American Economic Association

Competitive Payments Systems and the Unit of Account

Author(s): Lawrence H. White
Source: The American Economic Review, Vol. 74, No. 4 (Sep., 1984), pp. 699-712
Published by: American Economic Association
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 Competitive Payments Systems and the Unit of Account
By LAWRENCEH. WHITE*
Recent competitive innovations in pay-
ment mechanisms,particularlythe checkable
money market mutual fund, seem to have
blurred the edges of the category of assets
properlycalled "money."These innovations
have coincidedwith new attemptsby econ-
omists to reconstructmonetary theory and
policy using competitive models. Several
authorshave conceived of competitivepay-
ments systemsseeminglydevoid of any out-
side currency, base money, or standard
mediumof exchange.'The unit of accountin
these systems is evidently not a common
currencyunit establishedoutside the bank-
ing industry.Yet it can be argued that the
use of a common unit of account in de-
centralized economic calculation presup-
poses a generalmediumof exchange.
Lance Girton and Don Roper have re-
cently written:"One observesthat most con-
tractualobligationsare specifiedin terms of
the units in whichthe mediumof exchangeis
measured.Further researchshould provide
more insightinto why contractsare specified
in units in which the mediumof exchangeis
measured"(1981,p. 20). This paperattempts
to provide some insight into this question.
By examiningwhetherthe above-mentioned
cashless competitive payments systems are
coherent and operational, it explores the
fundamental relationship of the unit of
*AssistantProfessorof Economics,New York Uni-
versity, 269 MercerSt., New York, NY 10003. I am
indebted for discussion and comments to Robert
Greenfield, Leland Yeager, Fischer Black, Joseph
Salerno,membersof the colloquiumon Austrianeco-
nomics at New York University,and an anonymous
referee.Researchsupportfrom the U.S. Choicein Cur-
rency Commission(a privatefoundation)is gratefully
acknowledged.Responsibilityfor the views expressedis
mine alone.
'Fischer Black (1970), Eugene Fama (1980; 1982),
Robert Hall (1981; 1982a,b), Robert Greenfieldand
Leland Yeager (1983). At the other extreme, F. A.
Hayek (1978) and BenjaminKlein (1974) have con-
ceivedof a greatmultiplicityof parallelbase moniesand
standards.Criticismof the lattermodelsis left implicit
in what follows.
699
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account to the medium of exchange. It
specificallyexaminesthe plausibilityof com-
petition divorcing the unit in which prices
are specified(the unit of account) from the
mediumin whichpaymentis typicallymade.
The argument concludes that a payments
system not based on convertibilityinto an
outside currencyshould not be expected to
arise in the absenceof governmentinterven-
tion.
I. CashlessCompetitivePaymentsSystems:
A Brief Survey
A. Black
The belief that unrestrictedcompetition
would produce a payments mechanismde-
void of outside money is expressedalready
in the title of Fischer Black's 1970 article,
"Banking and Interest Rates in a World
Without Money: The Effects of Uncon-
trolled Banking."Black claims that in the
worldhe imagines"moneyin the usual sense
would not exist" (p. 9). Initiallyhe assumes
that no currencyis used; later he allows for
currency, but supposes that its nominal
quantitywill be purely demand-determined,
so that it does not serveas an outsidemoney
forming a base for bank liabilities.2 Pay-
ments are made by transferof this currency
and bank liabilities.No mention is made of
the redeemabilityof bank liabilities for this
currencyor any basic physicalmonetaryas-
set producedoutside the bankingindustry.I
will for brevity'ssake refer to such an asset
as "outsidecurrency"or "cash."
What servesas the unit of account?Black
cannot say "the currencyunit," for that is
supposed to be subsidiary to the unit in
which bank liabilities are denominated.In-
stead he says: "Goods may be priced in
2Currency in this worldis supposedto be issuedby
the government,but only on requestof the banks, in
exchange for reductionof governmentdebt with the
banks.For criticism,see fn. 16 below.
700 THE AMERICAN ECONOMIC REVIEW
terms of a unit of account that does not
fluctuatein value very much, and means of
paymentmay be pricedin termsof the same
unit of account"(1970, p. 14). The unit of
account in Black's world is clearly not an
outside currencyunit as it is in our world. It
is instead apparently a unit of a distinct
numerairecommodity (or bundle of com-
modities) that does not itself serve as the
means of payment.This is indicatedby the
remarkthat the means of payment is to be
priced in termsof the unit of accountrather
than the unit of account being defined in
termsof the meansof payment.Thus Black's
systemdivorcesthe unit of accountfrom the
characteristicunits of the system'sexchange
media.
It is not at all clear in terms of what
numerairecommodity the unit of account
would be defined in Black's world, or how
that numerairewould be selected. He con-
ducts a thought experiment in which the
means of payment successivelyassumesfive
forms:1) barter;2) sharesof commonstock;
3) corporate bonds; 4) corporate bonds
certifiedby "banks";5) purebank liabilities.
The passage quoted above appears in his
discussionof the second stage. There it was
clear that the hypothesizedunit of account
was not the characteristicunit of the hy-
pothesizedmeans of payment (a share of a
stock portfolio). At no later state is this
divorcemended.
The logic of Black'sconstructionreceives
fullercriticismbelow. But the followingcuri-
ous feature of Black's exposition deserves
mentionhere.He speaksof "the dollarprice"
of a medium-of-exchange unit and "the dol-
lar price"of a commodity,with "the dollar"
clearly intended to designate the unit of
account. He suggeststhat transactorsin his
system may use these "dollar"prices for the
purpose of computing a commodity'sprice
in terms of the medium of exchange. Yet
there is nothing called "dollars" actually
being tradedagainst the commoditiesin the
system, hence no mechanismfor registering
the prices of those commoditiesin terms of
dollars. There are no dollar prices estab-
lished on markets logically or temporally
prior to establishment of medium-of-ex-
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SEPTEMBER 1984
change prices.3The problemhere is not that
the unit of account is divorced from the
medium of exchange, but that it is totally
abstract, divorced from any traded good.
Such an abstract unit of account, as Don
Patinkin indicates (1965, p. 16), can have
no operationalsignificancefor market par-
ticipants. It can be meaningful only to a
Walrasian auctioneer or other outside ob-
server.
