COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1460

GOLD, FIAT AND CREDIT
An Elementary Discussion of Commodity Money, Fiat Money and Credit
Part II

Thomas Quint and Martin Shubik

April 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 between the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. In Part 1 of the paper, we covered models in which the money is a consumable storable; here in Part 2 we consider economies using 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