Free banking and monetary rules were rival ideas for guarding against abuses of discretionary monetary policy, today they are properly seen as complementary schemes, one for improving the performance of the banking system, the other for reforming the base-money regime.
On the Fed’s “instruments of monetary control,” which include devices for regulating the total quantity of bank reserves and circulating Federal Reserve notes, and also for regulating the quantity of bank deposits and other forms of privately-created money that will be supported by any given quantity of bank reserves.
A better alternative, if only it can somehow be achieved, or at least approximated, is a monetary system that adjusts the stock of money in response to changes in the demand for money balances, thereby reducing the need for changes in the general level of prices.
What sort of monetary policy or regime best avoids the costs of having too much or too little money?
How can a central bank manage a quantity without being certain just how to define, let alone measure, that quantity? How is it possible for the quantity of money supplied to differ from the quantity demanded? When those things do differ, how can one tell? Finally, just what does “the demand for money” mean?
What, exactly, is “monetary policy” about? Why is there such a thing at all? What should we want to accomplish by it — and what should we not try to accomplish?
The result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inﬂation and an initial investment boom, both of which are unsustainable in the long run.
The CPI vs. the Diversity of Real People’s Choices
A central tool for governments to maintain their authority in society and their control over people’s lives is the ability to make the citizenry accept and use their monopoly medium of exchange.
Most people assume that prices move as a result of changes in the money supply. Instead, let’s look at the effect of changes in interest.
The real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.
Free bankers have been fighting a war on two fronts. On one they face champions of central banking and managed money. On the other they struggle against advocates of 100-percent reserve banking. Although the second front is a lot smaller than the first, it’s far from being unimportant, in part because the battle there is being fought against people who generally favor free markets, who might have been expected to join rather than to oppose our cause.
Scott Sumner said he had a “modest” proposal: there should be a highly liquid futures market in Nominal Gross Domestic Product (NGDP). Let’s look at that.
The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one here.