A WALRASIAN THEORY OF MONEY AND BARTER

We study a barter economy in which each good is produced in two qualit ies and no trader can distinguish between the qualities of those goods he neither consumes nor produces. We show that in competitive equilib rium there exists a (unique) good-the one for which the discrepancy be tween qualities is smallest-that serves as the medium of exchange: thi s good mediates every trade. Equilibrium is inefficient because produc tion of the medium would be lower if it were not for its mediating rol e. Introducing fiat money enhances welfare by eliminating this distort ion. However, high inflation drives traders back to the commodity medi um.