Controlling the Price Level

Governments determine the size of the unit of value just as they determine the length of the length and weight of physical units of measure. What are the different ways that a government can control the size of the unit of value, that is, control the price level? In general, the government designates a resource—gold, paper currency, another country’s currency—and defines its unit of value as a particular amount of that resource. An interesting variant—proposed by Irving Fisher in 1913 and implemented more recently in Chile—is to alter the resource content of the unit to stabilize the price level. Another idea is to alter the interest rate paid on reserves in a way that stabilizes the price level.