"Constitution or Competition? Alternative Views on Monetary Reform"

Brown, Pamela J.
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First Pub. Date
Autumn 1982
Literature of Liberty. Vol. v, no. 3, pp. 7-52. Arlington, VA: Institute for Humane Studies
Pub. Date

I. Money: Medium of Exchange or Policy Instrument?


Money, for practically as long as it has existed, has been employed to realize two fundamentally different sorts of goals: production or plunder. In a market economy, private individuals routinely use monetary institutions in a cooperative way to achieve voluntary exchanges of goods and services. Political authorities, by contrast, use monetary institutions in a non-cooperative way to achieve involuntary transfers of wealth.


As a means for realizing cooperatively achieved ends, the use of money signals a great social advance over its predecessor, direct barter exchange. Carl Menger provided the classical invisible hand or spontaneous order explanation of the process of natural social evolution from barter to commodity money.*1 The emergence of money was an unplanned or "spontaneous" event. No one person invented money; it gradually evolved as individuals, seeking to minimize the number of barter transactions necessary to obtain the commodities they wanted, learned that certain goods were more marketable than others and began to accumulate trading inventories for the exclusive purposes of exchange.


Money's usefulness as a general medium of exchange is clear in contrast to the inconvenience of direct exchange: money eliminates the would-be trader's need to search among the sellers of the commodities he wants to acquire in order to find those few sellers who, in turn, want to acquire the particular commodity or service that he has to offer. The use of money thereby serves, in the words of Karl Brunner and Allan H. Meltzer, as a "substitute for investment in information and labor allocated to search."*2 Brian Loasby aptly comments: "Money, like the firm, is a means of handling the consequences of the excessive cost or sheer impossibility of abolishing ignorance."*3 It may be added that money, again like the firm, permits a far greater degree of specialization and division of labor because it reduces the need to search through markets. Without the institution of money, the modern economy could hardly have grown to its current level of complexity.


The use of money as a medium of exchange brings with it the widespread practice of quoting prices in a common currency unit. As a consequence, money becomes a tool of economic calculation—a "means of appraisal" in addition to its medium-of-exchange role as a "means of adjustment." It facilitates the formation of economic plans as well as their execution.


The corrective feedback processes of a complex exchange system crucially depend upon these social functions that money performs. The informational and operational constraints that block both the individual decision-maker and the whole economic order from better coordination of plans would be far more severe had not the institution of money spontaneously emerged. The emergence of money was itself an adaptive response to those obstacles.


The single most important book which has to date been written on the subject of money is Ludwig von Mises' Theory of Money and Credit, first published in 1912. If the reader wanted to read just one work for general instruction, this would be the text to choose. It offers still today the most comprehensive and sophisticated system of theory on monetary phenomena. There are of course a number of other important works discussing the nature, evolution, and functions of money.*4


In its contrasting role as a means for realizing non-cooperative ends, a government-issued circulating currency provides political agencies with an instrument for redistributing wealth. Wealth transfers are achieved through the manipulation of money and credit production, specifically through the injection of new money.*5 For its first spenders the new money represents fresh additional command over goods and services; but, as the monetary injection does nothing to increase the available supplies of goods and services, the first spenders' command of these goods and services comes at the expense of other participants in the monetary economy. Such money-facilitated government interventions may either transfer wealth from one group of private individuals to others within the private sector of the economy, or transfer wealth to the government itself from the private sector as a whole, depending on whether the initial recipients of the new money represent public or private agencies.*6 Economists refer to the first type of transfer as the use of "monetary instruments" in pursuit of macroeconomic "policy targets," and to the second as government revenue creation via an "inflation tax."


Discussion of the currently competing theories of macro-economic policy can be found in a number of textbooks.*7 The books of Arthur Marget, The Theory of Prices (1942), and Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (1968), provide valuable doctrine-historical perspectives on macro-economic theory. Of the many extensive analyses of the nature and implications of the revenue-generating potential of a government fiat currency monopoly, two works co-authored by H. Geoffrey Brennan and James M. Buchanan deserve special attention: "Money Creation and Taxation," which appears in The Power to Tax: Analytical Foundations of a Fiscal Constitution (1980); and Monopoly in Money and Inflation: The Case for a Constitution to Discipline Government (1981).*8


One point is worth noting in passing. There seems to exist a unidirectional ('one-way street') dependence between the feasibility of utilizing a currency's universal acceptability for facilitating economic exchange and the feasibility of exploiting this property for political ends. In other words, it appears possible for money to serve the needs of market participants without at the same time necessarily having to serve the interests of political agencies; yet it seems impossible for money to serve the non-cooperative currency controller without it already having been adopted for use by the cooperative social order. The relationship, in other words, is like that of host to parasite.*9

II. The Problem Plaguing Monetized Systems: Government Mismanagement of Currency Production


As S. Herbert Frankel has noted in his Money: Two Philosophies; The Conflict of Trust and Authority (1977), the cooperative and non-cooperative uses of money do not simply coexist peacefully. There exists a "trade-off" between the cultivation of a monetary order best suited to the purposes of microeconomic adjustment (processes based on the ability of individuals to calculate and exchange effectively), and the manipulation of the monetary system to achieve macroeconomic adjustment. Government impairs monetary reliability (i.e., the reliability of money price signals for calculation and exchange) when it manipulates money and credit flows in pursuit of "full employment" levels of output. Frankel has described the situation as one of "conflict between money as a tool of state action and money as a symbol of social trust."*10


