The Cato Institute recently released Monetary Alternatives: Rethinking Government Fiat Money, a collection of essays 30 years in the making. As George Selgin explains in the foreword,
The complacency wrought by the Great Moderation, not to mention the limited interest in fundamental monetary reform before then, resulted in a dearth of serious inquiries into potentially superior arrangements….Cato kept the subject alive, offering a safe haven, in the shape of its Annual Monetary Conference, for the minority of experts that continued to stress the need for fundamental monetary reform. Although fundamental reform has been a consistent theme of Cato’s monetary conferences, those conferences have never been dominated by one approach to reform. The articles in this book present a variety of ideas for improving the monetary regime — including proposals for a formal “monetary constitution,” various monetary rules, competing currencies, and establishing a new gold standard.
In sum, Monetary Alternatives explores fundamental and controversial ideas that would move our monetary system and economy beyond repeated crises to sustainable stability and prosperity. The contributors to the volume energetically question the status quo and provide compelling arguments for moving to a monetary system based on freedom and the rule of law.
A limited constitutional government calls for a rules-based, free-market monetary system, not the topsy-turvy fiat dollar that now exists under central banking. When the Federal Reserve was created in 1913, its powers were strictly limited and the United States was still on the gold standard. Today the Fed has virtually unlimited power and the dollar is a pure fiat money.
Central banking, like any sort of central planning, is not a panacea. Concentrating monetary power in the hands of a few individuals within a government bureaucracy, even if those individuals are well intentioned and well educated, does not guarantee sound money. The world’s most important central bank, the Federal Reserve, is not bound by any strict rules, although Congress requires that it achieve maximum employment and price stability. The failure of the Fed to prevent the Great Recession of 2009, the stagflation of the late 1970s and early 1980s, and the Great Depression of the 1930s, raises the question, can we do better?
In questioning the status quo and widening the scope of debate over monetary reform, the fundamental issue is to contrast a monetary regime that is self-regulating, spontaneous, and independent of government meddling versus one that is centralized, discretionary, politicized, and has a monopoly on fiat money. Free-market money within a trusted network of private contracts differs fundamentally from an inconvertible fiat money supplied by a discretionary central bank that has the power to create money out of thin air and to regulate both banks and nonbank financial institutions.
There are many types of monetary regimes and many monetary rules. The classical gold standard was a rules-based monetary system, in which the supply of money was determined by market demand — not by central bankers. Cryptocurrencies, like bitcoin, offer the possibility of a private non-commodity monetary base and the potential to realize F. A. Hayek’s vision of competitive free-market currencies. Ongoing experimentation and technological advances may pave the way for the end of central banking — or at least the emergence of new parallel currencies.
In making the case for monetary reform and thinking about rules versus discretion in the conduct of monetary policy, it is important to take a constitutional perspective. As early as 1988, James M. Buchanan argued, at an international monetary conference hosted by the Progress Foundation in Lugano, Switzerland:
The dollar has absolutely no basis in any commodity base, no convertibility. What we have now is a monetary authority [the Fed] that essentially has a monopoly on the issue of fiat money, with no guidelines that amount to anything; an authority that never would have been legislatively approved, that never would have been constitutionally approved, on any kind of rational calculus [“Comment by Dr. Buchanan,” Economic Education Bulletin 28, no. 6: 32–35].
In 1980, just after Ronald Reagan’s election, Buchanan recommended that a presidential commission be established to discuss the Fed’s legitimacy. There was some support within the Reagan camp, but Arthur Burns, a former chairman of the Federal Reserve Board, nixed it. As Buchanan explained at the Lugano conference, Burns “would not have anything to do with any proposal that would challenge the authority of the central banking structure.”
Buchanan’s aim was “to get a dialogue going … about the basic fundamental rules of the game, the constitutional structure.” There is, he said, “a moral obligation to think that we can improve things.” That is the spirit of this volume and Cato’s recently established Center for Monetary and Financial Alternatives.
This year marks Cato’s 40th anniversary and the 35th anniversary of the Annual Monetary Conference, making it an appropriate time to bring out this collection of articles devoted to rethinking government fiat money and to offer alternatives consistent with limited government, the rule of law, and free markets.
Contributors to Monetary Alternatives include: Claudio Borio, Jeffrey Lacker, John Allison, Bennett McCallum, James Buchanan, George Selgin, Peter Bernholz, Charles Plosser, Leland Yeager, John Taylor, Scott Sumner, James Dorn, Edwin Vieira, Lawrence White, Richard Timberlake, Roland Vaubel, and Kevin Dowd.