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Demandable Debts as a Means of Payment: Banknotes versus Checks

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  • Kahn, Charles M
  • Roberds, William

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.

Suggested Citation

  • Kahn, Charles M & Roberds, William, 1999. "Demandable Debts as a Means of Payment: Banknotes versus Checks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 500-525, August.
    • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:3:p:500-525
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    References listed on IDEAS

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    1. Arthur J. Rolnick & Warren E. Weber, 1988. "Explaining the demand for free bank notes," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Spr), pages 21-35.
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    Cited by:

    1. Daniel Sanches, 2016. "On the Inherent Instability of Private Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 198-214, April.
    2. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 935-954, August.
    3. Daniel R. Sanches, 2013. "Banking crises and the role of bank coalitions," Working Papers 13-28, Federal Reserve Bank of Philadelphia.
    4. Daniel R. Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia.
    5. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.

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