Most simulation mud economies are total disasters; with money ("gold coins", etc) simply hemorrhaging out of monsters etc. Shops simply create endless amounts of money for worthless items, which players continually bring in and sell at fixed prices. Essentially money is a secondary experience point system rather than a useful unit of trade.
In real world economies the continual printing of money results in hyperinflation and other economic nasties. The same applies in mud economies; most muds currently use a fixed pricing system to try and control problems; as a result money isn't a useful representation of effort among players. Basically the total pool of money continually increases while the same stock is available at the same price. Effectively the price of items is continually decreasing as a percentage of the total wealth available.
Seven or eight years ago we at Shattered World  changed the entire basis of our mud's economy in an effort to produce a "working" economy where money actually represents a relatively fixed amount of effort and items have a value representing the actual effort involved in obtaining the item rather than a value arbitrarily fixed by game administrators. We based this economy upon a paper written by L.M. Goldschlager and R. Baxter . This model has been called the "Loans Standard". The key to this system is simply this:
Hence banks are central to the control of money within economy. By controlling the amount of money banks are able to lend to players then the total pool of cash is controlled and can dynamically adjust according to the number of players willing to take out loans.
An essential aspect of such an economy is the total player control of all prices within the world. All cities, shops, pubs, restaurants, homes, butchers, brewers, banks, casinos and other manufacturers are owned and run by players. Shop owners (etc) specify items they'll buy and the prices they'll buy and sell these items at. This enables shops to function even while the owner is not in attendance. Shops are the best way to serious wealth on the mud; but if they're not run well it is just as easy to lose serious amounts of money.
Money enters the economy by players loaning money to purchase items, usually property. These loans are typically secured against the property in question and the bank owner determines interest rate and risk; of course the banks themselves are also tradable commodities. An important aspect of the economy is that wizards participate as if they were players if they want to offer coins as a reward or buy items already existing in game (this also restricts unlimited item creation).
How well has the economy functioned over the past 7 or 8 years?
I'd have to say very well; much better than anything else I've seen or participated in. There have been "boom" times and times of recession; typically this is associated with growth or shrinkage of the player base. But prices tend to remain relatively stable in terms of player time and there is a lot of competition in the market place for both buying and reselling goods and services. Prices actually reflect the difficulty of obtaining an item; if an item is created endlessly by the game then shops generally won't buy it. If it's a hard to get quest item, or a rare herb then it has intrinsic value and shops will pay a premium for it. It has been so successful that some players' main motivation for playing has been to do well in the economic framework provided! Property barons, casino barons, and cartels - we've had them all. Luckily the player run legal system tends to bring these some of these practices under control.
Obviously no system is problem free, and this system is no exception. The main difficulties have been associated with new players to the game who don't have an established "credit record". Firstly it is difficult just to give out cash, as you might like, to new players; experienced player typically exploit these types of cash giveaways by creating lots of second characters and simply taking the cash. And don't forget this cash comes from someone's (a wizards) account! Secondly, new players find it difficult to get loans because the bankers can't evaluate the risk of giving them a loan and usually won't do so until they've demonstrated that they'll be a regular player. This tends to leave menial tasks that established players don't really want to do. Favorites include collecting corpses for butchers (which goes back into the food system), selling ones own blood to a blood bank and searching for valuable herbs in the wilderness. Not ideal from a game play point of view. We're looking at a micro-loans scheme and an "award" scheme for tutoring (genuine) new players to the game to provide more fluidity in the tight end of the economy.
Overall though - it has certainly been worth the effort and added greatly to the game and game play.
If you'd like to reform the economic system of your mud, where can you start?
1. Start a new currency that you can track properly (and ensure no "magical" creation of money - use a "factory" object).
2. Player owned shops - players must be able to control the buying and selling prices of products.
3. Player owned banks, which can give out (secured) loans [subject to certain limits *].
* We have a "reserve" bank that limits the maximum amount a bank may loan; beyond that player held banks pay punitive interest rates.
By starting a new currency the existing economy can keep operating alongside the new one. Watch how the exchange rate changes! After that its just a matter of making everything tradable and integrating in your production/ecology systems with your economic system to get something really interesting.