by Kenneth Gould
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 andfrequently is subject to change as circumstances change, but the idea of some level of independence is almost always present.
Sound money advocates lost the intellectual battle in the early years of the 20th century, and now the principles of this doctrine have been largely forgotten. Even people who think of themselves as fiscal conservatives favor a “gold standard” where the government sets a price for which it is willing to exchange its currency for gold, rather than a currency whose value is set by market action. And almost all modern economic theories favor an “independent” central bank as the administrator of the stable money policy, including Keynesians, monetarists, andsupply-side economists. Exceptions include Austrian School economists and Libertarians.
Stable money advocates almost always favor “fiat” money, or money with no intrinsic value, such as the paper dollar, since then there can be no market disruption of the policy of the entity whose task it is to establish a stable money regime. Further, stable money advocates usually distrust markets in two ways.
1. Stable market advocates sincerely believe that market-controlled money will periodically cause recessions, panics, and deflation, and that therefore markets must be replaced by government actions, the government being the only entity strong enough to act in the place of markets.
2. Stable market advocates also mostly believe that the private citizens who make up markets will sometimes “hoard” money with intrinsic value — gold coins, for instance — thereby causing insufficient money to be available to fuel economic expansion, thus causing recessions, panics, and deflation. …