Money in a Static Theory of Optimal Payment Arrangements

Abstract

A MODERN ECONOMY is characterized by the virtually universal use of media of exchange, collectively called money. This poses certain questions, about as old as economics itself. Why do we use such media of exchange? What commodities are selected as media of exchange? What is the economic service we get from money? Some of the answers, as we know, are to be found in the fact that the economy may deviate from equilibrium, that expectations are subject to error and uncertainty. This includes those motives for holding money which are usually called speculative and precautionary. Though-or rather just because they have captured most of the economists' attention in recent decades, they will not be the subject of this paper. Other answers, however, are valid even in economic equilibrium. Paragraphs on them belong to the time-honored inventory of textbooks and treatises. We learn that a medium of exchange gives more scope to the division of labor. We learn that as media of exchange we should choose commodities which have a stable value, an appropriate value per pound, and all those nice properties with the fancy Victorian names like portability, indestructibility, homogeneity, divisibility and cognizability.l We learn that the basic service of money consists in the convenience it oSers in facilitating exchange. There is the recurring metaphor of the oil which lubricates exchange.2