Demandable Debts as a Means of Payment: Banknotes versus Checks

Charles Kahn and William Roberds

Journal of Money, Credit and Banking, 1999, vol. 31, issue 3, 500-525

Abstract: We examine whether transactable forms of privately issued, demandable debt are better used as "banknotes" or "checks." The distinction between the two is that a check must be redeemed by the issuing bank with each use whereas a banknote can circulate. We find that the answer to the question depends on the cost of early redemption. If this cost is small, banknotes will not circulate so the question is moot. If this cost is large, incentive problems may prevent the circulation of banknotes. For intermediate values of the early redemption cost, banknotes will be preferred over checks.

Date: 1999
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Journal Article: Demandable debt as a means of payment: banknotes versus checks (1999)
Working Paper: Demandable debt as a means of payment: banknotes versus checks (1998)
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