Commodity Money Equilibrium in a Walrasian Trading Post Model: An Elementary Example

Ross M Starr

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: Walrasian general competitive equilibrium is considered in a simple example of an exchange economy with commodity-pairwise trading posts and transaction costs. Budget balance is enforced at each trading post separately. Commodity-denominated bid and ask prices at each post allow the post to cover transaction costs through the bid/ask spread. In the absence of double coincidence of wants, the lowest transaction-cost commodity (with the narrowest bid/ask spread) becomes the common medium of exchange, commodity money. Selection of the monetary commodity and adoption of a monetary pattern of trade results from price-guided equilibrium without central direction, fiat, or government.

Keywords: commodity money; trading post; bid price; ask price; transaction cost (search for similar items in EconPapers)
Date: 2005-08-01
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