Wednesday, 20 September 2017


Money and the rule of law

August 7, 2015
in Blog

When people think of monetary economics, they tend to do so in the context of macroeconomics. The questions that are most often addressed have to do with the effects of particular monetary institutions or policies towards output, employment, inflation and other macro variables of interest.

There is nothing wrong with this.

In fact, understanding the macroeconomic effects of various monetary conditions is essential.  However, the macroeconomics of money is only one paradigm through which monetary factors can be fruitfully analyzed.  A complementary one, that in my mind is at least as important, is the relationship between monetary regimes and the rule of law.

Briefly, the rule of law means governance according to predetermined and non-discriminatory rules.  If governance rules can change arbitrarily to suit the whims of governors, the rule of law is absent.  A stable monetary regime, such as a gold standard or a fiat money NGDP targeting regime, would be a case where the regime adheres to the rule of law.  The rules governing money in these cases are clear, and the conditions concerning changes in money’s purchasing power are known in advance.  Unfortunately, these kinds of regimes are very much the exception; discretion on the part of central bankers is very much the norm.

Other than the familiar macroeconomic costs of lawless money, why else is lawless money undesirable?  One answer is that lawless money necessarily infringes on private property rights.  If the value of money is not fixed by law (or fluctuates unpredictably), fluctuations in the value of money due to lawless discretion can transfer resources from one group of people to another, and hence erode the rights of private property enshrined in contracts.  For example, unexpected inflation is an involuntary transfer of wealth from creditors to borrowers; unexpected deflation is an involuntary transfer from borrowers to creditors.  More importantly, unexpected inflation redistributes wealth from holders of money to creators of money, typically a state monopoly.  Monetary infringements on private property rights are worrying for the same reason infringements on private property in general are worrying.  Private property is the ultimate bulwark of individuals, families, and society’s ‘little platoons’ against the leveling and centralizing power of the modern state.  Whatever weakens this bulwark lessens the ability of these groups to resist, or even cope with, encroachments on their rights.

Once we begin to explore monetary arrangements from the perspective of political economy, we quickly find even more reasons to insist on lawful money.  The costs of lawless money, in addition to familiar macroeconomic concerns, now acquire an ethical and political dimension.  As such, monetary issues are not solely the proper purview of macroeconomists.  Historians, political scientists, and social philosophers more generally have an important part to play in exploring the effects of subjecting money to the governance of rules.