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Coordination, Credit, And An Elastic Currency


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    The market economy is modeled as a decentralized joint productionsystem. Markets in such an economy require the use of money or creditinstruments to facilitate exchange. As a result, market economies areat risk for monetary instability induced by real-side productioncoordination failure. In particular, economies decentralized viacentralized wholesaling markets are subject to precipitous collapses.The most stable monetary system is trade in specie. However, therevery likely is a scarcity of specie, which generates inefficiency anddiscourages production. There is, then, a need for an elasticcurrency. Bank-issued bills of exchange are a perfectly elasticmedium and eliminate the scarcity of specie and its attendantinefficiency, but are a less stable monetary system than is trade inspecie. In the trade-off between elasticity and stability, fiduciarycurrency (or fiduciary deposits) lies between specie and bank-issuedbills of exchange.

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    Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

    Volume (Year): 1 (1997)
    Issue (Month): 04 (December)
    Pages: 770-779

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    Handle: RePEc:cup:macdyn:v:1:y:1997:i:04:p:770-779_00

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    Cited by:
    1. James McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.


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