Money and Memory∗

This paper investigates the relationship between memory and the essentiality of fiat money. We consider a random matching economy with a large finite population in which commitment is not possible and memory is limited in the sense that only a fraction m ∈ (0, 1) of the population has publicly observable histories. We show that no matter how limited memory is, there exists a social norm that achieves the first–best as long as the arrival arrive of trading opportunities is large enough. In other words, fiat money can fail to be essential regardless of the amount of memory in the economy. ∗We would like to thank Narayana Kocherlakota, Ichiro Obara, Tim Vogelsang, and Randall Wright for their comments and suggestions. Financial support from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. †Address: 220A Marshall–Adams Hall, Department of Economics, East Lansing, MI 48824-1038. E–mail: [email protected]. ‡Corresponding Author. Address: Social Science Centre, Department of Economics, London, ON, N6A5C2. E–mail: [email protected].