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Stabilizing The Expected Price Level In A Bfh Payments System

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  • W. WILLIAM WOOLSEY

Abstract

The Black‐Fama‐Hall system of free banking promises improved macroeconomic performance through the use of a common unit of account defined in terms of a bundle of goods and services and indirectly convertible means of payment. This paper shows how BFH can operate when the actual market price of the dollar‐defining bundle is measured only periodically. The proposed version of BFH would require banks to calculate the amount of redemption medium (gold or securities) needed to redeem money using the subsequent measurement of the bundle's market price. The procedure in effect would make checks, banknotes, and token coins of given face value directly convertible into redemption medium of equal market value and into an index futures contract on the bundle's market price. The paper explains how the system would tend to stabilize the expected price of the dollar‐defining bundle and uses a dynamic stochastic model to illustrate the consequences for the actual price level, real income, and interest rates.

Suggested Citation

  • W. William Woolsey, 1994. "Stabilizing The Expected Price Level In A Bfh Payments System," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 46-54, April.
    • Handle: RePEc:bla:coecpo:v:12:y:1994:i:2:p:46-54
    DOI: 10.1111/j.1465-7287.1994.tb00422.x
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    References listed on IDEAS

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    2. James A. Dorn, 2010. "Editor's Note," Cato Journal, Cato Journal, Cato Institute, vol. 30(3), Fall.

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