ABSTRACT
Money as a medium of exchange Traditional GEA is worked out in real terms, (relative) prices being determined through the direct exchange of goods and services taking place on the commodity market. In a Walrasian pure exchange general equilibrium model, all trade takes place simultaneously, and there is no obvious need for the use of money. It is widely recognised, however, that several obstacles hamper the smooth functioning of the mechanism that should allow for the determination of prices. In his book on Money and the Mechanism of Exchange, Jevons had already pointed out the quandary due to the necessary double coincidence of wants. ‘The first difficulty of barter is to find two persons whose disposable possessions mutually suit each other’s wants. There may be many people wanting, and many possessing those things wanted; but to allow an act of barter, there must be a double coincidence which will rarely happen’ (Jevons 1875: 3). Today, most neoclassical economists agree that, besides Jevons’s double coincidence of wants (known also as the condition of monotone excess demand diminution), bilateral trade requires the respect of price consistency (or quid pro quo condition, or budget balance constraint), and the reduction to nil of all excess demands and supplies in the course of trade (excess demand fulfilment). Having observed that ‘it is generally possible to find trades fulfilling any two of the three restrictions but not generally all three’ (Starr 1989: 129), Starr locates the origin of the difficulties of direct relative exchange in an overdetermination in the demand for commodities that are used both as means of exchange and as consumption goods.
