The Evolution of Paper Money

33 Pages Posted: 4 Jul 2009 Last revised: 6 Jul 2009

See all articles by Oren Levintal

Oren Levintal

Interdisciplinary Center (IDC) Herzliyah

Joseph Zeira

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR); LUISS Guido Carli, DPTEA

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Date Written: July 4, 2009

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: Fiat Money, Paper Money, Banks, Liquidity, Financial Intermediation, Convertibility

JEL Classification: E4, E5, N1, N2

Suggested Citation

Levintal, Oren and Zeira, Joseph, The Evolution of Paper Money (July 4, 2009). Available at SSRN: https://ssrn.com/abstract=1429724 or http://dx.doi.org/10.2139/ssrn.1429724

Oren Levintal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Joseph Zeira (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem 91905, Jerusalem 91905
Israel
+972 2 588 3256 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

LUISS Guido Carli, DPTEA ( email )

viale Pola 12
Roma, Roma 00198
Italy

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