B. Fama
Black's article went uncited in the litera-
ture for a decade, until the appearanceof
Eugene Fama's "Banking in the Theory of
Finance."4Fama, like Black, considersout-
side money inessential to the competitive
payments mechanism he hypothesizes. He
posits a "pure accounting system of ex-
change" (p. 42) in which the function of
banks is to operate"a systemof accountsin
which transfers of wealth are carried out
with bookkeeping entries" (p. 39). This
method of wealth transferis asserted to be
"entirelydifferent"in relevantrespectsfrom
the use of cash. Fama claims that the trans-
actions industry in the world he examines
can dispense entirely with cash: "An ac-
counting system worksthroughbookkeeping
entries, debits and credits,which do not re-
quire any physicalmediumor the conceptof
money" (p. 39). This means that in Fama's
world, as in Black's,bank liabilitiesneed not
constitute claims to cash: ""In a pure
accountingsystemof exchange,the notion of
a physical medium or temporaryabode of
purchasingpowerdisappears"(p. 42).
Unlike Black, Fama is explicit in stipulat-
ing that the unit of account in his world
should be thought of as the unit of a com-
modity that plays no medium-of-exchange
role: "it could well be tons of fresh cut
beef or barrels of crude oil" (p. 43). He
explicitly recognizesthat bank "deposits"-
which would be heterogeneous,being essen-
3I am indebtedto RobertGreenfieldfor this point.
4This result of a search throughthe literature(by
Fama) was personallyreportedto me by Bob Hall. It
evidentlyexcludesself-citationsby Black.
VOL. 74 NO. 4 WHITE: COMPETITIVE PA YMENTS SYSTEMS
tially sharesin variousmutualfunds and not
claims to a common currency-are not a
suitablecandidatefor numeraire.
Prices of commoditiesare stated in terms
of the numeraire.Fama recognizesthat an
economyof this sort "is basicallynon-mone-
tary." There is no question of price-level
determination:since thereis no money com-
modity tradingagainst other goods, there is
no money price level. There are only numer-
aire or relativeprices to be determined.The
determinationof relativepricesis apparently
to be thought of as a performanceof the
Walrasian auctioneer. Fama speaks of the
systemposing "a standardproblemconcern-
ing the existence of a stable general equi-
librium in a non-monetarysystem" (1980,
p. 44).
Like Black, Fama leaves the particular
numerairecommodity ("some real good")
and its methodof selectionboth unspecified.
This is of no concernso long as we take the
auctioneerconstructseriously.The auction-
eer's choice of a numeraireis of no conse-
quence.But Fama implicitlyslips out of this
construct. He suggests that agents in his
world face genuine calculationalproblems,
and that they deal with one another in de-
centralized markets rather than with the
auctioneeralone. He says of the accounting
system of exchange, for instance, that "its
efficiency is improved when all prices are
stated in units of a common numeraire"
(1980, p. 43).
After analyzingbankingin a nonmonetary
setting,Famaintroducescurrencyin the form
of "a non-interest-bearing fiat currencypro-
duced monopolisticallyby the government"
(1980, p. 50). The unit in which currencyis
measuredmay then serve as the economy's
numeraire.The real value of a currencyunit
in termsof goods and servicesis determined
in familiarfashion,as a determinatedemand
for real currencybalances confronts a fixed
nominalstock of currency.
Fama suggests that banks in the world
with currencyprovide a "currencyconvert-
ibility service"for their customers.But it is
unclearwhetherhe means"convertibility"in
the usual sense of an obligation to redeem
deposits on demand for outside currency.
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701
Banks taking on such an obligationhave an
inventory demand to hold currency as re-
serves against stochastic redemption out-
flows.5Limitationof the quantityof reserve
currencyavailable to the banks then limits
the quantityof deposits that banks can pru-
dently create. Fama states that banks would
indeed "inventorycurrencyon behalf of de-
positors"(1980, p. 50), but at the same time
implicitlydenies that the banks of an unreg-
ulated system would hold any non-interest-
bearing reserves. Yet a bank's vault cash
shouldbe consideredthe primarycomponent
of its reserveswhereits depositsare convert-
ible in the usual sense of constitutingsight
claims to predeterminedquantities of cur-
rency.6By "convertibility,"Fama must mean
only that the banks act in the manner of
money marketmutualfunds. Bank liabilities
in his analysis are not claims to outside
currency,as they are today, but are on the
order of sharesin a mutual fund's portfolio
of interest-bearingassets. These funds (or
Fama's "banks") stand ready to liquidate
their shares (his "deposits")on demand by
selling the assets to which the deposits con-
stitute a claim and then turning over the
proceeds to the shareholder("depositor").
Fama is explicit in a more recent paper that
this is whathe envisions.He statesthat in his
world:"Depositsarejust claimsagainstother
claims (securities,loans, etc.)" (1982, p. 6).
That is, they are not redeemableclaims to
outside currency. Fama's propositions that
"depositsissued competitivelyshould not be
called money" and that "the concept of
5See Ernst Baltensperger(1980, pp. 4-6). In the
competitivebankingsystem of Scotlandprior to 1844,
to give a historicalexample,banksheld positivequanti-
ties of specie as reservesagainstredemptionsof liabili-
ties despite the absence of reserve requirementsand
despite the fact, consistentwith Fama's hypothesisof
how a competitivesystemwouldoperate,that the banks
settled claims among themselvesby transferof readily
marketableinterest-bearingassets, namely Exchequer
bills. On this episode,see my 1984 book, ch. 2.
6By "predetermined"I do not mean that deposit
interestratesnevervary,but thatratesare contractually
set before the periodto which they apply.They are not
calculatedafterwardsbased on portfolio performance,
as in the case of mutualfund shares.For furtherdiscus-
sion, see SectionIIIA below.
702 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1984

money plays no role in the transactions plicitly relies on for tying the value of the
services accessed through deposits" (1982, unit-of-accountdollar to the specifiedcom-
p. 7) both rest on deposits not being claims modity bundle. Only the commoditybundle
to outside currency.The significanceof the is to be legal tender for dollar obligations.
