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NBER WORKING PAPER SERIES
BANK DEREGULATION, ACCOUNTING SYSTEMS OF EXCHANGE, A CRITICALAND THE UNIT REVIEW OF ACCOUNT:
Bennett T. McCallum
Working Paper No. 15i
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 1985
This paper was prepared for the Carnegie—Rochester Conference on Public Policy, held in Pittsburgh on November 16—li, 198)4. I^ am discussionsindebted^ to onAllan the^ Meltzertopics ofand concern^ Marvin andGoodfriend to Robert^ for Barro,^ many^ helpfulRobert Greenfield, Robert Hall, Edward Shaw, Lawrence White and Leland Yeager for helpful comments. Financial support by the National Scienceresearch Foundation reported here(SES is8)4—08691) part of theis gratefullyNBER's research acknowledged. program inThe Financial are those ofMarkets the author and Monetary and not Economics.those of the Any National opinions Bureau expressed of Economic Research.
NBER March Working 1985 Paper #
BankDeregulation,AccountingSystemsofExchange,andtheUnitof Account:ACriticalReview ABSTRACT
ThispaperreviewsaspecificgroupofrecentpublicationsbyBlack,Fama,Hall,and GreenfieldandYeagerthat(i)encouragetherelaxationofgovernmentcontrolsonthebanking industry,(ii)emphasizethepossibilityofaneconomyinwhichmosttransactionsarecarried outthroughanaccountingsystemratherthananytangiblemedium of (^) exchange,and(iii)
suggestthatimprovedmonetary performance couldbeinducedbyseparatingtheunitof
accountfromthemediumofexchange. Themainsubstantiveconclusionsareasfollows. First,asystemwithanunregulatedbankingsectorandagovernment—issuedcurrencywouldbe viableandmightreduceinefficienciesresultingfromreserverequirements,apointthathas beenrecognizedbyneoclassical monetary economists. The second mainclassofsystems discussedinthereviewedpapers——onewithacomposite—commoditymediumofaccountandno convertibilityprovision——isquitedifferent.Iftherewereliterallynomediumofexchange,the non—coercivegovernmentdesignationoftheunitofaccountwouldencounternoinconsistency butwouldbeextremelyfragile.Morerealistically,withsomecirculating private currency the latter (^) wouldtendtobecomethemediumofaccountaswellasthemediumofexchangeand wouldtendtobeissuedinexcess,therebyseparatingtheunitofaccountfromtheofficially— designatedbundleofcommodities. (^) Severalconclusionsregardinganalyticalapproacharealso developed. BennettT. McCallum GraduateSchoolofIndustrialAdministration Carnegie—Mellon Pittsburgh,University PA 15213 (412) 578—
theleadingmonetarists(i.e.,Friedman,Brunner,Meltzer)havelongbeenregardedbymuchof theprofessionaslaissezfaireextremists.Infact,accordingtoHall(1982b),theBFHschoolis stronglycriticalofsomeofthemostbasictenetsofmonetarism.Thus"thenewmonetary economicsviewsthequantitytheoryasnothingmorethananartifactofgovernmentregulation" (Hall1982b,p.1552)while"themoneystockitselfisacreatureofinefficientregulation"(p. 1555).Black(1970)voicessomesimilarlyanti—monetaristsuggestions,suchasthefollowing: "Assoonaswegettoaworldwherepaymentsaremadebytransferringdepositsandnotes, thequantitytheorybecomesimpossibleeventoformulate"(1970,p.19). AndevenFama,
whosepositionislessradical,expressesratherstronglysomeviewsthatappearhardto
reconcilewithmonetaristtraditions. Oneexampleisprovidedbyhissuggestionthat"the bankingsystemisbestunderstoodwithoutthemischiefintroducedbytheconceptofmoney" (1980,p.44)2 One objectofmydiscussion,accordingly,willbetoconsidertheextentto whichdisagreementbetweentheBFHschoolandmonetaristsislogicallyimpliedbydifferent
theoreticaland/orempiricalbeliefs,andtheextenttowhichitisinsteadtheresultof
misinterpretationoftheothergroup'sposition.
