I am interested in writing a critique of libertarian monetary ideas. (I already have one criticizing MMT.) But first I’d like to have a better sense of what those ideas actually are. Thus I’d appreciate any comments that you might have on the best places to find a summary of these ideas.
Let’s start with “abolish the Fed”, an idea I see mentioned in various settings. In some cases, it’s not hard to imagine what people mean by the term “abolish”. Thus if people were to say abolish FDIC, I believe that I would know exactly what they mean. But abolish the Fed? That could mean one of many different things. The devil is in the details, especially the transition from here to there.
Much of the uncertainty relates to the status of base money (especially currency), as well as debt instruments that promise to pay $X dollars of base money at a specified future period of time. Does abolish the Fed mean abolish the US dollar? That seems unlikely; how would all of our dollar denominated debt be repaid?
Perhaps the proposal is to peg the US dollar to a fixed rate of gold, and then allow private entities to issue banknotes. To me, that seems the most feasible way of abolishing the Fed. In that case, it would make more sense to describe the proposal in a positive sense—say define the dollar as X grains of gold—rather than in the negative way (abolish the Fed.)
A libertarian might say they are not wedded to the gold standard, and that the market should decide what system works best. OK, but then in the meantime what do we do with all of the US currency and dollar denominated debt? Am I missing something?
What are some other libertarian monetary ideas? I’ve seen the following ideas kicked around in various places:
1. Inflation targeting is a bad idea, because it’s a form of price control.
2. NGDP targeting is a bad idea, as it’s a sort of central planning.
3. The effects of monetary policy depend very much on who gets the money first.
4. The Fed has been artificially controlling interest rates in recent decades, usually holding them below equilibrium.
5. Fed policy artificially raises asset prices, often creating asset price bubbles.
6. In a free market, private currencies would displace the US dollar.
I’m in a rather odd position. I view these ideas as being mostly or entirely wrong. And yet I view myself as a libertarian and view my own approach to monetary policy as being relatively libertarian.
So please help me. What libertarian ideas am I overlooking? Which ones did I get wrong? And exactly how is the abolition of the Fed to be carried out?
READER COMMENTS
John S
Aug 14 2022 at 9:45pm
Instead of a fixed rate of gold, why not opt for a compensated gold standard (i.e. the Fisher/Thompson plan) instead? I’ll let JP Koning explain:
“Rather than redeeming dollar bills and deposits with a permanently fixed quantity of gold, a central bank redeems dollars with whatever amount of gold approximates a fixed basket of consumer goods. This means that your dollar might be exchangeable for 0.34 grains one day at the gold window, or 0.41 the next. Regardless, it will always purchase the same consumer basket.”
Fischer’s plan was first published in 1911, before the creation of the Fed. Redemption of dollars or gold could be handled by the Treasury.
http://jpkoning.blogspot.com/2016/04/a-21st-century-gold-standard.html?m=1
(The plan is also described in David Glasner’s “Free Banking and Monetary Reform,” 1989.)
Scott Sumner
Aug 15 2022 at 1:08pm
I’ve written extensively on this idea. It has some merit, but when you look closely it’s actually just price level targeting with fiat money. The “gold” aspect is sort of a fig leaf to reassure fans of the gold standard. So I don’t think that hard core libertarians would be persuaded.
John S
Aug 15 2022 at 3:03pm
“I don’t think that hard core libertarians would be persuaded.”
Well, Hazlitt was a pretty hardcore figure in the history of American libertarianism, and here’s what he had to say about the compensated dollar:
“Others before Dr. Hayek have had a similar yearning for a commodity standard, but have been aware of this practical problem [of commodity redemption]. The most prominent is Irving Fisher, who in the 1920′s proposed his “compensated dollar.” This is a dollar that would have been convertible into a constantly changing quantity of gold, to keep it fixed in value in relation to an average price of commodities as determined by an official index.
Fisher’s compensated gold dollar would have solved the problem of the utter impracticability of any direct conversion of a currency unit into a trainload or shipload of assorted commodities, but it would have solved it at a prohibitive cost. As Benjamin M. Anderson5 and others pointed out, it would have enabled international speculators to speculate with impunity against the dollar and the American gold reserve, and would have had other self-defeating and confidence-undermining effects”
https://fee.org/articles/free-choice-of-currencies/
So Hazlitt’s only stated concern is the danger of speculative attacks. With Earl Thompson’s suggestions to prevent speculation by adjusting the gold price to compensate for changes in the commodity index, he might have supported the plan.
I agree that the gold aspect of the plan isn’t necessary, but I do believe that magic word “gold” still has a hypnotic effect on libertarians. (Although now it may have been surpassed by “crypto.”)
