Private Money, Settlement, and Discount: a Comment

Temzelides and Williamson present a model of private currency issuance to study the effect of clearing arrangements on the prices at which private currencies trade, on the volume of exchange, and on welfare. Their findings hinge on three factors: the location of the issuers relative to the area in which their currencies circulate, whether there is an arrangement for clearing nonlocally issued currencies, and whether agents are fully informed about the quality of the currencies. This paper finds that the TemzelidesWilliamson model provides valuable insights about historical experiences with private paper monies, but it raises more questions than it answers regarding electronic currencies. The model can, however, serve as a useful point of departure for further research. Ted Temzelides and Stephen Williamson have produced an intriguing paper on private money systems that is motivated both by historical experience and by the recent resurgence of private issuance. Evidence from the United States and elsewhere indicates that in the past clearing arrangements promoted the circulation of privately issued notes and eliminated discounting in regions served by the arrangements. Where clearing arrangements were absent, notes traded at par only in areas near their place of issuance. Eventually, most private currencies ceased circulating, largely because of regulatory prohibitions. Those regulations are no longer in place, and thanks to recent advances in electronic technology, private currencies are now rapidly being introduced. To study private money systems, the authors work with a two-sector, random-matching model with spatial separation that possesses equilibria in which privately issued currencies circulate. In the banking sector, any agent can issue indivisible units of currency that can be carried into the search sector and exchanged there for goods. While in the search sector, each agent will want to consume goods some fraction of the time. Agents can produce goods that others wish to consume, and they engage in production when matched with an agent who wants to consume their good. The matching process can bring together agents from any locations, and the probabilities of various matches are exogenous. Trade involves exchanges of goods for privately issued currency because there are no other means of payment (e.g., no governmentissued fiat currency) in the economy. Goods can also be produced in the banking sector, but there they can only be invested to back currencies. Using this model, the authors study the effect of clearing arrangements on the prices at which private currencies trade, on the volume of exchange, and on welfare. Three distinctions 1 Traveler’s cheques are a notable exception.