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 favouring the smaller denominations most useful in daily transactions.

Defining financial reforms in the 19th-century capitalist world-economy: The Ottoman case (1838–1914)

“…The capacity of silver to fluctuate in price gave the Empire a useful protective ‘cushion’ against the sudden cyclical downturns typical of capitalist economies. Thus, the Empire did not abandon silver, because of silver’s utility in productive activities and in keeping the domestic money market liquid (Burdekin & Keskinel 2013; Frangakis-Syrett 2007: 6163). It was as if the Empire had a semi-capacity to print its own currency in a self-serving manner.…”