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Barley, Gold, or FiatToward a Pure Theory of Money$
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Thomas Quint and Martin Shubik

Print publication date: 2014

Print ISBN-13: 9780300188158

Published to Yale Scholarship Online: May 2014

DOI: 10.12987/yale/9780300188158.001.0001

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Competitive Banking II: Demonetization of Gold

Competitive Banking II: Demonetization of Gold

(p.224) Chapter 15 Competitive Banking II: Demonetization of Gold
Barley, Gold, or Fiat

Thomas Quint

Martin Shubik

Yale University Press

Here we tell the story of a gold demonetization. We do this by presenting and solving three models. The first is the “usual” buy-sell two-good economy BEFORE a demonetization. It has gold as the money and no central bank but does have a continuum of moneylenders. The second model considers the effects of a demonetization. All holders of gold are given (on a one-to-one basis) fiat money but are allowed to keep their gold as a nonmonetary good. In the third model the fiat is given to a (newly created) central bank instead of to the traders. As one might expect from the analysis from chapter 6, the results show a gain in efficiency when the economy switches from a gold to a fiat money; there is a further efficiency gain (in the case of “not enough money”) when we add in the central bank. The chapter closes with a discussion on the usefulness of central banks.

Keywords:   central bank, demonetization of gold, gold merchants, gold strips, merchants vs central bank control of strips

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