A Model of the Federal Reserve Act under the International Gold Standard System

Abstract

This paper expands Freeman [1996a, b] into a two-country model. Optimal allocation of resources requires an elastic money supply in both the foreign exchange market and the domestic credit market to clear all debts and foreign exchange at par value in the short run, and provide a constant money supply in the long run. Such monetary controls could be achieved by either an independent central bank or a private clearinghouse, but the governance structure of those institutions must reflect the interests of both debtors and creditors. Those features are consistent with the 1913 Federal Reserve Act.