Jeremy Goodridge
Aug 14 2022 at 11:40pm
There are ideas I have read that may be elements of libertarian ideas that you could analyze. For example there is Hayek’s idea to denationalize currency so any currencies could compete and there would be no concept of a “legal” tender. Also doesn’t George Selgin believe in fully privatized banking, an idea which perhaps implies competitive currencies?
John S
Aug 15 2022 at 9:02am
Selgin doesn’t necessarily “believe in” free banking; he focuses his research on free banking b/c he believes it should be the baseline to which other banking and monetary regimes are compared (similarly to the roles that “free trade” and “perfect competition” play in Econ 101 textbooks).
However, Selgin did write an essay in 2020 entitled “A Libertarian Vision for Money and Banking” for libertarianism (dot) org. Regarding monetary policy, he writes:
“Any desirable rule should satisfy at least two requirements. First, if consistently abided by, it should guarantee a reasonably stable and predictable value for the dollar, especially in the long run. Second, the rule should be “hardwired” into the monetary system, as it might be by enshrining it in a constitutional amendment, or by allowing the public to trade in existing Federal Reserve dollars for new “cryptodollars” whose supply, like Bitcoin’s, is regulated by a tamperproof computer algorithm.”So a libertarian monetary policy could essentially be managed by a “night-watchman” version of the Fed.https://www.libertarianism.org/essays/libertarian-vision-for-money-banking
robc
Aug 15 2022 at 10:22am
It has been touched on by others, but the problem is with this statement:
Yes, you are missing something. Having a free market in currencies doesn’t exclude the US dollar from continuing to exist. I would assume taxes would still have to be paid in US dollars, so the need to convert to US dollars in order to pay taxes or cash out refunds would exist.
It would be nice if the US dollar also went on some sort of sane standard, but it wouldn’t absolutely be necessary.
robc
Aug 15 2022 at 10:27am
That was not supposed to be a reply to John S.
Scott Sumner
Aug 15 2022 at 1:11pm
But in that case you have not abolished the Fed.
John S
Aug 15 2022 at 3:23pm
I guess it depends what is meant by “abolish.” In this short video (and others), Milton Friedman says, “I have long been if favor of abolishing it [i.e. the Federal Reserve Board].” But presumably Friedman didn’t want monetary chaos; he famously said that he wanted monetary policy to be run “by a computer” (presumably, he meant some sort of algorithm).
https://www.youtube.com/watch?v=m6fkdagNrjI
So I think a night-watchman Fed would count as abolishing it in all but name.
robc
Aug 15 2022 at 3:27pm
We had US dollars prior to the Fed, so not sure why going back to pre-Fed dollars (along with competitive currencies) wouldn’t be “abolishing” the Fed.
Scott Sumner
Aug 15 2022 at 6:00pm
John, When I suggest a night watchman Fed, libertarians tell me I’m a socialist and that the Fed should be abolished.
robc, But that was a gold standard. Yes, that’s a possible alternative, but it would be a disaster if done without international cooperation.
Scott Sumner
Aug 15 2022 at 1:12pm
I’m all for competitive currency issue, and we do now have some competition with Bitcoin, etc. But I still don’t understand what people mean by abolish the Fed. What happens to dollar bills?
robc
Aug 15 2022 at 3:28pm
Nothing.
We had dollar bills before the Fed existed.
Logan zoellner
Aug 15 2022 at 1:25am
Some Libertarian Monetary policy suggestions:
The Federal Reserve should have FAR LESS (basically zero) discretion. I don’t care if they choose a gold standard or Inflation targeting or NGDP targeting. What I do care is that they pick a well-defined rule and then stick with it. If the Taylor Rule says that interest rates should be inflation+4%, then interest rates should be that. We shouldn’t have to wonder how Jay Powell is feeling on any given morning in order to figure out what monetary policy is going to be that day.
Legalize Narrow Banks. This seems like a no-brainer.
Make it WAY EASIER to buy/sell private securities. I know this isn’t *technically* a monetary policy issue, but it does have to do with “who gets the money first”. Large corporations are FAR less efficient at using capital than small businesses, but they nonetheless have access to capital at far lower rates because they earn a premium for being publicly traded stocks. This means that when interest rates are low instead of helping hard-working small businesses grow, they just subsidize large corporations and government spending.
Balance the budget. I know, haha, like that’s every going to happen. So far as I can tell there are basically 2 reasons the budget isn’t balanced 1) politicians like to give stuff away without paying for it. 2) every time there’s an economic downturn, the government spends money in order to “stimulate the economy”. Regarding 1), as a Libertarian this is clearly bad. Regarding 2), monetary policy should be carried out via the Federal Reserve (or rather a version of the Federal Reserve with less discretion and more automatic stabilizers).
