The Rise of Private Money as a Competing Medium of Exchange

When it is costly for a store (i.e., clearinghouse) to mediate trade, a speculative demand for money may arise. Trading money to another agent for a good, rather than trading good for good through a store, allows the money holder to obtain the good while avoiding the fee the store must charge to cover its costs. We show that when the mediation market is contestable, there are conditions in which the store must create and issue a form of fiat money to maintain control of the market. The equilibrium quantity of money is private money, determined by agent expectations and market forces. ∗ We are thankful for comments from Giorgio Di Giorgio, Elliott Parker, Randall Wright, and participants in the University of Nevada, Reno seminar series.