Crucial to the economic usefulness of money is the predictability of its exchange-value or purchasing power. The greater the general stability of monetary conditions of the economy, the more efficiently does resource allocation based upon subjective valuation and availability of economic goods take place. Unpredictability in the value of the money unit, on the contrary, is the quality of a money that proves most valuable for political purposes. Government may most profitably expand the number of money units in circulation when the inflationary consequences are unanticipated, especially by the economic sectors which are destined to experience the greatest loss of wealth due to the actions of the authorities. Where inflationary expectations of market participants underestimate the effects of politically expedient monetary disturbances on the system, the resulting changes in the distribution of wealth and income, and the unanticipated transfers of capital, are an indication that political goals are, by a crude process, being achieved at the expense of economic ends. Alternatively, if such monetary manipulations for political purposes are being unsuccessfully executed, this may indicate that individual agents in the market sector are successfully anticipating and, as a result, guarding themselves against movements in the currency's purchasing power. In this event, economic activities requiring the use of money are then succeeding at the expense of political programs.


In sum, the economic role of money within the market order is that of a general means serving no one particular end but rather an ever-changing set of private ends.*11 In order for this role to be most efficiently filled, the value of the money unit must be stable, or, at least predictable. By serving "economic" interests, money serves social interests in general.


In its political role, however, currency serves as an instrument to advance special interests. Unlike the market function of money, the political function of money is not end-independent, but endspecific. Whether the end consists of implementing full-employment policy or creating revenue, monetary systems that have been set up to permit manipulation of the money stock for the benefit of special rather than general interests tend to systematically destabilize the market. The resulting disturbances are the consequence of the falsification of economic calculations caused by price distortions. The distortions, in turn, result from the unpredictable changes in, and consequent uncertainty about, the structure of relative prices affected by policy decisions.


Several important works by economists and accountants have discussed the negative consequences of monetary expansion undertaken for political ends, as those consequences fall on particular private groups or individuals.*12 Others have considered the burden of such manipulations in terms of their disruption of the overall orderliness of a monetized exchange system.*13 Axel Leijonhufvud has cogently summarized the way in which inflationary monetary policies interfere with microeconomic coordination:

Transactors will not be able to sort out the relevant "real" price signals from the relative price changes due to... inflationary leads and lags. How could they? Messages of changes in "real scarcities" come in through a cacophony of noises signifying nothing... and "sound" no different. To assume that agents generally possess the independent information required to filter the significant messages from the noise would... amount to assuming knowledge so comprehensive that reliance on market prices for information should have been unnecessary in the first place.*14


The economics profession generally acknowledges that use of monetary policy for full-employment purposes involves some sacrifice. There is little consensus, however, concerning the nature and significance of this "trade-off." The properties of the "Phillips curve"—the graphic representation of a supposed trade-off between lower inflation and lower unemployment—have been the subject of extensive theoretical and empirical investigation. Economists of the Austrian School have recently been joined on one issue by those of the Monetarist School, and especially the "Rational Expectations" wing of the latter. Both groups advance the proposition that any increase in output or employment that is induced by monetary expansion must be temporary and self-reversing. Such an increase results only from mistaken actions influenced by the false price signals generated by the monetary expansion. Unexpectedly rapid money growth may bring greater measured output and employment today, but it does not bring greater output or employment tomorrow, and is indeed likely to depress aggregate productivity in the long run due to its structurally disruptive impact.*15 Unquestionably, it brings greater inflation of prices.


The contrary belief that discretionary money and credit management can achieve positive policy outcomes has been associated with Keynesian economic thought. The literature in support of discretionary policy is vast, as is the literature in opposition.*16 The issue is still very much alive in the economic journals.


The questions of the feasibility of generating (short-run) increases in employment and output through monetary expansion, and of the consequences of such a policy for the (long-run) reliability of money and money price signals, are matters for an impartial wertfrei economic science to investigate. However, the question of the relative desirability of such various policy-dependent outcomes, no matter what theoretical and empirical propositions one may accept, calls for a normative, value-oriented appraisal. The non-value-free nature of such an appraisal might have been emphasized by placing between quotation marks the words "problem" and "mismanagement" in the subtitle above.


A preference for long-term stability in the purchasing power of a community's monetary unit—as opposed to policy-induced changes of dubious duration in levels of aggregate resource utilization—is a major impetus behind recent arguments for reform of existing monetary arrangements. An even greater impetus to reform is a perception of the injustice inherent in a system that enables those in authority to systematically plunder the real wealth of the citizenry via an "inflation tax"—clearly a most insidious form of "taxation without representation." Economists in the field of monetary political economy have concluded that an extremely serious problem of design exists in the present organization of the governmentally controlled money supply system. In their view the money-using public's demand for long-term monetary stability is not being met. The task remaining for specialists in the field is therefore clear: to discover and develop a more appropriate means for realizing of the goal of monetary stability.


Let us now consider what these writers have proposed.

III. The Proposed Remedies to Bureacratic Corruption of Token Currency

A. Gold: A Note on the "Classical" Solution


The oldest and certainly most familiar solution to the corrupting effects of state-controlled paper money is a return to a gold standard. To many of us, the idea of reintroducing the use of specie (coined precious metals) and specie-convertible bank liabilities as exchange media is practically synonymous with a return to stable money. The essential virtue of a monetary system based on "hard" currency is perhaps best expressed by one of the leading proponents of the gold standard, Hans F. Sennholz. He writes, in his Inflation or Gold Standard:

It is undoubtedly true that the fiat standard is more workable for economic planners and money managers. But this is the very reason why we prefer the gold standard. Its excellence is its unmanageability by government. And we also deny that the fiat standard, which is characterized by rapid self-destruction and has failed wherever it was tried, compares favorably on purely scientific grounds with the gold standard, which is as old as man's civilization. Out of the ashes of fiat money the gold standard always springs anew because it is no technical creation of a few expert advisers, but a social institution that flows from economic freedom and economic law.*17