Briefmentionshouldbemadeattheoutsetoftwopreviouspapersthatprovidecritical
considerationoftheliteratureinquestion. ThefirstoftheseisFischer's(1983)useful
presentationofhisown"FrameworkforMonetaryandBankingAnalysis,"whichtouchesupon
severalofthetopicsconsideredbelow. ThereisverylittleattemptinFischer'spaperto
commentspecificallyuponclaimsoftheBFHschool,however,andsomeofitsdistinctive propositionsarenotcarefullyexamined.3Thesecondofthesepapersisaveryrecentarticleby White(1984),whichisexplicitlyconcernedwiththeBFHliteraturebutmainlywithregardtoa singleissue,viz.,thepossibilityofadivorceoftheunitofaccountandmediumofexchange. White'streatment,moreover,ismorehistoricalinemphasisthantheonedevelopedbelow.It thusprovidesausefulcomplement,whichIshalldrawuponinafewplaces.
Itshouldalsobementionedthat,intheirattitudetowardderegulation,theBFHwritings displayanotableelementofsimilaritywiththe"competitivecurrencies"proposalsofKlein
(1974),Saving(1976),Hayek(1978),Vaubel(1978),andothers.Thereis,however,amoderately cleardistinctionbetweenthetwogroupsprovidedbytheBFHemphasisonaccounting(as opposedtomonetary)exchangeandbythefloating—rateaspectofthevariouscurrenciesinthe othergroup;foranelaborationonthesedifferencesthereaderisreferredtoYeager(1983). Thepresentpaperdoesnotattempttosurveyoranalyzethecompetitivecurrenciesliterature.
wherebytheunitofaccount(e.g.,dollarsorounces)isaspecifiedquantityoftheassetthat servesasthemediumofaccount(e.g.,FederalReservenotesorgold).6Anobviousalternative istousethetermnumerairetorefertotheasset,someunitofwhichservesastheunitof account.7Thistermissometimesutilized,however,torefertothegoodthatisthebasisfor relativepricesasexpressedbytheeconomicanalyst,notasthebasisforpricesasstatedby sellersintheeconomyitself.8Inordertobedefinitewithrespecttothisdistinction,Iwilluse Niehans'terminwhatfollows: themediumofaccountisagood(orcollectionofgoods) someunitofwhichisusedasthebaseforpricesquotedbysellersintheeconomyunder study.
Theforegoingdiscussionprovidesareminderthatthereisnologicalnecessityforan economy'smediumofaccount(MOA)anditsmediumofexchange(MOE)tobethesame. Oncethatisrecognizeditmustbeadmittedthat,asFischer(1983,p.8)hasremarked,thereis nothinginmostmonetaryanalysesbearingonthedeterminationoftheidentityoftheMOA. Buthavingadmittedthat,itisimportantalsotorecognizethatinamonetaryeconomythe benefitsofhavingacommonunitofaccountareincompleteunlesstheMOAisalsotheMOE. Thispoint,whichismadeexplicitlybyNiehans(1978,p.121),maybeputintheformofa substantiveproposition:unlessprovidedwithinducementstodootherwise,sellerswillquote pricesintermsofthemediumofexchange;theMOAandMOEtendtocoincide. The validityofthispropositionisstronglysupportedbytheevolutionaryandhistoricalanalysis
presentedbyWhite(1984). Thepropositiondoesnotdeny,ofcourse,thattherecanbe
inducements——suchasthepresenceofsubstantialinflationintermsoftheMOE——foragentsto makecontractsintermsofsomethingotherthantheMOE.
