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Designing A New Nation – Part 6 – Monetary Policy
-By Caleb Jones
The issue of monetary policy, or how a nation manages its money supply and interest rates, is a little complicated, primarily since there’s no ideal way to do it. Like talking about marriage and raising kids in the modern era, any way you can think of doing it is seriously problematic. Therefore, the goal is not to get to good or best, but simply the least bad, since all options suck.
Regarding monetary policy, there are two opposite extremes, and everyone else falls in-between these to extremes.
One extreme (at least in terms of non-communist, non-socialist economic systems) are the Keynesians. Keynesians believe that the economic health of an economy is best managed by big government or (quasi-government, like the Federal Reserve) tightly controlling how much money is in circulation. They are strong believers in having a central bank of some sort that prints money whenever the government wants, makes certain other currencies illegal, and so on.
On the opposite extreme are the Austrians. (These people have nothing to do with Austria.) These are hardcore libertarians who think government should do literally nothing to control the money supply, and it should be left completely to the free market. They are against the concept of a central bank. They believe either there should be no government currency at all (and let companies and banks print their own competing currencies) or have a currency that is 100% backed by gold, otherwise known as a gold standard. This means government can’t just print more money out of thin air whenever the hell it wants, thus maintaining a strong currency.
As I said, both of these systems are fraught with problems. The problem with a Keynesian system is that you end up with a gigantic, bloated government with massive long-term inflation and eventually, economic collapse. The problem with an Austrian system is that your economy has a permanent ceiling on its growth, being only allowed to grow when more gold is mined out of the earth. (I’m overstating that; that’s not exactly how it works mathematically, but this is a huge and complex topic and I don’t have time to go through all the details in this little article.)
Ascendia would acknowledge the weaknesses in both systems, but as always, it would err on the side of more freedom for the citizens and less government. Therefore, if the Austrians and Keynesians were on a sliding scale, with zero for Austrians and ten for Keynesians, Ascendia would be at about a two. It would be largely Austrian, but not 100% so.
Here’s what this means:
- There would be no central bank in Ascendia of any kind. Furthermore, the Enforceable Constitution would clearly state that the formation of any type of central bank or Federal Reserve would be forbidden in perpetuity, and any politicians who attempted to do so would be immediately removed from office and thrown in prison by the Constitution Enforcement Agency.
- The government would indeed coin a currency / legal tender. This would be both physical and digital (a cryptocurrency). However, there would not be any monopoly on this currency. Any group, individual, city, private company, or private bank would be more than welcome to coin their own currency (paper or digital) and the free market would be left to decide which forms of currency or currencies it preferred. The only limitation would be on the widespread usage of a foreign nation's currency. (Ascendia basing most of its economy on Germany's or China's currencies would not be allowed for obvious reasons.)
- Counterfeiting of government currency would be illegal. Counterfeiting of any private currency would be the private sector’s problem and the government would stay out of that. (Though there would be court systems in place for private lawsuits; I will cover that in a future article.)
- Instead of being completely tied to gold, the government’s currency would be partially tied to gold via a formula which would allow for some level of money printing in order for faster economic growth. For example, the government could print money equivalent to the world-wide value of gold times two, or three, or five, or some other figure. I don’t know exactly what this formula would be since I don’t have the expertise to create such a thing, but Ascendia would get a very smart team of Austrian and Austrian-leaning economists to come up with the precise formulas. This way, the government can’t just print money whenever the hell it wants, but there is some wiggle room for some economic growth above and beyond the price of gold.
The result of all this would mean that Ascendia:
- Would have one of the most stable currencies on the entire planet.
- Would have extremely low inflation.
- Would have a government that was further pressured to stay reasonably small.
- Like countries such as Switzerland and Singapore, it would attract money and investors from all over the world.
Again, there are problems with the system I just described, but there are problems with all monetary systems, so again, we’re seeking least-bad here, within the framework of a libertarianish nation.
Next installment coming soon.
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Freevoulous 2018-04-25 05:54:55
What if the government currency is overshadowed completely by some Ascendian corporate currency? Is that corporation allowed to inflate their own currency, print it in abandon, and create their own central bank?
Shura 2018-04-25 06:26:16
Great summary on a complicated topic, Caleb! However, I don't agree with your assertion that the gold standard imposes a limit on growth. Monetary base growth is left to the market (in the form of allocation of capital to extracting gold), you don't get more capitalist than that. Economic growth outside gold mines would ensure that it all stayed together. Sure, going into debt would be more risky because of zero inflation, but that's the point. Assets would be way more affordable. You don't want every family into a 40-year mortgage just to pay for their home. Sometimes I feel your common mention of the early 90s as the last chance to right the US ship is related to monetary policy. I must be wrong because I can't believe you seriously propose having a team of mandarins calculating the right amount of money. Greenspan, the Ayn Rand fanboy, would have been in your team, the same way he was chosen for the Fed in '87 and created not one but the 2 largest bubbles in American History, one after the other, essential in putting the country firmly on the way to its collapse. 🙂 All those neo-cons you constantly despise would get on the team just by saying "I'm for small government, free currency and low inflation", the same way they say it now and then make the government bigger the first chance they have.
