Demandable debts as a means of payment: Banknotes versus checks

We examine whether transactable forms of privately issued, de mandable debt are better used as "banknotes" or "checks." The distinction between the tw o is that a check must be redeemed by the issuing bank with each use wherea s 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 proble ms; may pre vent the circulation of banknotes. For intermediate values of t he early redemption cost, banknotes will be preferred over checks.