Get rid of zoning. Again, not “technically” monetary policy, but seeing as how “housing is the business cycle”, I think it should. When we talk about asset bubbles, we usually mean either housing or meme-stocks. I consider meme-stock bubbles mostly harmless (fallout from 1999 was far less than 2008), so fixing housing bubbles would go a long way towards monetary stability.
You mentioned this one, but:
Legalize private currency. If Americans decide they want to use Shrute Bucks or Euros or Ethereum or Doge Coin, then it is their God-given right to do so. In particular, the SEC’s harassment of cryptocurrency (most recently Tornado Cash) needs to stop.
David S
Aug 15 2022 at 2:05am
I think Tyler Cowen still identifies as a Libertarian, but his views on monetary policy seem to align with yours. Maybe look at some of the things Megan McArdle has written–granted she’s a journalist.
I’m at a loss here, because aside from Ron and Rand Paul I’m not sure what significant “libertarian” policy stances are out there. MMT has the advantage of having some loud, crackpot advocates who cruise the Internet.
Conventional gold bugs still exist, but they seem to have been supplanted by the crypto/defi crowd, which claims to be grassroots so I’m not sure if they had any economists carrying the torch with a good technical explanation.
Arqiduka
Aug 15 2022 at 5:23am
“Abolish the Fed” also means (for some) no new production of base money, ever, but the current base to remain in circulation forever. Would probably empower the Treasury to replace old notes, etc.
That’s the thing about the slogan, its vague on purpose such to attract a bunch of views (well two I know of, but there may be others).
Scott Sumner
Aug 15 2022 at 1:15pm
That’s a possible interpretation. Of course that would be a horrifically bad system, likely leading to a depression worse than the 1930s.
Arqiduka
Aug 15 2022 at 9:14pm
Looking forward to your post on that, but to be fair the zero growth option is just a special case of the k% rule, where k is zero. An obvious Schelling point, but it does not have to be zero, or set forever (could set it every 5 or 10 years, etc).
Scott Sumner
Aug 16 2022 at 2:48pm
The K% rule for the base, but not for M1 or M2. Compare these aggregates during the early 1930s.
Arqiduka
Aug 16 2022 at 6:04pm
Yes, the magic of fractional reserves would adjust the higher aggregates beyond base (demand deposits suffice, even if banks dont issue their literal redeemeable notes), matching demand in the short-term. You’d still have secular deflation in the fixed base case, but I imagine this’d be only somewhat less stable than the gold standard otherwise.
Scott Sumner
Aug 17 2022 at 3:32pm
A gold standard would be highly unstable.
Thomas Lee Hutcheson
Aug 15 2022 at 6:36am
What about just allowing “banks” to issue notes, conduct credit and deposit operations backed by anything they want or nothing. In other words, abolish the SEC.
Scott Sumner
Aug 15 2022 at 1:15pm
I’m fine with abolishing the SEC, but what do people mean by “abolish the Fed”?
Eric Charles
Aug 15 2022 at 9:10am
What about Selgin’s A Theory of Free Banking?
“George Selgin develops a forceful argument that the existing regulated banking system based on central bank monopoly note issue should be replaced by an unregulated system in which commercial banks are free to issue bank notes as well as deposits.” (Anna J. Schwartz)
Scott Sumner
Aug 15 2022 at 1:17pm
What are the banknotes backed with? Gold? Federal Reserve Notes?
Either system is workable, but only one of the two involves abolishing the Fed.
Eric Charles
Aug 15 2022 at 3:00pm
Presumably addressed in the book.
Andrew_FL
Aug 15 2022 at 9:26am
“The best change of all would be to abolish the Fed completely, and simply have zero creation of high-powered money and no discretionary powers anywhere.” – Milton Friedman
Sumner: “What could he have meant by this?”
Andrew_FL
Aug 15 2022 at 9:30am
If you want to critique the libertarian idea of abolishing the Fed, I suggest you start with your own school of thought’s leader!
Scott Sumner
Aug 15 2022 at 6:03pm
I’d prefer to start with Friedman’s more sensible proposals, not his weaker ideas.
Scott H
Aug 15 2022 at 10:14am
Don’t we have a free market wrt mediums of exchange? I feel like I can get into and out of Euros, Rubles, gold, platinum, bit coin, etc. with relatively little overhead. I don’t do it because the dollar suits my needs. However, I try to maintain as little of my worth in currency as possible.