differencebetween such assets and deposits This means that all holders of contractual
in the usual sense is exploredbelow. claims to receivedollars(or of obligationsto
It is clear from the "parable"with which pay dollars)are entitledto demand(or make)
Fama concludeshis earlierarticle(1980, pp. payment in the physical commoditiesdefin-
55-56) that he regardsthe existenceof out- ing the dollar. Any sufficientlywide diver-
side money as unnecessaryfor the operation gence between the marketprice of the stan-
of an accountingsystem of exchange. Out- dard commoditybundle and one dollar will
side money is to him simply one commodity triggerdemandsby creditorsto receivecom-
that, if it exists, may serve as numeraire; modities rather than paper dollars (or de-
however,thereis no need for it to exist. Steel liveries by debtors of commoditiesin place
ingots or spaceshippermitsmay as well serve of paper dollars). Transactorschoosing to
as numeraire.This resultis arguablynot true contractin ANCAP dollarswould be expos-
of any plausibleworld.Thereare compelling ing themselvesto the risk of being forced to
reasons,discussedbelow, for outside money deliver, or to accept delivery of, physical
to exist and to serve as the unit of account. bundles of the standardcommodities.Every
transactorwouldbe takingon bank-likeobli-
C. Hall gations. It is natural to doubt that many
transactors would voluntarily do so. An
In two recentpapers Robert Hall, search- ANCAP obligation seems to be clearly
ing for monetarypolicies consistentwith sta- dominated for both creditorand debtor by
ble prices and full deregulationof banking an obligationindexedto the ANCAP bundle
and financial markets, has questioned the but contractually payable in a common
necessity and desirabilityof associatingthe mediumof exchange,that is, explicitlyruling
unit of account with a medium-of-exchange out the commodity-delivery possibility,given
currency unit. Citing Fama (1980), Hall that a common medium of exchange is by
states: "It is possible to define the monetary definition more readily accepted than other
unit [the unit of account] as one unit of a commodities.The creditorwould rather re-
resourcecalled currency,but this is only one ceive, and the debtor rather pay, readily
of manydifferentdefinitions"(1981, p. 4). In spendablemoney than a bundleof commodi-
generalthe unit is simply "a certainamount ties of equalmarketvalue. It is less implausi-
of some resource"specifiedby government; ble to suppose that specializedbank-likein-
the resource need not be currency.As an stitutions might issue ANCAP-redeemable
example of a noncurrencymonetary unit, obligations.The questionthat then arises,to
Hall proposes"defining"the dollar in terms be answeredbelow, is whethersuch obliga-
of a composite-commodityunit called the tions would gain currencyin an unregulated
ANCAP, consisting of specified physical environment.
quantities of ammonium nitrate, copper,
aluminum, and plywood. Beyond defining D. Greenfieldand Yeager
the dollar in such a way, governmentis to
play no role in the paymentsindustry. A recent paper by Robert Greenfieldand
The ANCAP unit was chosen by Hall for Leland Yeager attempts to elaborate more
its stable purchasing power over the last explicitlythe possibleoperationof a compet-
thirty years. Presumablythis stability was itive mutual-funds-typepaymentssystemde-
measuredin terms of some price index. An void of outside money. They attribute the
obvious question therefore arises: why does inspiration behind the cashless competitive
Hall not suggest definingthe dollar directly paymentssystem to the three authorswhose
in terms of the commodity bundle making works I have just surveyed. In Greenfield
up the price index he desires to stabilize? and Yeager's view of that world, bank-like
The answer lies in the mechanismhe im- mutual funds would develop and operate a

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VOL. 74 NO. 4 WHITE: COMPETITIVE PA YMENTS SYSTEMS
sophisticatedbartersystem(pp. 305-08). The
unit of accountwould be an arbitrarilycho-
sen numerairebundle of commodities;the
meansof paymentwould be primarilyshares
of ownershipin mutualfund portfolios.They
explicitlyaffirmboth the nonexistenceof any
outside money in which funds' liabilitiesare
redeemableand the divorce of the unit of
accountfrom these media of exchange.
Greenfieldand Yeagerdo not examinethe
question of whether such a system could
emerge or surviveunder competitivecondi-
tions. They do considerwhetherthe system's
unit of account "has operationalmeaning"
and whether"the level of pricesexpressedin
that unit is determinate"(p. 313). In both
cases, they find in the affirmative.But this
merely means that they find the concept of
keeping track of relativeprices by use of a
numeraireunit not incoherent or self-con-
tradictory. It remains to be considered
whethereconomic agents in an unregulated
world withouta centralauctioneerwould be
likely to convergeon use of a unit of account
that is not a unit of outside currency.
II. CompetitivePaymentsSystems
Perspective
in Evolutionary
In past and present monetary systems of
our world, the generally accepted media of
exchangehave been and are units of outside
money and inside-moneyclaims to outside
money. Inside money is naturally denom-
inated in units of the cash to which it is a
claim, as each banknoteor bank deposit is a
claim to a particularnumber of units of
outside money.The distinguishingfeatureof
outsidemoneyis that it does not constitutea
redeemable claim to any physical asset.
Whatevermay be the bookkeepingconven-
tions with regardto the issue of fiat money,
as a formof outsidemoney it is not in actual
fact a contractualdebt liabilityof any agent
or institution. The world has known both
commodityoutside money-gold and silver
coins provide the most familiar example-
and fiat outside money. The latter typically
originatedas monopolyissued inside money
whose redeemabilitywas suspendedafter it
had gained currency. In all cases the outside
monetary unit naturally functions as the unit
of account. This is because prices are natu-
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703
rally quoted in the units of the solitaryitem
(or set of items, identicallydenominatedbe-
cause secondary members of the set are
claims to a primarymember)whosepayment
will routinelybe acceptedin exchange.
To mount a critiqueof cashlesspayments
systems,one must give reasonsfor the emer-
gence and prevalenceof outside money as a
generallyacceptedmediumof exchangeand
unit of account.The reasonsgiven here delve
back to the originsof money.
A. The Origin of CommodityMoney
The classic invisible hand explanationof
the emergenceof money from an initial state
of barter was give by Carl Menger (1982).
Under barter, each agent, attempting to
transformhis initial endowmentinto his de-
sired final consumptionbundle throughdi-
rect exchange,confrontsthe problemof find-
ing a second agent who both offers for sale
what the first wishes to buy and is willing to
accept in payment what the first has to sell.
The typical agent can achievehis goal more
economicallyif, instead of searchingfor this
rareor even nonexistentmatch,he exchanges
his endowment for more widely acceptable
commodities that he may in turn readily
exchangefor the goods he ultimatelywishes
to consume. Accordinglyhe accumulatesa
trading inventory of highly saleable items.
These allow him to economize on search
costs by raisingthe probabilitythat he may,
in any given number of samplings among
sellers,make desiredpurchases.In this situa-
tion the superiorsaleabilityof certainitems
becomes self-reinforcing:the knowledgethat
other traderswill accept an item with high
probability raises its acceptability to each
particulartrader.A networkof traderswill
thereforeconvergeon one or a smallnumber
of items as generalmedia of exchange.Their
supreme saleability then distinguishesthese
items from all other commodities.They have
spontaneouslybecome money.7 Historically
gold and silver emerged as money in eco-
7For a modem version of this theory, see Robert
Jones (1976). See also Ludwig von Mises (1971, pp.