As anyone pursuing the question of monetary reform soon discovers, a mountain of literature—both popular and technical—has been published over the years on the nature and benefits of commodity money. Ludwig von Mises, in The Theory of Money and Credit, has deeply explored the distinctions among the three types of money: commodity money, credit money, and fiduciary, fiat, or "token" money. Of late, the leading advocates of the reinstitution of a gold standard have included Murray N. Rothbard, Henry Hazlitt, and Hans F. Sennholz.*18


Of related interest is the concept of a "commodity reserve" currency convertible not into coin but into a wide "basket" of standardized goods. Unlike a gold coin standard, a commodity reserve system would necessarily have to be the technical creation of a few expert advisers. This proposal has been discussed by Friedrich Hayek and Milton Friedman among others.*19


Although much has been written on the pros and cons of a return to gold as the solution to the chaos of politically controlled fiat money, this classic debate will not be considered in further detail here. Instead we turn to reform proposals not based on re-establishment of convertibility for government-issued currencies. In this context, two alternative means of preventing continued government mismanagement of currency production have been suggested: imposing legislated constraints on the behavior of the monetary authority or, more radically, abolishing the government's monopoly in currency production. An extremely significant literature has grown up in recent years out of the debate between these two camps concerning the most appropriate structure for a purely token money system. The first group supposes continued government monopolization, while the second argues for a free market in the issue of private currency.

B. Monetary Rules:

The Call for a "Constitutionally Constrained" Government Monopoly


The by-now-mainstream response among monetary economists to the need for reform of the existing currency arrangements is the proposal that a "monetary constitution" be constructed and imposed upon those authorities who are vested with the responsibility for managing the nation's money supply. Such a "constitution" would lay down binding rules defining in detail the money-supply procedure to be followed. Fundamental to this program is a perpetuation of the existing market structure in currency production, namely government-run or nationalized monopoly.


At present, the United States clearly lacks any explicit legal rule restricting the federal government's money-creation behavior. Indeed, it lacks even general constitutional limitation upon governmental efforts to "manage" the economic system overall. As Neil H. Jacoby notes, "It is a remarkable fact that the federal Constitution says practically nothing about the role of the President in guiding the national economy. Present institutions of control have evolved outside the Constitution and to a considerable extent outside of federal statutes." Jacoby conjectures that the Founding Fathers neglected "problems of economic stabilization" due to the fact that [s]uch problems did not exist in the predominantly rural and agricultural society of about four million souls that was the United States in 1789."*20


Existing statutes concerning the federal government's control over the monetary system are so vague that they may be interpreted in almost any fashion. They are therefore of little help in legally constraining the monetary authorities. This ambiguity is apparent in the original Federal Reserve Act of 1913, which broadly directed the monetary authorities to regulate the nation's currency so as to "accommodate commerce and business."*21 The Act was initially designed to guide the authorities within the context of the gold reserve standard that existed at the time. The elimination of the gold standard brought about by World War I, however, rendered the Act inadequate to constrain bureaucratic behavior.*22


With the end of the gold standard, money-creation authorities in the United States and other nations became free to follow more "activist" macroeconomic policy measures. The Keynesian intellectual underpinnings of such monetary policies as they have evolved in the last half-century have been dissected by "Public Choice" economists James M. Buchanan and Richard E. Wagner, and by Austrian economists F.A. Hayek and Murray N. Rothbard.*23

Two Rationales for Rules


As already suggested, the various programs that monetary constitutionalists have proposed rest on two basic planks. First, they propose to maintain the existing government-run monopoly of the currency industry. Secondly, they advocate that a binding money-creation "rule" be imposed on the monopoly authority. As we shall see below, a number of different rules have found advocates.


Imposing a strictly defined and inflexible rule of monetary discipline, of whatever kind, is taken by monetary constitutionalists to represent "nothing more than the replacement of an undefined and potentially biased system of monetary policy by a defined system."*24 They share the belief, as expressed by Milton Friedman, that "the monetary structure needs a kind of monetary constitution, which takes the form of rules establishing and limiting the central bank as to the powers that it is given, its reserve requirements, and so on." By defining the "rules of the game" of currency production, the monetary constitution will supposedly require that the government execute plans affecting the money supply "by law instead of by men." It will remove the "extraordinary dependence on personalities, which fosters instability arising from accidental shifts in the particular people and the character of people who are in charge."*25 As a result, such a monetary constitution will greatly diminish the wide fluctuations in economic activity which in the past have allegedly resulted from "the granting of wide and important responsibilities that are neither limited by clearly defined rules for guiding policy nor subjected to test by external criteria of performance."*26


Before discussing some of the specifics of the various monetary constitutionalists' programs for institutional reform, it is interesting to note that there appear to exist two very different theoretical rationales behind the advocacy of these reforms.


