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The Evolution of Paper Money

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Author Info
Levintal, Oren
Zeira, Joseph

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Abstract

This paper tells the story of how paper money evolved as a result of lending by banks. While lending commodity money requires holding large reserves of commodity money to ensure liquidity, issuing convertible paper money reduces these costs significantly. The paper also examines the possibility of issuing inconvertible notes and shows that while they further reduce the cost of borrowing they also have adverse effects on the stability of the banking system. As a result, governments often intervened, either outlawing the issuance of such notes, or monopolizing them for themselves by issuing fiat money. The paper examines the process of creation of paper money, but also sheds light on more general issues, like the relation between money and financial intermediation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7362.

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Date of creation: Jul 2009
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Handle: RePEc:cpr:ceprdp:7362

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Related research
Keywords: Banks; Convertibility; Fiat Money; Financial Intermediation; Liquidity; Paper Money;

Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations
N2 - Economic History - - Financial Markets and Institutions

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This page was last updated on 2009-11-25.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.