Besides, there’s no there there for libertarian ideals applied to the FED. Better to come up with arguments as to why libertarian ideals that are so appropriate to other situations don’t apply well to the concept of national currencies.
Don Geddis
Aug 15 2022 at 10:41am
The “libertarian” monetary vision has a discomfort for national central planning (vs. local free markets), and for fiat currency (money created out of “nothing”) rather than being “backed” by something of tangible value.
If I were to try to channel the vision… Private banks should be free to issue their own currencies. Fractional reserve lending should be illegal; all loans should be backed by previous deposits. Competitive currencies should not be illegal. Even federal taxes should be payable in a variety of convenient forms, not only in US dollars. (Why not bitcoin?) The supply of US dollars should be frozen. (Like bitcoin!)
The value of a money standard over barter (the “double coincidence of wants”) seems so overwhelming to me, that I don’t buy the vision of a robust competition in currencies. I suspect that even if an economy started that way, the value of a money standard and network effects would quickly lead to one form of currency dominating the whole economy. If that choice isn’t planned, then probably a random currency will quickly “win”. (Or maybe just a historically comfortable one, like a gold standard.) And then the economy will deal with whatever the characteristics of that accidental choice happen to be, whether for good or ill.
Scott Sumner
Aug 15 2022 at 1:19pm
“The supply of US dollars should be frozen. (Like bitcoin!)”
Look at what happened to the value of Bitcoin. Now imagine if that happened to the value of the US dollar!! It would be a disaster.
robc
Aug 15 2022 at 11:42am
I have never understood this. Why? As long as everyone is clear on the risks, why shouldn’t it be allowed?
Kevin Corcoran
Aug 15 2022 at 12:29pm
The most common argument I’ve heard for why it should be illegal isn’t due to risk per se – it’s argued that fractional reserve banking is inherently fraudulent. So the argument isn’t a consequentialist one about excessive risk, it’s a deontological argument about ownership and contradictions and such.
The argument, using small and easy numbers and simplified assumptions, goes something like this. Suppose I take ten dollars to the bank, in ten one dollar bills, and deposit it, as the bank’s first and so far only customer. Lets say the bank holds 10% reserves, so they’ll hold one dollar in reserve and loan out nine dollars. You come to the bank and apply for a nine dollar loan, which they put into your account (on paper), backed by nine of the ten dollars I deposited into the bank earlier. Now, according to that bank they hold ten dollars, and all ten dollars belong to me, but nine of those same dollars also belong to you. It’s created a situation where we now both hold a contradictory ownership claim to the selfsame nine dollars. And, according to certain schools of thought, since property rights are deontological, absolutist things, contradictory claims of property rights cannot exist. They are automatically invalid, therefore any system which creates them is itself inherently based on fraud. So even if everyone accepted the risk, even if you altered the thought experiment with as many assumptions as needed so that there would never be any risk, fractional reserve banking would still fail on deontological grounds, and is therefore impermissible. Or so the argument goes.
Scott Sumner
Aug 15 2022 at 1:25pm
Yes, but that problem would be trivial to solve. Banks could simply refrain from saying they “hold” the depositor’s money, and instead say they promise to pay the money on demand, but that there is some risk involved. In other words, tell the truth. Surely you’d still have fractional reserve banking, as even before FDIC millions of people deposited money in banks knowing full well that it was risky.
Kevin Corcoran
Aug 15 2022 at 3:36pm
For what it’s worth, I agree. I wasn’t endorsing the argument I laid out, I was just attempting to lay out what I understood the argument to be. And in my experience, when a response like yours is given, the opponent of FRB will usually just double down and insist that even if those caveats are made, and even if everyone fully understands how the system works and the risks involved etc, ultimately FRB still rests on the idea that people can have overlapping claims to identical property and is therefore intrinsically invalid. The argument rests on a sort of absolutist and deontological framework which I don’t find persuasive or interesting, but it’s the main argument I know of for why FRB ought to be illegal.
robc
Aug 15 2022 at 3:40pm
I am some sort of absolutist deontologist, and that argument is awful.
If I accept the risk on my deposit, the deontological responsibility of the bank is fulfilled.
Kevin Corcoran
Aug 15 2022 at 4:26pm
I believe it. One thing all deontologists seem to agree on is that their deontological arguments are obviously correct that the arguments of every other deontologist are obviously awful. I’m reminded of reading (I think in the book Radicals for Capitalism: A Freewheeling History of the Modern Libertarian Movement, but I might be misremembering) that Ayn Rand and AJ Galambos met each other once, for about five minutes, after which each one went on to talk about how the other one was clearly insane. But Rand seems to have far more devotees these days while Galambos seems largely forgotten. Part of that is likely due to how much Galambos depended on live lectures rather than Rand, who published newsletters and novels and books, which carried on after her death. No particular point to all of this rambling, your comment just reminded me of that nugget from the book and it made me smile.