Many proponents of a binding monetary rule argue for its necessity on the grounds that those in control of the currency production apparatus are faced with insurmountable limitations of knowledge. They argue that the authorities' inability to forecast precisely the lagged responses of the economic system to their policy actions renders the achievement of monetary stability via discretionary "fine-tuning" technically impossible. Given the present state of knowledge, then, some sort of inflexible and binding managerial "constitution" is perhaps the most reasonable procedure available. Most notable among those advancing this "informational limitations" argument are the Monetarist authors Phillip Cagan, Anna J. Schwartz, and Milton Friedman. Friedman expresses this position in the following way:

[A "simple" monetary rule] is also likely to strike many of you as simpleminded. Surely, you will say, it is easy to do better. Surely, it would be better to "lean against the wind," in the expressive phrase of a Federal Reserve Chairman, rather than to stand straight upright whichever way the wind is blowing... [T]he matter is not so simple. We seldom in fact know which way the economic wind is blowing until several months after the event, yet to be effective, we need to know which way the wind is going to be blowing when the measures we take now will be effective, itself a variable date that may be a half year or a year or two years from now. Leaning today against next year's wind is hardly an easy task in the present state of meteorology.*27


An alternative framework for analyzing the problematical behavior and consequences of an "unconstrained" government monopoly in currency production, though it leads to the same policy conclusions, has been developed and utilized by James M. Buchanan and other Public Choice theorists.*28 These writers emphasize the monetary authorities' motivational shortcomings, rather than their informational limitations. The authorities, according to this viewpoint, actually lack the proper intentions to be allowed to exercise discretionary powers in the day-to-day management of the supply of currency. Buchanan and H. Geoffrey Brennan, for example, base the case for a rule constraining government's currency-creating activities on "government behavior in the 'worst-case' setting," a setting in which the "natural proclivities" of politicians and bureaucrats predominate. The "natural proclivities" of political functionaries involve, according to these theorists, the tendency to make decisions and take actions based upon a "narrowly-defined self-interest" which "run[s] counter to the basic desires of the citizenry."*29


Richard E. Wagner argues in the same vein: "Existing monetary institutions create a link between politics and monetary control. The consequence of monetary monopoly combined with the pursuit of political self-interest can be macroeconomic discoordination." More specifically, given the government's notorious and seemingly irresistible tendency to consistently overspend and contribute annually to an already enormous federal deficit, its monopoly over the production of currency "alters the constraints within which government conducts its activities, and alters them systematically by creating the bias toward monetary expansion."*30 As Gordon Tullock notes, monetary administrators are

... people who have no great security of tenure. Under the circumstances, maximizing the present value of income over the next few years, rather than over the entire income stream, is their objective. In general, inflation is a better way of achieving this objective than is an effort to give a good reputation to your currency...*31


In short, monetary systems granting monopoly privileges and permitting the wide use of discretion to those in power will most certainly function in a manner which maximizes the prospects for achieving political ends through monetary means. As a result, such systems tend to do "maximum, rather than minimum violence, to the logic of the market economy, sufficing to transform it from a harmonious to a self-destructive system."*32 As Wagner has emphasized, "it is contrary to reason and to history to expect that a monopoly position will fail to be exploited for the benefit of those in a position to practice such an exploitation."*33

Suggestions Concerning the Rule's Content


Constitutionally constrained monetary systems are, as John Culbertson defines them, "token money systems with explicitly defined behavioral properties." Various monetary rules differ according to the particular economic variable whose behavior is singled out for explicit control. There are basically two sorts of rules: (1) those that focus on the behavior of some monetary statistic, such as Milton Friedman's well-known proposal for a fixed annual growth rate in some measure of the stock of money; and (2) those that focus on the behavior of some non-monetary statistic, such as proposals for stabilizing the price level or interest rates. In either case, the monetary authority is required to manipulate the monetary variable(s) under its immediate control—for the Federal Reserve System this is the sum of currency plus bank reserves—so as to keep the economic "target" variable on track.


Upon closer examination of proposals involving the first sort of rule, it becomes evident that their long-run aim is usually identical to those rules which directly focus on maintaining a constant consumer price index. Friedman's proposal, for example, calls for a three to five percent annual growth rate in a particular measure of the money stock. This growth-rate interval is chosen, he acknowledges, "so that on average it could be expected to correspond with a roughly stable long-run level of final product prices... A rate of 3% to 5% per year might be expected to correspond with [such a] price level."*34 Elsewhere Friedman argues that the "optimal" growth rate of the quantity of money would be that rate expected to correspond with a falling price level, specifically a price level falling at a percentage rate equal to the real rate of interest.*35


Friedman and others have extensively discussed the details of possible programs incorporating a constant-money-growth-rate rule.*36 E. S. Shaw has elaborated a version of the program specifying a 4% growth rate.*37 In all cases, inflexibility inherent in such programs has come under criticism. Martin Bronfenbrenner claims greater efficiency on behalf of a "lag" rule, "according to which the growth rate of the money supply is adjusted to prior fluctuations in the growth rates of real national output and the velocity of the circulation of money." He argues that such a rule "may be worthy of consideration as a compromise between the rigidity of the Friedman-Shaw proposals and complete reliance on that combination of forecasting ability, political pressure, and administrative routine which passes as 'judgment' or 'discretion.'"*38 Other writers suggest that the rule adopted should be a "flexible" one, containing "override provisions" which permit it to be subjected to "frequent review" and "modification... as may be needed for maintenance of stability in the value of money."*39 Yet inflexibility also has its defenders. They contend that the monetary rule, once put into operation, should function so "mechanically" and serve its purpose so effectively, that "hereafter, we may hold to it unrationally—on faith—as a religion, if you please."*40


Several authors have proposed and examined rules which constrain the monetary authorities by directing them specifically to maintain a constant price level rather than a constant money growth rate. Foremost among these authors are Jacob Viner, Henry Simons, Clark Warburton, and William H. Hutt.*41 James M. Buchanan's prescription for monetary management more broadly emphasizes predictability rather than simple constancy in the level of money prices.*42


The number of different monetary rules which could be devised is virtually infinite. Those which have been engineered to date suggest just a few of the many possibilities. Yet, despite disagreement among these theorists on the specific content of the constitutional constraint proposed, unanimity reigns concerning the necessity and importance of the constitutional construct itself. All would agree with Milton Friedman where he writes,

