Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform

33 Pages Posted: 13 Oct 2018

See all articles by Joshua R. Hendrickson

Joshua R. Hendrickson

University of Mississippi; American Institute for Economic Research

Date Written: September 21, 2018


Some have argued that a desirable property of nominal income targeting is that it would replicate characteristics of a free banking regime. However, the degree to which this is true and the degree to which this is desirable depend on the properties of commodity-based monetary regimes. In this paper, I provide a model of commodity money. I find that a pure commodity money regime can only generate an efficient stationary equilibrium by divine coincidence or giving policymakers control over the supply of the commodity. The introduction of bank notes makes it much more likely that the economy achieves an efficient equilibrium. In particular, in a commodity-based system, bank notes are equivalent to call options on the commodity and the commodity holdings are equivalent to a put option on the commodity. If I adopt the typical assumption that there is an absence of risk-free arbitrage in equilibrium, then this implies that both bank notes and the commodity will have an expected rate of return equal to the risk-free rate. If the risk-free rate is equal to the rate of time preference, then this commodity regime is efficient. A free banking system would therefore not only minimize deviations between the supply and demand for money, but also (potentially) implement the Friedman Rule. I use this result to discuss monetary reform. I argue that both market-based and more conventional nominal income targeting regimes are unlikely to replicate both features of a free banking system unless the nominal income target has a deflationary bias.

Keywords: Commodity Money, Free Banking, Nominal Income Targeting, Friedman Rule, Market-Based Monetary Policy, Asset Pricing

JEL Classification: E42, E58

Suggested Citation

Hendrickson, Joshua R., Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform (September 21, 2018). Available at SSRN: or

Joshua R. Hendrickson (Contact Author)

University of Mississippi ( email )

Oxford, MS 38677
United States

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics