COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1455

A CONSUMABLE MONEY
An Elementary Discussion of Commodity Money, Fiat Money and Credit: Part 1

Thomas Quint
Department of Mathematics, University of Nevada at Reno
and
Martin Shubik
Cowles Foundation, Yale University

March 4, 2004

In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions among the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. Part 1 covers models in which the money is a consumable storable; the economies in Part 2 use durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat.

Keywords: Barley, Gold, Fiat and credit, Evolution of money

JEL Classification: C28, C72, C91, D52, D84, E41, E43, E51, E58, G21, K12, L12, N20, P10