The main point... is not so much...the content of these or alternative rules as to suggest that the device of legislating a rule about the stock of money can effectively achieve what an independent central bank is designed to achieve but cannot. Such a rule seems to me the only feasible device currently available for converting monetary policy into a pillar of a free society rather than a threat to its foundations.*43

Suggestions Concerning the Money Monopoly's Organization


The passing years have witnessed numerous and detailed suggestions concerning the specific content of a constitution or rule that would define the appropriate procedure for money creation and control. The same cannot be said, however, of recommendations concerning the internal organization of the currency management apparatus. Although monetary constitutionalists concur on the necessity of concentrating the control of the currency industry in the hands of a single producer, there have been few detailed suggestions concerning this monopoly's specific setup and day-to-day internal operation. Henry Simons, in his classic article, "Rules Versus Authorities in Monetary Policy," proposed placing the money-creation power presently "dispersed indefinitely, among governmental agencies and private institutions, not to mention Congress itself," under the jurisdiction of the Treasury, which might then be "given freedom within wide limits to alter the form of the public debt—to shift from long term to short term borrowing or vice-versa, to issue and retire debt obligations in a legal tender form."*44 In order to "eliminate... the private creation and destruction of money," Milton Friedman suggests that the right to produce and control the supply of token units in circulation be granted exclusively to "the Central Bank" or "the Reserve System."*45 In general, though, the various authors offer no clear prescriptions concerning the possible internal structure or appropriate bureaucratic characteristics of the monopoly agency that they advocate. W. H. Hutt merely refers to "a monetary Authority,"*46 without giving details on the possible nature of this agency, while H. Geoffrey Brennan and James Buchanan speak simply of "government," in their recent book The Power to Tax. Lack of descriptive precision on this matter is not surprising, however, since the monetary constitutionalists believe that the content of rule constraining the privileged producer, rather than the set-up of the producing agency, is crucial to the success of their proposals.

The Anticipated Results of a Monetary Constitution


With constitutionally constrained monetary management, its advocates contend, the currency industry will no longer be a primary source of uncertainty and structural discoordination for the economy. Instead, the management will conduct its activities in such a way that monetary conditions become economically "neutral," permitting the emergence of what John M. Culbertson refers to as a "zero-feedback" monetary system. Such a system does not add to "the net positive feedback of the economic system" which tends to make it "prone to excessive self-feeding movements" away from equilibrium. It does not create inflations and recessions in the name of stabilization policy. Instead it allows the "financial side of the economy" to operate as the "feedback-control" or coordinating mechanism.*47


In sum, the legislation and enforcement of a monetary constitution, by appropriately restricting the actions of those with jurisdiction over the money production apparatus, will, it is believed, create a framework wherein the circulating medium behaves in harmony rather than in conflict with the exchange system.

