By Michael D. Bordo, Barry Eichengreen
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Extra info for A Retrospective on the Bretton Woods system
21 A theory of monetary institutions mined by the volume of the cash reserves that has been produced by the gold mines or that has been provided to them by the government or the central bank. For all its simplicity, the model of a single bank and of a banking system that I have outlined is perfectly general and follows directly from the assumption of profit maximization. It enables us to identify and analyze the competitive forces that have driven the evolution of banking since its origins in the Middle Ages and that continue to do so even now.
In the Middle Ages, exchange rates between different currencies varied systematically between different locations to reflect the implicit interest that accrued from the time (usually from ten days to a month) when a bill of exchange was accepted until it fell due. Let us suppose that the Medici bank in Venice accepted a bill of exchange for payment in Florence, falling due in one month. Say the exchange rate between ducats and florins quoted in Venice was 5 ducats a florin. The bank would then pay 100 ducats immediately to the issuer of the bill (say, an exporter), and its agent or its branch in Florence would receive 20 florins in one month (presumably, from the importer).
28 Money and the state I showed in the previous chapter, however, that competition in supplying money reduces not the value of money but the cost of holding it. The value of money is maintained because banks commit themselves contractually to redeem their moneys into an asset whose value they cannot control. The value of money, therefore, is identical to the independently determined value of the asset into which it is convertible. But even if the argument that money can't be supplied efficiently by competing producers were correct, that still would not explain the dominant role of the state in monetary affairs.