Today, the prevalent monetary system is that of fiat money, in which the medium of exchange consists of unbacked government liabilities, which are claims to nothing at all. Moreover, governments have usually established a monopoly on the provision of fiat money, and control, or potentially control, its quantity.

Fiat money is a very recent development in monetary history; it has only been in use for a few decades at most. Why did this evolution from commodity money to fiat money take place? Is fiat money better suited to the modern economy or was it desirable but impractical in earlier times? Were there forces that naturally and inevitably led to the present system?

Whether the mint will produce new coins or melt down existing coins will thus depend on how the price level relates to the parameters: silver content of the coins, production costs, and seigniorage rate. The price level cannot be too low (or the purchasing power of the coins too high) or the mint could make unbounded profits by minting new coins and spending them. Similarly, the price level cannot be too high (or the purchasing power of the coins too low), or the mint would make profits by melting down the coins. The absence of arbitrage for the mint places restrictions on the price level, which is contained in an interval determined by the minting point and the melting point

When the mint is minting new coins, its costs are the cost of the silver content, the seigniorage tax, and the production cost;4 its revenues are the market value of the coins, which is the inverse of the price level. Similarly, when the mint is melting down coins, its costs are the market value of the coins, and its revenues are the value of the silver contained in them.

In his A Program for Monetary Stability (1960), Milton Friedman begins with the question: Why should government intervene in monetary and banking questions? He answers by providing a quick history of money, which he describes as a process inevitably leading to a system of fiat money monopolized by the government (p. 8): These, then, are the features of money that justify government intervention: the resource cost of a pure commodity currency and hence its tendency to become partly fiduciary; the peculiar difficulty of enforcing contracts involving promises to pay that serve as medium of exchange and of preventing fraud in respect to them; the technical monopoly character of a pure fiduciary currency which

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Approximate Pages = 5 (250 words per page double spaced)