The Theory and Empirical Credibility of the Commodity Money

The recent instability in financial markets demonstrated the inadequacy of the mainstream treatment of money and the underlying production base. This has stimulated interest in the possible role of a money commodity. I demonstrate that the fundamental function of monetary theory, an explanation of the general level of prices, is provided through only two analytical mechanisms, quantity-based valueless money or a money commodity. I show that the quantity-based explanation is unsound by its own logic. I then present the theoretical argument for commodity-based money, which is analytically consistent. Theoretical superiority of commodity-based monetary theory has little practical impact because the commodity money hypothesis is considered empirically absurd. The final section demonstrates prima facie credibility of a link between gold and aggregate prices in the United States since the end of World War II. This credibility should motivate Marxists and other critics of mainstream economics to treat seriously commodity-based monetary theory.