Making Money: Existence and Determination of Commodity Money in General Equilibrium

Abstract

The classic Arrow-Debreu (1954) general equilibrium model cannot sustain or account for the existence of money. This lacuna arises because each household and firm faces a single budget constraint summarizing revenue and expense in all commodities. Money, a carrier of value between transactions, has no function when all credits and debits are rolled into a single expression. A trading post model of $N \geq 3$ commodities and transaction costs generates \(\frac{1}{2} N (N-1) \) separate budget constraints with distinct bid and ask prices. General equilibrium, market-clearing prices and transactions at each trading post, exists under conventional continuity and convexity conditions. Commodities acquired by an agent at one trading post and disbursed at another constitute commodity money.