Coin Sizes and Payments in Commodity Money Systems

Posted: 26 Nov 2008

See all articles by Angela Redish

Angela Redish

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

Warren E. Weber

Federal Reserve Bank of Minneapolis

Date Written: October 2008

Abstract

Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.

Keywords: commodity money, random matching, Gersham's Law, optimal denominations

JEL Classification: E40, N23

Suggested Citation

Redish, Angela and Weber, Warren E., Coin Sizes and Payments in Commodity Money Systems (October 2008). Available at SSRN: https://ssrn.com/abstract=1307284

Angela Redish (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

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Warren E. Weber

Federal Reserve Bank of Minneapolis ( email )

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