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Monetary Reform in an Uncertain Environment

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journal contribution
posted on 01.06.2012, 00:00 authored by Allan MeltzerAllan Meltzer

The 20th century has produced a rich array of monetary experience. The experience can be organized in several different ways. One emphasizes the role of gold in international monetary arrangements. Early in the century, domestic monies of major trading countries were convertible into gold at a pre-established fixed price, and gold coins circulated. Currently, governments do not set the price of gold, and there is no formal requirement on governments to exchange gold for currency or currency for gold.1 This is a relatively recent phenomenon, and there are some who prefer to return to a fixed, guaranteed price. A second method of organization focuses on the arrangements for exchanging a country's currency for other currencies and particularly on the choice between fixed and fluctuating exchange rates. Major trading countries now either permit exchange rates to be determined by market forces or adjust the rates frequently to reflect market forces. A third method of organizing experience focuses on the role of governments or central banks in the monetary system. Under either a gold standard or a regime of fixed currency exchange rates, the government sets a price and agrees to buy and sell its money at that price. The decision to control the price or exchange rate leaves the determination of the quantity to market forces. A decision to control the quantity of money perforce requires that the prices of gold and other currencies be permitted to change.


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