The Money Value Problem: Convertibility & Stable Prices Revisited

We could benefit from a radically new approach to the money value problem, by re-engaging an old one. With the loss of gold as value standard, in favor of the “cost of living”, physical convertibility was lost as a value-conforming mechanism, but modern financial markets and the particular device of the REPO (collateralized loan in asset exchange form) could be employed to deliver its equivalent effects: value enforceable by the individual currency holder (or ower) and conformance of its value in the market generally. Such a modern form of convertibility could enforce a standard of choice. Technological advance is steadily eroding the foundations of the “cost-of-living” index. As consumption mutates with invention, the sensible cost to target becomes that of the American standard of living, in the form of a per capita share of total consumption spending, not so different, upon examination, from the share commanded by a resource of stable relative scarcity (such as gold), and superior in some ways to nominal GDP as target. Convertibility to such a standard would resolve multiple policy issues, including the “duality” of the statutory mandate and the challenges of negative interest. The “zero lower bound” would be eliminated, and “economic stability” disentangled from “financial stability”, to the advantage of both. Fiat convertibility, as we may call it, could be adopted discretionarily by the Fed, but there are strong arguments for a rule of law. We may need one to deal with deteriorating national finances. In the bargain we could reconsider the merits of a central bureaucracy “managing the economy.”