The optimum behavior of the price level, in particular, has been discussed for at least a century, though no definite and demonstrable answer has been reached. Interestingly enough, it turns out that when the question is tackled indirectly, via the optimum quantity of money, a definite answer can be given. This chapter examines a rather roundabout way — as befits a topic that belongs in capital theory at least as much as in monetary theory. It also examines a highly simplified hypothetical world in which the elementary but central principles of monetary theory stand out in sharp relief. The amount will depend on the details of the institutional payment arrangements that characterize the equilibrium position reached, which in turn will depend on the state of the arts, on tastes and preferences, and on the attitudes of the public toward uncertainty. These attempts have produced welfare gains to the community by the payment of interest on at least some cash balances.
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