Working Paper: NBER ID: w19540
Authors: Gary Gorton
Abstract: An examination of U.S. banking history shows that economically efficient private bank money requires that information-revealing securities markets for bank liabilities be closed. That is, banks are optimally opaque, which is why they are regulated and examined. I show this by examining the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and show that markets endogenous closed. The opacity of bank money in the recent financial crisis is also briefly discussed.
Keywords: bank opacity; financial stability; bank runs; demand deposits; private bank notes
JEL Codes: E32; E41; E42; E44; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank Opacity (E58) | Acceptance of Liabilities at Par (G33) |
| Bank Opacity (E58) | Prevention of Bank Runs (E44) |
| Closure of Informative Financial Markets (G19) | Stability of Banking System (G21) |
| Transition from Private Bank Notes to Demand Deposits (E41) | Reduction of Transaction Costs (D23) |
| Clearing Houses (G29) | Management of Information during Financial Crises (H12) |
| Management of Information during Financial Crises (H12) | Prevention of Bank Runs (E44) |
| Opacity Mechanisms (O30) | Stability of Banking System (G21) |
| Historical Context of Banking Systems (N23) | Insights into Financial Crises (G01) |