Lesson of the Gold Standard: The Central Bank Should Target Nominal Income - Revisions to My Latest Paper

I've finished the next revision of my paper, "Wither Gold: A Reformulation of Austrian Business Cycle Theory". I've made substantial revisions. Of interest to many of my readers, it now includes commentary arguing that the mechanics of the gold standard suggest that nominal income targeting is an appropriate policy for a central bank at the center of a financial system. Here's a peak at the new section.

Fortunately, the modern international monetary system comprised of independent central banks who issue fiat currency is not subject to the same restrictions as a gold standard. This is not to suggest that a gold standard is without merit, only that any managed commodity standard with fixed exchange rates – stated simply, a fixed price for money – is inherently fragile. This shortcoming has not entirely disappeared. In the modern system, instead of holding gold, central banks expand the monetary base by purchasing debt. Many central banks hold primarily dollar denominated debt and target a specific exchange rate with the dollar. Such policies are reminiscent of the fixed exchange rates of the gold standard. Thus, the same problems that plagued the gold standard are present in the modern system. 

Assuming there is no radical regime change, these problems can at least be remedied in part by the implementation policy rules. Unlike gold, whose quantity produced responds slowly to changes in demand, dollars can be issued by the Federal Reserve via the open market. If foreign or domestic demand for dollars increases, the Federal Reserve – the central bank at the center of the international monetary system – can change the volume of base money to offset the effect of increased demand on prices. The Federal Reserve can adopt a policy of nominal income level (MV) stabilization. Observed and expected changes in demand for dollars are automatically adjusted for under a nominal income target regime. Which measure of nominal income is most appropriate is a subject beyond the purview of this paper, but the policy can at least be analyzed theoretically.

It goes on to support an nominal income futures market so as to endogenize Federal Reserve policy according to market expectations.