There Are Worse Things than Libertarian Fantasies

So says I, in commenting on Amar Bhidé’s ill-informed opinion piece in yesterday’s FT.

Here, with some minor edits (which I failed to fix on time in the original), is what I wrote:

Were Mr. Bhidé’s own suggestions for monetary policy reforms sound, his swipe at fundamental criticisms of central banking as “libertarian fantasies” would be perfectly gratuitous, but no worse than that. In fact, the idea that we’d be better off starting with a clean slate than trying to fix central banks seems to me considerably less fantastic than Mr. Bhidé’s suggestion that the Fed might manage money responsibly simply by checking commercial banks’ imprudent lending. That the Fed has a miserable track record when it comes to detecting, much less discouraging, imprudent lending, is the least of it: Bhidé’s more fundamental error consists of not imagining that merely by keeping an eye on imprudent lending the Fed would also avoid gross mismanagement of the money supply, and the macroeconomic disturbances consequences thereof. If there’s a theory that supports this view, I’d like to see it!

Nor is it true, despite what Mr. Bhidé claims, that the Fed managed the money supply in its early years merely by discouraging imprudent bank lending. It isn’t true, first, because the Fed’s management of the U.S. money stock was in fact notoriously irresponsible in its first decades (consider the rampant post-WWI inflation, the depression of 1920-21, the boom of the late 1920s, and the Great Monetary Contraction of the early 1930s); second, because “checking imprudent lending” wasn’t the Fed’s mandate then (it was “providing an elastic currency” — an entirely different matter); and third, because the long-run behavior of the money stock was constrained by the working of the gold standard.

Mr. Bhidé is right in one respect: he is right to regard the Fed’s dual mandate as supplying an insufficient check against imprudent Fed actions. The fix, though, isn’t Mr. Bhidé’s even more unsound prescription. It consists of replacing the dual mandate with a single stable spending growth mandate. Unlike Mr. Bhidé’s proposal, such a mandate would place definite limits on inflation, though ones that would vary with the economy’s productivity. It would, to be sure, not suffice to rule out imprudent actions by commercial bankers. But then, no monetary policy mandate should be expected to serve that purpose.

On a separate note, I do wish that Mr. Bhidé and other persons inclined to dismiss arguments to the effect that we’d be better off without central banks as “libertarian fantasies,” or the equivalent (besides Mr. Bhidé, Paul Tucker comes to mind), would grapple with the actual arguments of central bank critics, instead of merely labeling them. As for economists calling things “fantasies” because they seem far from politically possible, it seems to me that by making such pronouncements they shirk their proper duty, which consists of altering the boundaries of the politically possible through their influence upon people’s beliefs. Where would we be today had Adam Smith chosen, not to elaborate upon the potential benefits of free trade, but to dismiss the idea as a “libertarian fantasy?”

[Cross-posted from]