The Evolution of Small Change: Beliefs, Experiments, and ...

Interactions of supply and demand 19
and augmented the sources of supply in (2.2) to allow government purchases
of coin 1 with coin 2, namely, open market operations. Open
market operations in coins augment the supply mechanism in a way that
keeps p ≤ γ1 , while raising revenues for the government in the form of
silver. But there is a bound on the amount of silver that can be raised with
open market operations. We display this bound below. Beyond the bound,
more revenues can be raised only if the government engages in inflationary
finance. To accommodate that, (2.2) must be modified to include a term
for deficit finance. The Spanish discovered that term in 1625 (solidify
date).
Economics of interval alignments
Various alignments across coins of the mint-melt intervals are possible,
depending on the settings for σi, the per coin sums of production costs
and seigniorage taxes.
1. If σ1 = σ2 , the intervals can be aligned by setting the bi’s so that γ1
γ2
= e.
2. Per coin cost differences create problems in aligning the intervals, and
present a choice about whether to equalize the mint prices or the mint
equivalents. Evidently, if σ1