III.Fama
LetusnowbeginwithadiscussionofFama(1980),whichhasbeendescribedas"perhaps themostinfluentialstatementofthenewmonetaryeconomics."'°Fama'sanalysisinthispaper centersontwohypotheticaleconomies.Thefirstoftheseisoneinwhichthereisnotangible mediumofexchange. (^) Thereis,however,asophisticatedaccountingsystemofexchange (ASOE),accesstowhichisprovidedbydepositsheldwithbanks.1'Competitiveinterestrates arepaidbybanksondepositsandchargesaremadefortransactionservicesprovidedto depositors. Depositsareheterogeneousinthesensethattheyareclaimstoportfolioshares, thecompositionofwhichmaybetailoredtothedesiresofindividualdepositors.Thusbanks provideasecondtypeofservice——portfoliomanagement.Theseservices,likethosepertaining totransactions,arepricedcompetitively.
AsthiseconomyincludesnoMOE,itisanonmonetaryeconomy. (^) Analysisofits
workingsintheabsenceofregulationthenbecomesastandardprobleminrealgeneral
equilibriumtheory'2Famausesthisinsighttoassistintheanalysisoftheeffectsof
government—imposedregulations,includingcontrolsondepositinterestratesandtherequirement thatbankshold(non—interest—bearing)reserves——fractionsoftheirassets——withthegovernment's "centralbank."Thisapproachmakesitclearthatamajoreffectofreserverequirementsis
simplytolevyataxonbanks,therebyloweringdepositreturnstodepositors. Asa
consequence,householdsandfirms"areinducedtoeconomizetheirholdingsofdepositsandso toincurreplenishmentandothercoststhatwouldbeunnecessaryintheabsenceofareserve requirement"(Fama1980,p.47).Thepresumptionwouldseemtobethatthisrestrictionis sociallyundesirable,aconclusionthatseemsreasonablyconvincingforthisnonmonetary economy.13Somewhatsimilarconsiderationspertaintodepositrateregulations.
FamausestheforegoingframeworktocriticizeargumentsmadebyJohnson(1968),Pesek
andSaving(1967),GurleyandShaw(1960),andPatinkin(1961). Thefirsttwoofthese
referencescontendthat,intheabsenceofreserverequirements,depositraterestrictions,and otherregulations,thepricelevelwill"spiralupward"withoutboundwhilethesecondpair
travelisofrealvalue,suchastepwillclearlycreateademandforUnitsandwilltendto
induceagentstoholdfewerspaceships,justasFamasays.Anditmaycreateataxation
opportunityforthegovernment. ButthisdoesnotimplythattheUnitwillbecomethe
economy'sunitofaccount;creatingademandforUnitsisanecessarybutnotsufficient condition. Indeed,thereisnoevidentreasonwhysteelshouldnotremainthemedium(and Ingotstheunit)ofaccount.Itwouldappearthatthefunctionofreserverequirementsthatis pointedoutbythespaceshipexampleistocreateademandforanintrinsicallyworthlessentity issuedandcontrolledbythegovernment,nottodictatetheunitofaccount.
Letusnowturntothesecondhypotheticaleconomy,orclassofeconomies,discussedby Fama.Inthiscasecompetitivebanksprovideportfoliomanagementandtransactionservicesas beforebutnowtherealsoexistsatangiblemediumofexchange,namely,government—issued
papercurrency. Thelatterprovidesitsholderswithtransactionservicesthatare(by
assumption)imperfectlysubstitutableforthoseofferedbytheASOE.Furthermore,currencyis suppliedmonopolisticallybythegovernment,butbanksvoluntarilyholdstockslargeenoughto permitthemtomaintainconvertibilitybetweendepositsandcurrency.
Inthismonetaryeconomyitisreasonabletoassumethatcurrencywillserveasthe mediumofaccount,inaccordancewiththepropositiondescribedinourSectionII,andFama makesthisassumption.Healsopresumesthatcurrencyhasafixedownrateofinterestof zeroandthatthegovernmentcontrolsthesizeofthenominalstockofcurrency.Thuswitha well—defineddemandforcurrencyinrealterms(resultingfromitsservices)andwithafixed nominalstock,itsnominalvalue——andthusthepricelevel——iswelldetermined.Underthese circumstances,thereisnomotivationforunregulatedbankstotakeactionsthatwoulddrive thepricelevelupward.