George Selgin
Aug 15 2022 at 4:55pm
“According to that bank they hold ten dollars, and all ten dollars belong to me, but nine of those same dollars also belong to you.” There’s an elementary fallacy here to which too many fall victim. When you deposit 10 $1 bills at a bank, those bills at once become the bank’s property. Your property consists of a claim on the bank–think of it as an IOU–worth $10, which, depending on your deposit contract, you may be able to redeem at any time. Your relation with the bank is, in other words, a debtor-creditor relation. That’s the way it has been for centuries; and today pretty much every standard bank deposit agreement says so in plain English. It obviously follows that the bank is free to dispose of the $10 you traded for its IOU as it pleases, including by lending any part of it. It’s sole obligation is to meet your and other customers’ redemption demands as they arise. It has no obligation at all to maintain any particular reserve backing, unless special requirements compel it to do so.That so many libertarians have swallowed to argument that banks create multiple “titles” to or “warehouse receipts” for the same amount of basic money, despite the fact that the legal nature of deposit contracts has actually been quite clear to all save Murray Rothbard and a handful of his devoted acolytes, just proves that, if putting all your money in a fractional-reserve bank can be risky, getting all your information about money and banks from one tiny sect of like-minded economists can be so as well!
Kevin Corcoran
Aug 15 2022 at 5:56pm
Your last point is particularly well said – I have found that the people who are most likely to take the Rothbardian or Blockian line on banking have read pretty much only Rothbard or Block on banking.
And to once again clarify, I agree with your critique! I wasn’t presenting an argument I endorsed, I was simply trying to accurately represent what I understood the argument to be. It’s not a good or convincing argument in my opinion, but I think my presentation of it passes the Ideological Turing Test.
Henri Hein
Aug 16 2022 at 12:05pm
Quote of the week! That is awesome.
Adam M
Aug 19 2022 at 11:41pm
In my view, you and White have never properly addressed Hoppe 1998. As far as I can tell, you ignore the maturity mismatch aspect involved in FR banking and what that entails regarding property titles.
Spencer Bradley Hall
Aug 15 2022 at 12:39pm
Banks are not intermediaries. If the commercial bankers are given the sovereign right to create legal tender, then the DFIs must be severely circumscribed in the management of both their assets and their liabilities – or made quasi-gov’t, staid, institutions.
Monetarism has never been tried. Monetarism involves controlling the volume and rate of expansion in legal reserves and reserve ratios.
Monetarism is more than watching the aggregates – it also involves controlling them properly. The Fed cannot control interest rates even in the short end of the market except temporarily. And by attempting to slow the rise in the federal funds rate the Fed will pump an excessive volume of legal reserves into the member banks. This will fuel a multiple expansion in the money supply, increase monetary flows and generate higher rates of inflation – and higher interest rates including federal funds rates.
If the money supply is controlled properly, the determination of interest rates can be left to market forces because the rate of inflation will be brought down to tolerable levels.
Scott Sumner
Aug 15 2022 at 1:26pm
Everyone, So far, all of the proposals for abolishing the Fed would be either policies that do not abolish the Fed, or policies that would be disastrous.
There must be some sensible ideas out there . . .
John S
Aug 15 2022 at 2:29pm
First off, I’m not a libertarian, so I don’t know precisely what they mean. But I think what libertarians primarily mean by “end the Fed” is an end to bailouts of big banks and other financial institutions, which libertarians see as an unfair gov’t backstop that gives Wall St. leeway to gamble (i.e. “private profits, socialized losses”). Practical issues such as how to redefine the dollar are generally glossed over with vague suggestions that the free market will sort it out.
The Libertarian Party’s platform on its website says the following about its stance on “Money and Financial Markets”:
2.7 Money and Financial Markets
We favor free-market banking, with unrestricted competition among banks and depository institutions of all types. Markets are not actually free unless fraud is vigorously combated. Those who enjoy the possibility of profits must not impose risks of losses upon others, such as through government guarantees or bailouts. We support ending federal student loan guarantees and special treatment of student loan debt in bankruptcy proceedings. Individuals engaged in voluntary exchange should be free to use as money any mutually agreeable commodity or item. We support a halt to inflationary monetary policies and unconstitutional legal tender laws.
You’d probably get better answers abt what rank-and-file libertarians think by posting this question on the libertarian subreddit at https://www.reddit.com/r/Libertarian/
Scott Sumner
Aug 15 2022 at 6:06pm
Thanks John, I notice that doesn’t involve abolishing the Fed.
