Tuesday, May 24, 2011

"Control" of the Money Supply

Boyes identifies an important component of society - money. As economies mature the importance of money increases. The functions of money as well as the related functions of financial institutions are an institutional matrix that becomes critical for development and growth.

As with critical functions one can consider the costs and benefits and consequences of locating decision making - privately with individual agents using their own knowledge in pursuit of their own aims, or centrally by the state. This opposing forms of decision making generate an array of incentives that lead to radically different costs, benefits and consequences.

Before considering the alternative to the status quo, I find it useful to consider the formal and informal institutional framework that emerges to support a free and responsible society, what Adam Smith called a systemn of natural liberty. This framework is far from anarchy or even laissez faire, the government is responsible for defining and enforcing property rights, preserving the sanctity of contracts, and administering justice. These formal institutions develop after the informal institutional support - beliefs, conventions and norms emerge that support freedom, liberty and responsibility. But the key point for me is the essential role played by the state and an understanding of the areas (most) in which the absence of state action, centralization and planning leads to a more moral society and a higher order of outcome for society - greater economic welfare. This dual consequence - a more moral society with greater economic welfare is the general outcome from a system of natural liberty and the absence of the state.

So, money. Why would the government grant itself a monopoly on money, if the outcome is an immoral society with diminished economic welfare.

Well, it would seem that first, informal institutions - beliefs, norms and conventions have emerged that shape public support for government central banks, heavy intervention in financial markets and a state monopoly over the money. In other blogs, Boyes and I have commented on the emergence of this informal institutional view that is shaped by elites and intellectuals. This emergence has been, in the course of our history, far from constant. During two periods in the 19th century - the so called free banking or wildcat banking periods - there was pushback against central control by the state of money and financial institutions.

That said, the direction of public opinion toward intervention has been increasing in the 20th century and the early 21st century.

Boyes does a nice job of outlining the costs and consequences of this intervention by the state. Those of us who advocate a responsible and free society must acknowledge that this increasing intervention is supported by the vast majority of elites and intellectuals and, unsurprisingly, the general public.

As Boyes and I end our teaching careers I look to the young generation of thinkers and scholars who, after an analysis of the costs and benefits of comparative economic systems, advocate for liberty and responsibility with respect and some trepidation. Given the path dependence of informal institutional evolution, the current climate and public opinion, their importance has never been greater and their job more daunting.

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