As Good as Gold? A Framework for Analyzing Redeemable Paper Money

43 Pages Posted: 20 Dec 2023

See all articles by Bryan Cutsinger

Bryan Cutsinger

Angelo State University - Accounting, Economics and Finance Department; Texas Tech University - Free Market Institute; American Institute for Economic Research

Joshua R. Hendrickson

University of Mississippi

Date Written: December 15, 2023

Abstract

In this paper we present a theory of note discounts, exchange rates between brands of notes, and the price level in convertible paper money regimes. We show that under perfect commitment to convertibility, notes and the underlying commodity are perfect substitutes and price level determination is identical to a pure commodity standard. Different brands of currency trade at par. With imperfect commitment to convertibility, the probability that the issuer reneges on the commitment to convertibility explains discounts/premia on notes and exchange rates between brands in competitive note regimes. In non-competitive regimes, the probability of reneging explains fluctuations in the price level. To support our model, we discuss historical events and time periods that are consistent with our theory.

Keywords: commitment, competitive note issuance, price level, exchange rates, gold standard, commodity money

JEL Classification: E42, N10

Suggested Citation

Cutsinger, Bryan and Hendrickson, Joshua R., As Good as Gold? A Framework for Analyzing Redeemable Paper Money (December 15, 2023). Available at SSRN: https://ssrn.com/abstract=4666027 or http://dx.doi.org/10.2139/ssrn.4666027

Bryan Cutsinger

Angelo State University - Accounting, Economics and Finance Department ( email )

San Angelo, TX 76909
United States

Texas Tech University - Free Market Institute

Box 45059
Lubbock, TX 79409-5059
United States

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

Joshua R. Hendrickson (Contact Author)

University of Mississippi ( email )

Oxford, MS 38677
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
127
Abstract Views
343
Rank
408,881
PlumX Metrics