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. This Article examines the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and shows that financial markets closed endogenously. The opacity of bank money in the recent financial crisis is also discussed.