In this paper the case made by Klein (1975) and Hayek (1976) for competitive bank monies is reconsidered. To do so we build a model of the demand for bank money that derives from money’s ability to separate commodity purchases from sales across time and so avoid the trading costs implied by barter and the double coincidence of wants. Such a model allows us to view the bank cheating or time inconsistency problem alleged to undermine the case for free banking as part of a larger concern with the creation and maintenance of bank quality in a competitive banking environment. As such it helps to further refine the circumstances under which competition is and is not consistent with optimal money provision and stable money prices.

Additional Metadata
Keywords Competition in Banking, Free Banking, monetary credibility, Bank quality
JEL Monetary Policy, Central Banking, and the Supply of Money and Credit (jel E5), Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems (jel E42)
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Ferris, J.S. (2003). Competitive Bank Monies: Reconsidering Hayek and Klein from a Transactions Perspective (No. CEP 03-02). Carleton Economic Papers. Department of Economics.