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A Model of Commodity Money

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Abstract

Commodity money is modeled as one or two of the capital goods in a one-consumption good and one or two capital-good, overlapping generations model. Among the topics addressed using versions of the model are (i) the nature of the inefficiency of commodity money, (ii) the validity of quantity-theory predictions for commodity money systems, (iii) the circumstances under which one commodity emerges naturally as the commodity money, (iv) the role of inside money (money backed by private debt) in commodity money systems and (v) the circumstances under which a government can choose the commodity to serve as the commodity money.

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... No transaction between two persons is analytically pairwise in an open economy. The root of the confusion lies in the prevalent naïve-libertarian illusion that a transaction between two consenting adults, when devoid of coercion, is effectively just a transaction between two consenting adults and can be isolated and discussed as such 12 . But one must consider the ensemble of transactions and the interactions between agents: people happen to engage in contractual agreements with others; for them a specific transaction is just one piece. ...
... Bimetalism did not last long [11], nor could commodities last as currencies in developed economies [12]. ...
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This discussion applies quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin in particular -- as there are about $10,000$ cryptocurrencies, we focus (unless otherwise specified) on the most discussed crypto of those that claim to hew to the original protocol (Nakamoto 2009) and the one with, by far, the largest market capitalization. In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than $0$), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one's investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes. Furthermore, bitcoin promoters appear to conflate the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, with the speculative variations in the price of a zero-sum maximally fragile asset with massive negative externalities. Going through monetary history, we show how a true numeraire must be one of minimum variance with respect to an arbitrary basket of goods and services, how gold and silver lost their inflation hedge status during the Hunt brothers squeeze in the late 1970s and what would be required from a true inflation hedged store of value.
... 14 In such situation, if both coins (in the extended sense) are traded in equilibrium, they must do it at the same value, otherwise the "strong" coin would displace the "weak" one as it has happened in many episodes of the history. 15 From the mosaic of equilibria analyzed up this point, we have shown that there are different equilibria that justifies the endogenous value of fiat money, however, we still have to show that divisibility has an extrinsic value in exchange. It is, that some sellers will be willing to render a major quantity of output when they deal with a buyer holding two low coins, than the quantity they would render when dealing with a buyer holding a high coin (i.e. ...
... 14 Recall that a priori a low coin worths half a high coin. 15 As cited by Rolnick (1996), when agents started to debase metalic coins, those lost their value in the short run. ...
Article
Divisibility is conventionally considered as a feature that enhances an object's po-tential use as a medium of exchange. However, in spite of its theoretical and empirical relevance, it has been barely studied in monetary models, either because it is unim-portant in the proposed environment or because it is intentionally omitted from the analysis. The present paper develops a search model framed into an economy endowed with two denominations (so-called low and high), to explain how divisibility of fiat money, when available through an exogenous technology, permits to sustain an equi-librium in which a two-low coins monetary array bestows a premium in the exchange process if agents are sufficiently patient. Moreover, it is demonstrated that when sellers experience capacity constraints in the production, buyers holding divisible monetary arrays can avoid -partially-these frictions by splitting such money package, and con-sequently smoothing their consumption path. As a corollary, the quantity produced and the welfare attained in the economy is greater in the divisible equilibria.
... 3 For a model where minting and melting are costly processes, see Sargent and Wallace (1983). ...
... The assumption that the intrinsic value of the low quality coin is almost zero captures the idea that the marginal cost of producing counterfeit currency is close to zero. 12 The following proposition characterizes the terms of trade in uninformed matches: ...
Article
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How does the imperfect recognizability of commodity money aect its production, terms of trade, and circulation? This paper develops a model where coins of dierent intrinsic val- ues are minted to be used as a medium of exchange, and are subject to a private information problem. Our model oers a new perspective over existing analyses by allowing owners of coins to signal the quality of their asset holdings through the oer they make. The impli- cations for velocity, output and welfare are examined.
... This implies that a …at money as a perfectly recognizable medium of exchange is superior to a commodity money, which is quite novel in the sense that the superiority comes from the inherent physical characteristics of commodity money such as the imperfect recognizability of silver. It depends on neither the opportunity cost of using a commodity as a medium of exchange such as Wallace (1980), Sargent and Wallace (1983), Kiyotaki and Wright (1989), Banerjee and Maskin (1996), Burdett et al. (2001), Lagos and Rocheteau (2008) nor the indivisibility of commodity money as in Kim and Lee (2009). ...