Notes for this chapter

[C]arl Menger, "On the Origin of Money," Economic Journal 2 (June 1892): 239 -255. A modern version of Menger's theory has been developed by Robert A. Jones, "The Origin and Development of Media of Exchange," Journal of Political Economy 84 (Nov. 1976): 757-775.
Karl Brunner and Allan H. Meltzer, "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review 61 (Sept. 1973): 799.
Brian Loasby, Choice, Complexity and Ignorance (New York, Cambridge: Cambridge University Press, 1976) p. 165.
In addition to those already cited, see W.W. Carlile,The Evolution of Modern Money (London: Macmillan, 1901); W. Stanley Jevons, Money and the Mechanisms of Exchange (London: Kegan Paul, 1905); W.T. Newlyn, The Theory of Money (London: Oxford University Press, 1971); Boris P. Pesek and Thomas R. Saving, Money, Wealth and Economic Theory (New York: Macmillan, 1970); C.A.E. Goodhart, "The Role, Functions, and Definition of Money," in G.C. Harcourt, ed., The Microfoundations of Macroeconomics (Boulder, Co.: Westview Press, 1977), pp. 205-277; Leland Yeager, "Essential Properties of the Medium of Exchange," Kyklos 21 (Jan. 1968): 45-68; William H. Hutt, "The Nature of Money," South African Journal of Economics 20 (March 1952): 50-64; Hutt, "The Yield from Money Held," in Mary Sennholz, ed., The Economics of Free Enterprise (Princeton: Van Nostrand, 1956): pp. 196-216; Hutt, "The Notion of the Volume of Money," South African Journal of Economics 20 (Sept. 1952): 231-241; Hutt, "The Notion of Money of Constant Value," South African Journal of Economics (Sept.-Dec. 1953); Hutt, "The Concept of Idle Money," in The Theory of Idle Resources (Indianapolis: Liberty Press, 1977); Murray N. Rothbard, "The Austrian Theory of Money," in Edwin G. Dolan, editor, The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976), pp. 160-184; Joseph M. Ostroy and Ross M. Starr, "Money and the Decentralization of Exchange," Econometrica 42 (Nov. 1974): 1093-1113; Morris Perlman, "The Roles of Money in an Economy and the Optimum Quantity of Money," Economics 38 (Aug. 1971): 233-252; Jack Hirshleifer, "Exchange Theory: The Missing Chapter," Western Economic Journal(Economic Inquiry) (June 1973): 129-146; Robert Clower, "A Reconsideration of the Microfoundations of Monetary Theory," Western Economic Journal (Economic Inquiry) 6 (Dec. 1967): 1-8; Harold Demsetz, "The Cost of Transacting," Quarterly Journal of Economics 82 (Feb. 1968): 33-53; and R.A. Radford, "Money in a Prisoner-of-War Camp," in Jonas Prager, ed., Monetary Economics: Controversies in Theory and Policy (New York: Random House, 1971), pp. 6-8.
In the case of the U.S. Federal Reserve System, this is only a shorthand way of describing the usual process of monetary expansion. More precisely, the Fed injects new bank reserves into the system, enabling commercial banks to issue new money.
An especially important transfer of the first type, namely to capitalist investors from other income groups, occurs when new money is injected as loanable funds made available by the central bank. This transfer, known as "forced savings" because it involuntarily restricts the availability of resources for consumption, plays an important role in the Austrian theory of the trade cycle. See F.A. Hayek, "A Note on the Development of the Doctrine of 'Forced Saving'," in Profits, Interest and Investment (New York: Augustus M. Kelley, 1975), pp. 183-197; and Prices and Production (New York: Augustus M. Kelley, 1967), pp. 18-22, 85-91.
See John Culbertson, Macroeconomic Theory and Stabilization Policy (New York: McGraw-Hill, 1968); Nancy Smith Barrett, The Theory of Macroeconomic Policy (Englewood Cliffs, NJ: Prentice Hall, 1975); Michael R. Darby, Macroeconomics (New York: McGraw-Hill, 1976); and Rudiger Dornbusch and Stanley Fischer, Macroeconomics (New York: McGraw-Hill, 1978). Also relevant are E.S. Phelps et. al., Microeconomic Foundations of Employment and Inflation Theory (New York: W.W. Norton, 1970); and Don Patinkin, Money, Interest, and Prices (New York: Harper & Row, 1965). For a survey of recent developments by a pioneering "Rational Expectations" theorist, see Robert E. Lucas, Jr., "Methods and Problems in Business Cycle Theory," in Studies in Business-Cycle Theory (Cambridge: MIT Press, 1981), pp. 271-296.
See also Milton Friedman, "Government Revenue from Inflation," Journal of Political Economy 79 (July-Aug., 1971): 846-856; Eamonn Butler, "How Government Profits from Inflation," Policy Review 6 (Fall 1978): 73-76; Leonardo Auernheimer, "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy 82 (May-June 1974): 598-606; Martin Bailey,"The Welfare Cost of Inflationary Finance," Journal of Political Economy 64 (April 1956): 93-110; and Michael Mussa, "The Welfare Cost of Inflation and the Role of Money as a Unit of Account," Journal of Money, Credit, and Banking 9 (May 1977): 276-286.
But for an alternative view—that of monetary statism—see G.F. Knapp,The State Theory of Money (London: Macmillan, 1924); and Abba P. Lerner, "Money as a Creature of the State," American Economic Review 37 (May 1947 supplement): 312-317.
S. Herbert Frankel, Money: Two Philosophies (England: Basil Blackwell, 1977), p. 86. See also this book's recent sequel, Money and Liberty (Washington: American Enterprise Institute, 1980).
On the importance of such institutions see F.A. Hayek, Law, Legislation and Liberty, vol. II (Chicago: University of Chicago Press, 1978), ch. 7.
These include William T. Baxter, Solomon Fabricant, et al., Economic Calculation Under Inflation (Indianapolis: Liberty Press, 1976); Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Henry Regnery, 1966), pp. 550-565; Axel Leijonhufvud, "Costs and Consequences of Inflation," in Information and Coordination (New York: Oxford University Press, 1981), pp. 227-269; William D. Bradford, "Monetary Position, Unanticipated Inflation, and Changes in the Value of the Firm," Quarterly Review of Economics and Business 16 (Winter 1976): 47-53; and Benjamin Klein, "The Social Costs of the Recent Inflation: The Mirage of Steady 'Anticipated' Inflation," in Karl Brunner and Allan H. Meltzer, eds., Institutional Arrangements and the Inflation Problem (New York: North Holland, 1976), pp. 185-212.
See Constantino Bresciani-Turroni, The Economics of Inflation (London: George Allen and Unwin, 1937); C.A. Phillips, T.F. McManus and R. W. Nelson, Banking and the Business Cycle (New York: Arno Press, 1972); Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, NY: Free Market Books, 1978); F.A. Hayek, Monetary Theory and the Trade Cycle (Clifton, NJ:Augustus M. Kelley, 1975); Hayek, Full Employment at Any Price? (London: Institute of Economic Affairs, 1975); Hayek, "Full Employment, Planning and Inflation," in Studies in Philosophy, Politics and Economics (New York: Simon and Schuster, 1967), pp. 270 -279; Milton Friedman, "The Effects of a Full-Employment Policy on Economic Stability," in Essays in Positive Economics (Chicago: University of Chicago Press 1966), pp. 117-132; Otto Eckstein, "Instability in the Private and Public Sectors," Swedish Journal of Economics 75 (March 1973): 19-26; and Benjamin Klein, "Our New Monetary Standard: The Measurement and Effects of Price Uncertainty, 1880-1973," Economics Inquiry 13 (Dec. 1973): 461-484.
Axel Leijonhufvud, Information and Coordination, p. 259. Italics in the original deleted.
The long-run Phillips Curve, to use that manner of speaking, is said to be positively sloped rather than negatively sloped. See Hayek, Full Employment at Any Price?; Milton Friedman, "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy 85 (June 1977): 451-472; Robert E. Lucas, "Some International Evidence on Output-Inflation Tradeoffs," in Studies in Business Cycle Theory, pp. 131-145. On the Rational Expectations theorists as "neo-Austrians," see David Laidler, "Monetarism: An Interpretation and an Assessment," Economic Journal 91 (March 1981): 1-28.
For evidence and discussion supportive of reliance upon "discretionary" money and credit management for the achievement of policy objectives, see for example, Phillip J. Copper and Stanley Fischer, "Simulations of Monetary Rules in the FRB-MIT-Penn Model," Journal of Money, Credit, and Banking 4 (May 1972): 384-396; C.R. Whittlesey, "Rules, Discretion, and Central Bankers," in C.R. Whittlesey and J.S.G. Wilson, editors, Essays in Money and Banking in Honor of R.S. Sayers (Oxford: Clarendon Press, 1968), pp. 252-265; L.R. McPheters and M.B. Redman, "Rule, Semirule, and Discretion During Two Decades of Monetary Policy," Quarterly Review of Economics and Business 15 (Spring 1975): 53-64; D.A. Peel, "Some Implications of Alternative Monetary Rules," Indian Economic Journal 27 (July-Sept. 1979): 81-94; Daniel Ahearn, "Automatic Increases in the Money Supply: Some Problems," in Jonas Prager, ed., Monetary Economics: Controversies in Theory and Policy, pp. 352-355; and Franco Modigliani, "Some Empiricial Tests of Monetary Management and of Rules Versus Discretion," Journal of Political Economy 72 (June 1964): 211-245.

