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A model of bimetallism

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  • Francois R. Velde
  • Warren E. Weber

Abstract

Bimetallism has been the subject of considerable debate: Was it a viable monetary system? Was it a desirable system? In our model, the (exogenous and stochastic) amount of each metal can be split between monetary uses to satisfy a cash-in-advance constraint, and nonmonetary uses in which the stock of uncoined metal yields utility. The ratio of the monies in the cash-in-advance constraint is endogenous. Bimetallism is feasible: we find a continuum of steady states (in the certainty case) indexed by the constant exchange rate of the monies; we also prove existence for a range of fixed exchange rates in the stochastic version. Bimetallism does not appear desirable on a welfare basis: among steady states, we prove that welfare under monometallism is higher than under any bimetallic equilibrium. We compute welfare and the variance of the price level under a variety of regimes (bimetallism, monometallism with and without trade money) and find that bimetallism can significantly stabilize the price level, depending on the covariance between the shocks to the supplies of metals.

Suggested Citation

  • Francois R. Velde & Warren E. Weber, 1998. "A model of bimetallism," Working Papers 588, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:588
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    References listed on IDEAS

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    Keywords

    Bimetallism; Gold;

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