CHAPTER 5

Monetary Policy

Monetary Policy in a World of Fiat Money

Most of man’s accumulated experience is with commodity money. Fiduciary money, by contrast, is relatively new. It has only been with us for the last several centuries. Like commodity money, the origin of fiduciary money generally is viewed as a spontaneous market development. The supposition is that the process that led to both of these types of money involved attempts by individual economic agents to reduce the transactions costs associated with voluntary exchange.

Nearly all money in use today is fiat money. As largely a 20th century phenomenon, this is a relatively new form of money. Unlike the other two types of money, the adoption of fiat money was not a spontaneous market ...

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