Views on Monetary Policy

By Hoskins, W. Lee | Federal Reserve Bank of St. Louis Review, March-April 1993 | Go to article overview

Views on Monetary Policy

Hoskins, W. Lee, Federal Reserve Bank of St. Louis Review

THE IDEAL MONETARY POLICY requires a credible and predictable commitment to maintain the long-term purchasing power of a currency. The performance of central banks, which have traditionally been entrusted with monetary policymaking, is far from this ideal simply because a clear mandate for price-level stability--zero inflation--is absent. In practice, central banks serve as instruments that governments use to pursue multiple objectives that they believe serve their interests. Therefore central banks pursue monetary policies that at best have only a fragile commitment to price stability. Governments are currently pursuing policy coordination or monetary union strategies that are little more than attempts to implement a regime of monetary protectionism in the global economy. The future of monetary policy rests on the continuing struggle between politicians seeking policies that serve their short-term agendas and global financial markets that limit the actions of an individual central bank.

In my remarks I discuss why central banks have been established, their bias toward inflation and the importance of independence and accountability to their effectiveness. I also argue that zero inflation should be the dominant objective of a central bank and that current efforts to coordinate monetary policies are likely to conflict with that objective.


What is the justification for a central bank? Can some configuration of private institutions in a so-called free-banking environment perform the functions of a government-sponsored monetary authority? Are central banks necessary?

In his 1959 Millar Lectures at Fordham University, MIlton Friedman provided a classic statement of the economic rationale for central banks.(1) Friedman's argument appealed fundamentally to the costs inherent in a pure commodity-standard system, for example, a gold-standard system. These costs arise both from pure resource costs and perhaps more significantly from substantial short-run price variability resulting from inertia in the adjustment of commodity-money supply to changes in demand. The inefficiencies these costs represent are a significant disadvantage of commodity-money exchange systems.

As a consequence there is a natural tendency, borne out by history, for pure commodity standards to be superseded by fiat money. But particular aspects of fiat money systems--such as fraudulent banking practices, natural monopoly characteristics and tendencies for localized banking failures to spread to the financial system as a whole--resulted in the active participation of government. We have come to know this active participation as central banking.

Rationales for establishing central banks have not gone unchallenged, not even by Friedman.(2) Disruptions in payments can be costly, but so are the instabilities and inefficiencies caused by the lack of an effective anchor for the price level in fiat money systems. Moreover, theoretical discoveries in finance and monetary economics, closer attention to the lessons of historical banking arrangements and advances in information and financial technologies have contributed to a healthy skepticism about the superiority of central banks and government regulation to alternative market arrangements. For example, some of the financial-backstop functions performed by central banks and banking regulators may have weakened private market incentives to control and protect against risk.(3)

Still, those who argue for alternative monetary structures must at least recognize that their case rests on untested propositions. Yes, it would be wrong to accept unthinkingly our current central banking system as the best alternative for performing the monetary functions of advanced economies, but it would also be wrong to claim that the current central banking system does not reflect society's choice of an institutional arrangement to perform those functions. …

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

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.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Views on Monetary Policy


Text size Smaller Larger Reset View mode
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?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    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.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.