In standard overlapping generations models [e.g. Samuelson(1958), Wallace(1980), Tirole(1985)], the valuation of the intrinsically useless asset, or fiat money, is benign to all agents: every agent in the economy becomes happier when money has positive value than when it does not. As is widely known, markets in some of those economies fail to achieve efficient allocation unless incomes are appropriately transferred across generations. If money is demanded as a store of value, it promotes such transfers and, as a result, improves economic welfare.

This paper, however, gives another picture of fiat money not so rosy as the above. In the model of this paper, the valuation of fiat money may be malign to the generations bom in and after the first period. Roughly speaking, this result is brought about by the installation of the following externality in a Wallacian overlapping generations economy: the rate-of-return on physical investment is a decreasing function of the value of money; and dominates the rate of population growth when money is valueless. Owing to the externality, the valuation of money lowers the rate-of-return on physical investment. This implies that the interest rates when money is valued are lower than those when it is not, because arbitrage equalizes the rate-of-return on money with that on physical investment. As the result of this decline in interest rates, the agents except the initial old are worse off when money has positive value.