Discretionary Monetary Policy and the Stability of a Money’s Value

George Selgin has a very nice blog about an FT op-ed on Bitcoin. He didn’t say all that might be said though.

The conclusion of the FT article is:

“Governments should be wary of allowing any virtual currency, unless they first find a way of putting central bankers back in charge.”

I couldn’t help but smile reading this.

So ends a profoundly uninformative piece on Bitcoin in the Financial Times no less.

The author of the article is Mark Williams “a former Federal Reserve risk examiner….” I guess this affiliation is supposed to suggest some sort of expertise concerning monetary policy. Unfortunately for the FT and we poor readers, the article is more a rant than a thoughtful piece.

The premise of the article is: “Keeping money stable and trustworthy has traditionally been a function of national governments.”

This premise assumes a great deal. It is fair to say that governments typically, although certainly not always, have been involved in defining the unit of account and money used by most people in the government’s area. Whether that money typically has been stable or trustworthy is quite another question. Probably the best answer is: “Sometimes yes, sometimes no.”

In the main part of the article, the loss of discretionary monetary policy determined by central banks is the big loss if private currency is allowed to exist. According to the author, central banks do a good job of executing the “enormous job” of adjusting monetary policy to the current state of the economy.

Williams assumes that Bitcoin and similar currencies will become sufficiently popular that they will make discretionary monetary policy less effective. A new currency faces a lot of hurdles to being adopted in place of an incumbent currency that is legal tender. If private currencies become widely held, it is hard to see how this can happen unless private currencies become a more reliable store of value than government currencies.

For private digital currencies to become a more reliable store of value and popular, there must be a trade-off of discretionary monetary policy and instability of money as a store of value. The desirable discretionary policy must make the money’s value less stable, or else digital currency is very unlikely to be widely adopted.

This whole line of argument seems more like an argument against discretionary monetary policy than an argument for it.


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