Jeremy Goodridge
Aug 15 2022 at 1:41pm
Why does a libertarian HAVE to believe in abolishing the Fed? Maybe the libertarian position should just about removing all of the Fed’s monopolistic powers — i.e. the competitive currencies. It would just be another bank.
Another way to think about this is that up until 1914, there was no Fed and the US still grew economically enormously. It was probably the richest country in the world as early as 1910. But during that time, the US govt still managed currency. So it may just be a question again of limiting Fed’s powers as much as possible, but still allow the US govt to manage a currency (and maybe other minimum functions now done by the Fed) as long as it wasn’t given special privileges. That might also handle the transition issue to “free banking” allowing alternatives to take time to evolve.
Another point — when people say “abolish” something, they often leave out that they want to keep some of its functions and put them somewhere else. It’s rhetoric. Like “defund police” or “abolish the IRS” or “abolish ICE” never really meant no one arresting people for crimes or collecting taxes or enforcing border rules.
TGGP
Aug 15 2022 at 2:01pm
A simple interpretation would just be striking out the laws which established the Fed in the first place. Would that abolish the dollar? Of course not, since the dollar predates the Fed.
Scott Sumner
Aug 15 2022 at 6:07pm
As I explained above, we were on the gold standard before 1913. So that explanation is not adequate.
robc
Aug 16 2022 at 9:49am
Why isnt it?
The problem is fiat money, not necessarily the Fed.
I think that is the answer to your question, what “abolish the Fed” means is “abolish fiat money”. No need for a Fed if money is based.
The reason I didn’t buy into bitcoin when it was under a $1 is that I don’t see it as any better…it is still fiat money.
Of course, BTC shows that you can, in fact, have fiat money without a Federal Reserve, so, what again is your objection to abolishing the Fed?
Scott Sumner
Aug 16 2022 at 2:52pm
Both gold and Bitcoin have very unstable values (in recent decades), and thus are not well suited to be the medium of account.
robc
Aug 17 2022 at 1:33pm
Is gold unstable or is it the dollar?
Einstein might have a word or do to say about how that is measured.
I don’t think the amount people value jewelry is bouncing around that much. Gold is “unstable” because people’s sentiments about the economy and the dollar are unstable.
I have no strong preference for what is used to back currency, just that it should be backed, and I doubt gold would be very unstable if it was backing the dollar.
My personal weird currency idea would be a digital currency backed by SPY (or really VOO, it has lower fees). 256 Voodoo bucks == 1 share of VOO.
At this exact moment a V$ would be worth 1.53USD.
Scott Sumner
Aug 17 2022 at 3:34pm
ThAt’s just factually wrong and it’s not even debatable. You ought to check the data before commenting. The value of gold in terms of other goods has been extremely unstable.
robc
Aug 17 2022 at 4:36pm
Yes, but why?
It the demand of jewelry (and other practical uses of gold) that unstable? No.
So why does gold bounce around? It is a proxy for future inflation and etc.
If gold is unstable, it is because worries about the dollar are unstable.
Scott Sumner
Aug 17 2022 at 9:15pm
The value of gold changes for many reasons. The relative value of gold soared in the early 2000s due to fast rising demand in India and China—it had nothing to do with increased inflation expectations. Changes in nominal interest rates impact the value of gold.
But even if you are correct, it’s a moot point. The US switching to gold would not have much impact on the global market for gold, certainly not enough to stabilize its value.
Scott Sumner
Aug 15 2022 at 6:08pm
Everyone, I see there is a real need for me to write this paper. Lots of confusion over lots of issues.
Eric Charles
Aug 15 2022 at 11:05pm
Scott Sumner
Aug 16 2022 at 2:54pm
I have no problem with free banking. This post is about monetary policy, not banking policy.
Is George Selgin currently advocating abolishing the Fed?
But yes, I can do another post.
Peter Cresswell
Aug 15 2022 at 6:58pm
George Reisman, in his treatise ‘Capitalism,’ argues for a 100% commodity money — achieved by what he describes as a “potential spontaneous remonetization of the previous metals” (pp. 510-11) achieved by various means described in subsequent pages, especially p. 930 and pp951-54, ‘A Proper Gold Policy for the Government.’
Would love to see a detailed critique.
NB: You can download a free searchable PDF of the book at http://georgereisman.com/CAPITALISM_Internet_Pepperdine.pdf.
Scott Sumner
Aug 16 2022 at 2:57pm
Gold is unsuitable to be a medium of account, as its value is currently too unstable.
