Money and Bonds in Organized Exchange∗

A model of fiat money is constructed in which money is used in equilibrium as the universal medium of exchange despite the presence of a negotiable and perfectly divisible outside bond that dominates money in rate of return. All trade takes place in facilities organized by competitive entrepreneurs. There are setup costs of operating a trade facility. ∗Draft of paper to be presented to the conference on monetary theory at the University of Western Ontario on March 12.