Selgin Rides Again
Like a good guy in an old Western determined to put things aright, George Selgin has once again arrived on the scene shooting from the hip--and displaying remarkably bad aim.
There are a number of substantive issues to criticize in Selgin's typically intemperate and ill-tempered piece attacking Tom Woods and me. Bob Wenzel has done a good job of exposing and rebutting Selgin's selective reading of Hayek, particularly Selgin's contention that the early Hayek advocated that the central bank maintain constancy in total spending by varying the money supply inversely to fluctuations in the public's demand for money. Indeed, as Wenzel shows, Hayek explicitly denied that stabilizing total spending can ever be "a practical maxim of policy." I will therefore restrict my comments to Selgin's gross misrepresentation of my views.
Selgin claims that I argue in favor of something he calls "a constant-M ideal." But I have never argued that a constant money stock is optimal. I have instead argued in favor of the Currency school view that the ideal monetary regime is one in which the composition, quantity, and value of money should be determined exclusively by market forces. This means that in an open economy with no natural deposits of the money commodity (gold, silver or whatever it may be), the money stock varies strictly with the balance of payments. This is how the money stock is determined currently for each region in the same currency area, e.g., states in the U.S. In a closed economy, variations in the money stock would be governed by changes in the costs of mining gold in conjunction with changes in the demand for gold in monetary and nonmonetary uses. That the value AND the stock of money should vary like any other commodity produced on the market is a theme running throughout my writings. George may want to check my writings here (pp. 343-46, 409-13) and here (pp. 97-100) and exercise more careful scholarship in the future.
Selgin goes on to sermonize, "it's meaningless to suggest that a central bank, assuming one exists, do nothing." I agree. But once again Selgin either deliberately or unwittingly misrepresents my position. In defending those like Larry White who advise "an inflation target [is] better than no constraint" George is assuming more than that a central bank exists. In fact he assumes in addition that the central bank is and should remain independent of "politics," i.e., not subject to the control of the elected representatives of the public. Otherwise it would be meaningless to direct one's advice to the Fed. Freely granting that the Fed exists and is run by entrenched Federal bureaucrats unaccountable to Congress but beholden to large banks and financial institutions, I would advise Congress to bring monetary policy under its control by incorporating the Fed into the Treasury Department where its budget would be determined by Congressional appropriations. Under this plan, which is very close to the one advocated by Milton Friedman in 1948, money effectively would be issued and destroyed through Federal deficits and surpluses.
Without going into further detail, my plan (which can be read in its entirety here) has at least four advantages over the current monetary regime: 1. the money creation process becomes immediately transparent to the public; 2. politicians cannot escape being held directly responsible by the electorate for inflation by placing blame on the the Fed; 3. the Fed is finally shut out from distorting credit markets as money is simply spent into existence via budget deficits, and the "bonds" issued by the Treasury to the Fed are just intradepartmental accounting entries with no effect on the interest rate; 4. monetary expansion does not initially impinge on credit markets and therefore causes only "simple inflation" and random resource misallocations and not the systematic malinvestments associated with the Austrian-style business cycle. I might add that now that the Fed is held in such great disrepute by so many Americans, establishing effective Congressional oversight of the Fed is a far more feasible plan than persuading a bunch of entrenched bureaucrats to voluntarily submit to a "constraint" dreamed up by academics. My plan is intended as a transitional, second best stopgap preliminary to the complete separation of money and the government. I would of course push on and advise Congress to remove all taxes on gold, silver, and foreign currencies and abolish legal tender laws, while completely deregulating the financial sector.
It is therefore actually George and the NDGP targeters who propose to "do nothing" of substance to rein in the Fed, an outmoded and destructive Progressive Era agency. Advising the Fed to change the guidelines according to which it manipulates the the money supply is worse than useless because it accepts the Fed's "independence" as something that is beneficial. In contrast, fomenting popular discontent with the Fed and revulsion against its century-long depredations on the American economy is "doing something" to move toward a sound money.