A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become i...

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide ...

THE PURPOSE OF THIS NOTE is to apply an argument developed in Hülsmann (2009) to a claim used in advocacy of fractional reserve banking (FRB) under a system of free banking (that is, a system of banks lacking any formal, central control [as characterizes the state-monopolized central banking systems of the modern Western world]). Hülsmann considers the effects on the structure of production of ...

a r t i c l e i n f o a b s t r a c t JEL classification: C73 D8 E4 E5 Keywords: Fiat money Random matching Dynamic games Memory Monitoring I use a simplified version of Trejos and Wright's (1995) random matching environment to make a point about when fiat money is essential – that is, when the set of equilibrium outcomes is strictly larger with money than without. Under two natural forms of li...

In their paper “Credit Default Swaps from the Viewpoint of Libertarian Property Rights and Contract Theory,” Thorsten Polleit and Jonathan Mariano attempt to show that credit default swaps (CDS) are legitimate and enforceable contracts under Murray Rothbard’s conception of property rights and contract theories. They also try to demonstrate that “CDS are an efficient and effective instrument for...

This article argues that fiat money’s only technological role in an economy is to act as societal memory: money allows people to credibly record some aspects of their transactions and make that record accessible to other people. This recordkeeping role is demonstrated in the three standard paradigms of fiat money: the overlapping generations, turnpike, and search models. In these models, if a n...

The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of economic general equilibrium in the presence of transaction costs and market segmentation (in trading posts with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Scale economies in transaction cost account for...