Analyses critical of credit and currency control characterized by discretionary "fine tuning" can be found in Henry C. Simons, "Rules Versus Authorities in Monetary Policy," in Economic Policy for a Free Society (Chicago: University of Chicago Press, 1973), pp. 160-183; Martin Bronfenbrenner, "Statistical Tests of Rival Monetary Rules," Journal of Political Economy 69 (Feb. 1961): 1-14; Bron-fenbrenner, "Statistical Tests of Rival Monetary Rules: Quarterly Data Supplement," Journal of Political Economy 69 (Dec. 1961): 621-625; Milton Friedman, A Program for Monetary Stability (New York: Fordham University Press, 1975); Edward S. Shaw, "The Positive Case for Automatic Monetary Control," in Jonas Prager, editor, Monetary Economics: Controversies in Theory and Policy, pp. 348 -351; and Bennett T. McCallum, "Price Level Stickiness and the Feasibility of Monetary Stabilization Policy with Rational Expectations," Journal of Political Economy 85 (June 1977): 627-634.

Further discussions of both the pros and cons of discretionary money management are contained in Edward Gramlich, "The Usefulness of Monetary and Fiscal Policy as Discretionary Stabilization Tools," Journal of Money, Credit, and Banking (May 1971); Richard H. Puckett and Susan B. Vroman, "Rules Versus Discretion: A Simulation Study," Journal of Finance 28 (Sept. 1973): 853-865; Victor Argy, "Rules, Discretion in Monetary Management, and Short-Term Stability," Journal of Money, Credit and Banking 3 (Feb. 1971): 102-122; Ronald S. Koot and David A. Walker, "Rules Versus Discretion: An Analysis of Income Stability and the Money Supply," Journal of Money, Credit, and Banking 6 (May 1974): 253-262; Wilfred Lewis, Jr., "The Relative Effectiveness of Automatic and Discretionary Fiscal Stabilizers," in Robert W. Crandall and Richard S. Eckhaus, eds., Contemporary Issues in Economics: Selected Readings (Boston: Little, Brown, and Company, 1972), pp. 178-181; and Erich Schneider, "Automatism or Discretion in Monetary Policy?," Banca Nazionale del Lavoro (June 1970): 111-127.

Hans F. Sennholz, Inflation or Gold Standard, p. 57.
See Murray N. Rothbard, "The Case for a 100 Percent Gold Dollar," in: Leland B. Yeager, editor, In Search of a Monetary Constitution (Cambridge: Harvard University Press, 1962), pp. 94-136; Rothbard, What Has Government Done to Our Money? (Novato, CA: Libertarian Publishers, 1978); Henry Hazlitt, The Inflation Crisis and How to Resolve It (New York: Arlington House, 1978); See also Joseph T. Salerno, "A Proposal for Monetary Reform:The 100% Gold Standard," Policy Report (July 1981): 6-11. For an analysis and defense of free banking on a species standard see Lawrence H. White, "Free Banking as an Alternative Monetary System," in M. Bruce Johnson and Gerald P. O'Driscoll, Jr., eds., Inflation of Deflation? (Cambridge, MA: Ballinger Publishing Co., forthcoming).
See F.A. Hayek, "A Commodity Reserve Currency," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 92-106; Benjamin Graham, "The Commodity Reserve Currency Proposal Reconsidered," in Leland Yeager, ed., In Search of a Monetary Constitution; Milton Friedman, "Commodity Reserve Currency," in Essays in Positive Economics; and Robert E. Hall, "Explorations in the Gold Standard and Related Policies for Stabilizing the Dollar," in Hall, ed., Inflation (Cambridge, MA: National Bureau of Economic Research, forthcoming).

The interested reader will also want to peruse "A Proposal for Monetary Reform" (unpublished ms., Sept. 1980) by John F.O. Bilson, in which an "equity" reserve standard is proposed. Under Bilson's scheme, the Federal Reserve System is transformed into a "type of Mutual Fund" which maintains a monetary base incorporating reserves composed of a diversified portfolio of "internationally traded" financial assets.

