Commodity Money Equilibrium in a Walrasian Trading Post Model: An Elementary Example

Walrasian general competitive equilibrium is considered in a simple example of an exchange economy with commodity-pairwise trading posts and transaction costs. Budget balance is enforced at each trading post separately. Commodity-denominated bid and ask prices at each post allow the post to cover transaction costs through the bid/ask spread. In the absence of double coincidence of wants, the lowest transaction-cost commodity (with the narrowest bid/ask spread) becomes the common medium of exchange, commodity money. Selection of the monetary commodity and adoption of a monetary pattern of trade results from price-guided equilibrium without central direction, fiat, or government.