Klein (1974a) and Hayek (1976) argue that, if transactions costs permit, a number of currencies, each with its own metric, will compete so that the transactors will gravitate towards currencies that stretch and squirm least, causing better-behaved to oust worse-behaved ones. They do not stress enough that there is now choice between national currencies (see Burstein, 1978). True, greed for seigneurage causes governments to seek currency monopolies, partly under cover of legal tender acts — a point pounced on by Hayek. Still, in the real world, where information is costly, official currencies, sometimes one or two, may naturally dominate a national market.
KeywordsCentral Bank Inertial Reference Frame Monetary Base Legal Tender Fractional Reserve
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