... This superiority result is quite novel in the sense that it comes from the physical characteristics of commodity money such as the imperfect recognizability of silver. It depends on neither the opportunity cost of using a commodity or an asset as a medium of exchange such as Wallace (1980), Sargent and Wallace (1983), Kiyotaki and Wright (1989), Banerjee and Maskin (1996), Burdett et al. (2001), and Lagos and Rocheteau (2008) nor the indivisibility of a commodity money as in Kim and Lee (2009). ...
Article
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This paper provides a theoretical account for the separation of a unit of account from a medium of exchange in the commodity money system and the superiority of …at money as a unit of account as well as a medium of exchange. We incorporate the recognizability of silver as a medium of exchange explicitly into the standard search-based model of exchange where the silver can be either carried into the decentralized market for a pairwise trade or invested in the world market for a given rate of return. When the recognizability problem becomes severe, both the real balance of silver as a medium of exchange and the quantity traded decrease substantially. The declining real balance of silver is due to either a decrease in the price of silver when silver is scarce or a decrease in the nominal balance of silver when silver is abundant. The variability of silver price and silver demand also implies the failure of an imperfectly-recognized medium of exchange to be a stable unit of account due to its liquidity return which is negatively related to its recognizability. An increase in the recognizability of silver improves welfare through its positive e¤ects on the informative single-coincidence meetings, the quantity traded, net of opportunity cost of holding nominal balance of silver for a bilateral trade in the decentralized market. This implies the superiority of …at money which is perfectly recognizable.
... Commodity money was used as the medium of exchange the money and as for payment. But it is not convenient and easy to carry the goods elsewhere [6]. ...
Article
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Cryptocurrency is the latest adventure of currencies that works by using the new edge technology called the blockchain. It has gained the notable attention of the people for the last several years across the world. Cryptocurrency is also globally known as digital currency or virtual currency, and it is a form of payment that can be used online for goods and services. Blockchain has captured the application of many in the financial industry, including those vigorous in the transaction, clearing, and settlement, with its promise of greater efficiency and higher resiliency. The Cryptocurrency has been adopted by using blockchain technology that raised eye-catching attention in the financial sector, government, stakeholders, and individuals as well. It can be anticipated that Cryptocurrency will be the future currency that will replace fiat money worldwide. Though it has been attracted the users' attention, the money of them worried about its future useability, drawbacks, and challenges. Still, the research on cryptocurrencies is far behind and in the initial stage to integrate these currencies in financial institutes. This lack of trust situation in the financial sector aggravates further when it comes to cryptocurrency management challenges that are still not critically analyzed. The originality of this paper is the concept of currencies including cryptocurrencies, the concept of the blockchain ecosystem, and the cryptocurrency integration challenges of the existing blockchain in the financial institution. This paper will help the new researchers to work on cryptocurrencies and their integration challenges in the financial system.
... Commodity money was used as the medium of exchange the money and as for payment. But it is not convenient and easy to carry the goods elsewhere [6]. ...
Article
Full-text available
Cryptocurrency is the latest adventure of currencies that works by using the new edge technology called the blockchain. It has gained the notable attention of the people for the last several years across the world. Cryptocurrency is also globally known as digital currency or virtual currency, and it is a form of payment that can be used online for goods and services. Blockchain has captured the application of many in the financial industry, including those vigorous in the transaction, clearing, and settlement, with its promise of greater efficiency and higher resiliency. The Cryptocurrency has been adopted by using blockchain technology that raised eye-catching attention in the financial sector, government, stakeholders, and individuals as well. It can be anticipated that Cryptocurrency will be the future currency that will replace fiat money worldwide. Though it has been attracted the users' attention, the money of them worried about its future useability, drawbacks, and challenges. Still, the research on cryptocurrencies is far behind and in the initial stage to integrate these currencies in financial institutes. This lack of trust situation in the financial sector aggravates further when it comes to cryptocurrency management challenges that are still not critically analyzed. The originality of this paper is the concept of currencies including cryptocurrencies, the concept of the blockchain ecosystem, and the cryptocurrency integration challenges of the existing blockchain in the financial institution. This paper will help the new researchers to work on cryptocurrencies and their integration challenges in the financial system.
... Thus, in the Potterian economy, commodity value of the money is distinct from the exchange value of money. This is counter to the models of commodity money where the value of the money is pegged to the value of the commodity it is made of (Sargent and Wallace, 1983;Rockoff, 1990) (Note: In The Lord of the Rings, for example, the value of gold as a medium of exchange is determined by weighing it. Thus, Tolkien seems to have understood this aspect of the difference between commodity money and fiduciary money.). ...
