Legal Tender Laws and Fractional-Reserve Banking

This article will explore the economics of legal tender laws, arguing that they are not only a necessary prerequisite of paper money, but also benefit fractional-reserve banking. Such laws make paper money and fractional-reserve banking more widespread than they would otherwise be. Thus, legal tender laws must be understood as a major factor in the development of Western economies which today operate on paper-money standards and feature very large fractional-reserve banking sectors that grow at over-proportional rates.

Volume 18, Number 3 (2004)