Furthermore,wehaveseenabovethatthegovernmentcancreateademandfor
intrinsicallyuselessandnon—interest—bearing"reserves"thatitissues,eitheraspiecesofpaper orasbookkeepingentries.Soitcouldimposereserverequirementsonbanks,inthepresent
economy,requiringthemtoholdreservesinsomespecifiedrelationtobankdeposits. Ifthat
stepweretaken,thegovernmentcouldthenmaintaindeterminacyofthepricelevelwithout explicitconcernforthequantityofcurrencyinexistenceifitcontrolledthesupplyofreserves innominal(unitofaccount)terms. Sincedepositsarevaluable,andreservesarerequiredfor theexistenceofdeposits,arealdemandforreserveswillexistandspecificationofthenominal quantitybythegovernmentwillpindownthepriceofreserves.
Inwhatunitswillthesepriceshequoted?AccordingtothepropositionofSectionII above,currencywouldtendtoremaintheeconomy'smediumofaccountandsomecurrency unitwouldthenbetheunitofaccount.Reservesmightbedenominatedinunitsthathavea fixedvalueintermsofcurrency,butsuchwouldnotbenecessary.Providedthatamarketin reservesisnotprohibited,thepricelevelintermsofcurrencycanberegulatedviathesupply ofreservesevenwiththelatter'svaluepotentiallyvariableincurrencyterms.
DoestheanalysisinthismodelofFama'sprovideavalidbasisforcriticismofFriedman, Johnson,GurleyandShaw,PesekandSaving,orPatinkin?Theanswerwouldseemagainto be"no"inthecaseofFriedmanandGurley/Shaw,forbotharediscussingmonetaryeconomies inwhichthereisnooutsidecurrency(orreserves)forthegovernmenttocontrolinnominal
terms. And,ashisreaderswillknow,Famaexplicitlyagreesthathisviewpointis
fundamentallyconsistentwithPatinkin's.15Johnson,however,iscriticizedbyFamaforhis statementthatpricelevelstability"requiressocialcontroloverthetotalquantityofmoney suppliedbythebankingsystem"(Johnson,1968,p.43). InFama'sview,"theconfusionin Johnson'sinterpretationofPatinkinprobablyarisesfromthefactthatPatinkin... treats depositsasmoney,"i.e.,doesnotdistinguishbetweendepositsandcurrency. Inmyopinion, Fama'sinsistencethatcurrencyanddepositsbeviewedasdistinctentitiesisuseful;toreferto "money"asthe"product"offeredbybanksismorelikelytoleadtoanalyticalerrorthanto viewbanksassellingtwo(ormore)typesofservices.ButwhileJohnson'sterminologyisin thisregardconfusing,Johnsondoesmanagetoconclude——aswouldFama——that"thecentral bankcancontrolthepricelevelifitfixestheyieldonitsliabilitiesandcontrolsthequantity
IV.Black ThetwoanalyticalmodelsusedbyFamaareinmostrespectssimilartoonesdevelopedin amuchearlierarticlebyFischerBlack(1970). (^) Inthispiece,Blackdescribesanumberof hypotheticaleconomies,someofwhicharefreeoffinancialregulationsandallofwhich incorporateanASOE(togetherwithorinsteadofatangibleMOE).Indeed,manyofthe
distinctiveinsightsandviewpointsoftheBFHschoolcanbeclearlytracedtoBlack's
pioneeringpaper.Thelatteralsofeatures,however,alargenumberofassertionsconcerning theunimportanceorvaguenessofthequantityofmoneyandthepointlessnessofthequantity theory.Theseassertionsare,inmyopinion,unhelpfulatbestandservetodetractfromthe overallmeritofBlack'scontribution.Inthefollowingparagraphs,afewexamplesofthistype willbedescribed.
