Media of Exchange and Payment Systems

Kevin Dowd
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Kevin Dowd: Sheffield Hallam University

Chapter 10 in Competition and Finance, 1996, pp 241-275 from Palgrave Macmillan

Abstract: Abstract This chapter addresses various issues related to exchange media and payment systems. We begin with the media of exchange issues. A medium of exchange (MOE) may be defined as any object which is taken in exchange, not to be consumed or used up by the receiver, but with the intention of being exchanged for something else at some point in the future. The first issue is therefore to explain the development of a commonly or generally accepted MOE. Economists broadly agree over how a commonly accepted commodity MOE can arise spontaneously from initial conditions of barter, but what happens next is more controversial. The controversy centres on the claim made by Kiyotaki and Wright (1989), and others, that commodity currency would then directly give way to fiat or inconvertible paper currency. However, such a development is in fact most unlikely. The commodity currency actually would give way to convertible paper currency and that the currency would remain convertible thereafter. Convertibility arises and then persists because the public demand it, and they demand it because of the reassurance it provides them regarding the value of their currency. An implication of this position is that real-world fiat currencies did not arise spontaneously, but because of government intervention to suppress the convertibility guarantee.

Keywords: Central Bank; Smart Card; Payment System; Network Externality; Free Banking (search for similar items in EconPapers)
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-24856-8_10

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DOI: 10.1007/978-1-349-24856-8_10

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