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The transition from barter to fiat money

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  • Joseph A. Ritter
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    Abstract

    How did it become possible to exchange apparently valueless pieces of paper for goods? This paper provides an equilibrium account of the transition between barter and fiat money regimes. The explanation relies on the intervention of a self-interested government which must be able to promise credibly to limit the issue of money. To achieve credibility, the government must offset the benefits of seigniorage by internalizing some of the macroeconomic externalities generated by the issue of fiat money. The government's patience and the extent of its involvement in the economy are key determinants of whether the transition can be accomplished.

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    File URL: http://research.stlouisfed.org/wp/more/1994-004/
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    File URL: http://research.stlouisfed.org/wp/1994/94-004.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1994-004.

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    Date of creation: 1994
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    Publication status: Published in American Economic Review, 85(1) March 1995, pp. 134-49
    Handle: RePEc:fip:fedlwp:1994-004

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    Related research

    Keywords: Money ; Money theory;

    References

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    1. Gordon Tullock, 1957. "Paper Money-A Cycle In Cathay," Economic History Review, Economic History Society, vol. 9(3), pages 393-407, 04.
    2. Diamond, Peter A, 1984. "Money in Search Equilibrium," Econometrica, Econometric Society, vol. 52(1), pages 1-20, January.
    3. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
    4. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
    5. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
    6. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    7. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland.
    8. Friedman, Milton & Schwartz, Anna J., 1986. "Has government any role in money?," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 37-62, January.
    9. Croushore, Dean, 1993. "Money in the utility function: Functional equivalence to a shopping-time model," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 175-182.
    10. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
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    Cited by:
    1. Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August.

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