Publication Date: April 2005
In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided ﬁat money and enforced repayment of loans, giving ﬁat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a ﬁat salary. Here, for comparison, we consider the same trade problem without government or ﬁat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether ﬁat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society.
C7, D5, H5, K42
JEL Classification Codes: Bureaucracy, Contract enforcement, Taxes, Money