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The Evolution of Paper Money

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  • Zeira, Joseph
  • Levintal, Oren

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.

Suggested Citation

  • Zeira, Joseph & Levintal, Oren, 2009. "The Evolution of Paper Money," CEPR Discussion Papers 7362, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7362
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    References listed on IDEAS

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    1. Kim, Young Sik, 2001. "Liquidity, Prices, Seigniorage, And The Transition From Barter To Fiat Money," Macroeconomic Dynamics, Cambridge University Press, vol. 5(3), pages 353-379, June.
    2. Gordon Tullock, 1957. "Paper Money-A Cycle In Cathay," Economic History Review, Economic History Society, vol. 9(3), pages 393-407, April.
    3. Luo, Guo Ying, 1998. "The evolution of money as a medium of exchange," Journal of Economic Dynamics and Control, Elsevier, vol. 23(3), pages 415-458, November.
    4. George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
    5. Pradeep Dubey & John Geanakoplos, 2003. "Inside and outside fiat money, gains to trade, and IS-LM," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 347-397, March.
    6. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, May.
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    Cited by:

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    More about this item

    Keywords

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    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; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

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