Article
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Recent studies in psychology and neuroscience offer systematic evidence that fictional works exert a surprisingly strong influence on readers and have the power to shape their opinions and worldviews. Building on these findings, we study 'Potterian economics', the economic ideas, insights, and structure, found in Harry Potter books, to assess how the books might affect economic literacy. A conservative estimate suggests that more than 7.3% of the world's population has read the Harry Potter books, and millions more have seen their movie adaptations. These extraordinary figures underscore the importance of the messages the books convey. We explore the Potterian economic model and compare it to professional economic models to assess the consistency of the Potterian economic principles with the existing economic models. We find that some of the principles of Potterian economics are consistent with economists' models. Many other principles, however, are distorted and contain numerous inaccuracies, contradicting professional economists' views and insights. We conclude that Potterian economics can teach us about the formation and dissemination of folk economics-the intuitive notions of naïve individuals who see market transactions as a zero-sum game, who care about distribution but fail to understand incentives and efficiency, and who think of prices as allocating wealth but not resources or their efficient use.
... Thus, in the Potterian economy, commodity value of the money is distinct from the exchange value of money. This is counter to the models of commodity money where the value of the money is pegged to the value of the commodity it is made of (Sargent and Wallace, 1983;Rockoff, 1990) (Note: In The Lord of the Rings, for example, the value of gold as a medium of exchange is determined by weighing it. Thus, Tolkien seems to have understood this aspect of the difference between commodity money and fiduciary money.). ...
Article
Full-text available
Recent studies in psychology and neuroscience offer systematic evidence that fictional works exert a surprisingly strong influence on readers and have the power to shape their opinions and worldviews. Building on these findings, we study ‘Potterian economics’, the economic ideas, insights and structure, found in Harry Potter books, to assess how the books might affect economic literacy. A conservative estimate suggests that more than 7.3% of the world’s population has read the Harry Potter books, and millions more have seen their movie adaptations. These extraordinary figures underscore the importance of the messages the books convey. We explore the Potterian economic model and compare it to professional economic models to assess the consistency of the Potterian economic principles with the existing economic models. We find that some of the principles of Potterian economics are consistent with economists’ models. Many other principles, however, are distorted and contain numerous inaccuracies, contradicting professional economists’ views and insights. We conclude that Potterian economics can teach us about the formation and dissemination of folk economics—the intuitive notions of naïve individuals who see market transactions as a zero-sum game, who care about distribution but fail to understand incentives and efficiency and who think of prices as allocating wealth but not resources or their efficient use. ‘I think the writers [of popular literature] are not particularly sympathetic to or don’t understand how a market works. It’s not easy to convey that to a child. It’s not always easy to convey it to grown-ups.’ Gary Becker (New York Times, August 21, 2011, p. SR5). ‘With all due respect to Richard Posner, Cass Sunstein, or Peter Schuck [reference to the books these scholars published in 2005], no book released in 2005 will have more influence on what kids and adults around the world think about government than [Rowling’s] The Half-Blood Prince.’ Benjamin Barton (Michigan Law Review, 2006, p. 1525). ‘As economic theorists, we organize our thoughts using what we call models. The word “model” sounds more scientific than “fable” or “fairy tale” although I do not see much difference between them. The author of a fable draws a parallel to a situation in real life. He has some moral he wishes to impart to the reader. The fable is an imaginary situation that is somewhere between fantasy and reality. Any fable can be dismissed as being unrealistic or simplistic, but this is also the fable’s advantage. Being something between fantasy and reality, a fable is free of extraneous details and annoying diversions. In this unencumbered state, we can clearly discern what cannot always be seen in the real world. On our return to reality, we are in possession of some sound advice or a relevant argument that can be used in the real world.” Ariel Rubinstein (Econometrica, 2006, p. 881). ‘An investigation of novels and [economic] models…may help us better understand how the public thinks about economic issues.’ Tyler Cowen (The Street Porter and the Philosopher: Conversations on Analytical Egalitarianism, 2008, p. 321).
... Bimetalism did not last long (Velde and Weber 2000), nor could commodities last as currencies in developed economies (Sargent and Wallace 1983). ...
Article
A technology should be judged in how it solves recognized problems, not by its technical appeal
... Given the historical evidence on how payment vehicles had become true money, it is possible to see that the role of trust/confidence is extremely important. The problem of confidence in decentralized money is related to the intrinsic value, asymmetric information and trust (Aiyagari, 1989;Gandal & Sussman, 1997;Sargent & Smith, 1997;Sargent & Wallace, 1983;Samuelson, 1958), and how it can be solved with the help of new technological opportunities is still under discussion (Eichengreen, 2018). Since trust is an institutional phenomenon that is rising from many decentralized iterations, demonstrating even distribution of uncertainty risks and transaction costs between participants of interactions, the evolutionary path of monetary order will depend on what drives such trust or trust per se. ...
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The virtual nature of digital money is fueling the conflict between usability, functionality and trust in the digital form. Institutional trust drivers should move forward in understanding the nature of confidence in digital money. Do central banks digital money (CBDC – central bank digital currency) and private cryptocurrencies demonstrate the same or different trust patterns? The paper used the general regression method to discover the relationship between trust in different forms of digital money and selected variables that may generate this trust. Simple empirical tests were sufficient to find the fundamental importance of age as a confidence driver relevant to CBDC and cryptocurrencies. It is found that traditional factors associated with the inflation history and quality of monetary order (central banks independence and rule of law) do not play a role in the case of CBDC, but are important in the case of cryptocurrencies. Structural features (like FinTech development or social trust) that should support trust in digital money are not found to be important. Societies with larger fraction of younger generations demonstrate higher confidence in centralized and decentralized forms of digital money. This challenges the traditional approach to money and calls into question the future role of monetary stability institutions in the digital age. Digitalization is perceived as an improvement in welfare only when fiat money institutions become fragile. The efficiency and credibility of central banks are not a bonus to confidence in CBDC. This is a challenge for the institutional design of the future digital-based monetary order.
... -^For examples of overlapping-generations models with the possibility of capital over-accumulation, see Diamond (19^5), Cass-Yaari (1966), Wallace (1980), and Sargent-Wallace (1983). ...
... Because some theories of money suggest that broad measures of money may fail to reveal important relationships between money and inflation, we also employ narrower measures of money. 1 These theories imply that money should be divided into two mutually exclusive catego-1 Examples of such theories are given in Tobin 1963and Sargent and Wallace 1983. For example, Tobin (1963 states that "the fountain pens of commercial bankers are essentially different from the printing presses of governments. ...
... The first, which has been used to answer both questions, is to posit a fixed exchange rate between the various competing monies, something called circulation by tale. 3 The origin of this fixed rate is sometimes thought to be legal restrictions, such as legal tender laws, or "conventions arising out of habit or ignorance." Examples of this approach are the models of commodity money in Sargent and Wallace (1983) and Sargent and Smith (1995), models that under some circumstances are able to generate outcomes consistent with Gresham's Law and debasement experiences. But circulation by tale does not arise endogenously in these models; it is simply imposed. ...
... Several previous studies have built explicit models of commodity money systems with multiple types of coins. Sargent and Wallace (1983) build an overlapping generations model with two storable goods, gold and silver, which can be transformed into and out of a perishable good at a some cost. They determine the conditions under which there are monetary equilibria (equilibria in which at least one storable good has value). ...
... But while these models emphasize the store of value and insurance functions of money, our search-based model captures the role of money as a medium of exchange. Our work is also related to previous models of commodity money, such as Sargent and Wallace (1983), Kiyotaki and Wright (1989), Banerjee and Maskin (1996) and Burdett, Trejos and Wright (2001), which also find that commodity monies are socially inefficient arrangements. ...
... At a theoretical level, the debate is unsettled, primarily because there currently is no fully developed model of commodity money regimes in which these questions can be directly answered. Models of commodity money have been proposed by Barro (1978), Sargent and Wallace (1983), and Sargent and Smith (1997). Models of bimetallism have been constructed by Chen (1972), Dowd (1996), and Flandreau (1996). ...
... After all, technological progress would equip an advanced system with a money-making commodity that is practically divisible (e.g., bitcoins) and has all other nice physical properties. Of course, there is always an opportunity cost for a commodity-money system (see Sargent and Wallace [20] and Velde and Weber [25]) and one should ask whether it is worth paying the cost for the commitment to no over-issuing money. ...
