A Model of the BFH Payments System

Abstract

The BFH payments system was introduced by Robert L. Greenfield and Leland B. Yeager in A Laissez-Faire Approach to Monetary Stability [6]. The key element of their proposal is to dispense with base money and instead tie the means of payment to a nearly-comprehensive bundle of goods and services by the institution of indirect convertibility. Their system promises to be free from inflation and several sources of recession. While BFH was named to credit Fischer Black [I], Eugene Fama [3; 4], and Robert Hall [10; 11], it must not be confused with their specific institutions or arguments. Greenfield and Yeager modified their ideas and have continued to develop the system [20; 5; 21; 8; 9]. The purpose of this paper is to present a model of BFH consistent with simple textbook macroeconomics. Contrary to first impressions, BFH is best understood using the concept of money. But the absence of base money makes the theory inappropriate for analysis. Instead, a simple Keynesian model illustrates the determination of interest rates, real income, the price level, and the quantity of money. Aggregate supply, the IS relationship, and money demand are conventional. Only the money supply process is unusual.