Hello,
in "Denationalization of Money", F.A. Hayek wrote that private money suppliers might increase the stock of money in order to compensate a higher demand for cash balances among market participants and decrease it, when people reduce cash reserves. So to speak, the higher demand for cash is getting satisfied through the printing press.
I wanted to ask you, what "Austrians" think about that proposal.
Assume, for example, that the central bank doesn't interfere in the credit markets and doesn't try to manipulate market interest rates. Instead, whenever people start hoarding more cash, shrinking the money supply, the central bank mitigates this by buying gold reserves, increasing the amout of money in circulation. Later, when people decrease their cash reserves, the central bank sells the gold again, sucking the excess cash out of the economy, all without influencing interest rates.
Doesn't such a monetary policy sound reasonable?
Tobbog, it is a reasonable monetary policy if it could ever work. Horwitz and White have both written on this (see the last chapter of Horwitz' Microfoundation and Macroeconomics). The problem as both writers have pointed out is that due to the institutional arrangements it couldn't possibly ever work. Protected from competition centralized organizations such as the Fed or the ECB could have access to neither the information that they would need to implement the policy nor the profit and loss accounting necessary to know if their policy is working. The problem is deeper than "well, we need the central bankers to act in a way that's consistent with this goal and then we can have a sound monetary environment" the problem is more like "central bankers could never implement this policy successfuly".
In order to acheive the goal which you correctly believe to be important we need competition in currency. Outside money would need to be denationalized and inside money would need to be deregulated. As things stand a central bank can only really rely on aggregates such as price levels and interest rates which take a long time to compile, hide important information and are unreliable for other reasons. Horwitz gives a specific example, I forget what it is where certain aggregates the central bank may use will actually give the bankers incorrect information about which policies they should pursue .
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
The only reasonable monetary policy is "There is no State regulation of money and banking at all."
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
The issue here is what is money? Cash, government notes, etc are what we think of as money. The free market being a cooperative mechanism of discovery may choose something else as money. Moreover, the amount of money will be up to the forces of supply and demand for money not the feelings of central bankers.
Using history as a guide, most people used some combination of gold, silver and copper as money and wrote bank notes redeemable in one of those three metals.
As for central bank monetary policy, there is only one that will guarantee that central bank won't inflate which is the one where the central bank does not exist. If the central bank exists then it always has an incentive to reward some at the expense of others: In the US Fed case the rewards are shared by the central government and member banks. It may be different in other countries.
The central bank like any other central planner does not have the information at their disposal to determine the price of money. So central bank reactions to changes in the supply of money relative to some commodity are just guesses at the optimal solution or worse; they are attempts to pay off their friends.
If "In God we trust", then "God, have mercy!". The best monetary policy is that, when you can assert: "In money I trust!"...
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