A Theory of Money and Financial Institutions. Part V. The Rate of Interest on Fiat Money in a Closed EconomyAuthor(s):
Publication Date: April 1972
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.