My previous posts have been fairly positive towards the idea of a monetary constitution: a binding rule on monetary policy makers that these policy makers cannot change. A monetary constitution is particularly appealing for those who desire monetary affairs to be brought under the rule of law. But there is one problem with monetary constitutions that should impel us to examine them more critically.
A monetary constitution—like all constitutions—runs into a quandary with respect to enforcement. Someone must enforce the rule on the monetary authority, or else it is not binding. Who will be the enforcing authority? And what if it is not in their interests to enforce the rule?
Quis custodiet ipsos custodies?
Either it is in the monetary authority’s interests to follow the rule proscribed by the monetary constitution, or it is not. In the case of the former, the monetary constitution is redundant. In the case of the latter, it is ineffective. Lysander Spooner knew his subject well when cautioning against constitutional worship.
What then is left for proponents of lawful money? I would argue that one of the above positions, that incentive-compatible constitutions are redundant, is reached too hastily. Constitutions can be important, not because they bind, but because they coordinate. There are many monetary rules that, if they were followed, could improve the lawfulness and economically stabilizing effects of money. Which should we pick? Economics can help us narrow the potential list, but it is unlikely that a single, all-around best will leap out at us. We need some way of coordinating around an equilibrium with an economically and politically viable rule; a monetary constitution may very well help.
Given the difficulties with constitutional enforcement, the monetary constitution around which we coordinate ought to be self-enforcing. Economics can help us here, too, by showing us precisely which proposals provide agents the right incentives and information to uphold the proposal. Ultimately any durable and effective monetary constitution must be able to cope with the host of incentive and information problems that market and political actors confront on a regular basis.