The moral obligation of monetary policy

Sound money advocates frequently invoke moral arguments.

Some refer to Deuteronomy 25:15-16, where Jews were instructed to have “honest weights and measures” because “the Lord detests anyone who … deals dishonestly.” Some mention Juan de Mariana’s assessment of debasement as an “infamous systemic robbery.” Some recall Murray Rothbard’s view that the government “is supposed to apprehend counterfeiters and duly break up and punish their operations” but, instead, the “government itself turns counterfeiter.” For such advocates, moral reflection provides the primary case for sound money.

I usually prefer to make economic arguments for sound money. Although my consequentialist case is, of course, a moral argument in its own right, it isn’t couched in terms of rights and wrongs. And it certainly doesn’t pull one’s heartstrings. It is a cold calculation. If my consequentialist case were compatible with the deontological, rights-based case other sound money advocates put forward, I’d be in good shape. But it’s not.

I don’t want a fixed money supply. Rather, the money supply should be flexible to offset changes in money demand. I don’t want a fixed real value of money. Rather, purchasing power should vary with changes in productivity growth. So, am I left without a rights-based moral case? I don’t think so.

In fact, I think the monetary authority has a moral obligation to set reasonable (i.e. achievable) expectations and then do everything in its power to meet those expectations. In the context of a nominal income level target, for example, the monetary authority should state, at the outset, that nominal income will equal 100 at the end of year 1, 102 at the end of year 2, 104.04 at the end of year 3, … and so on. [I’ve chosen a 2 percent growth rate. But the optimal rate is up for debate.] It would then buy and sell assets to fulfill its promise. And, indeed, it might even need to establish a futures market to fulfill its moral obligation of doing “everything in its power”. [Note that the execution of this particular rule would also be consistent with my consequentialist case.] Will mistakes will be made? Sure.

But a genuine commitment to righting wrongs—aiming for the pre-stated level in the next period—is, in my mind, sufficient to call such a rule morally sound. Why do I think it is morally right for the monetary authority to set and meet expectations and morally wrong for the monetary authority to do anything else—and not just a prudent or appropriate or desirable thing to do? I’m an economist, not an ethicist. But such a view satisfies my moral intuitions. Individuals plan ahead, coordinating their actions with others to the extent possible.

Should I start working or go to college? Should I get married now or later or never? How much should I save? Which production process is most appropriate? A monetary authority that fails to set and meet expectations undermines the plans and coordination of individuals—and for no good reason! Sure, businesses often undermine the plans of rival businesses. But the result is usually a better product for consumers (or the same product at a lower price). Similarly, suitors usually undermine the plans of rival suitors. But the result is usually a more appropriate match in the marriage market.

I could list more examples, but the point is this: it isn’t merely the undermining of plans that rubs me the wrong way—it is the senselessness of it. A friend who regularly let the air out of my tires so that I couldn’t get to work on time or tied my shoelaces in knots so that I’d trip and fall on my face would not be my friend for long. I don’t like it when people undermine my plans. And I suspect others don’t like it when I undermine theirs.

So we don’t do unto others what we’d prefer they not do unto us. Sure, we might all come together and agree that some acts of undermining will be accepted when the result is a better, more prosperous society. But senseless undermining will not be tolerated.

When the monetary authority fools people into thinking inflation will be lower than it turns out to be, individuals produce more than they would if they had not been fooled. When it fools people into thinking inflation will be higher than it turns out to be, individuals produce less than they would if they had not been fooled. In both cases, the monetary authority undermines our plans. And for no good reason. My moral intuition says that’s wrong.

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