Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples

The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of an economic general equilibrium. Monetary structure can be derived from price theory in a modified Arrow-Debreu model. Two constructs are added: transaction costs and market segmentation in trading posts (with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium. Copyright Springer-Verlag Berlin Heidelberg 2003Keywords and Phrases: Commodity money, Fiat money, Transaction cost, Scale economy, Double coincidence of wants., JEL Classification Numbers: E40, D50.,