Monetary Alternatives: Rethinking Government Fiat Money

274 Pages·2017·1.6 MB·English

by  James A Dorn

MONETARY ALTERNATIVES
RETHINKING GOVERNMENT FIAT
MONEY
Edited by
James A. Dorn
Copyright © 2017 by the Cato Institute
All rights reserved
ISBN: 978-1-944424-44-2
eBook ISBN: 978-1-944424-45-9
Library of Congress Cataloging-in-Publication Data available.
Printed in the United States of America
Cover design: Jon Meyers
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CONTENTS
FOREWORD
George Selgin
EDITOR’S PREFACE
Chapter 1 INTRODUCTION
Toward a New Monetary Regime
James A. Dorn PART 1 CENTRAL BANKING AT A CROSSROADS
Chapter 2 Revisiting Three Intellectual Pillars of Monetary Policy
Claudio Borio Chapter 3 Understanding the Interventionist Impulse of the
Modern Central Bank
Jeffrey M. Lacker Chapter 4 The Fed’s Fatal Conceit
John A. Allison
Chapter 5 Alternatives to the Fed?
Bennett T. McCallum
PART 2 RESTORING A MONETARY CONSTITUTION
Chapter 6 From Constitutional to Fiat Money: The U.S. Experience
Richard H. Timberlake Chapter 7 Reductionist Reflections on the
Monetary Constitution
James M. Buchanan Chapter 8 The Implementation and Maintenance of a
Monetary Constitution
Peter Bernholz PART 3 RULES VERSUS DISCRETION
Chapter 9 Commitment, Rules, and Discretion
Charles I. Plosser
Chapter 10 Real and Pseudo Monetary Rules
George Selgin
Chapter 11 Legislating a Rule for Monetary Policy
John B. Taylor Chapter 12 Nominal GDP Targeting: A Simple Rule to
Improve Fed Performance
Scott B. Sumner Chapter 13 Toward Forecast-Free Monetary Institutions
Leland B. Yeager PART 4 ALTERNATIVES TO GOVERNMENT FIAT MONEY
Chapter 14 Gold and Silver as Constitutional Alternative Currencies
Edwin Vieira Jr.
Chapter 15 Making the Transition to a New Gold Standard
Lawrence H. White Chapter 16 Currency Competition versus
Governmental Money Monopolies
Roland Vaubel Chapter 17 The Market for Cryptocurrencies
Lawrence H. White
Chapter 18 Monetary Freedom and Monetary Stability
Kevin Dowd
NOTES
REFERENCES
FOREWORD
George Selgin
My, things have changed! In 1986, when the earliest of the papers gathered here
first appeared in print, interest in alternatives to government fiat money was
already limited to a small set—not to say a fringe—of monetary economists and
policymakers. Subsequent events only tended to reduce that interest still further.
Paul Volcker’s Fed had managed to rein inflation back to a modest level last
seen in the 1960s. On the heels of that success came the “Great Moderation”—a
decline in the severity of business cycle fluctuations that many experts, after a
decade or so, considered permanent. By 2000 Alan Greenspan, who had presided
over most of that moderation, had been dubbed the “Maestro.” So far as Fed
officials and many academic economists were concerned, after three quarters of
a century of stumbling, the Federal Reserve System had at last found its sea legs.
If it wasn’t the best of all possible monetary systems, surely it was close enough.
Subsequent events have left that confident view in tatters. The Great
Moderation ended, suddenly and harrowingly, with the outbreak of the 2008
financial crisis. The accompanying “Great Recession” was, among all U.S.
downturns, second only to the Great Depression itself in its overall severity. In
responding to it, the Federal Reserve found it necessary to altogether abandon its
traditional methods of monetary policy—the stirrups and reins that saw it
through the glory days of the 1980s and 90s—in favor of untested alternatives.
To say that those alternatives failed to bring about a rapid, or even a complete,
recovery from the crisis, is putting things diplomatically. The unvarnished truth
is that disappointment with the Fed’s post-crisis experiments—and also with its
handling of the crisis itself—have raised doubts concerning its ability to perform
the duties Congress has assigned to it.
To appreciate the Fed’s shortcomings is one thing; to propose ways to
improve upon it is quite another. The complacency wrought by the Great
Moderation, not to mention the limited interest in fundamental monetary reform
before then, resulted in a dearth of serious inquiries into potentially superior
arrangements. The Cato Institute was, until recently, practically alone among
think tanks in stepping into the breach. Throughout the 1980s and 90s, while
journalists and most academic economists celebrated the Fed’s mastery of
scientific monetary management, and other think tanks avoided the topic of
monetary reform, Cato kept the subject alive, offering a safe haven, in the shape
of its Annual Monetary Conference, for the minority of experts that continued to
stress the need for fundamental monetary reform.
Although fundamental reform has been a consistent theme of Cato’s monetary
conferences, those conferences have never been dominated by any one approach
to reform. The articles in this book present a variety of ideas for improving the
monetary regime—including proposals for a formal “monetary constitution,”
various monetary rules, competing currencies, and establishing a new gold
standard. The intent of the conferences has always been to encourage serious
discussion of not one but many possible alternatives to discretionary government
fiat money. The same purpose also informed the establishment and naming, in
2014, of Cato’s Center for Monetary and Financial Alternatives.
Any idea for fundamental reform is bound to be controversial; and the
proposals offered here are certainly no exception. Their authors do not agree
with one another, and neither I nor Jim Dorn nor anyone else at Cato agrees—or
could possibly agree—with all of them. But while I’m not inclined to agree with,
much less to defend, all of the ideas put forward here, I do want to counter the
