Looking for Alternatives to Government Fiat Money?

iat money, alternatives, james dorn, george selgin, john taylor
Cover of Monetary Alternatives, by James Dorn

fiat money, alternatives, james dorn, george selgin, john taylorThe Cato Institute recently released Monetary Alternatives: Rethinking Government Fiat Money, a collection of essays 30 years in the making. As George Selgin explains in the foreword,

The complacency wrought by the Great Moderation, not to mention the limited interest in fundamental monetary reform before then, resulted in a dearth of serious inquiries into potentially superior arrangements….Cato kept the subject alive, offering a safe haven, in the shape of its Annual Monetary Conference, for the minority of experts that continued to stress the need for fundamental monetary reform. Although fundamental reform has been a consistent theme of Cato’s monetary conferences, those conferences have never been dominated by one approach to reform. The articles in this book present a variety of ideas for improving the monetary regime — including proposals for a formal “monetary constitution,” various monetary rules, competing currencies, and establishing a new gold standard.

In sum, Monetary Alternatives explores fundamental and controversial ideas that would move our monetary system and economy beyond repeated crises to sustainable stability and prosperity. The contributors to the volume energetically question the status quo and provide compelling arguments for moving to a monetary system based on freedom and the rule of law.

A limited constitutional government calls for a rules-based, free-market monetary system, not the topsy-turvy fiat dollar that now exists under central banking. When the Federal Reserve was created in 1913, its powers were strictly limited and the United States was still on the gold standard. Today the Fed has virtually unlimited power and the dollar is a pure fiat money.

Central banking, like any sort of central planning, is not a panacea.  Concentrating monetary power in the hands of a few individuals within a government bureaucracy, even if those individuals are well intentioned and well educated, does not guarantee sound money. The world’s most important central bank, the Federal Reserve, is not bound by any strict rules, although Congress requires that it achieve maximum employment and price stability. The failure of the Fed to prevent the Great Recession of 2009, the stagflation of the late 1970s and early 1980s, and the Great Depression of the 1930s, raises the question, can we do better?

In questioning the status quo and widening the scope of debate over monetary reform, the fundamental issue is to contrast a monetary regime that is self-regulating, spontaneous, and independent of government meddling versus one that is centralized, discretionary, politicized, and has a monopoly on fiat money. Free-market money within a trusted network of private contracts differs fundamentally from an inconvertible fiat money supplied by a discretionary central bank that has the power to create money out of thin air and to regulate both banks and nonbank financial institutions.

There are many types of monetary regimes and many monetary rules. The classical gold standard was a rules-based monetary system, in which the supply of money was determined by market demand — not by central bankers. Cryptocurrencies, like bitcoin, offer the possibility of a private non-commodity monetary base and the potential to realize F. A. Hayek’s vision of competitive free-market currencies. Ongoing experimentation and technological advances may pave the way for the end of central banking — or at least the emergence of new parallel currencies.

In making the case for monetary reform and thinking about rules versus discretion in the conduct of monetary policy, it is important to take a constitutional perspective. As early as 1988, James M. Buchanan argued, at an international monetary conference hosted by the Progress Foundation in Lugano, Switzerland:

The dollar has absolutely no basis in any commodity base, no convertibility. What we have now is a monetary authority [the Fed] that essentially has a monopoly on the issue of fiat money, with no guidelines that amount to anything; an authority that never would have been legislatively approved, that never would have been constitutionally approved, on any kind of rational calculus [“Comment by Dr. Buchanan,” Economic Education Bulletin 28, no. 6: 32–35].

In 1980, just after Ronald Reagan’s election, Buchanan recommended that a presidential commission be established to discuss the Fed’s legitimacy. There was some support within the Reagan camp, but Arthur Burns, a former chairman of the Federal Reserve Board, nixed it. As Buchanan explained at the Lugano conference, Burns “would not have anything to do with any proposal that would challenge the authority of the central banking structure.”

Buchanan’s aim was “to get a dialogue going . . . about the basic fundamental rules of the game, the constitutional structure.”  There is, he said, “a moral obligation to think that we can improve things.” That is the spirit of this volume and Cato’s recently established Center for Monetary and Financial Alternatives.

This year marks Cato’s 40th anniversary and the 35th anniversary of the Annual Monetary Conference, making it an appropriate time to bring out this collection of articles devoted to rethinking government fiat money and to offer alternatives consistent with limited government, the rule of law, and free markets.


Contributors to Monetary Alternatives include: Claudio Borio, Jeffrey Lacker, John Allison, Bennett McCallum, James Buchanan, George Selgin, Peter Bernholz, Charles Plosser, Leland Yeager, John Taylor, Scott Sumner, James Dorn, Edwin Vieira, Lawrence White, Richard Timberlake, Roland Vaubel, and Kevin Dowd.

  • Mattyoung

    OK. Bought the book. My very first investment in monetary theory. Now reading.

    • Mattyoung

      Now I have read it.
      One point not mentioned was that we are already an on line transaction system. Crypto trading already applies in the Mastercharge, Visa already use encrypted transactions to avoid double spending. So, clearly crypto technology is where we are headefd, with or without central banking.
      Currently, on line trading results in high speed snooping, and regulations limit the size of the price snooping bots. Hence crypto systems have to eliminate that unfair advantage, and that means robo traders and fair access to the trade book. Once you have fair access to the trade book and robo trading, you have duration risk. Bots know when things happen up front and will time hedge.

