The Challenge of Stability: Mexico's Pursuit of Sound Money

By Jordan, Jerry L. | Economic Commentary (Cleveland), March 15, 1999 | Go to article overview
Save to active project

The Challenge of Stability: Mexico's Pursuit of Sound Money


Jordan, Jerry L., Economic Commentary (Cleveland)


Mexico needs a stable standard of value. Indeed, no economy can achieve its potential without a stable standard of value.

Mexico needs to experience another extended period of sustained prosperity, as it did in the 1960s. A necessary condition for prosperity is sound money. So long as fears of exchange rate or banking crises persist, no country can sustain a period of rising standards of living.

There is no mystery about what conditions will foster sustainable growth. The experiences of the transition economies of the former Soviet Union and Eastern Europe have provided us with many valuable lessons. One of those lessons is that a market economy requires a Hayekian infrastructure. That is, there must first be a foundation of enforceable property rights, generally accepted accounting principles, stable currency, and sound financial intermediaries.

If public contracts are not honored and private contracts are not enforced, markets are impaired. If title to property is not certain, normal banking is not possible. If financial statements are not reliable, investment opportunities are obscured.

Sound Money

Changes in the money prices of goods and assets convey information. If an economy's monetary unit is known to be a stable standard of value, then changes in money prices will accurately reflect changes in the relative values of goods and assets. That is. price fluctuations signal changes in the demand for, or supply of, goods or assets. Resource utilization then shifts toward more valued uses and away from those less valued.

However, if changes in money prices are contaminated by the changing purchasing power of money, false signals are sent to businesses and households. Bad decisions are made, and resources are misallocated. Standards of living fail to rise at their potential rate. Nominal interest rates respond to shifting expectations about the future purchasing power of money. Changes in real interest rates are obscured. Again, resources are misallocated. Saving and investment decisions are affected, and growth is impaired.

Neither inflation nor deflation enhances economic performance. Unanticipated inflations and deflations induce redistribution of wealth-especially between debtors and creditors-but they leave the average standard of living lower.

A former Federal Reserve governor used to say, 'a place that tolerates inflation is a place where no one tells the truth." He meant, of course, that true changes in the relative values of things cannot be observed when the purchasing power of money is not stable.

The standard of value is stable-money is sound-when people make decisions in the expectation that all observed changes in money prices are changes in relative prices, and all observed changes in interest rates are changes in real rates.

The Challenge

There is no single best way to achieve and maintain a stable standard of value. Even the commodity-backed currencies of the eighteenth and nineteenth centuries were subject to periodic inflations or deflations-as when new gold or silver mines were discovered, or mines were depleted.

The choice of monetary regime has implications for fiscal policies; and that, in turn, means political choices must be made.

Under a true gold standard, a country's internally and externally held debt both represent claims to its gold reserves. This effectively limits the government's ability to engage in deficit spending. The size of government is restrained by the ability to raise taxes.

Under the gold exchange standard of the Bretton Woods System, a country's externally held debt still represents a claim on its gold holdings. The government's ability to engage in deficit spending is constrained primarily by the willingness of its residents to add to their holdings of government bonds.

Under a pure fiat money system,2 such as we have experienced since 1973, the universal challenge has been to find effective constraints on the growth of government spending financed by the issuance of new debt.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

The Challenge of Stability: Mexico's Pursuit of Sound Money
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?