In my last post, I argued that monetary regimes should be judged not just on macroeconomic grounds, but also on whether they adhere to the rule of law. In this post, I want to extend that argument: the rule of law should be the primary consideration for judging monetary regimes.
Macroeconomic issues matter, but should be viewed as of secondary importance.
Money has been called humanity’s greatest labor-saving technology, and there is much truth to this claim. Money is ultimately what enables society to achieve more than the most rudimentary division of labor. By serving as one half of all exchanges, money economizes on the significant costs of finding willing trading partners under barter. Resources previously used in search can now fruitfully be applied to other ends. In addition, by providing a common denominator for judging various production and consumption plans, money enables individuals to communicate their subjective preferences over economic outcomes to each other, enabling market coordination. Money, then, is the cornerstone of commercial societies, and hence economic prosperity.
Consequently, whether it is privately- or publicly-provided, money is an institution of communal importance. When money is tampered with arbitrarily, even to achieve seemingly-beneficial goals, individuals are made means to serve the ends of others. At best, this constitutes an involuntary redistribution of resources. At worst, it can actually destroy wealth, as individuals take action to avoid the harmful effects of funny money, and can privilege the politically powerful and connected at the expense of ordinary citizens. Tampering with the monetary regime thus transforms money from a means of social cooperation into a tool of social control.
This perspective is central to James Buchanan’s efforts to change how the economics profession thinks about money. In light of its importance for a free society, money must be judged as one of the foundational rules of civilization, which cannot be tampered with in the course of ordinary affairs. Reasonable people can disagree over exactly how to achieve best money’s protection as a meta-rule. I myself disagree with Buchanan’s specific recommendations. But what is of primary importance is the recognition that money, like weights and measures, like freedom of speech and assembly, is one of the basic institutions that constitutes a liberal society, and as such must be safeguarded from manipulation.