30-34). Mengerdefines"saleability"moreor less as the
narrownessof the effectivebid-askspread,but construes
this broadlyto includespatialand temporaldimensions.
704 THEAMERICANECONOMICREVIEW
nomically advanced nations through this
process.
It shouldbe readilyapparentby extension
of this perspectiveon the origin of money
that a unit of accountemergestogetherwith
and wedded to a medium of exchange. A
seller pursues his self-interest by posting
prices in terms of the media of exchangehe
is routinely willing to accept. This practice
economizeson time spent in negotiationover
what commoditiesare acceptablein payment
and at what rate of exchange. More ini-
portantly,it economizeson the information
necessary for the buyer's and the seller's
economiccalculation.Postingpricesin terms
of a numeraire commodity not routinely
accepted in payment, by contrast, would
force buyer and seller to know and agree
upon the numeraireprice of the payment
media due. This numeraireprice of the pay-
ment mediumwould naturallybe subjectto
fluctuation, so that updated information
wouldbe necessary.A non-exchange-medium
numerairecommoditywould furthermorebe
subject to greaterbid-ask spreads in barter
against other commodities,as by hypothesis
it is less saleable, than the medium of ex-
change.It would thereforeserveless well as a
tool of economiccalculation.
It is worth emphasizing,as Menger em-
phasized with respect to the genesis of a
general medium of exchange,that a collec-
tive decision is in no way necessaryfor the
emergenceof a clearlydefinedcommonunit
of account.This point seemsto have escaped
those authorswho consider monetaryunits
to be the creaturesof governmentproclama-
tions.
B. Coinage
The evolution of monetary institutions
does not, of course,stop with the emergence
of commodity money. One may trace out
further steps that take place in an unregu-
lated competitive environment. Supposing
that gold has emergedas primarymoney,the
next logical step is economization of the
costs of using the metal in transactions
accomplishedby the institution of coinage.
Coined metal enjoys greater acceptability
than uncoinedmetal (for example,gold dust)
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SEPTEMBER1984
due to the lower cost of determiningits true
bullion content.The ease of authenticationis
still further enhanced by the institution of
brandnamesin minting:once a mint'sprod-
ucts are trusted to be of the weight and
fineness stated on their face, its coins may
pass by tale. Transactorsmay then forego
weighing and assaying each piece of metal
tenderedin payment.The demandfor read-
ily authenticatedpieces of gold will therefore
give rise to a market in minting services.
Each mint strives to maintain a reputation
for uniformly high quality, lest it lose
customers to its rivals by imposing higher
authenticationcosts.8 In competitive equi-
librium,the mintagefee will be just sufficient
to earn each minterthe normalrate of return
on investment.Self-interestwill lead all mints
in an economyto denominatecoins in terms
of a unit of standardweight and fineness.A
mint doing otherwise would inconvenience
its customers.The precise definition of the
unit is itself unimportant;it may be based on
preexistingcustom in measuringthe bullion
content of uncoined gold, or it may be
adopted from the coinageof an earlyreputa-
ble mint. This unit then servesas the unit of
account.
Competitive private minting industries
have been comparativelyrare historically.
Governmentshave typicallymonopolizedthe
supply of mintingservices.In a noncompeti-
tive situation, where debased government-
issued coins circulate,the bullion content of
an earlier full-weightcoin may continue to
serve as unit of account though no existing
coin measuresup to that content.This is the
phenomenon of "ghost money," which is
sometimesmisleadinglycited as an example
of divorce between the unit of account and
8For examplesof this processat workin the United
States, where some three dozen privatemints operated
in the gold rush regionsof the nineteenthcentury,see
Donald Kagin(1981). Black(1972, p. 811) inaccurately
identifies privately minted coins as a form of inside
money.ArmenAlchian's(1977)accountof the selection
of a commoditymoneyreliessolelyon economizationof
authenticationcosts. In my view, this explainsthe emer-
gence of standardizedformsof money,but as far as the
origin of money itself goes is subsidiaryto economiza-
tion of searchcosts throughholding of highly saleable
commodities.Easy authenticationis simply one among
severalpropertiescontributingto readysaleability.
VOL. 74 NO. 4 WHITE: COMPETITIVE PA YMENTS SYSTEMS
the mediumof exchange.9In fact, the unit of
account and the medium of exchangeboth
continue to be quantitiesof gold. The unit-
of-account value of any particularcoin in
circulationis a question of its weight and
fineness, not of variable market exchange
rates. The unit of account and medium of
exchangehave not becomedistinctcommod-
ities, only distinct quantities of the same
commodity. The informational difficulties
posed by a non-payment-medium numeraire,
whose exchangevalue may vary in terms of
payment media, do not arise. The minor
inconveniencethat does arise may be attrib-
uted to the absence of competitive condi-
tions. Under competitive conditions, a de-
basing mint would find that money users
reject its products in favor of full-weight
coins.
C. BankLiabilities
The emergenceof preciousmetals as mon-
ey, and subsequentlyof coins as their com-
mon form,comes about in a free economyas
the undesigned outcome of decentralized
pursuitof self-interest.The genesis of inside
monies may be similarly explained. Bank
liabilities originate as claims to specie de-
posited with bankers (hence the term de-
posits; Fama's use of this term to denote
money marketfund sharesis misleading).In
medievalItaly the first bankerswere money
changers;in London they were goldsmiths.
Claimsto specie assumea monetarychar-
acter when bankers discover profit in the
business of effecting the payments one de-
positor wishes to make to anotherby direct
transferof bankbalancesfrom the one to the
other. Checksare today the common means
of signallingthe bank to performa transfer
of balances,but the emergenceof paperless
electronicmeanswould do nothingto change
90n "ghostmonies,"see CarloCipolla(1956, ch. 4).
The misleadingclaim that theserepresentabstractunits
of accountis made by Patinkin(p. 15). Whileit is true
thata ghostmoneyunithadno exactcounterpartamong
existing coins, each of these coins bore a fixed value
relationshipto the unit based on relativebullion con-
tent. For purposesof pricingand calculation,the situa-
tion was similarin kind to that prevailingtoday in the
Italianmonetarysystem,whereno one-liracoin or note
circulates.
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705
the essential nature of the transaction.
Banknotes-claims to bank specie transfer-
able without bank interventionand payable
to the beareron demand-similarly emerge
as a means of payment.'0 Banknotesnatu-
rally find the greatest acceptance when
denominatedas roundmultiplesof the specie
unit that has previouslybecomethe standard
unit of account.Money usersfind each form
of redeemableclaim to bank specie more
economical to use for many purposes than
actual specie. Bankersare recompensedfor
providing these instrumentsby the interest
they earn on assets correspondingto the
fraction of their liabilities not matched by
specie on theirbalancesheets,or (in the case
of deposits) by direct fees for the transfer
service.In an unregulatedsystem, the banks
pay competitive rates of interest on their
deposits. Due to the costliness of doing so,
they are unlikely to pay interest on their
notes."
