The money value problem convertibility and stable prices revisited



Abstract. To serve its essential purpose – certainty of value in exchanges among bargainers – convertible currency drew its value as a proxy from that into which it was convertible.  Gold came with its challenges as a value standard, and those of physical conversion.  The setting of currency value in the discretion of its issuers, by varying the issuance, has led to new and adverse consequences in the fallibility of the discretion. Modern financial markets could provide rule of law conformance to an optimal value standard without physical conversion.The necessary financial device is already at hand, in the market and in the Fed toolbox. REPO, the sale and re-purchase or purchase and re-sale of a Treasury, at the spread of measured currency value to a target of choice, would duplicate in monetary effect that of specie conversion. Technological advance is steadily obsolescing the “cost-of-living” as target. As consumption mutates with invention, the sensible value standard becomes the American standard of living, in the form of a per capita share of total consumption spending. Effective convertibility to such a standard would resolve multiple policy issues, including any conflict in the “duality” of the Fed mandate and the supposed strictures of the “zero bound”, father to the immense distortions of “quantitative easing”. Financial or “fiat” convertibility, as we may call it, effectuated by inflation-priced Fed REPO, could be adopted as a discretionary tool by the Fed, but there are strong arguments for a rule of law. We may need one to deal with deteriorating national finances, and welcome one that returns the “management of the economy” to the free market.

Keywords. Monetary economics, Monetary policies, Convertibility.

JEL. F21, F68, O53, K23.


Monetary economics; Monetary policies; Convertibility.

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