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)