are the author’s and not necessarily those of the Bank of Canada, the Federal Reserve Bank of Atlanta, or the Federal Reserve System. Any remaining errors are the author’s responsibility.
Please address questions regarding content to Warren E. Weber, Visiting Scholar, Bank of Canada; Visiting Scholar, Federal Reserve Bank of Atlanta; Visiting Professor, University of South Carolina, weweber@gmail.com.
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