STABILIZING THE EXPECTED PRICE LEVEL IN A BFH PAYMENTS SYSTEM |
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| Authors: | W WILLIAM WOOLSEY |
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| Institution: | *Associate Professor, Department of Business Administration, The Citadel. This is a revised version of a paper presented at the Western Economic Association International 64th Annual Conference, Lake Tahoe, Nev., June 24, 1993. The author thanks Kevin Dowd, Scott Sumner, Leland Yeager, James P. Dow, Jr., Warren Coats, Steven Horwitz, and two anonymous referees for helpful comments and the Citadel Development Foundation for financial assistance. |
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| 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. |
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