Black'smaindiscussionpertainstoaneconomyinwhichalltransactionsarecarriedout bymeansofanASOEor,almostequivalently,bycheckswrittenonbankdepositsthatare claimstoportionsofthebank'sportfolioofassets. Thereexists,byassumption,notangible mediumofexchangeineithercase.Thereis,therefore,littleanalyticalenlightenmentprovided bytheobservationthat"thereisnothinginthis... world thatcanmeaningfullybecalleda quantityofmoney"(1970,p.10). Inotherwords,whilethisassertioniscorrectitdoesnot implythatanyformofvaguenessappliestotheconceptofthequantityofmoney.Onthe contraryitispossibletosayquitepreciselywhatthemagnitudeofthemoneystockis,inthis hypotheticaleconomy:itiszero.
ElsewhereatBlack'sbehestwe"takeonestepinthedirectionofamorecomplexworld byintroducingcurrency.Thefederalgovernmentwillprintthecurrency,andwillissueitto banksasrequested"(p.13)whichwillpassitontoindividualsasrequested,withappropriate creditsanddebitsenteredtoaccountswiththerelevantbanks."Thustheamountofcurrency heldbyindividualsandbusinesseswillbedeterminedbyhowmuchisneededforsmall payments.Solongastheinterestrateonbankaccountsispositive,anindividualwillwantto holddowntheamountofcurrencythathecarries.becausecurrencyearnsnointerest"(p.13).
Allofthissoundsresonablystandard.ButthenBlackindicatesthattherewillbenoneedfor
anyfederalagencytofixtheamountofcurrencyoutstanding"(p.14)andconcludesas
follows:
Currencyalonecanhardlypassforthewholeofmoney. Thequantityof
currency,inthisworld,willnotbecontrolledbythecentralbank,andwillnot
influencetheeconomy.Soevenwhencurrencyisaddedtoourmodel,thequantity ofmoneycanhavenoeffectonoutput,employment,orprices,becausethequantity ofmoneydoesnotexist"(1970,p.14).
Butthisconclusionseems,tome,quiteunjustified. ThereisatangibleMOEinthis
hypotheticaleconomy,i.e.,currency,andthestockofmoneyisappropriatelymeasuredasthe quantityofcurrency.ItisunclearwhyBlackbelievesthismeasuretobeunsatisfactory. Isit becausethegovernmentdoesnot(byassumption)choosetocontrolitsquantity?Orbecause thereareotherpaperassetsinexistence?Orbecausethereareways,notinvolvingcurrency, ofeffectingtransactions? Butnoneofthesepotentialreasonsseemsvalid;noneofthem underminesthepossibilityofmeasuringthequantityofthemediumofexchange——whichinthis caseissimplycurrency.
Apossibleobjectiontomyconclusion,thatcurrencycomprisestheentiremoneystockin thecurrentexample,isthateconomistswhoemploytheMOEdefinitiontypicallyinclude checkabledeposits(aswellasFederalReservenotes)intheirempiricalmeasureoftheU.S. moneystock.Butthereisacompellingreasonforthat,namely,thatU.S.institutionsaresuch thatcheckabledepositsareclaimstocurrency,claimsthatcanbeexecutedwithoutdelayor significantfinancialpenalty. Thatfactsuggeststhatdemanddepositsshouldbetreatedas nearlyperfectsubstitutesforcurrencyfromthestandpointofthenonbankpublic. Itmaybe
usefulforsomepurposes,therefore,toviewthesumofthesetwoitemsastheexisting
quantityofthemediumofexchange,eventhoughpaymentsbycheckactuallyinvolvetransfers ofclaimstocurrencyratherthantransfersofcurrencyitself.
