There does seem to be a lot of confusion (even in libertarian circles) about monetary policy.
There are two points of view, on monetary policy, that libertarians might favour. The better known school of thought (at least better known to the media and other such) is the ‘Monetarist’ school of thought that holds that government should increase the money supply in line with increases in economic output in order to keep the rate of inflation at zero. And the ‘Austrian’ school of thought that holds that government should not increase the money supply at all.
The Monetarist school is most closely associated (in modern times) with Milton Friedman – although the situation is complicated by the fact that Dr Friedman (in recent years) has come out against a government being allowed to increase the money supply in line with the output of general goods – on the grounds that government can not be trusted with this power and that therefore the ‘monetary base’ (the notes, coins and other government produced money) should be ‘frozen’ – i.e. not increased.
The ‘Austrian’ school of thought is divided between those (such as F.A. Hayek) who have argued that money need not be linked to any particular commodity (hence Hayek’s bringing back of the 1920’s idea that money might be based on a ‘basket’ of different commodities held by banks in a sort of ‘index money’), or at least that private institutions who issued paper money (or credit notes) need not be forced to actually have the exact amount of the commodity they claimed was backing their notes. And the ‘hard money’ people who have argued that a bank (or other institution) that issues money should base it on one commodity and have enough of that commodity in its vaults to cover all its notes.
Actually the debate within the Austrian school has little political importance – as even the ‘hard money’ people (Ludwig Von Mises, Murray Rothbard and so on) formally agreed that a bank (or other private institution) did not have to base its notes on a commodity or have to back all its notes with this commodity – as long as it told people what it was doing. A private institution that did not base its notes on a commodity or did not have enough of that commodity to back its notes would only be guilty of fraud if it implied that it did.
The real matter of dispute was what would happen to institutions that issued unbacked paper money – with the hard money people arguing that such institutions would eventually go bust (or convince the government to bail them out).
These seemingly obscure matters of theory do matter. For example when a libertarian says that the government is increasing the money supply ‘too much’ he is talking as a Monetarist (whether he knows it or not) – as an Austrian school man (of whatever faction) would hold that government had no business being involved in increasing the money supply at all.
For the record I am Austrian school man – and of the ‘hard money’ faction. Any book choice I recommended might well be influenced by these facts – so I will stop here.
Paul Marks
