St. Louis Fed's Bullard Discusses "Non-Uniform Currencies and Exchange Rate Chaos"

May 14, 2018

NEW YORK – Federal Reserve Bank of St. Louis President James Bullard discussed “Non-Uniform Currencies and Exchange Rate Chaos” on Monday at the CoinDesk Consensus 2018 conference.

While acknowledging the promise of blockchain and related technologies, he focused his remarks on the narrower topic of currency provision. Bullard, who has contributed to the literature on “private money,” drew on this literature as well as other observations.

He noted that the U.S. is drifting toward non-uniform currency trading arrangements. “Cryptocurrencies are creating drift toward a non-uniform currency in the U.S., a state of affairs that has existed historically but was disliked and eventually replaced,” Bullard said.

Global currency competition

Currency competition is nothing new, nor is electronic delivery of value, Bullard noted, adding that many currencies are government-issued and backed by the government’s monetary policy.

As an example of global currency competition, he pointed to the exchange rate between the Venezuelan bolivar and the U.S. dollar during 2018. “U.S. monetary policy is relatively stable, while Venezuelan policy has been unstable, leading the bolivar to devalue against the dollar,” he said.

Privately issued currency

Regarding privately issued currency, Bullard said that it can fit into this context of many competing currencies. The literature suggests public and private currencies can coexist as part of an equilibrium, in which one type of money need not crowd out the other, he explained. In an equilibrium like this, he added, both are required to allow all voluntary trade to occur.

Historically, the profusion of privately issued currency created an unsatisfactory system in the U.S., he noted, pointing to the 1830s, when 90 percent of currency was privately issued. As a result, there was a call for a uniform currency in the U.S., which was implemented during the Civil War.

The drift toward non-uniformity

Turning to today, Bullard said the cryptocurrency trade could be described as “a drift toward a non-uniform currency in the U.S.,” with lots of privately issued cryptocurrencies trading at various rates minute by minute. He noted that more than 1,800 cryptocurrencies have been launched.

He explained that consumers and businesses may not like a non-uniform currency system in which many types of currency trade simultaneously at a variety of prices in a local market.

“Currencies have to be reliable and hold their value. This is probably why government backing has been important historically, combined with a stable monetary policy that promotes stability of the currency,” he said, adding that the Venezuelan bolivar devaluation is an example of what happens when a country has unstable monetary policy.

Vagaries of monetary policy remain

Bullard posed the question of whether cryptocurrencies could protect against the vagaries of monetary policy, as in the Venezuelan example.

“The problem of how to stabilize currency value is not mitigated by commodity-backed money or cryptocurrency,” he said. With cryptocurrencies, for example, there is monetary policy encoded in the system, but that system could bifurcate, creating two fixed volumes of coins instead of one—a process that can happen multiple times.

“One of the main lessons of monetary theory is that the credibility of future issuance policy is a key aspect to the value of a currency,” he said.

Exchange rate chaos

Turning back to non-uniform currency systems, Bullard noted that societies have disliked such systems because the currencies trade at different values. This can be avoided by having a uniform currency, he added.

While countries have wanted a uniform currency locally, Bullard pointed out that globally, there is not a uniform currency. Instead it is a system of competing currencies with widely fluctuating exchange rates, even in the case of the U.S. and Japan, which both have relatively stable monetary policies in place.

Bullard noted that a local non-uniform currency system may have similar volatility to that of the global currency system in place today. “I am arguing that the current cryptocurrency wave may be driving the U.S. uniform currency system toward something more like the international non-uniform currency system,” he said.


Bullard reiterated that the U.S. is drifting toward non-uniform currency trading arrangements, a system the society has disliked historically. He also noted that, globally, there is an example of a non-uniform system of currencies, but these currencies trade at exchange rates that are often viewed as excessively volatile.

Bullard concluded, “Cryptocurrencies may unwittingly be pushing in the wrong direction in trying to solve an important social problem, which is how best to facilitate market-based exchange.”

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