The evolving nature of central bank liabilities - from gold convertibility to bond convertibility

In his tradition of imagining alternative monetary systems, Nick Rowe asks if there is any fundamental theoretical difference between how monetary policy worked under the gold standard and how monetary policy works today for a modern inflation-targeting central bank. Nick uses a progression-style of reasoning in which he incrementally adds/subtracts elements to the original gold standard system to arrive at a modern inflation-targeting regime, or what he calls the CPI standard.

His point, and I agree with it, is that the two standards are not fundamentally different - rather, the same core mechanism underlies each system, with only a few modifications here and there. This runs counter to most people's intuition that the gold standard is a totally different beast from our modern system.

Although I criticized some of his points in the comments section, these disagreements stemmed from the fact that what interests me is not so much the evolution of monetary policy, but the evolution of the nature of a central bank liabilities. But this is really just the flip side of Nick's argument, since monetary policy is carried out via central bank liabilities, and updates to central bank monetary policy occur by tinkering with the structure of the liabilities issued by central banks. In essence, mine is the store of value approach to money, in which money is analyzed as a security. That's also why Nick didn't quite understand what I was saying, even though our final meeting place was the same.

Invoking Nick's method, the evolution of central bank liabilities goes something like this. Under a gold standard, the convertibility feature provided by central bank money - when it was exercised - was to be settled in gold by the central bank. The convertibility rate was some fixed quantity of gold. Everyone could directly go to the central bank and enjoy money's gold convertibility feature. Convertibility meant that in the secondary market, the public market for already-issued money, central bank money could purchase the same amount of gold for which it could be converted at the central bank.

Nowadays, the convertibility feature is still there, but it's been updated. Upon exercising central bank money's convertibility feature, the redemption medium is bonds, not gold. You can redeem notes for bonds via open market operations. The redemption rate is no longer fixed. Rather, it is adjusted to ensure that, in the secondary market for central bank money, that money's value relative to goods-in-general falls by 1-3% a year. Only a select few institutions can enjoy this redemption feature, but their participation is enough to ensure that central bank money falls at a 1-3% rate. The exclusivity of the modern redemption option is not entirely unique to our modern system, since even in the waning days of the gold standard central banks began to limit gold conversion to a few select institutions, usually other central banks.