Commodity Money Inflation: Theory and Evidence from France in 1350-1436

Nathan Sussman and Joseph Zeira

This paper presents a theory of inflation in an economy with commodity money and supports it by evidence from the inflationary episodes in France during the fourteenth and fifteenth centuries. The paper shows that commodity money can be inflated similarly to fiat money through repeated debasements, which act like devaluation. Furthermore, as with fiat money, demand for commodity money falls with inflation. Unlike fiat money, at high rates of inflation the demand for commodity money becomes insensitive to inflation, since commodity money has intrinsic value in addition to transactions, and thus losses from inflation are bounded. Finally, we show that an anticipated stabilization reduces the demand for commodity money, which is opposite to the effect of an anticipated standard stabilization on the demand for fiat money. All the results of the model are supported by the data.