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This paper draws quantitative implications for some historical coinage issues from an existing formulation of a theory that explains the society's demand for multiple denominations. The model is parameterized to match some key monetary characteristics in late medieval England. Inconvenience for an agent due to a shortage of a type of coin is measured by the difference between his welfare given the shortage and his welfare in a hypothetical scenario that the mint suddenly eliminates the shortage. A small coin has a more prominent role than small change. Because of this role, a shortage of small coins is highly inconvenient for poor people and, the inconvenience may extend to all people when commerce advances. A debasement may effectively supply substitutes to small coins in shortage. Large increase in the minting volume, cocirculation of old and new coins, and circulation by weight, critical facts constituting the debasement puzzle, emerge in the equilibrium path that follows the debasement. JEL Classification Number: E40; E42; N13
... Thus, in the Potterian economy, commodity value of the money is distinct from the exchange value of money. This is counter to the models of commodity money where the value of the money is pegged to the value of the commodity it is made of (Sargent and Wallace, 1983;Rockoff, 1990) (Note: In The Lord of the Rings, for example, the value of gold as a medium of exchange is determined by weighing it. Thus, Tolkien seems to have understood this aspect of the difference between commodity money and fiduciary money.). ...
Article
Recent studies in psychology and neuroscience find that fictional works exert strong influence on readers and shape their opinions and worldviews. We study the Potterian economy, which we compare to economic models, to assess how Harry Potter books affect economic literacy. We find that some principles of Potterian economics are consistent with economists’ models. Many others, however, are distorted and contain numerous inaccuracies, which contradict professional economists’ views and insights, and contribute to the general public’s biases, ignorance, and lack of understanding of economics.
... Our answer, in essence, is that placing restrictions on withdrawals allowed Amsterdam to partly escape the opportunity costs of a system of exchange based on commodity money (e.g., Sargent and Wallace 1983), as compared to a system with either greater availability of credit, or fiat money. To be certain, some amount of commodity money was essential for the functioning of a seventeenth-century open economy. ...
... Thus, in the Potterian economy commodity value is distinct from the value of money. This is counter to the models of commodity money where the value of the money is pegged to the value of the commodity it is made of (Sargent andWallace 1983, Rockoff 1990). 37 Furthermore, the Potterian economic model has a trivial but important flaw, which under normal Muggle economic conditions would lead to the system's bankruptcy. ...
Working Paper
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... Therefore, the appropriate kind of fiscal policy which is consistent with the goal of stabilizing inflation is neutral or restrictive, according to theoretical approaches which establish a direct link between public spending and inflation (Sargent and Wallace, 1983;Buchanan, 1958). According to a Quantity Theory of Money interpretation of the price level, government expenditure is mainly directed to subsidies, wages for services in the public administration, unemployment doles and other non-manufacturing uses, thereby leading to an increase in the money supply without an increase in transactions (i.e. the velocity of money) and thus producing inflation. ...
Thesis
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The existence of high unemployment and underinvestment in socially relevant 'wage goods' in modern economies (e.g. efficient public housing, the availability of clean energy sources at affordable prices, functioning local transports and many others) highlights that there is room for significant improvements in social productivity. This paper discusses the possibility to increase the latter through a policy mix which is able to guarantee full employment to everyone who is willing and able to work and at the same time provide opportunities for research in technological advancements and productivity improvements in the aforementioned social sectors. The paper provides an analysis of the major determinants of the current stagnation, by reviewing competing theories of stagnation and discussing data related to productivity and income inequality in mature economies. It also investigates the process of innovation and assesses the impact of public investment on the capital development of the economy. Moreover, it evaluates competing theories of the labour market and discusses fundamental features, policy experiences and issues of Employment Guarantee Schemes (EGS). Finally, it provides the definition of a general measure of productivity, which captures the fact that human labour is the only true factor of production, as it directly and indirectly enters the process of production of all goods and services in the economy, including the 'capital' goods that the economy uses as intermediate inputs. Building on such an intuition, the paper illustrates a multisectorial model of an economy in which a policy mix composed of public investment in R&D and EGS is implemented.
... This dissertation, however, makes a departure from the prevailing literature by considering an economy where only paper money circulates and gold operates as a backing commodity if held by the central bank or as a consumable good that yields utility if held by the household. Commodity money systems have been analysed recently by Barro (1979), Sargent and Wallace (1983), Goodfriend (1988) and Bordo, Dittmar and Gavin (2003). ...
... Our answer, in essence, is that placing restrictions on withdrawals allowed Amsterdam to partly escape the opportunity costs of a system of exchange based on commodity money (e.g., Sargent and Wallace 1983), as compared to a system with either greater availability of credit, or fiat money. To be certain, some amount of commodity money was essential for the functioning of a seventeenth-century open economy. ...
