Pricing free bank notes

During the pre-Civil War period, US banks issued distinct private monies, c alled bank notes. A bank note is a perpetual, risky, non-interest-bearing, debt claim with the right to redeem on demand at par in specie. This paper investigates the pricing of this private money taking into account the enor mous changes in technology during the period, namely, the introduction and rapid diffusion of the railroad. A contingent claims pricing model for bank notes is proposed and tested using monthly bank note prices for all banks in North America together with indices of the durations and costs of trips back to issuing banks constructed from pre-Civil War travelers' guides. Evi dence is produced that market participants properly priced the risks inhere nt in these securities, suggesting that wildcat banking was not common beca use of market discipline. (C) 1999 Elsevier Science B.V. All rights reserve d. JEL classification: G21.