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

Warren E. Weber

CenFIS Working Paper 15-02
March 2015

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Beginning in 1864, in the United States notes of national banks were the predominant medium of exchange. Each national bank issued its own 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 national 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 (a uniform currency). It finds that bank notes made transacting easier and were not subject to overissuance. National bank notes were perfectly safe because they were insured by the federal government. Further, national bank notes were a uniform currency. Notes of different banks traded at par with each other and with greenbacks. This paper describes the mechanism that was put in place to achieve uniformity. The U.S. experience with national bank notes suggests that a privately issued e-money system can operate efficiently but will require government intervention, regulation, and supervision to minimize counterfeiting, promote safety, and provide the mechanism necessary for different media of exchange to exchange at par with each other.

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 for useful comments on earlier versions of this paper. 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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