I just read Murray Rothbard’s The Case Against the Fed, and it brought back to mind my youthful exposure to his whole approach to monetary economics. (See here, here, and here for more). My mature view is that there are a couple of big lessons that Rothbard teaches better than anyone; at the same time, however, there are important mainstream results that he failed to grasp.

Let’s start with what the mainstream can learn from Rothbard:

1. Government action is the reason why inflation exists. The monetary base is under the Fed’s complete control, and it virtually always goes up. Thus, if the Fed took no action, inflation would almost always be lower. In fact, as George Selgin emphasizes, the natural tendency of a growing economy is mild deflation.

If you think this is obvious, let’s see what happens if inflation gets much higher. Not only will the public hunt for scapegoats; but even a lot of economists will avoid pointing the finger at the Fed. (And needless to say, the Fed will not point the finger at itself!)

2. The Fed (like all central banks) virtually never “fights inflation.” Of course, sometimes the Fed creates less inflation than at other times. But popular talk about the Fed moving into “fighting inflation” mode is pure obsfucation. It makes about as much sense as saying that an orange farmer who cuts back orange production by 20% is “fighting oranges.”

If you’ve taught monetary for years, you may dismiss this as obvious, too. But when I was an economic novice, it was a revelation. And if you don’t hit your students over the head with it, most of them will never get it.

OK, now here’s what Rothbard should have learned from the mainstream:

1. Seigniorage is a trivial fraction of the U.S. federal budget. Contrary to Rothbard’s extravagant claims, printing money accounts for only about 1-3% of the federal budget. There are some Third World countries where Rothbard’s “conspiracy” theory is quite right. But in the First World, the government has much easier – and less unpopular – ways to pay the bills.

2. Although central banks cause inflation, central bank independence reduces inflation. In The Case Against the Fed, Rothbard joins with populists who object to the Fed’s political independence:

Absolute power and lack of accountability by the Fed are generally defended on one ground alone: that any change would weaken the Federal Reserve’s allegedly inflexible commitment to wage a seemingly permanent “fight against inflation.” This is the Johnny-one-note of the Fed’s defense of its unbridled power.

Unfortunately for Rothbard, there is solid evidence that Johnny-one-note is right: Central bank independence does lead to lower inflation. If the Fed did nothing, inflation would be lower than today; in fact, we’d probably have deflation. Nevertheless, letting elected politicians boss the Fed around would make inflation higher than it already is. The economists who run the Fed are not inflation hawks in an absolute sense, but they are hawkish relative to elected leaders. After all, our elected leaders win by catering to the economically illiterate voters who cry “Do something, government!” every time the economy hiccups. In contrast, the typical staffer at the Fed understands the long-run neutrality of money.