For centuries, pharaohs, emperors, and kings ruled and made ordinary people do their thing. The rise of political liberalism changed our concept of power, arguing that governments exist to serve the people. A new book argues that we should bring liberal principles to our money.
Government actions ultimately involve force, which liberalism says is only legitimate if it serves the people. Today, governments are taking some of the same measures that emperors did. Taxes, for example, still involve armed men taking things from people. Taxes steal unless the people consent; As America’s Founders said, “Taxes without representation are tyranny.”
Governments controlled money before the liberal revolution. The kings found minting coins profitable. Just as taxes are like theft, creating government money is like counterfeiting. Money creation is an illegitimate counterfeit if not under the controls of liberal democracy.
in a Money and the rule of law, economists Peter Bottky, Alex Salter, and Dan Smith (formerly of Troy University) argue that the Fed’s ultimate powers over the US money supply violate the rule of law, an important component of liberal government. The rule of law means that the rules apply equally to everyone; No one is above or below the law. The rule of law results in generality, predictability, and strength. They argue, “If money is subject to arbitrary manipulation by public authorities, this amounts to an actual infringement of property rights.”
The response to Boettke, Salter, and Smith might be, “But the Fed manages the money supply to keep our economy thriving, which is to the benefit of all of us.” However, the authors argue that the evidence is less clear than you think. Between its creation in 1913 and 1933, the Federal Reserve essentially ran only the banking system. However, it left a quarter of American banks to collapse between 1930 and 1933, turning the Recession into the decade-long Great Depression.
The Fed also fueled 1970s inflation, which reached 13 percent in 1980. The “misery index” – the sum of inflation and unemployment rates – routinely exceeded 15. By comparison, the misery index was 6 in 2019.
The Federal Reserve also contributed significantly to the Great Recession. Ben Bernanke, Chairman of the Federal Reserve in 2008, asserted that the Fed was the only lender of last resort. The authors completely refute this claim and assert that an unexpected response – for example, bailing out Bear Stearns and then allowing Lehman to fail – caused most of the financial crisis.
The authors also show how the Fed’s expertise in steering the economy has been greatly exaggerated. Discretionary monetary policy as explained in textbooks requires accurate forecasting of money demand. But as the two former Fed chairs, Paul Volcker and Alan Greenspan, acknowledge, the Fed cannot even accurately measure the money supply.
The understanding of economists comes from our models. The best models are simplified and deducing the right lessons from current economic events remains a challenge. But we don’t have specialized expertise in the things we can’t model.
As the authors explain, the Fed models have some notable omissions. Like money and financial institutions. The New York Fed’s forecasting model omits money; Boettke, Salter and Smith describe this as “a virtual abandonment of the very economic problem that monetary authorities are supposed to manage.” Models with no financial institutions have provided little insight into the financial crisis.
Really limited government involves limiting the discretion of the Federal Reserve. The solution involves imposing binding rules on both the Federal Reserve and Congress. The rules should specifically restrict the creation of “liquidity and credit except in specific ways that are general, predictable and robust.”
Three of the great free-market Nobel Prize winners of the twentieth century, Friedrich Hayek, Milton Friedman, and James Buchanan, have all written on monetary economics. As Bottke, Salter, and Smith note, eventually all of them concluded that the power of central banks must be curbed. Money and the rule of law It presents an important case for extending limited government to money.
Reprinted from Yellowhammer News