19. Assume you are a banker in the time of free banking. You start with $50,000 in gold, which you use to purchase govern¬ ment bonds for deposit in the state treas¬ ury. This transaction authorizes you to issue bank notes, and you use $10,000 of these notes to buy gold reserves and lend out the remaining $40,000. What does your balance sheet look like? How safe is your bank? Consider the following.

(a) . If the value of bonds at the state treasury falls to zero but your loans re¬ main sound, will your bank have to close? Will noteholders be at risk of suffering a loss?

(b) . If the value of bonds at the state treasury stays at $50,000 but the value of the loans you have made falls to zero, will your bank have to close? Will noteholders be at risk of suffering a loss?

(c) . If both the value of bonds at the state treasury and the value of your loans fall to zero, will your bank have to close? Will noteholders be at risk of suffering a loss?

(d) . In many states, owners of free banks were liable not only for their initial invest¬ ments but also for an additional sum equal to those investments. That is, the bank owner in our example would be liable for another $50,000 in personal funds to cover bank notes in the event of bank fail¬

ure. Would this liability be sufficient to prevent noteholders from suffering losses in the above cases?