An invisible hand process can be shown
(see my book, pp. 19-22) to account for the
emergenceof an interbankclearinghousein a
competitive banking system. Briefly, each
member of a pair of banks profitably en-
hances the moneyness of its notes and de-
posits relativeto specieby agreeingto accept
one another'snotes and depositsat face value
as tenderedby customersfor deposit or loan
repayment.Mutual acceptanceof liabilities
is naturallyaccompaniedby an arrangement
for periodic settlement of the claims each
bank collects againstthe other.The potential
gains from these pairwise arrangementsare
not exhausteduntil all bankingcompaniesin
a region belong to a single clearinghouse
system.
Membersof the clearinghousewill, in the
absence of regulation,be able to economize
on specie transhipmentsby settlingbalances
partly throughthe transferof highly market-
able interest-bearingassets. Specie redeem-
ability remains essential to the economical
functioning of the mutual acceptance ar-
10On the early history of Europeanbanking, see
Raymondde Roover(1956, ch. 5).
"1Seemy book (pp. 8-9). Fama (1982, pp. 14-15)
comes to the same conclusionfor currencythat is not a
claim to outside money. Note that today's traveler's
checksdo not bearinterest.
706 THE AMERICAN ECONOMIC REVIEW
rangement,however,as the means by which
all bank liabilities have their value fixed in
termsof the unit of account.The acceptance
of theirnotes at fixedparvaluessparesbanks'
customers-and the banks themselves-ex-
change risk and calculationalinconvenience,
and is thereforeintegral to the function of
acceptance arrangementsin enhancing the
moneynessof the participatingbanks' liabil-
ities.
A competitivebanking system of the fol-
lowing sort thus emergesin the absence of
regulation.The stock of exchangemediacon-
sists of speciein the handsof the public plus
numerousbrands of redeemablebanknotes
plus transferablebank deposits. The self-
interestof issuersinsuresthat notes circulate
at par, that is, at unit-of-accountvaluesfully
equal to the numberof specie units to which
they are claims."2Transferabledepositsbear
a competitiverateof interest,subjectto com-
petitive charges for transfer services. The
nominal quantities of specie, notes, and
transferabledeposits held by the public are
determinednot by any centralbank regula-
tion of the monetarybase, but by the real
demand to hold those assets divided by the
purchasing power of specie. Each bank's
holdingsof speciereservesare determinedby
its equatingat the marginthe cost of fore-
gone interestto the benefitof reducedriskof
illiquidity.Total specie reservesare simplya
summationof theseholdingsacrossbanks.13
The transitionfrom a specie-basedcom-
petitive banking system to a fiat-currency-
based system is most readily made in two
steps:governmentcreationof a centralbank,
whose specie-redeemableliabilities displace
specie as a commercialbank reserve asset;
and suspensionof redeemabilityfor central
bank liabilities. The supply of banking
12That banknotesfell below par when they crossed
state borders-reflecting risk and transportationcosts
of accomplishingredemption-in the American"free
banking"era was due to the legal prohibitionon inter-
state branchbanking.In the freer Scottishsystem,no
such inconveniencewas experienced.
13This systemis spelledout in my book (ch. 1). The
statementof marginalconditionsin the text assumes
equalmarginaloperatingcosts of holdingvariousassets.
The basicparadigmof bankoptimizationis set forthby
Baltensperger.
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SEPTEMBER 1984
servicesmay continueto be competitive,but
the nominalquantityof moneyis now scaled
to central bank determinationof the mone-
tary base.
Note what happensto the unit of account
in the transitionto fiat money. At no point
does it cease to be defined in units of the
basic outside-money medium of exchange.
The status of basic medium of exchange,
however,passes from specie alone to a strad-
dle between specie and a redeemablecentral
bank currencydenominatedin specie units
(dollars, pounds sterling, etc.), then to the
no-longer-redeemable centralbank currency
(still bearing the same name) alone. In this
way the economy arrives at a situation in
which a noncommodityoutside money has
positive exchangevalue. Papermoney is able
to functionas the basic mediumof exchange
because it previously functioned as a sec-
ondarymediumof exchange.`4
III. CashlessCompetitivePayments
Systems:Critique
In light of the evolution of money and
banking,the problemconfrontingmodels of
noncurrency-based paymentssystemsis clear.
Their applicabilityfor modeling currentin-
stitutions or predictingfuture arrangements
awaits a coherentaccountof how a cashless
system is consistent with or might emerge
from the currency-basedpayments systems
the world has known. This is not to deny
that such models may serveto illuminatethe
monetaryinstitutions of our world by con-
trast to the abstractionof a world without
outside money. This is a use to which
Greenfieldand Yeagerdeliberatelyput their
model. It is a role Fama may also have in
mind, as he later introducesoutsidecurrency
to his model afterfirstabstractingfrom it. In
a way, the models play this role in the pres-
ent discussion:I hope to illuminatethe im-
portance of the causal-geneticprocessesbe-
hind monetaryinstitutions,particularlythe
unit of account,by contrastto models seem-
ingly inconsistentwith these processes.
14This historicalaccount may explain the fact that
intrinsicallyuseless fiat money has positivevalue more
plausiblythan the overlappinggenerationsmodelof fiat
money. For that model, see Neil Wallace(1980).
VOL. 74 NO. 4 WHITE: COMPETITIVE PAYMENTS SYSTEMS
A. The Disappearance of Demand Deposits
Coulda monetarysystembased on outside
currency (specie or fiat currency) sponta-
neously evolve into a cashless competitive
payments system of the sort envisioned by
Black, Fama, and Greenfield-Yeager? Three
steps are necessaryto make the transition:
1) disappearanceof redeemableinside mon-
ey; 2) disappearanceof outside money; and
3) redefinitionof the unit of accountin terms
of a numeraireother than outside money.
This sectionconsidersthe firstof these steps.
For expositional convenienceit focuses on
demand deposits, though in the past bank-
notes have also been important as inside
money. The term inside money here denotes
ready claims to outside currency.These are
distinct from sharesin a managedportfolio
of assets.
Famaenvisionsa worldin which"compet-
itive unregulated banks provide a wide
varietyof portfoliosagainswhich depositors
can hold claims"(1982, p. 15). Bankdeposits
no longer constituteclaims to cash, in other
words, but are instead akin to transferable
shares in mutual funds and hence "can be
tailored to have the characteristicsof any
form of marketablewealth"(Fama, 1980, p.