Article
We investigate a fiat money system introduced by the Bank of Amsterdam in 1683. Using data from the Amsterdam Municipal Archives, we partially reconstruct changes in the bank's balance sheet from 1666 through 1702. Our calculations show that the Bank of Amsterdam, founded in 1609, was engaged in two archetypal central bank activities—lending and open market operations—both before and after its adoption of a fiat standard. After 1683, the bank was able to conduct more regular and aggressive policy interventions, from a virtually nonexistent capital base. The bank's successful experimentation with a fiat standard foreshadows later developments in the history of central banking.
... The key to understanding the proposition is to see that houses are used as a form of commodity money. For the standard reasons identified in the monetary literature (Sargent and Wallace, 1983), when we introduce a housing construction sector there is excessive production of commodity money, i.e., excessive construction of new houses. The tax rate equals the liquidity services from housing θ times the steady state value of money (the Lagrange multiplier on the CIA constraint, or the opportunity cost of holding money, which is 1 − β). ...
Article
A salient feature of the recent recession is that regions that haveexperienced the largest changes in household leverage have alsoexperienced the largest declines in output and employment. We study acash-in-advance economy in which home equity borrowing, alongside publicmoney, is used to conduct transactions. Declines in home prices tightenthe cash-in-advance constraint, triggering recessions. We parameterizethe model to match the key cross-sectional features of the data. Themodel implies that real activity is very sensitive to liquidity shocks,but not to credit shocks, and that monetary policy can significantlyreduce the severity of credit-driven recessions.
... indivisibility of coins means that the existence of multiple coins of different sizes (different " denominations " ) can improve allocations in the sense of delivering higher ex ante welfare than can be achieved with only a single size coin. Several previous studies have built explicit models of commodity money systems with multiple types of coins. Sargent and Wallace (1983) build an overlapping generations model with two storable goods, gold and silver, which can be transformed into and out of a perishable good at a some cost. They determine the conditions under which there are monetary equilibria (equilibria in which at least one storable good has value). Sargent and Velde (2002) build a model with a larg ...
Article
Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.
... Before the introduction of fiat money, the main commodity that was used as money, gold, was not particularly useful per se. Hence, as noted by Sargent and Wallace (1983), the inefficiency of commodity money was not the distortion in the use of gold, but its overproduction. Sargent and Wallace (1983) seem to suggest that the introduction of fiat money eliminates this problem. ...
Article
We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector.
Chapter
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Is Bitcoin the payment system of the future? This chapter argues that Bitcoin is neither a currency nor gold, but that it is a tradable asset and an alternative form of investment. Bitcoin also exhibits some features as an investment asset that are similar to collectibles. The true value of Bitcoin lies not in its speculative nature but in the embedded technology which has the long-term potential of revolutionizing traditional finance. Blockchain technology can provide solutions to Big Data challenges and provide an off-ramp during political uncertainty. Bitcoin's long-term survivability and viability as an asset will largely depend on its diversification role, institutional adoption, tax treatment and regulations.
Thesis
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Cryptocurrencies and distributed ledger technology became a revolutionary and insightful phenomenon that provide benefits of decentralized payment system, quasi- or complete anonymity, and lower transaction fees for cryptocurrency users. Despite all the advantages, the crypto domain also imposes challenges on the market participants. The long-lasting status quo of governments and their refusal to quickly clarify the rights and obligations of cryptocurrency service providers and offerors of crypto-related contracts has given rise to uncertainty on civil liability issues in the crypto sphere. Thus, many private actors – companies and users – are suffering from financial losses. The thesis intends to outline the main pitfalls in contractual cryptocurrency relations and provide clarification of possible liability issues that may occur. The research refers to findings in the relevant case law as well as gives an overview of legal provisions found in national legislation, regional and international frameworks that might help to eliminate the uncertainty of contractual liability. The question of the tortious liability has been raised in the thesis. In particular, cryptocurrency platforms and programmers’ duty of care, as well as its breach, may lead to civil claims regarding the tort of negligence. The possible breach of statutory by crypto companies and developers has been also explored in the work. The purpose of all information provided by the thesis is to safeguard private actors’ interests, prevent damages in the future, and propose solutions that will alleviate existing risks in the cryptocurrency domain. Keywords: blockchain, civil liability, contractual liability, cryptocurrency, tortious liability.
Chapter
Fiat money is an intrinsically useless object that serves as a medium of exchange. One challenge is to construct models that depict the ancient notion that a medium of exchange is beneficial. Another is to construct models in which the medium of exchange has a low rate of return. This article reviews how those challenges have been approached and argues that progress has been achieved by taking seriously some old ideas about the circumstances in which money is helpful and about the desirable properties of money: money is helpful when there are absence-of-double-coincidence difficulties that cannot be easily overcome with credit; and a good money has desirable physical properties – recognizability, portability and divisibility.
