Liquidity Preference and Interest-Bearing Money: The Ottoman Empire, 1840-1851

Abstract

Legal restrictions theory suggests that interest-bearing money would dominate if there were no legal impediments precluding competition with non-interest-bearing currency. There are very few historical examples with meaningful issues of interest-bearing currency, however, and these tend to occur during extreme circumstances like civil war. The Ottoman Empire in the 1840s offers an unusual opportunity to observe large-scale issuance of interest-bearing notes under stable conditions over an extended period of time. This experience features government-issued interest-bearing money circulating in the absence of legal restrictions – with the data pointing to a liquidity preference favoring the smaller denominations most useful in daily transactions.