43). Fama unfortunatelyfails to show that
the outcome of unregulated competition
would be the total domination of interest-
bearing demand deposits by mutual fund
shares.In fact this outcomeis unlikely,even
apartfromthe questionof whichcan provide
paymentsservicesmore efficiently.Demand
deposits,being readydebt claims,are poten-
tially superiorto mutual fund shares,which
are equityclaims,in at least one respect.The
value of a deposit may be contractually
guaranteedto increaseover time at a prean-
nounced rate of interest.Its unit-of-account
value at a futuredate is certainso long as the
bank continues to honor its obligation to
redeem its deposits on demand. No such
contractualguaranteemay be made with re- was
spect to an equity claim. A mutual fund is
obligatedto pay out after the fact its actual Roover(pp. 201-02).
earnings, so that the yield on fund shares
cannot be predetermined.In the absence of
deposit rate ceiling regulation,the range of
anticipated possible returns from holding purchasingsecurities).
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707
fund shares need not lie entirely above the
deposit interest rate. Risk-diversifyingport-
folio ownersmight thereforenot divest them-
selves entirelyof demanddepositseven given
a higher mean yield on mutual funds. It is
true that the characteristicpledge of money
market mutual funds to maintain a fixed
share price, or ratherthe policy of investing
exclusively in short-term highly reputable
securities so that the pledge can be kept,
makes fund shares akin to demand deposits
in having near-zerorisk of negativenominal
yield over any period. The difference be-
tween predetermined and postdetermined
yields-between debt and equity-nonethe-
less remains.The historicalfact is that de-
posit banking did not naturallygrow up on
an equitybasis."
The more importantreason why demand
deposits would survive even under unregu-
lated competitionis that the payments sys-
tem they provideis, given the conditionsthat
lead to the emergenceof money, less costly.
This cost differentialis suggestedby the fact
that a checkablemoney market fund today
typicallyimposesa $500 minimumon checks
writtenagainstsharesin the fund. The com-
parative costliness of check writing against
money market funds in their present form
arises from the fact that checks written
againsta fund requireit either1) to incurthe
transactionscosts of selling securities plus
the cost of transmittingthe receipts to the
payee, or 2), what is presumablyless costly
and the methodactuallyused,to drawagainst
a demand deposit with a commercialbank
held as one of the fund's assets.'6 In the
latter case, it is evident that effectinga pay-
ment by writing a check against a fund,
which in turn draws down its demand de-
posit, must be more costly than directly
"5Thoughtherewas medievalbankingin whichbank
deposits were treated as equity claims, this treatment
devised to evade church and state prohibitions
against the paymentof intereston debt. Again see de
16A11fundswhoseprospectusesI have examinedhold
a smallpercentageof theirassets(less than 1 percent)in
the form of a demanddepositwith a commercialbank
for the purpose of honoring redemptionchecks (and
708 THE AMERICAN ECONOMIC REVIEW
effecting the payment by writing a check
against the payer's own demand deposit. In
the present world the checkable money
marketfund rides piggybackupon the bank-
ing system.
The checkwritingfeatureof moneymarket
mutualfunds relies on a money-transfersys-
tem for the obvious reason that sellers of
commodities generally wish to be paid in
money and not in other assets. Checkswrit-
ten on a money market fund are generally
acceptablein payment only because to the
recipientthey representa transferof inside
money, that is, of cash-redeemablebank de-
posits. Its unique acceptabilityas a routine
means of payment is, as we have seen, an
essential property conferred on money by
the Mengerianconvergenceprocess that en-
genders money. Every form of marketable
wealth could servegenerallyas a mediumof
exchangeonly in a world whereall forms of
wealthbegin and remainequallymarketable.
Outsidea Walrasiangeneralequilibriumset-
ting, this is difficultto imagine.
There are no obstaclesin principleto the
spontaneous emergence of an interfund
clearingsystem that does not rely on trans-
fers of inside money. If mutual funds really
could providepaymentsservicesefficiently,it
would be natural to expect money market
funds in the presentsystem,unlessprevented
by law, to begin announcing bilateral or
multilateralarrangementsto permit check
writingin any amountfor purposesof trans-
ferring wealth to accounts in participating
funds. By this device,each participatingfund
would enhance the spendabilityand hence
desirabilityof its shares relative to nonpar-
ticipating shares and demand deposits. As
yet this has not happened.At present,money
marketfunds rarely allow check writing for
unlimitedlysmall amounts,even for transfer
of shares to another customerof the same
fund. This is difficult to reconcile with the
idea that fund sharesare so routinelyaccept-
able that they could dominateinside money
as a means of payment.
This argumentdoes not rule out mutual
funds developing a money-transfersystem
and allowing cash withdrawals, or what
would be identical,banks offeringcheckable
mutual fund accounts with direct access to
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SEPTEMBER 1984
an interbankclearingmechanism.The ana-
lytical question in this case-why money-
transfer and cash-inventoryservices should
be jointly produced with deposits at lower
cost than with mutual fund shares-awaits
furtherresearch.But it seems clear that the
majorimpetusto the use of mutualfunds for
check writing purposes,a use negligiblebe-
fore 1974, has been RegulationQ's prohibi-
tion of competitiveinterest rates on check-
able bank deposits. With this ceiling largely
lifted, the rationaleforjoining money-tranfer
services to mutual funds has largely disap-
peared."7
In a model competitivepayments system
devoid of cash or genuine demand deposits,
payments effected via check writing against
fund sharesobviouslydo not work by trans-
fers of money.Insteada checkwrittenagainst
Fund A in favor of a customerof Fund B is
supposedto occasiona transferof nonmone-
tary assets from Fund A to Fund B via a
clearing arrangement(Greenfield-Yeager,p.
307). These two funds must have previously
entereda mutual acceptancearrangementof
the sort (describedearlier)arising in a free
bankingsystem.The clearingmechanismhas
to be slightly different,however,in the fol-
lowing respect.Fund B, in acceptingchecks
writtenon Fund A, does not possess a claim
to Fund A's vault cash of a specificquantity.
Instead Fund B possesses a claim to Fund
A's assets of a specific value. Checks are
written, and interbank clearing balances
computedin units of account,as at present.
But a check no longertransfersa claim to so
many physical units of outside currency;it
instead transfersownershipof earningassets
with a marketvalue of so much. The inter-
fund clearing arrangementhas to specify
17Two caveats are in order. 1) The 1982 Garn-St.