Chapter
Commodity money is a medium of exchange that may be transformed into a commodity, useful in production or consumption. Although commodity money is a thing of the past, it was the predominant medium of exchange for more than two millennia. Operating under a commodity money standard limits the scope for monetary policy, actions that alter the value of money. However, it does not eliminate monetary policy entirely. The value of money can be altered by changing the commodity content or legal tender quality of monetary objects, or by restricting the conversion of commodities into money or vice versa.
Chapter
The very use of the term ‘equality’ is often clouded by imprecise and inconsistent meanings. For example, ‘equality’ is used to mean equality before the law (equality of treatment by authorities), equality of opportunity (equality of chances in the economic system), and equality of result (equal distribution of goods), among other things. These different meanings often conflict, and are almost never wholly consistent. See Hayek (1960, p. 85; 1976, pp. 62–4) for a discussion of equality before the law and equality of result, and Rawls (1971) for a discussion of equality of opportunity within a theory of distributive justice. Elsewhere I have discussed the difference between equality of opportunity and equality of result in education (Coleman, 1975). See also Pole (1978) for a detailed examination of the changing conceptions of equality in American history.
Chapter
A command economy is one in which the coordination of economic activity, essential to the viability and functioning of a complex social economy, is undertaken through administrative means — commands, directives, targets and regulations — rather than by a market mechanism. A complex social economy is one involving multiple significant interdependencies among economic agents, including significant division of labour and exchange among production units, rendering the viability of any unit dependent on proper coordination with, and functioning of, many others.
Chapter
A commodity is an object that is intrinsically useful as an input to production or consumption. A medium of exchange is an object that is generally accepted as final payment during or after an exchange transaction, even though the agent accepting it (the seller) does not necessarily consume the object or any service flow from it. Money is the collection of objects that are used as media of exchange. Commodity money is a medium of exchange that may become (or be transformed into) a commodity, useful in production or consumption. This is in contrast to fiat money, which is intrinsically useless.
Chapter
An object is often said to qualify as money if it plays one or more of the following roles: a unit of account, a medium of exchange, a store of value. The first and third seem insufficient. The Arrow-Debreu model with prices expressed in terms of either an abstract numeraire or one of the goods is not a model of a monetary economy. Neither is every model that contains an asset or durable good. That leaves the medium-of-exchange function: an object is a medium of exchange if it appears in many transactions — in the sense of a Clower (1967) transaction matrix.
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The purpose of this paper is to try to weave the theoretical work of that emerging school of monetary economists who have espoused the ‘Legal Restrictions’ theory of the demand for money and monetary policy together with practical observations taken from the experience of the UK in recent years. Professor Neil Wallace, Professor of Economics at the University of Minnesota, coined this term, ‘The Legal Restrictions Theory of Money’, in a paper in the Federal Reserve Bank of Minneapolis Quarterly Review (Winter 1983), in his paper, ‘A Legal Restrictions Theory of the Demand for ‘Money’ and the Role of Monetary Policy’ (31). There had been forerunners of this approach in the literature much earlier, for example the article on ‘Problems of Efficiency in Monetary Management’ by Harry Johnson in 1968 (14), and in an extraordinarily prescient article by Fischer Black on ‘Banking and Interest Rates in a World Without Money’, in the Journal of Bank Research, (Autumn 1970) (2). More recently, this theoretical approach has been taken further by economists such as Fama (6), Robert Hall (12), Kareken (16), Sargent (24, 25), Wallace (16, 24, 25, 31), and other economists, with a centre in Minneapolis: the arguments and analysis of this developing school have been summarised and pooled together in a brilliant survey paper, ‘A Libertarian Approach to Monetary Theory and Policy’, by Professor Y.C. Jao of the Department of Economics, University of Hong Kong (13).
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Historians of the period have generally played down the debasement of France's coinage to increase crown revenues during the Hundred Years' War or treated it as a last resort and an inept one. Based on archival data and an analytical framework drawn from the modern literature on inflation tax, this article supports challengers of that view, showing that debasement was an effective instrument of public finance.
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This chapter discusses the mechanism of exchange for money. The object that temporarily intervenes in sale and purchase is money. It might seem that the use of money only doubles the trouble, by making two exchanges necessary where one was sufficient; however, a slight analysis of the difficulties inherent in simple barter shows that the balance of trouble lies quite in the opposite direction. The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other's wants. In the present day, barter still goes on in some cases, even in the most advanced commercial countries, but only when its inconveniences are not experienced. Money remedies these inconveniences and, thereby performs two distinct functions of high importance, acting as—(1) a medium of exchange, and (2) a common measure of value. In its first form, money is simply any commodity esteemed by all persons, any articles of food, clothing, or ornament which any person will readily receive, and which every person desires to have by him in greater or less quantity, in order that he may have the means of procuring necessaries of life at any time.
