The Theory of Monetary Institutions

The Theory of Monetary Institutions analyzes the often overlooked - but fundamental - questions about monetary policy regimes: How and why have monetary institutions evolved into their present forms? What are the leading arguments for and against government involvement in money and banking? What models do we have for explaining how monetary authorities choose to behave in a discretionary fiat money regime, and how well do they fit? What alternatives to the current regime are available, and how would they work? Using a history of thought approach, The Theory of Monetary Institutions begins with a logical evolutionary account of the development of market monetary institutions from barter to the inter-bank clearinghouse. It analyzes the behavior of a metallic money standard, the market forces regulating the quality of bank-issued money, and the naturalness of the various roles associated with central banking. The second section of the book scrutinizes the major welfare arguments used to justify government roles in the monetary and banking systems - such as Samuelson’s non-optimality of money-holding under laissez-faire and Diamond and Dybvig’s parable about the danger of bank runs - and identifies their strengths and weaknesses. The third section reviews the major positive theories for explaining central bank behavior in a discretionary fiat regime: the seigniorage motive, political business cycles and the trap of discretion. Concluding with a discussion of alternative regimes, the book examines monetary rules, private fiat money and a multi-commodity standard.