Reputation Formation in Early Bank Note Markets.

Two hypotheses concerning firms issuing debt for the first time are tested. The first is that new firms' debt is discounted more heavily by lenders compared to otherwise identical firms that have 'reputations' in the form of credit histories. The second hypothesis is that, prior to the establishment of a reputation, new firms issuing debt are monitored more intensely. The sample studied consists of new banks issuing bank notes for the first time during the American Free Banking Era (1838-60). The results explain why the pre-Civil War system of private money issuance by banks was not plagued by problems of overissuance ('wildcat banking'). Copyright 1996 by University of Chicago Press.