Snow: ‘Money and the Rule of Law’

July 8, 2024

by Nathanael Snow, Ph.D.

Money has a social function and is an emergent institution. Together with private property, the rule of law, and free exchange that allows for price discovery money improves the processes of coordination, cooperation, and innovation that generate flourishing in our lives. Money reveals profit and loss (Mises 1951), directing the activities of entrepreneurs. When money is bad, economic calculation is frustrated and economic growth falters. Governance of money needs to be disciplined by the rule of law, recognizing each person’s holdings of money as a property subject to taxation only by democratic consensus, and sensitive to how interventions may affect market processes. In Money and the Rule of Law Peter J. Boettke, Alexander William Salter, and Daniel J. Smith consider the Federal Reserve (Fed) and argue that its structure of governance, open to the discretion of Fed officials, cannot be robust to knowledge problems or incentive problems, and consequently the Fed must be bound by a monetary rule. 

The authors present their argument in seven chapters. Following an introduction (Chapter 1) the authors explain the knowledge problem and the incentive problem as they relate to discretionary monetary policy as practiced by a central bank (Chapters 2 and 3). It is shown that the incentives faced by experts within the Fed often lead those who ought to be monetary crisis firefighters to behave as arsonists (Chapter 4). The authors demonstrate the evolving concerns of Nobel Laureates F.A. Hayek, Milton Friedman, and James Buchanan regarding the vulnerabilities of discretionary monetary policy (Chapter 5). Therefore, the authors argue that the rule of law ought to govern monetary policy (Chapter 6). In conclusion the authors relate their argument to the maintenance of classical liberal institutions (Chapter 7).

In 2004 Boettke and Peter Leeson initiated a research program in “Robust Political Economy” (Leeson & Subrick 2006; Pennington 2010). A robust political economy interrogates a field of public policy with concerns about epistemology and incentives. Successful projects in this program include Christopher J. Coyne’s and Abigail Hall’s (2021) work on military propaganda; and more recently, studies on government responses to the COVID-19 pandemic (Candela & Geloso 2021). 

The robust (Levy 2002) approach to political economy searches for institutional arrangements that, when populated by knavish (Hume 1777) or ignorant participants, avoid outcomes that would not be anticipated by nor preferred by those same participants. To test the robustness of a policy regime the political economist applies two sets of standards. First, the regime must not presume decision-makers to already have knowledge that is only generated by the process (Kirzner 1963) being governed (Hayek 1945). Second, the regime must not presume that decision-makers will violate their own self-interests in pursuit of some ephemeral ideal outcome (Buchanan & Tullock 1962). 

In contrast, interventionist monetary policy presumes the following: First, that there has been a market failure (for example, a decrease in nominal spending growth) such that financial markets will not correct themselves. Second, that the expert-officials at the Fed can obtain information in a timely manner and implement a new policy that corrects for the supposed market failure with such precision and rapidity that the policy implemented does not undershoot or overshoot its target. Third, that officials at the Fed are constrained by appropriate accountability to sufficiently democratic institutions such that Fed policy does not result in unanticipated redistributive outcomes. Upon rigorous analysis by Boettke, Salter, and Smith we are reminded that Fed officials are neither omniscient nor angelic.

Monetary policy as practiced by technicians at the Fed has sought to fine-tune the instruments at its disposal (and has often invented new instruments at its own discretion) with the aim of achieving the most efficient solution between the dual mandates of stable price growth and unemployment. There are no solutions, however, there are only trade-offs (Sowell 2015), and pursuit of efficiency has come at the cost of robustness. 

The Fed does have rules. However, as the authors show, the Fed also has the discretion to bypass its rules. Such an institution is not accountable to those who are affected by its decisions. When the Fed has faced financial market uncertainty, pressure from politicians in the Executive and Legislative branches, or pressure from special interests within the market, the Fed has failed to implement efficient policies, to follow its own rules, and to produce outcomes that would achieve consensus from all of those affected by its actions. Burton Abrams (2006) has revealed how Richard Nixon put the screws on Arthur Burns, and laughed in his face (p. 75), but this example is merely the tip of the iceberg among instances where the Fed violated its independence from politics and duty to the rule of law.

Standing on the shoulders of giants, the authors outline the increasing skepticism of Hayek, Friedman, and Buchanan towards the Fed. Hayek’s opinion evolved away from attempts to implement better technical controls over the Fed to advocating “the abolition of central banks” (1978). Friedman’s thought evolved from arguing that government must provide money early in his career (1948) to a rejection of “the ability of discretionary monetary authorities to be able to achieve sound money” (p. 138). Buchanan began from an open exploration of alternative monetary institutions and “became convinced that the only solution was to constitutionalize money” (p. 140). The implication is that careful classical liberal analysis leads to concerns about discretionary monetary policy.

Given the rapid changes in Fed policy surrounding the COVID-19 pandemic, the unexpected inflation of 2022, and political volatility this book may require a revised edition sooner rather than later. The authors acknowledge as much, noting that the book went to print near the beginning of the pandemic. However, the principles outlined in Money and the Rule of Law are explicitly of the sort that do not waver in response to current events. Salter and Smith, along with authors like William Luther, director of the Sound Money Project at the American Institute for Economic Research, continue to apply those principles in their regular publications in academic journals and popular outlets. 

The reader comes to appreciate both the soundness of the methodology found in robust political economy, and the argument for a Fed bound by the rule of law. The book is thoroughly researched. Each chapter includes references readily pursued by the reader. I have personally assigned this book the last two semester to my Intermediate Macroeconomics students who have completed very satisfactory term papers based upon it and the references within, and I plan to use it again in coming semesters. Inflation in the last year has demonstrated that the experts at the Fed have a limited understanding of the consequences of their interventions. Now is the time to constrain them from making more errors in the future. Boettke, Salter, and Smith could not have provided the argument for a classical-liberal monetary rule of law at a more urgent time.

Nathanael Snow, Ph.D. is an assistant professor of economics at Ball State University teaching intermediate macroeconomics courses.


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Candela, Rosolino and Vincent Geloso (2021) “Economic freedom, pandemics, and robust political economy” Southern Economic Journal, Apr; 87(4): 1250–1266.

Coyne, Christopher J., and Abigail R. Hall (2021) Manufacturing Militarism: U.S. Government Propaganda in the War on Terror. Stanford, CA: Stanford University Press.

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Pennington, Mark (2010) Robust Political Economy. Cheltenham, UK: Edward Elgar.

Sowell, Thomas (2015) Basic Economics: A Common Sense Guide to the Economy, fifth edition. New York, NY: Basic Books.


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