Credit and Cranium: Three Essays on the Meaning of Money

Cameron J. Harwick

Advisor: Lawrence H White, PhD, Department of Economics

Committee Members: Richard E. Wagner, Mark Koyama

Buchanan Hall, #D180
April 26, 2017, 04:30 PM to 01:30 PM


I. Money and its Institutional Substitutes

This chapter relates Smith’s dictum that “the division of labor is limited by the extent of the market” to developments in anthropology and sociobiology to offer an increasing returns model of the evolution of exchange institutions from autarky, through various intermediate stages, and finally to monetary exchange as the extent of trading networks grows. Exchange institutions will involve a tradeoff between fixed and marginal cognitive costs: up-front investment in increasingly higher fixed-cost exchange institutions lowers marginal costs of exchange, resulting in increasing returns to the division of labor. Those costs account for the persistence of more or less direct barter in more primitive societies, despite the “inevitability” of monetary exchange that seems to be a feature of traditional models of the origin of money. In identifying the relevant fixed costs of money and its institutional substitutes throughout the world, the paper advances a framework through which the successes and failures of modern development can be understood

II. Helicopters and the Neutrality of Money

Discussions of adjustments to the quantity of money tend to take for granted the method by which new money enters the economy. Milton Friedman, for example, famously assumed the central bank distributed money directly to agents via helicopter in order to abstract away from relative price effects, in contrast to real- world expansion through financial markets, which is presumed to result in relative price distortions. This paper stands the analytical justification of helicopter money on its head: by comparing the distribution and relative price effects of expansion by helicopter and through financial markets using an agent-based model, it shows that the distortions arising from helicopter money are in fact more severe than those arising from expansion through financial markets, except in the sort of representative agent model Friedman used. This re-evaluation of helicopter money is relevant to the prospects of unconventional monetary and fiscal policy, as well as the emerging literature on money supply norms for cryptocurrencies, which – unlike modern fiat currencies – must distribute changes in the money supply without the use of financial markets.

III. Cryptocurrency and the Problem of Intermediation

Though Bitcoin currently enjoys a healthy niche, the aspirations of many in the project are grander: to supplant the existing regime of fiat currencies with cryptocurrencies, and to do so outside of normal political channels. Its primary practical obstacle is its purchasing power volatility, arising from a rigid money stock in the face of wide swings in demand. Nevertheless, the historical example of gold, another (much more successful) money commodity with a more or less rigid supply, illuminates the institutional prerequisites for purchasing power stability, economic efficiency, and sustained growth – namely a market of financial intermediaries whose liabilities denominated in the base money themselves circulate as media of exchange. This paper discusses potential benefits and hurdles to establishing financial intermediation in cryptocurrency, as well as the possibility of managing the money supply to create a stable purchasing power cryptocurrency without the need for intermediation at all. Such schemes ultimately require an existing market of intermediaries in order to provide any benefits, the emergence of which governments are for the moment well-positioned to prevent.