– June 10, 2018

I previously discussed how an international monetary order promotes cosmopolitanism: an extension of the division of labor across international borders that fosters larger circles of social empathy by extending the practice of the “bourgeois virtues.” In the next few posts, I want to elaborate on the cosmopolitan elements of an international monetary order. But first we need to do some basic economics. Why would we even suppose that international, rather than national, money is desirable?

Money is a good that has interesting scaling properties. The utility of money to its users grows the more people accept money in exchange. For many more familiar goods we consume on a regular basis, this is not the case. An apple, for example, does not have this scaling property. The utility you gain from consuming an apple is largely independent of the number of other people consuming apples. But money, precisely because it is a medium of exchange, becomes more valuable to you when more people are willing to trade with you using money. The more people using the same money you are, the larger the number of your potential trading partners. This is true even if there is a well-functioning market in which you can trade your money for a different money — dollars for pounds sterling, say — because making these trades is costly. If you use dollars, you would be perfectly happy if everyone else in the world used dollars too.

Money is thus an example of a network good. The more people within the network, the more valuable is being a part of the network. Other network goods include the internet, cell phones, and the QWERTY keyboard layout. Each of these goods has desirable properties independent of their network value. But the network value is still present, and once the network gets past a crucial minimum threshold, the value of being in the network can skyrocket. If we were to graph the benefits of using a given money, it would probably resemble an S curve. Benefits initially rise slowly because the network has not yet hit its threshold. Once it does, the benefits rise sharply and quickly. But eventually they will taper off again. If 7,000,000,000 people in the world are using dollars, the additional benefit of a 7,000,000,001th person using dollars is probably pretty small.

We have some reason to want the monetary network to be as large as possible. International money certainly seems like a way of making this happen. But we can’t be too hasty: we have discussed the benefits of a large monetary network, but not yet the costs. Maintaining a larger circulation of money is costly: it uses up resources. So long as these costs are increasing as the money network increases, there is an optimal size for the monetary network.

How big is big enough? Does international money hit the sweet spot in terms of network size? We can’t answer this question using pure theory. We have a theoretical understanding of money as a network good, and we suspect that the monetary network ought to be quite large, where “large” is some intuitively plausible amount. We can’t be precise about it ex ante, but we’d probably know it when we see it ex post. 

The thing to do now is some monetary history. In my next post, I will discuss the classical gold standard, which prevailed from the late 19th to the early 20th century.

Alexander William Salter

Alexander W. Salter

Alexander William Salter is an Associate Professor of Economics in the Rawls College of Business and the Comparative Economics Research Fellow with the Free Market Institute, both at Texas Tech University. He has published articles in leading scholarly journals, such as the Journal of Money, Credit and Banking, the Journal of Economic Dynamics and Control, the Journal of Macroeconomics, and the American Political Science Review. His opinion pieces have appeared in The HillThe American ConservativeUS News and World ReportQuillette, and numerous other outlets. Salter earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Occidental College. He was an AIER Summer Fellowship Program participant in 2011.

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