Actually the knob is just a decorative way to cover up the joinery.
The mortgage button is one of history’s more enduring myths. You will hear it told in many historic houses, and believe it or not, there are actually companies that sell “mortgage buttons” so you can install one on your newel post to show all your friends that there is no lien on your property. Buy one if you like—there’s no law against silliness—but I know of no instance where mortgage documents, or anything else, have been discovered rolled up inside the newel post of an old house. Nor do any of the architectural historians at Colonial Williamsburg.
Usually the myth claims that this is a long-standing New England tradition (or old British tradition) dating from the 17th century. Some say it originated in Nantucket. Supposedly, when the house’s mortgage was fully paid, the homeowner drilled a hole in the newel post of the main staircase, rolled up the mortgage document, put it inside, and capped the hole with a decorative plug. Or they burned the document and stashed the ashes. And some people do this today because they’ve heard the myth.
Trouble is, mortgages didn’t exist in the 17th century. Or the 18th. Heck, banks didn’t exist in America in the 17th or 18th centuries! Real property has been used as collateral for debt for centuries, but that isn’t a mortgage. In the nineteenth century, mortgages (and banks) did exist. Homes were typically financed by a three-to-five-year balloon loan where homeowners made interest-only payments for the duration, then could roll them over into a new loan when they came due. Mortgages as we know them didn’t exist until the creation of the FHA in 1934. As Time magazine says in its 9/6/10 issue, “The thirty-year mortgage was a revolution, a stark contrast to the short-term loans that had been the norm until then.”
The late Charles Peterson, preservationist and architectural historian who conceived of the HABS project during the Depression, tried for years to find historic proof for this legend. He noted that some Philadelphia homes from the colonial period had ivory “amity” buttons in their newel posts, supposedly put there by the Quaker builder when the owner had paid his debt.
“Unfortunately, Charlie Peterson couldn’t find any evidence for the truth of this fable, and you can be sure he subjected the matter to a totally dedicated search. You might think there would be some notations in the deeds, or in the correspondence of the day, or in the literature of the times. You would think that someone who repeats this tale would be able to relate where he got it, and that would lead to some letters in an attic, and that if you work hard enough, you will find it. But when the button matter came up, Mr. Peterson would suddenly become grim-lipped and sad, and repeat the mantra that there is no evidence to support the story. He even awarded prizes to architectural students for essays on newel posts, bannisters and stair rails, but no student essay ever turned up any authentication of the Amity Button story. Absence of evidence is of course not the same as evidence of absence, so it is remotely possible that the story will some day be vindicated.” (http://www.philadelphia-reflections.com/blog/946.htm)
History Myths Debunked 
Actually, mortgages did exist in the 18th century in NJ. But they came from individuals, not from banks, which, as you say, did not exist.
Banks had existed in Europe (especially northern Italy) since the mid-12th century. Why were there none here?
Many mortgages in the U.S. prior to 1934 were from insurance companies. They were much different from the mortgages we know today. Typically they would have a five or ten year term — though they would often be rolled over — and would virtually never be for more than 50% of the purchase price.
The payments were interest-only until the final payment in which the entirety of the principal was due. The purpose of these loans (from the lenders’ point of view) was not to encourage construction or industry, but to hope that the final payment could not be made, so the property could be taken over by the lender (think Snidely Whiplash).
Interesting. But the 18th century mortgages I am thinking of did not come from insurance companies. They came from the richest guys in the neighborhood.
This article is SO wrong. Mortgages did exist. The banks used to require 50% down because the idea of the bankers was that 50% equity right off the bat meant that someone would be very unlikely to walk away from a loan. Then the government decided that wasn’t fair to people of less means so the 20% down payment became the norm and then again that was decided to be not fair so the FHA loan was born in the 1930s. Now we even have 0% down mortgages which led to the financial meltdown of 2008. People that started off with zero equity were much more prone to walk away from a house. Incredibly, the bankers got the blame for the 2008 fiasco when, left to their own devices (ie without government interference), they required 50% down to protect their own money. The greedy banker argument for that mess simply doesn’t hold water.