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Commodity Money and the Valuation of Trade

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Abstract

In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided fiat money and enforced repayment of loans, giving fiat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a fiat salary. Here, for comparison, we consider the same trade problem without government or fiat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether fiat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society.

Suggested Citation

  • Eric Smith & Martin Shubik, 2005. "Commodity Money and the Valuation of Trade," Cowles Foundation Discussion Papers 1510, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1510
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    References listed on IDEAS

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    1. Martin Shubik, 2000. "The Theory of Money," Working Papers 00-03-021, Santa Fe Institute.
    2. Eric Smith & Martin Shubik, 2005. "Strategic freedom, constraint, and symmetry in one-period markets with cash and credit payment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(3), pages 513-551, April.
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    More about this item

    Keywords

    Bureaucracy; Contract enforcement; Taxes; Money;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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