CFDP 338

A Theory of Money and Financial Institutions. Part V. The Rate of Interest on Fiat Money in a Closed Economy


Publication Date: April 1972

Pages: 54


In a well controlled monetary economy with no uncertainty and a money market, money is not merely a veil, it is a cocoon. There are no idle cash balances in a competitive monetary economy with a money market without uncertainty. The presence of uncertainty calls for the holding of cash.

In a trading economy with perfect foresight, without taxes, but with traders having positive time discounts the rate of interest on paper money is positive.

With uncertainty, fiat money is a form of insurance or generalized futures contract.

The mathematical differences among static general equilibrium theory, a theory of money in a static general equilibrium context with perfect foresight and an evolutionary system are essentially the differences among maximization subject to equalities; convex programming and dynamic programming.

They are needed for current transactions or are loaned.