Can Interest-Bearing Money Circulate? A Small-Denomination Arkansan Experiment, 1861-63

Richard Burdekin () and Marc D. Weidenmier

Journal of Money, Credit and Banking, 2008, vol. 40, issue 1, pages 233-241

Abstract: Legal restrictions theory suggests that dominance of non-interest-bearing currency is possible only because legal impediments prevent financial institutions from offering interest-bearing alternatives. A viable interest-bearing medium must be issued in denominations low enough for day-to-day use, however, and without historical examples of small-denomination interest-bearing issues we cannot properly test whether interest-bearing currency will circulate as legal restrictions theory predicts. Civil War Arkansas offers a rare instance where large quantities of small-denomination interest-bearing money were actually issued, mostly below $5. The results of this Arkansan experiment show that small-denomination interest-bearing issues can indeed function as the primary medium of exchange. Copyright 2008 The Ohio State University.

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