The Development of Opacity in U.S. Banking
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.
This paper draws on ideas in joint work with Tri Vi Dang, Bengt Holmström and Guillermo Ordonez to whom I am very grateful. Thanks to Yiming Ma and Arwin Zeissler for research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.