Thereare,ofcourse,seriousproblemsthatariseinanyattempttoimplementthisconcept empirically.Aleadingdifficultyatthepresentpointoftime(i.e.,1984)wouldbetodecide whichactualaccountsare,andwhicharenot,checkable. Butananalogousproblemwould
interestitwouldneedtobethecasethatactualeconomieswillsoonexistwhichpossessno mediumofexchange. (^) Furthermore,themainmessageofthequantitytheory——namely,that
exogenouschangesinthequantityofspecifiedpaperassetswillhavenoultimateeffectonthe economy'slevelofrealoutput——wouldappeartoremainvalideveninthissetting.
V.Hall ThecontributionbyHall(1982a)continuestopromotebankingderegulationbutaddsa newingredientbyturninginthedirectionofacommoditymoneystandard. Inthisregard, Hall'sproposalpossessesanimportantsimilaritytothe"commodity—reservecurrency"scheme—— itselfageneralizationofAlfredMarshall's(1887)"symmetallism"——thatwasexhaustively
analyzedbyFriedman(1951). Thepresenceorabsenceofatangiblemediumofexchangeis notexplicitlyconsideredbyHall,butatleastonepassage(onp.120)seemsclearlytoimply thattheexistenceofsuchamediumistakenforgranted.Inanyevent,Hallproposesthat theunitofaccountbedefinedasacommoditybundleincludingspecifiedquantitiesofseveral goods,selectedsothattheexchangevalueofthebundlewilltendtoconformmorecloselyto thegeneral"costofliving"thanwouldbethecasewithanysinglemonetarycommoditysuch asgold.Theobjectistopreventbothtrendsandfluctuationsinthepricelevel——thecostof livingintermsoftheunitofaccount——which,itispresumed,areinimicaltothewelfareof theeconomy'sindividuals.
Therearetwoimportantways,however,inwhichthisproposalofHall's——evenwhen interpretedasincludingatangibleMOE——differssignificantlyfromthecommodityreserve
schemediscussedbyFriedman. Thefirstoftheseinvolves"gradualadjustmentsinthe
definitionofthedollar[i.e.,theunitofaccount]sothatitspurchasingpowerremains
constantastimepasses"(Hall,1982a,p.115).Withoutsometypeofadjustmenttherewould bepricelevelchangesovertimeevenwithacomposite—commoditybundlesuchasHall's ANCAP,23soHallproposesthatthedefinition(thescale.notcomposition)ofthestandard bundlebeadjustedinresponsetodeparturesofthepricelevelfroma(constant)targetvalue. Thisfeature,whichisbasedonanideadevelopedbyIrvingFisher(1913),contrastssharply withtheusualcommodity—standardprinciplewherebythedefinitionofthestandardbundleis fixed,supposedlyforeternity.
Isthisadjustable—bundlefeatureofHall'sproposaldesirable?Onepossibleobjectionthat somemightraisewouldcharacterizeitasinjecting"tinkering"ordiscretionarybehaviorintoa
opportunitiesforcoveredarbitrage"(p.118). Butunderwhatconditionsisittruethat
arbitrageopportunitieswouldexist? Itiscertainlyclearthatsuchopportunitieswouldbe availableifthegovernmentwascommittedtomaintainconvertibility,bystandingreadyto exchangepaperdollarsandstandardbundlesoneforone.Butgovernmentinterventionofthis typehasbeenruledout.Anotherpossibilityisthatbanks26wouldmaintainconvertibility——but thatdutywouldhavetobeundertakenvoluntarily,sinceagovernmentalrequirementtothat effectwouldbeinconsistentwiththerecommendedabsenceofregulation.Hall'sview,inany event,seemstobethatconvertibilitycommitmentswouldbeunnecessary;thatthearbitrage opportunitieswouldbecreatedbythelegaltenderprovisionitself.27Butthathypothesisseems tomeunconvincing.Whatismeantbyalegaltenderprovisionisthatthecourtswillnot helpacreditortocollectadebtifthecreditorhasrefusedpaymentofferedbyadebtorinan assetthathaslegaltenderstatus.28Theusualpurposeofsuchalawistoconferacceptability onasecondaryclassofassets,bydenyingcreditorshelpiftheyrejectsuchassetsandtryto requirepaymentinapreferred(andsimilarly—denominated)primarymoney. Inparticular, legaltenderlawsdonotrequirethatallcontractsbespecifiedintermsoflegal—tenderassets. Thus,evenifstandardbundlesarethesolelegaltenderassetinHall'seconomy,itwouldbe possibleforbuyersandsellersroutinelytousepaperdollarsastheMOEandapaperdollaras theunitofaccount. Consequently,itwouldbepossibleforthepaperdollarpriceofa standardbundletodifferfrom1.0,withoutcreatinganyarbitrageopportunity,ifnooneis committedtothemaintenanceofconvertibility.Indeed,thepaperdollarpriceofthestandard
bundlewillvarydirectlywiththenumberofpaperdollarsinexistence;thefunctionof
convertibilityistoforcethequantityoftheMOEtobesuchastomaintaintheprice
standard.
