Commodity-basket Monetary Standards

Kevin Dowd
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Kevin Dowd: Sheffield Hallam University

Chapter 14 in Competition and Finance, 1996, pp 337-380 from Palgrave Macmillan

Abstract: Abstract We turn now to monetary systems in which the value of the unit of account is tied to a commodity basket rather than to any individual commodity. While bimetallism and the systems related to it might provide some protection for the price level in the face of ‘excessive’ fluctuations in the relative value of the anchor commodity, there is a strong argument that the price level would be more stable if it were tied to a basket of gold and silver rather than to fixed amounts of either metal because a basket would normally have a more stable relative price. We thus arrive at symmetallism — a system in which the price of a basket of gold and silver (i.e., a weighted average of the prices of gold and silver) is pegged, but the individual prices of gold and silver are left floating. The underlying idea is that shocks to the relative prices of each metal will cancel out to some extent in their impact on the relative price of the basket as a whole; the relative price of the basket will therefore be more stable, and so a system that pegs the nominal price of the basket should lead to a more stable price level than a monometallic or bimetallic system that pegs the nominal price of an individual metal. The same logic also suggests that a basket would normally generate more price-level stability if it included three metals instead of two, and that it would generate more still if it had n metals. We can thus go from a ‘narrow’ basket with a relatively small number of included commodities to a ‘broader’ one with many.

Keywords: Price Index; Asset Price; Price Level; Relative Price; Speculative Attack (search for similar items in EconPapers)
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-24856-8_14

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DOI: 10.1007/978-1-349-24856-8_14

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