GermainAct authorizingSuperNOW accounts(check-
ing accountswith no legal interestceiling)denies these
accounts to business firms,leaving firms a reason for
using money marketfund or sweep accountsfor check
writing. 2) So long as demand deposits are in effect
taxed by the impositionof reserverequirements,there
remainsa rationalefor hybridaccounts.The reasonwhy
money marketmutualfunds (like banks) do not price
theirmoney-transfer servicesexplicitlymay be foundin
the taxation of explicit interest but nontaxation of
gratuitousservices.
VOL. 74 NO. 4 WHITE: COMPETITIVE PAYMENTS SYSTEMS 709

what types of assets are acceptablein settle- shares are indeed not perfect substitutes
ment of adverse balances. So does an whose supplies may with any obvious sense
interbank clearing arrangementif it is to be aggregated,and while outside currency
economizeon physicaltransfersof non-inter- and demand deposits are also not perfect
est bearingcurrency,of course,but this does substitutes, demand deposits (and bank-
not reduceits relianceon cash redeemability notes) may sensibly be aggregatedwith out-
as the means by which the unit-of-account side currencyheld by the nonbankpublic in
value of bank liabilities is fixed and their a measure of the quantity of money. The
generalacceptabilitymaintained. econometricuse of this aggregateis a sep-
An apparent disadvantage of bank de- arate question. 2) The supply of demand
posits in the form of ready claims to prede- deposits will likely be important in the
terminedquantitiesof currency,in contrast determinationof the price level for a closed
to fund shares,is the possibilitythat a bank economy with a competitive unregulated
might become insolvent and therebyunable bankingsystem.Even if the determinationof
to honor all the claims presented to it for the price level in that economy is most ap-
redemption.(Illiquidityis no greaterprob- propriatelymodeled in terms of the supply
lem for a bank than for a mutual fund that and demand for outside money alone, de-
allows check writingand cash withdrawals.) mand deposits are presumablya close sub-
A mutual fund cannot become insolvent:as stituteon the demandside. 3) The conceptof
it issues no liabilitiesin the strict sense, but money clearlydoes play a role in the transac-
only equities, it cannot have liabilities in tions services made available through de-
excess of its assets. A money market fund mand deposits.4) A bank using the clearing
can legally break its pledge to maintain a mechanismof an unregulatedbanking sys-
fixed sharepriceif a sharpfall in the valueof tem holds claims againstthe cash reservesof
its assets makes a reduction necessary. A otherbanks,not againsttheirportfolios.'9
bank lacks the flexibilityto reduceits deposit
liabilitiesin a similarway withoutgoing into B. The Disappearance of Outside Money
bankruptcy. In a laissez-faire monetary sys-
tem, bank depositswould not be govemment Might outside money disappearwith the
insured.Depositorfears of insolvencymight evolution of competitive payments mecha-
be adequatelyaddressed,however, by high nisms?This boils down to the questionof the
capital-asset ratios, by private deposit in- disappearanceof outside currency. In the
surance,by forms of organizationgiving the present American banking system, the de-
bank'sstockholdersextendedpersonalliabil- posits of member banks with the Federal
ity for its debts, or by some other means.18 Reserve may be regardedas a form of out-
Hence it is not obviousthat checkablemutu- side money(thoughtheyareclaimsto Federal
al funds would dominate demand deposits Reservenotes, theirquantityis not regulated
on groundsof lesser risk. The debt form of by the existingquantityof those notes). This
deposits does insulate depositorsfrom shar- form of outsidemoney is an artifactof regu-
ing in portfoliolosses that leave equity posi- lation, however;in an unregulatedbanking
tive. system with a private clearing mechanism
The differencebetween demand deposits and no central bank, outside currency(say,
and fund shares,and the plausiblenondisap- specie or fiat currency)would be the only
pearanceof the formerunderfreelycompeti- form of outside money.
tive conditions, requires the revision of The authorswhose models have been con-
severalpropositionsput forthby Fama(1982, sidered here all recognizethat currencywill
pp. 2-8). 1) Whileoutsidecurrencyand fund continuein use so long as manualtransferof

18Unlimitedliabilitywas a featureof the Scottishfree 190nly the last of these sentencesrectifiesan incor-
banking system. Depositors' losses due to bank in- rect statementFama makes about a banking system.
solvencieswere completelynegligible,as failureswere The otherscontrasta bankingsystemto his characteri-
rareand the losses fell upon shareholders. zation of a paymentssystemoperatedby mutualfunds.

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710 THE AMERICAN ECONOMIC REVIEW
currencyremainsthe least costly method for
accomplishingcertaintransactions.Not only
is currency 1) more convenient to use in
small payments,but 2) its acceptance,unlike
acceptanceof personalchecks,entailsno risk
that the payer's funds may be insufficient,
and 3) its use leaves behind no possibly
incriminating records of payment. These
authors all think it coherent, however, to
suppose that all currencyis inside currency.
Pieces of such currency would be akin to
banknotes,except that they would constitute
claims against the portfolios of the issuing
funds ratherthan claimsto cash.20
Cashlessness has an important implica-
tion. Bonds in the cashlessworld cannot be
what they are in our world, claims to future
streams of money payments. They must
ratherbe claims to futurepaymentsof com-
modities or to other financial assets. These
other financial assets must be equities or
sharesin a mutualfund portfolioof equities,
as it wouldbe circularfor bonds to be exclu-
sively claims to other bonds, either directly
or indirectlyvia money marketfund shares
in bond portfolios. The present value of
bonds in the cashlessworldmust then be the
discountedvalue of the commoditiesor equi-
ties to be receivedin future payments.This
clearlywould makebond pricingmuch more
difficult than it is in our world were the
futurepaymentsto be definedin units of the
commoditiesor equities to be paid. Green-
field and Yeagerunderstandablysuggestthat
the quantity of payment property (as they
call it, p. 313) to be received would be
specified,like all othercontractualpayments,
in numerairevalue units rather than in the
physical own-unitsof the property.Coupon
paymentswould proceed in commoditiesor
equities of specified worth in terms of the
20Fama(1982,pp. 9-11) and Greenfield-Yeager (pp.
307-08) clearlyenvisioncurrencyissued exclusivelyby
mutual funds. Black (1970, pp. 13-14) introduces
government-issuedcurrency,but erroneouslybelieves
that the nominalquantityof this currencywill be endog-
enouslydetermined.He apparentlyfails to see or denies
that an excess of supply of governmentcurrencyat a
givenlevel of priceswill be workedoff througha risein
prices,not throughretirementof the excesscurrency.In
anotherpaper(1972), Blackadvancesa doctrineof the
passivityof outsidemoney.
