On these principles it will be seen that it is not necessary that paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be standard. Ricardo (1965, p. 239)
Experience, however shows that neither a state nor a bank ever have had the unrestricted power of issuing paper money without abusing that power; in all states therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion. Ricardo (1965, p. 241)
Abstract
We utilize the strategic market game approach to analyze the role and function of a mutual bank with variable fractional reserves, redemption in gold, and endogenous interest rate formation. We specify the conditions of enough money and its distribution. Using the continuum of traders model, we show existence and optimality for the case ofno bankruptcy as well as for the case in which there exists the potentiality of bankruptcy. Finally, we analyze the relationship of the gearing ratio and the bankruptcy penalty with respect to the resulting equilibrium allocations.
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The authors wish to acknowledge the help of discussions held with Pradeep Dubey, John Geanakoplos, Jingang Zhao and the comments of two anonymous referees.
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Shubik, M., Tsomocos, D.P. A strategic market game with a mutual bank with fractional reserves and redemption in gold. Zeitschr. f. Nationalökonomie 55, 123–150 (1992). https://doi.org/10.1007/BF01227417
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DOI: https://doi.org/10.1007/BF01227417