      Simply avoiding the glitches of the current system leads you to an automated currency layer, 'no humans allowed', all has to be no arbitrage with verifiable currency issue processes that can be risk priced. Central banking is stuck, automation is forced upon it.

  • The fact that people and countries live through debts that have never been known in the human history until recently (i.e. 100 years) should raise more than questions about the current mechanism that does not work other than for a handful of people.
    How smart can a group of people be when so many others live an unknown future that does not bring jobs, incomes, securities, healthcare etc.?
    The entire system of value requires changes starting from resources as water, electricity, internet, food, clothing etc., knowledge in science, technology etc. Everything that has been made so far was for humans to benefit. Technology has a max potential if and when the system will be created to all.

  • I’m pleased to see the book “Monetary Alternatives” presents “a variety
    of ideas for improving the monetary regime”. When the authors have firmed that
    up into some sort of coherent program, I shall study them with interest.

    Re the “the topsy-turvy fiat dollar that now exists under central
    banking” I have doubts as to whether putting more power into the hands of
    private banks solves many problems. The 2007/8 crisis was sparked off by
    irresponsible private bank lending. Since that time, private banks have had to
    pay $300billion in fines and out of court settlements, which makes them far and
    away the biggest criminal organisation in the country, if one goes by the size
    of fines and out of court settlements. Seems to me we might as well put Al
    Capone in charge of enforcing alcoholic liquor regulations.

    Re the alleged failures of central banks to deal with recessions, simply
    pointing to central bank failures since WWII does not prove much. The important
    question is whether things have improved since the days when central banks did
    little to iron out economic fluctuations. To judge by the chart linked to
    below, it looks like things have improved slightly since the 1800s when central
    banks didn’t do much about such fluctuations, with the obvious exception of the
    1930s. But perhaps the 1930s can be written off to experience: i.e. central
    banks and governments have a much better idea now as to what to do about
    recessions than they did in the 1930s. Unfortunately dealing with recessions is
    still thwarted by anti-stimulus forces: e.g. Rogoff, Reinhart, the IMF and
    OECD. Talk about ignoramuses in high places!


  • Hannibal Smith

    It doesn't help all that much when people that don't know what they're talking about are in this field muddying up the waters with ideological and/or conspiracy mumbo jumbo. The Fed is bound by the limitations of The Federal Reserve Act and it has a triple mandate not double.

    • w nieder

      Speaking of historical events, Mr Smith, are you not
      aware that governmental units have a repeated record
      of metastasizing, until they are unrecognizable?

      The "bound of limitations" has lead to a decade of
      FedZero, destroying the middle class.

    • George Selgin

      I find this comment very puzzling, Mr. Smith. The authors of the paper's in Jim's book hardly qualify as "people who don;t know what they're talking t about." And to what "conspiracy mumbo jumbo" are you referring? Or are you merely supposing the book contains such, without having actually looked at its content? Having no patience with conspiracy theory myself (or with ideological "muddying" of things, for that matter), I think I might have noticed faults such as those your describe

      As for the Fed's mandate, it's description as a "dual" one is standard fare, both inside and outside the Fed. Your pedantic claim to the contrary doesn't exactly enhance the credibility of your other opinions.

      Finally, those "limitations" of the FRA: to any observer of the Fed's actions and expansion over the course of the last decade, it must appear evident that, whatever they consist of, they don't seem to be particularly effective!

      • Hannibal Smith

        No, I was referring to the author of the post repeating some of the usual tall tales. I would hope the authors featured in the book have much more sense!

        Anyone who says that the Fed has a triple mandate is merely making a "pedantic claim" just goes to prove what I said originally: so-called "experts" have no idea WTF they are talking about. But my core point here is if such "experts" cannot be bothered studying and learning actual political-economic history and reading actual statutory legislation and implementing regulations, why should they be paid any attention to??? It doesn't bolster their credibility one iota to come off as ignorant and also have the audacity to propose reforms — especially from a layman's perspective (and this is the year of anti-elitism). While it's not my personal vocation to become a careerist "expert" in this field, I am distressed at the ideological joke the whole monetary policy field has become. Too much noise and nearly all of the noise is make believe. How can anyone even begin to have a rational conversation when hardly anyone is on factual ground? Exactly how is that supposed to work after the next crash and burn when we need a new monetary system again? It's not encouraging at all.

        Case in Point: If you think the Fed has "radically" deviated from its original mission, you obviously missed the fact that it originally had the power to buy corporate bonds to directly affect employment levels. THAT is radical, both by today's standards and yesteryear's. Yet, that part of the triple mandate was neutered relatively shortly thereafter by Congress forcing the Fed to monetize WWI spending. So isn't it just stupidly silly and dumb nowadays to rote repeat that the Fed has a mandate to "maximize employment" when it no longer even has the tool? So this is what ignorance does… perpetuates into a hydra-headed monster with no connection to reality. The more someone wants to blame a central bank for nearly every perceived ill and then some, the more you can safely conclude that they're ignorant of operational reality and more into ideological bias pigeonholing. Because if they were truly informed, they wouldn't risk saying such ignorant mumbo jumbo in the first place. Yet when you got millions of groupies all believing in the same faux thing, no one hold's them accountable except cranky people like me.

        As far as limitations go, well, the various "gold standards" didn't impose any lasting limitations either. So what do we have that is effectively binding other than the rule of law? Cryptocurrencies are great, but they have many flaws and none are anywhere near towards replacing the need for rule of law yet.

        BTW, I really enjoyed your series on the private Canadian monetary system. That's the level of caliber the "experts" need to be learning about the Fed (past and present) instead of fairy tales.