Thealternativeideaherebeingpursuedisthatpaperdollarsmight,underHall'sscheme, gainacceptanceastheMOEbyinitiallyexistingasclaimstostandardbundles——claims redeemablebybanksthatvoluntarilymaintainconvertibility. Butthen,sinceitiscostlyto maintaintherequisitecommodityreservesandsincetheconvertibilityoptionisveryrarely exercised,banksmighteventuallydoawaywiththisguarantee.Thepaperdollarwouldthen
becomeaninconvertiblepaperasset,withoutlegaltenderstatus,thatneverthelessfunctionedas theMOE——justaswasthecasewithBankofEnglandnotesbetween1797and1821.°The paperdollarwouldhavevalue,ifthistranspired,becauseofitsMOEserviceflow,notbecause itwasaclaimtoastandardbundle.Undersuchcircumstances,itisclearthatitsvaluecould departfromthatofastandardbundle——justasthevalueofBankofEnglandnotesdeparted fromthatoftheirnominalgoldbullionequivalentintheearly1800's.
Hall's(1982a)argumentagainstthissuggestionisthat"itisimpossible"forthedescribed situationtoarisebecause"whensellerspostadollarprice,theyhavetherighttoreceive paymentinresourceunits[i.e.,standardbundles]insteadofanyotherformofpayment"(p. 118). Butthatargumentpresumesthatbuyersandsellersaremakingexchangesinwhichthere isambiguityastowhetherthe"dollarprice"referstopaperdollarsorstandardbundles. Rationalagentswouldnot,however,engageinexchangesinwhichsomuchambiguityprevailed. Inatemporaltransactions,bothpartieswould(underthealternativescenario)takeitfor grantedthatpostedpricesrefertopaper—dollarmagnitudes.31Loancontractsextendingover timewouldbeadifferentmatter,becauseofthelegaltendersituation,andspecificprovisions wouldhavetobemadeiftheseweretobespecifiedinpaperdollars. Butsuchprovisions couldberoutinelyaddedatalmostnocost. (^) Bankaccounts,finally,wouldbe——underthe presenthypothesis——denominatedinpaperdollarsratherthanstandardbundles.
ThelatterconsiderationindicatesthatHall'soutcomecouldprobablybeattainedbya law——moresweepingthanalegaltenderlaw——declaringthatnoloancontractswouldbe enforcedunlessspecifiedintermsofstandard—bundledollars.Thiswouldnecessitatethatbank accountsbedenominatedinthesedollars,andthatwouldprobablyresultinthepaperMOE consistingofclaimstostandardbundles. (^) Thissortofalawwould,ofcourse,constitutea seriouslimitationonthetypesofcontractsthatwouldbeviable.
Whattheforegoinglineofargumentsuggestsisthatifaneconomyhasapapermedium
ofexchange,thatpaperwillalsotendtoserveasthemediumofaccountevenifthe