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Gold and its price have emerged as frequent topics of both academic and government debate. Public attention focused on the gold market when gold's price surged briefly to $850/ounce by January, 1980; by July, 1981, the price collapsed to less than $400/ounce.
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Writing in the June 1965 issue of theEconomic Journal, Harry G. Johnson begins with a sentence seemingly calibrated to the scale of the book he set himself to review: "The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement--monumental in its sheer bulk, monumental in the definitiveness of its treatment of innumerable issues, large and small... monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues." Friedman and Schwartz marshaled massive historical data and sharp analytics to support the claim that monetary policy--steady control of the money supply--matters profoundly in the management of the nation's economy, especially in navigating serious economic fluctuations. In their influential chapter 7, The Great Contraction--which Princeton published in 1965 as a separate paperback--they address the central economic event of the century, the Depression. According to Hugh Rockoff, writing in January 1965: "If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz had contended, then the case for market economies was measurably stronger." Milton Friedman won the Nobel Prize in Economics in 2000 for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function (1957). © 1963, by National Bureau-of Economic Research. All Rights Reserved.
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Two competing monetary policy prescriptions are analyzed within the context of overlapping generations models. The real-bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation. The quantity-theory prescription, in contrast, is for restrictions on private intermediation designed to separate "money" from credit. Although our models are consistent with quantity-theory predictions about money supply and price-level behavior under these two policy prescriptions, the models imply that the quantity-theory prescription is not Pareto optimal and the real-bills prescription is.
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On our interpretation, real bills advocates favor unfettered intermediation, while their critics, who we call quantity theorists, favor legal restrictions on intermediation geared to separate “money” from “credit.” We display examples of economies in which quantity-theory assertions about “money-supply” and price-level behavior under the real bills regime are valid. In particular, both the price level and an asset total that quantity theorists would identify as money fluctuate more under a real bills regime than under a regime with restrictions like those favored by quantity theorists. Despite this, the Pareto criterion does not support the quantity-theory position.
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Our suggestion consists of three postulates: assets are valued only in terms of their payoffs, perfect foresight, and complete and costless markets under laissez-faire. Together these postulates imply that the crucial anomaly, rate-of-return dominance of “money,” is to be explained by legal restrictions. ; Our defense of these postulates is two-fold. First we compare them with existing alternative theories. Second, we provide an illustrative model which : (a) is consistent with the postulates, (b) implies rate-of-return dominance under suitable legal restrictions, and (c) addresses monetary policy questions with standard welfare economics and, in particular, rationalizes in terms of price discrimination a debt management policy that “tailors debt issues to the needs of the market.”
A suggestion for further simplifying the theory of money Federal Reserve Bank of Minneapolis
  • Bryant
  • John
  • Wallace
  • Neil
Bryant, John, and Wallace, Neil. 1980. A suggestion for further simplifying the theory of money. Research Department Staff Report 62. Federal Reserve Bank of Minneapolis
A sqgestion for further simplifying the theory of money. Research Department Stuff report 62, I.'ederal Reserve Bank of Minneapolis
  • Bryant
  • Neil John
  • Wall
Bryant, John and Neil Wall.~ce, 1980, A sqgestion for further simplifying the theory of money. Research Department Stuff report 62, I.'ederal Reserve Bank of Minneapolis, Minneapolis, MN.
Gold monetization and gold discipline. Federal Reserve International Finance pa
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  • Gsrber
Flood, Robert and Peter Gsrber, 1981. Gold monetization and gold discipline. Federal Reserve International Finance pa.xr I89 (Washington. DCI.
AIU essay on the llure theory of commodltj money. Oxford Economic papers 31
  • John K Whitaker
Whitaker, John K., 1979. AIU essay on the llure theory of commodltj money. Oxford Economic papers 31. Nov., 339-357.
The real bil!s doctrine vs. the quantity theor!: .4 reconsideration, Journal 1 )f Political Economy 90
  • Sargent
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Sargent. Thomas and Neil Wallace, 198_, ' The real bil!s doctrine vs. the quantity theor!:.4 reconsideration, Journal 1 )f Political Economy 90, Dec.. 1212-1236.