Judy Shelton’s monetary policy

I share Judy Shelton’s support for monetary policy with a hard anchor. Following currency board rules, the public should determine the money supply they want to hold at its fixed price. Historically, gold was the most common hard anchor. It worked well for centuries. However, it had two problems.

The first is that central banks actually bought and stored gold, which distorted its market supply and thus price. Widespread adoption of a gold anchor combined with central banks buying up much of it would be an even more serious problem today. But gold can anchor the price of a currency without the central bank actually hoarding gold. It would instead issue its currency against other safe assets, such as government debt securities, as fixed gold price. It would fully back its currency with such assets so that it could redeem it all if the public chose to return it. This would ensure that the gold price in the market in the central banks currency was always very close to its official (anchor) price.

This system of indirect redeemability, as Leland Yeager called it, would ensure a more stable market price for gold relative to other goods and services and thus a more stable purchasing power of a currency fixed to it. However, choosing a single commodity as the anchor (its second problem) would result in a less stable value of the currency than would choosing a small basket of widely traded commodities. https://www.adamsmith.org/blog/returning-to-currencies-with-hard-anchors

Given the discretion to manage their currency supplies, central banks have historically tended to undermine its value as the result of over issuing it (inflation). Judy is right to want to limit that discretion. The Federal Reserve Act mandates that the Federal Reserve should aim for price stability (and full employment). This is an important constraint on the Fed’s behavior, but we can do better.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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