Commodity Money and the Price Level

Abstract

This article finds that in an open, free market economy, with a privately accessible state mint and an official currency based on a metallic standard, supply or demand shocks leave prices stable both in the short run and in the long run, with the exception of when the currency is debased. The stabilization property of this kind of currency derives from the mechanism by which changes in commodity prices motivate the holders of the stock of currency to shift their demand for it such that its acquisition cost equates to its purchasing power in terms of goods and services. When a country is large relative to the international market for specie, maintenance of price stability may require adjustments in the seigniorage charge, whereas in countries with closed economies such adjustments are in general imperative. In addition, through seigniorage adjustments, the price level may even be held fixed irrespective of the magnitude and origin of shocks, the relative size of the country, and the degree of its openness, whereas at the zero bound of the seigniorage charge, the same result may be achieved though lowering the specie content of the currency. These results are consistent with the monetary experiences of Athens in classical times, France during the period AD 1350–1436, Spain in the sixteenth century, the United States in AD 1870–1914, and China in AD 1910–35. Additionally, since electronic money such as bitcoin has properties similar to gold or silver, these results may extend to a cryptocurrency standard.