Neil H. Jacoby, "The President, the Constitution, and the Economist in Economic Stabilization," History of Political Economy 3 (Fall 1971): 398.
Cited in Friedman,A Program for Monetary Stability p. 85. An earlier version of the Act prepared by the Senate Banking and Currency Committee did contain a clause specifically instructing the Fed to manage the currency system for the clear and unambiguous co-purpose of "accommodating the commerce of the country and promoting a stable price level." (Hearings before the Committee on Banking and Currency, U.S. Senate, 63rd Congress, 1st session on S. 2639, 1913, vol. 2, p. 1730, sec. 15 of the bill.) It was deleted from the bill while in committee because it was believed that such a provision was an unnecessary precaution. It appears that a genuine ignorance of the potential importance of such an explicit provision caused its removal from the Act. See Irving Fisher, Stabilized Money: A History of its Movement (London: George Allen and Unwin, 1935), pp. 148 ff.
For a detailed historical discussion see Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: Princeton University Press, 1971), pp. 189 ff. See also Irving Fisher, Stabilized Money; and C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle.
James M. Buchanan and Richard E. Wagner, Democracy in Deficit (New York: Academic Press, 1977); James M. Buchanan, Richard E. Wagner, and John Burton. The Consequences of Mr. Keynes (London: Institute of Economic Affairs, 1978); F.A. Hayek, "The Campaign Against Keynesian Inflation" in New Studies in Philosophy, Politics, Economics, and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 191-231; and Murray N. Rothbard, For a New Liberty (New York: Collier Books, 1978), ch. 9.
John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 453.
Milton Friedman, "Should There Be an Independent Monetary Authority?," in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 224-225, 239, 236.
Milton Friedman, A Program for Monetary Stability, p. 86.
Friedman, A Program for Monetary Stability, p. 93. See also Friedman, "The Effects of a Full-Employment Policy on Economic Stability: A Formal Analysis"; and Phillip Cagan and Anna J. Schwartz, "How Feasible is a Flexible Monetary Policy?," in Richard Selden, ed., Capitalism and Freedom—Problems and Prospects (Charlottesville: University Press of Virginia, 1975), pp. 262-310.
See H. Geoffrey Brennan and James M. Buchanan, Monopoly in Money and Inflation: The Case for a Constitution to Discipline Government (London: Institute of Economic Affairs, 1981); Brennan and Buchanan, "Money Creation and Taxation," in The Power to Tax: Analytical Foundations of a Fiscal Constitution (New York: Cambridge University Press, 1980), pp. 109-134; Richard E. Wagner, "Economic Manipulation for Political Profit: Macroeconomic Consequences and Constitutional Implications," Kyklos 30 (1977): 395-410; and Keith Acheson and John F. Chant, "Bureaucratic Theory and Choice of Central Bank Goals," Journal of Money, Credit, and Banking 5 (May 1973): 637-655.
Brennan and Buchanan, Monopoly in Money and Inflation, p. 23.
Richard E. Wagner, "Politics, Monetary Control, and Economic Performance: A Comment," Mario J. Rizzo, ed., Time, Uncertainty, and Disequilibrium (Lexington, MA: D.C. Heath, 1979), pp. 178, 180.
Gordon Tullock, "Competing Monies," Journal of Money, Credit, and Banking 7 (November 1975), pp. 496-497.
John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 148.
Wagner, "Politics, Monetary Control, and Economic Performance," p. 179.
Milton Friedman, A Program for Monetary Stability, p. 19.
Milton Friedman, "The Optimum Quantity of Money," in The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing Co., 1970), p. 34.
In addition to Friedman's above-cited works see Milton Friedman, Monetary Correction (London: Institute of Economic Affairs, 1974), and Friedman, "A Monetary and Fiscal Framework for Economic Stability," in Essays in Positive Economics, pp. 133-156. Also see Richard T. Selden, "Stable Monetary Growth," in Leland B. Yeager, ed., In Search of a Monetary Constitution.
E.S. Shaw, "Monetary Stability in a Growing Economy," in Moses Abramovitz, ed., The Allocation of Economic Resources (Standford: Standford University Press, 1959).
Martin Bronfenbrenner, "Statistical Tests of Rival Monetary Rules," pp. 1-2; "Statistical Tests of Rival Monetary Rules: Quarterly Data Supplement," pp. 624 -625.
Clark Warburton, "Rules and Implements for Monetary Policy," Journal of Finance 8 (March 1953): 8; John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 432.
Henry C. Simons, "Rules Versus Authorities in Monetary Policy," pp. 164, 169; Willford King, "Sound Money—Why Needed and How Obtained," in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 315-316.
Jacob Viner, "The Necessary and the Desirable Range of Discretion to be Allowed to a Monetary Authority," in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 244-274; Henry Simons, "Rules Versus Authorities in Monetary Policy"; Clark Warburton, "Rules and Implements for Monetary Policy"; William H. Hutt, Keynesianism—Retrospect and Prospect: A Critical Restatement of Basic Economic Principles (Chicago: Henry Regnery, 1963), pp. 100-101; and Hutt, A Rehabilitation of Say's Law (Athens, OH: Ohio University Press, 1974), pp. 61-62. For Friedman's case against a fixed price-level rule, see his "The Role of Monetary Policy," American Economic Review 58 (March 1968): 1-17.
James M. Buchanan, "Predictability: The Criterion of Monetary Constitutions" in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 155-183.
Friedman, "Should There Be an Independent Monetary Authority?," p. 243. Emphasis added.
Simons, "Rules Versus Authorities in Monetary Policy," pp. 175-176. This article first appeared in 1936.
Friedman, "A Monetary and Fiscal Framework for Economic Stability," p. 135; "Should There Be an Independent Monetary Authority?," pp. 233-234; A Program for Monetary Stability, p. 99.
Hutt, Keynesianism, Retrospect and Prospect, p. 100.
John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 423.

End of Notes

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