Caleb Jones 2018-04-25 09:55:53
What if the government currency is overshadowed completely by some Ascendian corporate currency? Is that corporation allowed to inflate their own currency, print it in abandon, and create their own central bank?Of course. And if free market hates it, they can use some other currency And a corporation printing its own money is not a central bank.
Economic growth outside gold mines would ensure that it all stayed together. Sure, going into debt would be more risky because of zero inflation, but that’s the point. Assets would be way more affordable. You don’t want every family into a 40-year mortgage just to pay for their home.I agree completely.
Sometimes I feel your common mention of the early 90s as the last chance to right the US ship is related to monetary policy.That's part of it.
I can’t believe you seriously propose having a team of mandarins calculating the right amount of money.How else wold you do it? Other than pegging the value of your currency to gold and nothing else?
Johnny Caustic 2018-04-25 16:16:13
Do you envision any restrictions to prevent employer abuse of scrip? In 19th century USA, for instance, some company towns paid their employees in company scrip, which could only be used at company stores, which in some places charged large markups. It sometimes became abusive enough that the UK, if I understand correctly, banned it.
Caleb Jones 2018-04-25 16:56:23
Do you envision any restrictions to prevent employer abuse of scrip?None at all. That's totally up to the free market.
In 19th century USA, for instance, some company towns paid their employees in company scrip, which could only be used at company stores, which in some places charged large markups. It sometimes became abusive enough that the UK, if I understand correctly, banned it.If employees don't like it, they can quit and work somewhere else. If this happens en mass, companies will have a hard time finding good employees. The free market often works slower than people like, but it usually works itself out. (Not always, but usually.)
Alex Jones 2018-04-25 19:33:38
As you probably know basing a currency on gold is fraught with problems, some of which you mention. The common claim that gold based money has an "intrinsic value" is plainly false -- things are only worth what people think they are worth -- gold included, and, although gold has a number of useful properties (it is a good conductor, second only to silver, it is highly resistant to corrosion, and it looks pretty) this is really not what people are thinking. I actually think there is a simpler solution to this, which also kills two birds with one stone. The government issues fiat money, as is done in every country today, however, it grows the money supply at a fixed, constitutionally determined rate. Let's say 4%. So each year the government prints money equivalent to 4% the cash in circulation (released gradually over the year -- not one big batch). What does it do with that money? Well it is used to fund the government, alleviating the need for any other taxes. In a sense, it is a fee the government is charging to "run the economy". Of course if you don't like it you can, as you say, just use a private currency, however, government debts would be payable in the fiat currency, and for any system to work that right must also be guaranteed in the constitution. This gives you a voluntary tax system giving sufficient funds to the government to perform their legitimate function without the need for any force. The 4% is meant to represent the growth in the economy, since the purpose of money is to represent the value of trade goods. But what happens if the economy grows more than 4%? Well you'd have a small amount of deflation. What happens if it grows less than 4%? You'd have a small amount of inflation. However, over time they would cancel out. The number 4% though has to be fixed in the constitution, and unchangable except through extreme measures (such as amendment.) The advantages of this are many. First it gives you a completely stable and predictable currency. Since it is mildly inflationary it encourages spending, but it is not so inflationary that it discourages saving. Because the 4% is fixed the government can't just arbitrarily mess with it. It provides a "fee" based structure to fund the country, with an opt out if you don't want to pay, which is to say, it is voluntary, and it has the ultimate freedom defense mechanism that the citizens can simply not use it, and use an alternative, if it is abused. What would happen if people all started moving to a different currency? Well that would cause the gradual devaluation of the currency -- you could trade less private currency for the same amount of government currency. This means, since government debts are paid in government currency, that the devaluation of the currency means the government gets less value for its debts. That of course leads the a strong motivation for the government to prevent the devaluation of the currency, and so encourages them to make it attractive to the population to use. This of course is the power of competitive pressures. There is a danger they could use force to maintain the value of the currency, but that is why the constitution must demand that private currencies are a right. I'd be interested in your views on this approach.
Dave from Oz 2018-04-26 02:23:53
some company towns paid their employees in company scrip, …If employees don’t like it, they can quit and work somewhere else.
Investor 2018-04-26 03:58:17
some company towns paid their employees in company scrip, …If employees don’t like it, they can quit and work somewhere else.
Investor 2018-04-26 04:01:52
Any group, individual, city, private company, or private bank would be more than welcome to coin their own currency (paper or digital) and the free market would be left to decide which forms of currency or currencies it preferredThis is already the case almost everywhere in the world and always has been. I can pay private companies / individuals in any currency / payment method they chose to accept. The government though (taxes etc) can only be paid in they're currency of choice which almost always is the offical currency of the country. In your system that I assume would still be the case because this would be the currency the government would chose to accept. So your idea is not different in any way to what is currently the case.
Caleb Jones 2018-04-26 10:29:15
For those of you commenting about this, the government would accept any free-market currency (except for foreign currency) to pay taxes that had at least a 30% market share (or so) of currency circulation in the country. I should have said that in the article but I didn't, which was my error.
The government issues fiat money, as is done in every country today, however, it grows the money supply at a fixed, constitutionally determined rate. Let’s say 4%.That's an interesting option that I've read about before, and I'm not against it. The only reason I like mine a little better is that zero to ten Austrian/Keynesian scale. My option is about a 2, yours is about a 4 or 5. Still not bad, but I want to be as close to a gold standard as I can without actually adopting one.
Yeah, they can just catch a train … oh, no they can’t: they only have company scrip.Incorrect. You're forgetting this would be a totally free and unregulated market. They would (in all likelihood) be able to sell the company scrip (at a lower value of course) to get some "normal" currency, as well as have other options. One top of that, the "train" would likely take multiple forms of currency since it would(likely) be a free market train. And so on.
The company bills them for accommodation, health care, uniforms they are required to wear, a debt that must be paid with – you guessed it – company scrip. Which you can only get from the company. A bad head-cold and two days off work is a ticket to lifelong debt enslavement.Incorrect again. They would be able to buy company scrip to pay these things. And then once they did, they would say, "Holy fuck! I'm never doing that again!", tell all of their friends about it, and the company would start having a very hard time finding employees / paying people in scrip. You're viewing this as if companies suddenly started doing this in your country as-is. That's not what I'm describing here. Ascendia would be a free market society, not a corporatist society.
Alex Jones 2018-04-26 11:50:38
An interesting thing about this whole "scrip" money discussion is that it is a common complaint by the left. (I don't know the broader position of the people talking about it here, they might not be left wing, I'm just commenting generally that it is a common concern on the left.) What they seem to fail to realize is that they have a pretty analogous situation today for the poorest. The poor are given fiat money by the government, along with company housing (section 8 for example) and even government groceries in the form of SNAP. They travel with cards paid for by the government. The company says "you can't work for anyone else or you'll loose your job", the government says "you can't work a job or else you'll loose your entitlements". So all the concerns that apply about the company being over controlling must surely apply to the government doing the same thing and being over controlling. All the talk about being trapped must surely apply to the government trapping people. The entitlement trap is horrifyingly worse than anything an factory owner imposed on its people. I think it shows a remarkable selective blindness when people complain about "big oil", or "big pharma" or "big whatever" and how their bigness is used to manipulate, distort and bully. Yet they seem blind to the biggest big of all "big government": somehow they think it is incapable of the same sins they project on these other boogie men. Instead, bestowing on it the intentions of angels, despite the overwhelming evidence of their eyes.
Shura 2018-04-29 08:06:03
How else wold you do it? Other than pegging the value of your currency to gold and nothing else?You changed my mind! I looked Singapore up and your idea could work. The basis is that in a small, open economy things are simpler and faster. Singapore seems to have this problem nailed down, to the point where it has at least once been analyzed as a "black box" to try to deduct the secret formula they apply for stability in the face of internal and external shocks: http://www.imf.org/~/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp0410.ashx Notice they act directly on exchange rates, with a clear, immediate effect on an economy heavily reliant on international trade, whereas the interest rates, upon which Western Central Banks prefer to act, have an effect on the economy that is nothing short of complete and utter bullshit. (https://www.hussmanfunds.com/wmc/wmc110404.htm)
Caleb Jones 2018-04-29 10:28:30
You changed my mind!I'm cool like that.
The basis is that in a small, open economy things are simpler and faster.That's the core of this entire concept. Big countries don't work well, period. They just don't. It doesn't matter how well you try to run them, they become a cluster fuck. (It's the same with big companies too.) If you want lots of personal freedom, you need to live in a small country since at least that country has a chance of being well-run, prosperous, and staying the hell out of your business.
Notice they act directly on exchange rates, with a clear, immediate effect on an economy heavily reliant on international trade, whereas the interest rates, upon which Western Central Banks prefer to act, have an effect on the economy that is nothing short of complete and utter bullshit.Singapore is too authoritarian, and I don't like how they act on exchange rates, but at least they're closer in the right direction than any other country in the West.
B 2018-05-03 20:39:51
What's do you think of Benjamin Graham's (and, separately Henry Ford's) idea of a commodity backed currency? I've always liked the idea of currency being backed by something essential to survival, such as clean water or grain or something comparable, I think it would better align environmental and economic concerns. Where would something like that place on your 0-10 scale?