Adam M
Aug 16 2022 at 6:53pm
Is gold inherently and necessarily unstable, or are there current factors exacerbating it? Can we address these factors to make gold more stable? IIRC, there used to be 50 yr or even 100 yr contracts when we had a quasi gold standard in ~1870-1913, arguably the most prosperous period in history.
Do you believe that free markets clear? If so, then why is inflation, with all its own problems, a better cure for sticky wages than the abolishment of regulations and union privileges that impede markets from clearing?
Scott Sumner
Aug 17 2022 at 3:36pm
“If so, then why is inflation, with all its own problems, a better cure for sticky wages than the abolishment of regulations and union privileges that impede markets from clearing?”
Who said it was? But getting rid of “regulations” does not solve the problem of sticky wages (or nominal debt.)
Adam M
Aug 17 2022 at 5:50pm
If free markets clear, then any unemployment in a free market is voluntary. So why are sticky wages a “problem” in a free market? We don’t view other types of voluntary unemployment as a problem or irrational.
I am unconvinced that deflation is bad in a free market and this is one of the main arguments against a gold standard.
Scott Sumner
Aug 17 2022 at 9:12pm
“If free markets clear, then any unemployment in a free market is voluntary.”
That’s just false. You can have a free market with monopsonistic labor markets. There weren’t many labor regulations in 1894 and in 1921, but both years had high unemployment and it wasn’t all “voluntary”.
But it’s a moot point, as we need to design the monetary system for the world we have. Would you design an airplane for a world with no gravity?
John Hamilton
Aug 16 2022 at 9:58am
You write about monetary economics at EconLog and have a position at the Mercatus Center… Your ideas are libertarian monetary ideas.
Scott Sumner
Aug 16 2022 at 2:55pm
True.
Philo
Aug 16 2022 at 10:51am
The fundamental libertarian idea about money is that “the market should decide what system works best.” There does not seem to be any particular libertarian idea about how to manage the transition from the government-fiat system we have now to this market-based libertarian system; different libertarians will have different ideas, which will be based more on positive economic theory than on libertarian principle. If it is this transition you are primarily interested in, you probably won’t find much in the literature: why should anyone think hard about how to effect it, when it is politically completely unrealistic?
robc
Aug 16 2022 at 12:49pm
Yeah, I primarily think of the transition as “not my problem.”
I have a goal. How we get there? Probably chaos. Hail Eris!
Scott Sumner
Aug 16 2022 at 2:59pm
We live in a democracy. If abandoning the Fed plunges us into a Depression, don’t expect voters to stick with the plan for the long haul.
robc
Aug 17 2022 at 12:09am
If they didnt get rid of the Fed after it caused (extended?) The Great Depression, why would they bring it back?
Scott Sumner
Aug 17 2022 at 3:37pm
They got rid of the gold standard, which was just as much to blame for the Depression as the Fed. Canada had a big depression too.
Roger Sparks
Aug 16 2022 at 12:33pm
I am not sure that there is a ‘libertarian’ view on banking, money creation, and borrowing. Here is my idea of the interaction:
So, what say you Professor? A libertarian view or something else?
Scott Sumner
Aug 16 2022 at 3:02pm
I’m confused. Why is a loan document net wealth? It’s an asset to one person and an equal liability to another.
Roger Sparks
Aug 16 2022 at 7:01pm
That’s a valid question. The answer relates to the difference between ‘real’ and ‘nominal’.
If we had no debt at all in the macro economy, real and nominal distinctions would not exist. Fiat economies could only spend real fiat money. GDP could only be reported in real terms. Real would equal nominal.
Now let a bank make a loan. It makes no difference whether the bank is lending existing fiat money or creating new fiat money to be placed on account; the bottom line is that the lending bank is allowing access into the marketplace for the benefit of the borrower. A benefit which the borrower is expected to repay.
With the first loan in place, we again ask your valid question:
The borrower received a real benefit — unearned access to existing real products and real assets. The lender has a balancing nominal asset that must be counted for the first time (because we began the exercise in a debt free economy). For the first time, we begin to talk about a real economy and the nominal economy.
Of course, the lender’s loan document is both real and nominal. The borrower received ‘money’ that was both real and nominal. The GDP would be measured as increasing, both real and nominal.
Yet, the borrower has a void in his accounting–a real hole in nominal terms. To fill/remove that hole, the borrower must increase measured GDP and somehow extract nominal/real money for return to the lender. Should the borrower be successful in repaying the loan, the nominal measured wealth must fall, leaving only real financial wealth in the form of fiat money remaining.
That’s the best explanation I can give at the moment.
