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The Transition from Barter to Fiat Money

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  • Ritter, Joseph A

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 that 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. Copyright 1995 by American Economic Association.

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  • Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money," American Economic Review, American Economic Association, vol. 85(1), pages 134-149, March.
  • Handle: RePEc:aea:aecrev:v:85:y:1995:i:1:p:134-49
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    References listed on IDEAS

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    1. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    2. 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.
    3. Milton Friedman & Anna J. Schwartz, 1987. "Has Government Any Role in Money?," NBER Chapters,in: Money in Historical Perspective, pages 289-314 National Bureau of Economic Research, Inc.
    4. Diamond, Peter A, 1984. "Money in Search Equilibrium," Econometrica, Econometric Society, vol. 52(1), pages 1-20, January.
    5. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-775, August.
    6. 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.
    7. Gordon Tullock, 1957. "Paper Money-A Cycle In Cathay," Economic History Review, Economic History Society, vol. 9(3), pages 393-407, April.
    8. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
    9. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-453, November.
    10. 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.
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