Over at the Free Banking Blog, George Selgin replied to some recent criticisms that appeared in the Economic Policy Journal (here and here.) The criticism is aimed at what Selgin calls the “Bitdollar,” which is the idea of a tamper-proof-Bitcoin-type protocol that automatically adjusts the supply of base dollars in a way that a measure of nominal income keeps a stable path. The criticism (which, at least to me, reads more as a sequence of statements than arguments) sustains that any increase in the supply of money, in this case Bitdollars, would produce distortions in the economy.
The question, however, is not whether the supply of base money should remain constant, but rather what its growth rate should be. This equilibrium growth rate may or may not be zero. In an ideal free market of money and banking, the supply of base money does not remain constant, but rather follows the demand to hold real balances of money. There are, then, at least two different levels of discussion that can take place. One level is the discussion of what the ideal monetary institutions would be and how to get there. This can be thought as a long-term discussion. Note that there can be agreement in what the ideal monetary institutional framework would be but disagreement in what steps to take to go from here to there. Either the ideal scenario is a classic gold standard, free banking, or something else, the potential nontrivial costs of transition should not be overlooked. The second level of discussion should be to look at a central bank given what its optimal monetary policy should be. This can be thought as a short-term discussion. Certainly it is a mistake to take a “short-term” proposal and criticize it for not being a “long-term” discussion.
There are two advantages in the Bitdollar idea. (1) It targets monetary equilibrium rather than price level stability. This allows to separate between supply shocks (i.e. changes in productivity) and shocks to aggregate demand. (2) It offers a secure rule that constraints the policy maker ability to change the rule. Note that while the Fed remains in place, it’s actual “central bank” role as the institution that defines money supply is minimized.
Selgin’s Bitdollar can be thought as a marginal (but important) short-term step towards a long-term goal. Consider the hypothetical scenario where the Bitdollar mimics perfectly the ideal supply of gold under a pure free market on money and banking (or the alternative scenario where the Bitdollar rule just outperforms the Fed’s performance.) Note also that the Fed as institution has not disappear, and therefore arguments like the need to provide financial regulation is not affected by the Bitdollar proposal. It seems to me that the Bitdollar idea should receive a positive acceptance by central bankers unless they think they can outperform the market but at the same time acknowledge being unable to write down the ideal rule that should govern money supply (whether it’s NGDP Targeting or not). With this Bitdollar rule, central bankers keep their other regulatory powers in place. Isn’t this a step toward a more sound, stable, and free monetary system?