Thursday, December 20, 2012

Sound Money vs. Stable Money

Historically, there have been two contrasting monetary doctrines.
The first doctrine favors what it calls "sound money," defined as money that has a purchasing power determined by markets, independent of governments and political parties. A true gold standard is one example of money that has an intrinsic value determined by markets rather than governments. Note that, under a sound money doctrine's principles, a gold standard where the government sets a fixed price at which it is willing to exchange its currency for gold does not qualify. If the government sets the peg price, the market’s essential role does not occur. So the various “gold price” systems that have existed from time to time (most famously the Bretton Woods system) do not qualify as sound money systems.
The second doctrine favors what it calls "stable money," originally defined as money that is managed so its value does not change, but more recently redefined as money that is managed so its value changes at some fixed, predictable rate. The principles of this doctrine require some authority to "control" the supply of money so fluctuations in the value of money do not create financial disruptions, such as recessions, panics, and deflation. Candidates for the authority to exert this control are always limited to governmental bodies, typically either the finance ministry (the U.S. Treasury, for instance) or an "independent" central bank. The degree of actual independence to be exercised by the central bank is always somewhat ambiguous and frequently is subject to change as circumstances change, but the idea of some level of independence is almost always present.

Read more: http://www.american.com/archive/2012/december/sound-money-vs-stable-money

No comments: