Limited Government and Money: A Review of Money and the Rule of Law by Daniel Sutter for American Institute for Economic Research
For centuries pharaohs, emperors, and kings ruled and made average folks do their bidding. The rise of political liberalism changed our conception of power, arguing that governments existed to serve the people. A new book argues we must bring liberal principles to our money.
Government actions ultimately involve force, which liberalism argues is legitimate only if it serves the people. Governments today take some of the same actions as emperors did. Taxation, for example, still involves armed men taking things from people. Taxation is theft unless the people consent; as America’s Founders put it, “Taxation without representation is tyranny.”
Governments took control of money before the liberal revolution; kings found minting coins profitable. Just as taxation resembles theft, government money creation resembles counterfeiting. And money creation is illegitimate counterfeiting if not subject to the controls of liberal democracy.
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In Money and the Rule of Law, economists Peter Boettke, Alex Salter and Dan Smith (formerly of Troy University) argue that the Federal Reserve’s unchecked powers over America’s money supply violate the rule of law, an important element of liberal government. The rule of law means that the rules are enforced equally on all; no one is above or beneath the law. The rule of law yields generality, predictability, and robustness. They argue, “If money is subject to arbitrary manipulation by public authorities, this amounts to a de facto infringement on property rights.”
A retort to Boettke, Salter and Smith might be, “But the Federal Reserve manages the money supply to keep our economy prosperous, benefitting us all.” Yet the evidence, the authors argue, is less clear than you might think. Between its creation in 1913 and 1933, the Fed basically only managed the banking system. Yet it let one quarter of America’s banks fail between 1930 and 1933, turning a recession into the decade-long Great Depression.
The Fed also fueled the inflation of the 1970s, which hit 13 percent in 1980. The “Misery Index” – the sum of the inflation and unemployment rates – routinely exceeded 15. By comparison, the Misery Index was 6 in 2019.
The Fed also contributed significantly to the Great Recession. Ben Bernanke, Fed Chair in 2008, contended that the Fed merely served as a lender of last resort. The authors thoroughly refute this claim and contend that the unpredictable response – e.g., bailing out Bear Stearns and then allowing Lehman to fail – created most of the financial crisis.
