Demandable Debts as a Means of Payment: Banknotes versus Checks

Charles M. Kahn, William Roberds

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)492-525
Number of pages34
JournalJournal of Money, Credit and Banking
Volume31
Issue number3
DOIs
StatePublished - Aug 1999

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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