The Evolution of Paper Money

Joseph Zeira and Oren Levintal

No 7362, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Banks; Convertibility; Fiat money; Financial intermediation; Liquidity; Paper money (search for similar items in EconPapers)
JEL-codes: E4 E5 N1 N2 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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