Working Paper Series no. 506: Coin Assaying and Commodity Money

Abstract

When money was made of gold and silver, individuals faced the problem of determining the intrinsic content of coins in many exchange situations. In this paper we look at a well-documented solution to this problem, and a key institution of the commodity money system: coin assaying. To that goal we build a model of search and matching in which agents trade using coins that are imperfectly recognizable, but have access to a coin inspection technology that reveals the intrinsic content of coins for a fee. We consider two sources of imperfect information: counterfeit coins and clipping. With counterfeits we show that coin assaying reduced the extent of inefficiencies associated with imperfect coins recognizability (namely lower traded quantities and lower trading frequencies). Yet it did not necessarily increase welfare because it unmasked counterfeits which then traded at a discount, reducing total output. With clipping, we show that agents clip for two reasons: in the hope of passing an inferior coin for a superior one, and to reduce the purchasing power of coins that are too valuable. While coin assaying could remove the first type of clipping, it had no effect on the second. While framed in the context of the commodity money system, our analysis relates to the more general issue of asset trading under imperfect information.

Vincent Bignon and Richard Dutu
August 2014

Classification JEL : D82, E42, N23

Keywords : Commodity Money, Asymmetric Information, Coin Assaying, Clipping