The boostrap theory of money: A search-theoretic foundation of monetary economics

Abstract

This paper develops a search-theoretic model of a decentralized economy with heterogeneous individuals trading goods endowed for goods in need among themselves. It characterizes both barter and monetary systems as two different forms of trade equilibrium and demonstrates that while the existence of a barter equilibrium requires a well-balanced distribution of endowments and needs, that of a monetary equilibrium requires no ‘real’ conditions. Indeed, it argues that money is accepted as money by everybody merely because it is accepted as money by everybody else. The paper also points out, however, that there is a fundamental difficulty in the ‘natural’ evolution of money and that in order for an economy to achieve a potential monetary equilibrium a large disturbance has to break the intrinsic symmetry of a barter system.