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...silver coinage least where the mint-owners lacked monopoly status or chose not to exploit that status through debasement). The quantity of bank-issued money was constrained by the commercial banks' commitment to gold- and silver-redeemability for banknotes and deposits. Together these commitments prevented excessive monetary expansion and thereby price inflation. (2) Today (since 1971) the commitments are gone, and substitute is needed.
Constraining Central-Bank Discretion
Inflation targeting has been much discussed in recent years as a proposal for constraining the Federal Reserve's monetary policy-making. As proposed constaints on central banking go, it is relatively weak. Inflation targeting doesn't abolish the central bank, and--at least in the well-known version recommended by Bernanke et al. (1999)--doesn't even fasten a strict rule on it. In both the Bernanke version and in the versions actually practiced in other developed countries, the central bank authorizes inflation within a range of positive rates, typically 1 to 3 percent. At the midpoint rate of 2 percent, inflation is higher than experienced historically under commodity-standard regimes, and is too high to promote optimal money-holding. As David Laider (2006: 3) has recently pointed out, "A 2 percent inflation rate is a far cry from anyone's (or at least any retiree's) idea of price-level stability: this seemingly low rate in fact reduces the purchasing power of a fixed-money income at a noticeable pace ... over the duration of the current 'low inflation" regime [since 1991 Canada has had an inflation target of "under 2 percent" and an average inflation rate of 2 percent per year] the [Canadian] dollar has lost a quarter of its purchasing power."
But, to emphasize the half-full part of the glass, 2 percent inflation is better than 10 percent inflation, and a predictable 1 to 3 percent...
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