Endogenizing the Choice of a Monetary System1
Endogenizing the Choice of a Monetary System1
In this chapter we introduce our first multi-timescale models of an economy. Longer timescales are associated with commitment to product specialization and to discounting and depreciation of durable goods. We compare an economy mediated by a durable commodity money, such as gold, with one with a fiat money implemented through a bureaucracy. The inefficiency costs associated with asymmetric strategic roles between money-providers and producers of consumption goods are compared with explicit losses of material productivity due to labor costs required to maintain a bureaucracy needed to manage a fiat money system. It is shown how a stable trade system can emerge. We discuss material and institutional capital stock in an economy and note that capital stock acts much like the stock of catalysts used to enable chemical reactions. In a framework such as General Equilibrium, capital stock vanishes from the net input-output relations in an abstract production correspondence.
Keywords: Commodity money, fiat money, bureaucracy, depreciation, trust
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