The Rate of Return Paradox II: “Legal Restrictions”

Abstract

Expounding the rate of return paradox as the upshot of legal restrictions amounts to taking an outside position of which most monetary economists disapprove. For example the following criticism has been voiced against this attempted explanation: It is a logical consequence of the erronous claim, that Walras’ tatonnement and his auctioneer mirror the real world. Once this claim has been accepted, a means of payment with a low nominal rate of return obviously has no place to occupy. If one nevertheless wants to have it in the model, then one is in a quandary. As a last resort, legal restrictions are invoked. In this view, generating a demand for money by means of legal restrictions resembles clutching at a straw. This objection is at best incomplete. It does not answer the question whether under laissez faire agents would choose a means of payment with a high interest rate, and what might induce them to forgo these high return rates.