Every time I say something nice about monetary rules, as I did in my last post here, some Alt-M readers wonder why I’m doing that instead of championing free banking and choice in currencies. Have I given up my former views concerning the merits of these alternatives? Am I suffering from a bout of, or even from chronic, “fedophilia”? Might the Fed itself have purchased my apostasy?
Nothing of the sort. Although my views on the Fed, and on free banking, have changed somewhat since I first started writing on these subjects back in grad school (what sort of scholar would I be if they hadn’t?), they haven’t changed in any fundamental way. I still consider the acquiescence of economists in governments’ creation of currency monopolies to have been one of that professions’ greatest blunders; and I still favor freedom in banking, provided such freedom is understood to imply the absence, not just of extraordinary government regulations, but also of extensive government guarantees, whether explicit or implicit. Finally, I continue to oppose laws that interfere with people’s freedom to employ currencies other than the one officially sanctioned by their own government, whether those other currencies be public or private, paper or metallic or digital.
If I still believe all these things, why do I keep saying nice things about monetary rules? So what if a rule might be better than discretion, given the existence of a fiat-money issuing currency monopoly? If currency competition is better still, surely that’s what I ought to be plugging!
Well, yes…and no. I recently put it to my friend Gene Epstein this way. Suppose that the U.S. dollar is like the Titanic, and that all those who are employing U.S. dollars as their principal or sole medium of exchange are like the Titanic’s passengers. Suppose as well that the S.S. Dollar, to christen it so, having already hit an iceberg, is sinking, albeit slowly. (If you’re a stickler for verisimilitude, you are free to imagine that other ocean liners scattered around the seven seas are also sinking, some more rapidly than others. These are the world’s other government-supplied fiat monies.)
Now, there are in principle two ways of trying to spare the S.S. Dollar’s passengers. The first is to do whatever can be done to get other ships to come to their rescue. Besides sending the usual S.O.S. signals, allowing other ships complete freedom of the seas is obviously a good step. So is making it as easy as possible for the S.S. Dollar’s passengers to abandon ship and make their way to other, more seaworthy craft. Having an abundance of lifeboats (currencies that are themselves dollar-based, but at least a bit more seaworthy and maneuverable than the mother ship) also helps.
The other step consists of doing whatever can be done to keep the S.S. Dollar itself afloat, or at least make it sink less rapidly, by manning pumps, patching the hull, or other means.
It ought to be plain that the two options aren’t mutually exclusive, and that prudence dictates that both ought to be pursued. As free as they may be to come to the rescue, other ships and boats may take time getting there; and once they arrive, a last-minute rescue could prove both chaotic and costly, especially given passengers’ inclination to cling to their sinking ship until it takes its final plunge into the deep.
No analogy is perfect, of course; and the U.S. dollar certainly differs from the S.S. Dollar. For one thing, if the U.S. dollar is sinking, it’s doing so very slowly indeed. Moreover, unlike a sinking ship, a slowly sinking currency, insofar as that’s understood to mean one that’s slowly losing value, can go on sinking indefinitely. Finally, the fact that the dollar continues to lose value is perhaps less important than the fact that its mismanagement contributes to macroeconomic instability. Consequently it’s more like an unstable ship than a sinking one. But these particular differences only serve to reinforce the case for making the dollar itself at least a little more reliable and durable than it is now, provided that one can do so without interfering with anyone’s ability to either supply or use dollar alternatives.
As for those alternatives, if it’s prudent to try and keep the U.S. dollar, not only afloat, but sailing as smoothly as possible, it’s no less prudent to encourage discussion and development of superior, if not unsinkable, substitutes. And doing that has, of course, been Alt-M’s purpose all along.