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SEPTEMBER 1984
numeraire.The bondholdernonetheless re-
ceives payment in commoditiesor equities.
In general he will wish to sell these rather
than hold his wealthin theirform, so that he
will prefer bonds whose coupon payments
are madein the most readilysaleableform of
property. In our world the most saleable
propertyis money; in the cashlessworldit is
supposed to be sharesin mutual fund bond
portfolios.But this, as I have noted, createsa
circularityproblem. Hence one of two out-
comes is possible: either bondholders are
saddledwith relativelyhigh transactionscosts
in unloading payment property, or bond
portfolio sharesare not the dominantmeans
of payment. In the latter case, say where
sharesin a mutualfund portfolioof common
stocks were instead the dominant means of
payment, the numerairevalue of exchange-
mediumholdingswould clearlybe subjectto
significantfluctuation.
The naturalquestionto ask froman evolu-
tionary perspectiveis whether there is any
plausiblereason for outside currencyto dis-
appear in a payments system freed from
anticompetitiveregulation.I have explained
above that the emergenceof particularcom-
modities as money is not wholly accidental,
but a consequenceof their superiorsaleabil-
ity. Black (1970, p. 14) hypothesizesthe use
of sharesof a portfolio of common stock as
money, that is, as a generally accepted
medium of exchange. There are good rea-
sons, however, to doubt that such an item
would ever become the most saleable in an
economy. The primary reason is that the
institution of common stock is unlikely to
arise in a premonetaryeconomybecausethe
division of labor it presupposeswould not
exist there.Even were stock sharesto emerge
in a bartereconomy,it is difficultto conceive
of their being more saleable than the most
widely saleable of commodities.Arising in
an alreadymonetizedeconomy(this is Black's
scenario),sharesof stock are from the outset
routinelysold againstmoney and not against
any other good. They lack the saleability
of money. And this inferior saleability is
self-reinforcing:no trader routinely accepts
shares of stock or shares of a portfolio of
stocks when he cannot expect to be able to
spend them easily. Each traderfinds the use
VOL. 74 NO. 4 WHITE: COMPETITIVE PA YMENTS SYSTEMS
of sharesan inefficientmediumof exchange
due to high information and search costs.
The "inefficiencies"of commodity money
cited by Blackwouldexceedthe inefficiencies
of common stock money only in a world in
which common stock approachedthe sale-
ability of commoditymoney.
For analogous reasons it should be ap-
parent that a commodity reserve currency
system,in which the basic money is redeem-
able for a basket of nonmonetarycommodi-
ties, would not arise spontaneouslyin an
unregulatedsetting. A claim to a basket of
commoditieswould not originallyemergeas
money, since in a bartersetting it would be
less saleable then the most saleable of its
components.Nor wouldit supplantthe origi-
nal monetarycommodity.This is not to deny,
however, that one money (say, silver or
domestic fiat currency) may be sponta-
neously supplantedby another(say, gold or
foreignfiat currency)in a regionwhereboth
have been circulatinginternally, or where
external trade with neighboringregions is
conductedin theirdifferentmoney.A switch
may come about because the transactions
conductedin the secondmoney growin rela-
tive importance,or because the first money
experiencesan exogenouslycaused ongoing
relativedeclinein purchasingpower.
C. The Divorce of the Unit of Account
from the Medium of Exchange
For reasons already suggested,a unit of
accountemergesweddedto a generalmedium
of exchange.Pricesare universallyposted in
the characteristicunits of a mediumor set of
media that sellers are routinelypreparedto
accept in exchange.This processis self-rein-
forcing:a buyeror sellerwho communicated
bid or ask offersin nonstandardunits would
impose calculationcosts on potentialtrading
partners.For this reasonthe unit of account
remainsweddedto the mediumof exchange.
In an inflationaryenvironmentit is cer-
tainlypossiblefor a unit of stablepurchasing
power to dispace the depreciatingcurrency
unit as the unit of account voluntarily
adoptedin contractscalling for paymentsat
future dates. An example of a stable unit
would be the "constantdollar"definedby a
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711
base-yearprice index. There is no tendency
for spot prices to be indexed in this way,
however. Indeed the perpetuationof non-
indexed spot pricesis presupposedby index-
ing, which uses current nominal prices to
compute the current-dollarequivalent of a
constant-dollarsum.
The unit of accountstickswith the medium
of exchangeeven throughthe transitionfrom
commodity-basedto fiat currency. A his-
torical example is instructive here. In the
suspensionperiod of the Napoleonic Wars,
1797-1819 in Britain,Bankof Englandnotes
and deposits became the basic outside mon-
ey.2' Gold coins ceased to circulate. The
unit of account, the pound sterling, stuck
with the actual medium of exchangerather
than with a now-abstract gold definition.
The pounds-sterlingprice of gold fluctuated
ratherthan the pounds-sterlingpriceof Bank
of England notes. Commodity prices rose
with the expansionof Bankof Englandnotes
and deposits,while the unit-of-accountvalue
of a banknoteor depositremainedfixed.
IV. Conclusion
In a decentralizedand unregulatedecon-
omy in which all property is not equally
saleable,outside money emergesas most the
saleablecommodityand persistsas a general
medium of exchange. Inside monies arise
and persist on the basis of their convertibil-
ity into outside money. The characteristic
unit of outside money naturallydefines the
unit of account,as pricesare natuallyposted
by tradersin terms of the item sellers will
routinelyaccept in payment.
In a Walrasianworldwherethe auctioneer
rendersall commoditiesequallysaleable,and
thereforeequally suitablefor use in indirect
exchange,paymentin any commoditycould
be acceptedindifferently.Tatonnementmay
proceed without outside money. Any com-
modity or bundleof commoditiescould serve
as unit of account,the auctioneer'schoice of
a unit of account being unconstrainedby
any economic considerations.The payments
21Technically theywerenot fiat moneysinceresump-
tion at a laterdatawas both anticipatedand realized.In
von Mises'(p. 483) terminologytheywerecreditmoney.
712 THE AMERICAN ECONOMIC REVIEW
system appropriatefor such a world, how-
ever, is inappropriatein the presentworldof
decentralizedtrade involving goods of un-
equal marketability. The convenience of
tradersin the presentworld dictates outside
moneywhoseunitsdefinethe unit of account.
Deregulationof the paymentssystem in the
presentworld does not imply disappearance
of outside money, nor divorce of the unit
of account from the basic outside-money
mediumof exchange.
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de Roover,Raymond,Business, Banking, and
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Fama, Eugene F., "Banking in the Theory of
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