Showing papers on "Collateral published in 1976"

The Loan Market, Collateral, and Rates of Interest

Abstract: This paper develops a theoretical model in which collateral is a mechanism for enforcing loan contracts. Collateral functions in two ways in the model. First, default on a loan triggers the loss of collateral value to the borrower, where this value is stochastic at the time when the loan is negotiated. The assignment of collateral provides incentive for the borrower to repay the loan. Second, default implies that the property nght to the collateral is transferred to the lender. The lender valuation of collateral, which may diverge from the borrower valuation, is also stochastic at the time of loan negotiation. The relation of lender to borrower valuation plays an important role in the loan process. If, because of costs of collection and marketing, moral hazard problems, or other types of "transaction costs," the lender valuation is much below the borrower valuation, then the process of default will entail dead-weight losses. Interest rates charged on loans will reflect these losses-appropriately weighted by the probability of default-and the expected interest charge paid by the borrower will be correspondingly above the underlying, transaction-cost-free rate of return. The more important these costs associated with default, the greater would be the dead-weight losses incurred and the amount of (otherwise) profitable loan opportunities foregone. Section 1 sets out the basic model and discusses the expected interest costs from the viewpoint of the borrower. Section 2 introduces transaction costs associated with default, discusses the expected interest return from the viewpoint of the lender, and analyzes the maximum size loan that would be issued by lenders on the basis of a given "quantity" of collateral. Section 3 uses the assumption that the lending industry yields a competitive rate of return to analyze the determination of

The Conundrum of the Low Issue of National Bank Notes

Abstract: In the late nineteenth century the United States experienced a prolonged period of deflation, with the Warren-Pearson wholesale price index declining from 136 in 1872 to 68 in 1896 (Warren and Pearson 1933, pp. 12-13). Between 1879 and 1897 prices fell at a rate of 1 percent per year while the money stock increased at a 6 percent annual rate, which was markedly slower than the rate of increase after 1897. This relatively slow rate of growth of the money supply resulting in the deflation has frequently been attributed to the scarcity of gold over the period. To be sure, increases in the stock of high-powered money did account for twothirds of the monetary growth which occurred between 1879 and 1897 (Friedman and Schwartz 1963, p. 121), but the scarcity argument is somewhat incomplete since gold was not the only constraint on the growth of the stock of high-powered money. The volume of high-powered money at the time was nowhere near the maximum allowable amount. National bank notes also were a component of high-powered money. The National Banking Acts of 1863 and 1864 authorized national banks to issue notes after certain types of U.S. bonds were deposited with the treasury as collateral. The amendments of 1882 limited note issue by individual national banks to 90 percent of the paid-in capital of the bank and 90 percent of the par or market value, which ever was lower, of the bonds used as collateral. The Gold Standard Act of 1900 eased these requirements to allow issues up to 100 percent of the paid-in capital and the par or market value of the bonds.1 Between the passage of the Resumption Act of 1875 and 1900 never more than 30 percent of the maximum allowable issue of notes was actually issued. Some constraint other than just gold affected the growth of the stock of high-powered money. What could have limited the issue of national bank notes? In fact, the problem is all the more curious in