Why is there Money?

Why is there Money?

Walrasian General Equilibrium Foundations of Monetary Theory

Ross M. Starr

The microeconomic foundation of the theory of money has long represented a puzzle to economic theory. Why is there Money? derives the foundations of monetary theory from advanced price theory in a mathematically precise family of trading post models.

Chapter 10: Microfoundations of Jevons’s Double Coincidence Condition

Ross M. Starr

Subjects: economics and finance, history of economic thought, money and banking

Extract

1 Jevons’s double coincidence of wants condition for barter trade is inconsistent with the Arrow2Debreu general equilibrium model. But it can be derived from more elementary transaction cost properties. Suppose each household experiences a set-up cost on entering an additional trading post. Existence and local uniqueness of commodity money in equilibrium can follow from the scale economy implied by the household set-up cost. Jevons’s double coincidence condition is an outcome of transaction cost structure in general equilibrium. 1 INTRODUCTION Jevons (1875, p. 3) observes: [In monetary] sale and purchase . . . one of the articles exchanged is intended to be held only for a short time, until it is parted with in a second act of exchange. The object which thus temporarily intervenes in sale and purchase is money. At first sight it might seem that the use of money only doubles the trouble, by making two exchanges necessary where one was sufficient; but a slight analysis of the difficulties inherent in simple barter shows that the balance of trouble lies quite in the opposite direction . . . The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other’s wants. There may be many people wanting, and many possessing those things wanted; but to allow an act of barter, there must be a double coincidence, which will rarely happen. Jevons’s statement appears sound, but we should recognize how completely it is at odds with a conventional Arrow2Debreu general equilibrium model (Arrow and Debreu, 1954; Debreu, 1959). In the...

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