Scott Sumner
Aug 17 2022 at 3:39pm
“That’s the best explanation I can give at the moment.”
You’ll have to do better, as I have absolutely no idea what you are talking about.
Roger Sparks
Aug 17 2022 at 11:28pm
I can understand your expression of equality by thinking from a microeconomic perspective. This view is quite understandable if you are thinking about microeconomic loans like paying for a car. You are thinking that the value of the car plus the value of the loan is equal to either of the two linked properties, not the sum of the two properties added together.
This unitary value does not work at all well when we try to measure macro-economic wealth because loan documents and physical property are members of two classes of wealth, both measured individually.
I believe a libertarian view would/should follow wealth measurement practice so that monetary policy can be more precisely focused. Then, from a macroeconomic perspective. a new loan document would represent new wealth; new wealth that could be extinguished by loan payoff.
New loan document wealth is particularly important when the loan document is issued by government, especially when the government is expected to roll the debt, not retire it. When an economy operates in this mode, debt becomes a second form of money, needing to be widely distributed as payment for reoccurring work performed.
It will be interesting to read your libertarian critique when you get it completed!
Paul M
Aug 16 2022 at 12:41pm
There’s a ton of material you can read about this.
Since most of it is about money, I’d recommend What Has Government Done to Our Money? By Murray Rothbard.
There’s a free audiobook. It’s tells the story of a free money system (free as in free speech, not as in free coffee).
Eric Charles
Aug 16 2022 at 4:15pm
How about this by Lawrence White?
“Competitive Money Inside and Out”
https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1983/5/cj3n1-16.pdf
Eric Charles
Aug 16 2022 at 4:51pm
For anyone interested, Scott Sumner briefly (9 minutes) debated Lawrence White here (“Fiat Money vs The Gold Standard”):
https://www.youtube.com/watch?v=FbDZ0ObRXfE
Being generous towards Sumner, I would call that a draw. 😉
Scott Sumner
Aug 17 2022 at 3:42pm
“Being generous towards Sumner, I would call that a draw”
No, White won the debate, but that has no bearing on what I’m discussing here.
I don’t think people understand that just abolishing the Fed doesn’t magically bring back the gold standard. You might as well talk about recreating the Holy Roman Empire.
Eric Charles
Aug 17 2022 at 4:55pm
“No, White won the debate, but that has no bearing on what I’m discussing here.”
lol, you made some valid points!
It seems there are two questions you posed unless I misunderstood.
What is the libertarian view on transitioning to an environment with the current Federal Reserve in place to one without it.
What is the libertarian view on monetary policy with a clean slate such as if a large group of libertarians colonized another planet.
Not sure which one you are interested in.
Scott Sumner
Aug 17 2022 at 9:08pm
I also don’t even think a gold standard would be a good idea on a newly colonized planet. But in any case, the phrase “abolish the Fed’ presumes we start from here, so that’s my focus.
Eric Charles
Aug 17 2022 at 9:32pm
A new planet with David Friedman’s bundle idea sounds about right from a libertarian principle standpoint. I doubt you will get much resistance with your objections concerning transition pains or impossibility changing away from the current regime.
Philo
Aug 18 2022 at 12:49pm
By the end of your EconDuel debate with Larry White you both seemed to be wondering what you were even debating, since no monetary system would work if the government wasn’t firmly supportive, and governments can’t be trusted. Even with the classic gold standard, governments periodically suspended convertibility, restoring it only when convenient; under the gold-exchange standard, the U.S. government even abrogated private contracts involving gold. And, of course, while a fiat money system would work if constrained by a good rule, who expects government to follow a rule if it does not wish to do so?
Of course, one should not focus the blame exclusively on governments, which, after all, operate on the basis of public opinion. The fault lies not so much with the governments as with the people they govern.
Policy debates, like yours with White, are really exercises in wishful thinking. “If people and their governments were wise (in certain respects), the following policy would work.” But the people/governments are not wise (in those respects), and your policy would not work in practice–in the world as it really is.
Max Goedl
Aug 17 2022 at 7:13am
I would recommend David Friedman’s “Gold, Paper, or … Is the A Better Money?” in which he argues for a commodity money system based on warehouse receipts produced by a private firms. He argues that if the bundle of warehouse commodities backing the money is broad enough, free competition among issuers would lead to price stability.
https://www.cato.org/sites/cato.org/files/pubs/pdf/pa017.pdf
Scott Sumner
Aug 17 2022 at 3:46pm
I’ve seen that argument, but I think it’s totally wrong. The value of even a basket of commodities is too unstable to serve as money.
Philo
Aug 20 2022 at 7:26pm
How about including some services and various kinds of labor in the basket?
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