suggestion that proposals for doing away with the Fed, or fiat money, or both,
amount to a plea to “roll back the clock” to some bygone era. Just as there’s
nothing new under the sun, there are few ideas for monetary reform that might
not have this complaint hurled at them. Champions of the Federal Reserve Act
might, for example, have been accused of attempting to “turn back the clock” to
the days of the Second Bank of the United States. Of course the complaint would
have been fatuous, because the Fed, whatever its shortcomings, was not simply a
replica of the Second Bank of the United States.
Similarly, while some of the alternatives proposed here, and especially those
that recommend dispensing with the Fed, or establishing a new gold standard, or
both, are necessarily informed by past experience, it doesn’t follow that their
authors regard any past arrangement as ideal, let alone as an ideal that can be
replicated today. In proposing sometimes radical departures from the status quo,
their aim is, not to reverse genuine progress, but to help us move beyond a
system that has repeatedly, and often cataclysmically, failed to deliver the
stability its champions promised.
EDITOR’S PREFACE
When the Federal Reserve was created in 1913, its powers were strictly limited
and the United States was still on the gold standard. Today the Fed has virtually
unlimited power and the dollar is a pure fiat money.
A limited constitutional government calls for a rules-based, free-market
monetary system, not the topsy-turvy fiat dollar that now exists under central
banking. This book examines the case for alternatives to discretionary
government fiat money and the reforms needed to move toward free-market
money.
Central banking, like any sort of central planning, is not a panacea.
Concentrating monetary power in the hands of a few individuals within a
government bureaucracy, even if those individuals are well intentioned and well
educated, does not guarantee sound money. The world’s most important central
bank, the Federal Reserve, is not bound by any strict rules, although Congress
requires that it achieve maximum employment and price stability. The failure of
the Fed to prevent the Great Recession of 2009, the Great Depression of the
1930s, and the stagflation of the late 1970s and early 1980s raises the question,
can we do better?
In questioning the status quo and widening the scope of debate over monetary
reform, the fundamental issue is to contrast a monetary regime that is self-
regulating, spontaneous, and independent of government meddling versus one
that is centralized, discretionary, politicized, and has a monopoly on fiat money.
Free-market money within a trusted network of private contracts differs
fundamentally from an inconvertible fiat money supplied by a discretionary
central bank that has the power to create money out of thin air and to regulate
both banks and nonbank financial institutions.
There are many types of monetary regimes and many monetary rules. The
classical gold standard was a rules-based monetary system, in which the supply
of money was determined by market demand—not by central bankers.
Cybercurrencies, like bitcoin, offer the possibility of a private non-commodity
monetary base and the potential to realize F. A. Hayek’s vision of competitive
free-market currencies. Ongoing experimentation and technological advances
may pave the way for the end of central banking—or at least the emergence of
new parallel currencies.
The distinguished authors in this volume examine the constitutional basis for
alternatives to central banking, the role of gold in a market-based monetary
system, the obstacles to fundamental reform and how they might be overcome,
and the advent of cryptocurrencies.
In making the case for monetary reform and thinking about rules versus
discretion in the conduct of monetary policy, it is important to take a
constitutional perspective. As early as 1988, James M. Buchanan argued, at an
international monetary conference hosted by the Progress Foundation in Lugano,
Switzerland: “The dollar has absolutely no basis in any commodity base, no
convertibility. What we have now is a monetary authority [the Fed] that
essentially has a monopoly on the issue of fiat money, with no guidelines that
amount to anything; an authority that never would have been legislatively
approved, that never would have been constitutionally approved, on any kind of
rational calculus.”
In 1980, just after Ronald Reagan’s election, Buchanan recommended that a
presidential commission be established to discuss the Fed’s legitimacy. There
was some support within the Reagan camp, but Arthur Burns, a former chairman
of the Federal Reserve Board, nixed it. As Buchanan explained at the Lugano
conference, Burns “would not have anything to do with any proposal that would
challenge the authority of the central banking structure.”
Buchanan’s aim was “to get a dialogue going . . . about the basic fundamental
rules of the game, the constitutional structure.” There is, he said, “a moral
obligation to think that we can improve things.” That is the spirit of this volume
and Cato’s newly established Center for Monetary and Financial Alternatives.
I would like to thank The George Edward Durell Foundation for its long
support of Cato’s annual monetary conferences from which all the articles in this
book stem. I also would like to thank George Selgin for writing the foreword,
Kevin Dowd for commenting on various aspects of the project, and Ari Blask for
helping to bring this volume to fruition.
This year marks Cato’s 40th anniversary and the 35th anniversary of the
monetary conference. It is thus an appropriate time to bring out a collection of
articles devoted to rethinking government fiat money and to offer alternatives