Abstract
Can creation of private money fulfill the liquidity needs of the economy? The answer is no if the market of private money is run only by forces of perfect competition. Multiple equilibria are possible: there exist good equilibria with complete satiation of liquidity and absence of default on private money, and bad equilibria characterized by shortage of liquidity and partial default. In this framework, capital requirements, distortions to the demand or supply of private money, and the role of public liquidity in substituting private liquidity or in offsetting liquidity crises are investigated.
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