The Emergence of Commodity Money as a Medium of Exchange

This paper examines the endogenous emergence of a commodity money in a trading post economy. The commodity money is defined as the common medium of exchange and is determined by the equilibrium pattern of exchange. The long run equilibria are analyzed using an evolutionary style model. Agents follow a simple adaptive process, generating dynamics that are reduced to a Markov process. Examples are given where the economy spends almost all the time in one or more of the monetary equilibria. Properties that favor the selection of one good as the commodity money are high trading volume and low trading cost. * Department of Economics, University of California, San Diego. Email: [email protected]. I am grateful to Vince Crawford, Ross Starr, Joel Sobel, Jason Shachat and participants of the Monetary Theory Reading Group at the University of California at San Diego for helpful advice.