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Competitively-Issued Convertible Bank Notes in a Theory of Finance: Earl Thompson Meets Fischer Black

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  • Hendrickson Joshua R.

    (Department of Economics, University of Mississippi, 306 Odom Hall, University, MS, 38677, USA)

Abstract

In this paper, I show the validity of and the relationship between two previously unrelated claims in monetary theory. The first claim, made by Earl Thompson, is that privately-issued bank notes pay a positive rate of return in a competitive equilibrium. The second claim, made by Fischer Black, is that it is possible to have a gold standard in which the gold reserves of the central bank are near zero. I show that both of these claims are correct under the assumption of complete markets and perfect commitment. The link between these claims is the Black-Scholes equation applied to convertible bank notes. In commodity-based monetary systems, bank notes are perpetual American options. I extend the model to consider the implications of a lack of commitment on the part of the bank and incomplete markets. I show that both arguments break down when banks lack commitment to redemption or markets are incomplete. I conclude with implications for macroeconomic theory.

Suggested Citation

  • Hendrickson Joshua R., 2022. "Competitively-Issued Convertible Bank Notes in a Theory of Finance: Earl Thompson Meets Fischer Black," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 22(1), pages 311-328, January.
    • Handle: RePEc:bpj:bejtec:v:22:y:2022:i:1:p:311-328:n:14
    DOI: 10.1515/bejte-2020-0021
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    More about this item

    Keywords

    bank notes; competitive money supply; commodity money;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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