Money and Markets: Essays in Honor of Leland B. Yeager

10 Roger Kopplwill buy gold to replenish its reserves. Unlike other demanders, it is willing to pay aprice for gold that exceeds the redemption ratio. Other considerations might bemarshaled to bolster the point. The price of silver is not likely to be so sticky. Noteredemption entails transaction costs which, for some, will be high enough to inducethem to buy gold on the open market even at prices above the redemption ratio.The deviations from par that we have imagined were set at unreasonably highvalues only to aid exposition; real deviations would be vanishingly small andquickly closed. Like Greenfield et al., I conclude that there is no problem of circularityin the BFH system.Even if we imagine that the circularity problem is real, there are easy fixes. AsBennett McCallum has said, “this difficulty, even if genuine, can be overcome”(2004: 88). He notes that we can lag by one period the market price the bank uses tocalculate its redemption ratio. This period may be an hour, a day, a month, or ayear. Further safeguards, not mentioned by McCallum, could be applied. Forexample, the bank could retain the option of suspending redemption for, say, tenbusiness days. These and similar measures would prevent the sort of downwardspiral imagined by Schnadt and Whittaker, if such a problem could be shown toexist in the first place.The BFH system was conceived largely as an anti-inflation measure. Yeager’sconcern with inflation is reflected in many of his writings including Experiences withStopping Inflation. Typical of his scholarly style, Yeager looked beyond theories andmodels to consider in detail several historical episodes in which inflation was put toa stop. Minniti and Polutnik (Chapter 11) use the framework of Stopping Inflation toexamine an interesting recent case, that of Slovenia. They find that Yeager’sanalysis applies fully to the Slovenian case as well. They show that “the Slovenianmonetary reform was successful because it addressed all three aspects of theinflationary momentum” identified by Yeager, which they list as “1. The credibilitycomponent. 2. The catch up component. 3. The expectations component.” Minnitiand Polutnik say, “in particular, that the newly appointed Slovenian monetaryauthorities were able to leverage popular expectations in favor of stabilization.”The foresight and cunning exhibited by the Slovenian authorities in stoppingdinar inflation was almost a match for that shown in their brief ten-day war ofindependence. One government official has told me how arms were smuggled intoSlovenia shortly before their war of independence. Slovenian political leaderssecretly engaged the leaders of the garbage-workers union to call a strike. Thegarbage piled up. These same Slovenian political leaders then pretended to breakthe strike by calling in foreign garbage collectors from neighboring Austria. Theentering garbage trucks passed easily through checkpoints manned by Yugoslavsoldiers who were, one may guess, happy for the prospect of seeing rotting garbageremoved from Slovenian street corners and alleyways. If the soldiers had lookedinside the trucks, however, they would have discovered great caches of arms, whichwere later distributed to Slovenian soldiers. The fledgling Slovenian army was nowready to fight.The story Minniti and Polutnik tell is not quite as gripping, but it may be oneof the more exciting episodes in recent monetary history. In class and private