The Transition from Barter to Fiat Money

Joseph Ritter

American Economic Review, 1995, vol. 85, issue 1, 134-49

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.

Date: 1995
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