Designing A New Nation – Part 6 – Monetary Policy
This is the next installment in a series where I design, with your help, a small, hypothetical new nation called Ascendia, based on small government, personal liberty, and free markets. Please read parts one, two, three, four and five if you have not yet before reading this article so that you’re up to speed. Today I will lay out how Ascendia will handle its monetary policy.
The issue of monetary policy, or how a nation manages its money supply and interest rates, is a little complicated, primarily since there’s no ideal way to do it. Like talking about marriage and raising kids in the modern era, any way you can think of doing it is seriously problematic. Therefore, the goal is not to get to good or best, but simply the least bad, since all options suck.
Regarding monetary policy, there are two opposite extremes, and everyone else falls in-between these to extremes.
One extreme (at least in terms of non-communist, non-socialist economic systems) are the Keynesians. Keynesians believe that the economic health of an economy is best managed by big government or (quasi-government, like the Federal Reserve) tightly controlling how much money is in circulation. They are strong believers in having a central bank of some sort that prints money whenever the government wants, makes certain other currencies illegal, and so on.
On the opposite extreme are the Austrians. (These people have nothing to do with Austria.) These are hardcore libertarians who think government should do literally nothing to control the money supply, and it should be left completely to the free market. They are against the concept of a central bank. They believe either there should be no government currency at all (and let companies and banks print their own competing currencies) or have a currency that is 100% backed by gold, otherwise known as a gold standard. This means government can’t just print more money out of thin air whenever the hell it wants, thus maintaining a strong currency.
As I said, both of these systems are fraught with problems. The problem with a Keynesian system is that you end up with a gigantic, bloated government with massive long-term inflation and eventually, economic collapse. The problem with an Austrian system is that your economy has a permanent ceiling on its growth, being only allowed to grow when more gold is mined out of the earth. (I’m overstating that; that’s not exactly how it works mathematically, but this is a huge and complex topic and I don’t have time to go through all the details in this little article.)
Ascendia would acknowledge the weaknesses in both systems, but as always, it would err on the side of more freedom for the citizens and less government. Therefore, if the Austrians and Keynesians were on a sliding scale, with zero for Austrians and ten for Keynesians, Ascendia would be at about a two. It would be largely Austrian, but not 100% so.
Here’s what this means:
- There would be no central bank in Ascendia of any kind. Furthermore, the Enforceable Constitution would clearly state that the formation of any type of central bank or Federal Reserve would be forbidden in perpetuity, and any politicians who attempted to do so would be immediately removed from office and thrown in prison by the Constitution Enforcement Agency.
- The government would indeed coin a currency / legal tender. This would be both physical and digital (a cryptocurrency). However, there would not be any monopoly on this currency. Any group, individual, city, private company, or private bank would be more than welcome to coin their own currency (paper or digital) and the free market would be left to decide which forms of currency or currencies it preferred. The only limitation would be on the widespread usage of a foreign nation’s currency. (Ascendia basing most of its economy on Germany’s or China’s currencies would not be allowed for obvious reasons.)
- Counterfeiting of government currency would be illegal. Counterfeiting of any private currency would be the private sector’s problem and the government would stay out of that. (Though there would be court systems in place for private lawsuits; I will cover that in a future article.)
- Instead of being completely tied to gold, the government’s currency would be partially tied to gold via a formula which would allow for some level of money printing in order for faster economic growth. For example, the government could print money equivalent to the world-wide value of gold times two, or three, or five, or some other figure. I don’t know exactly what this formula would be since I don’t have the expertise to create such a thing, but Ascendia would get a very smart team of Austrian and Austrian-leaning economists to come up with the precise formulas. This way, the government can’t just print money whenever the hell it wants, but there is some wiggle room for some economic growth above and beyond the price of gold.
The result of all this would mean that Ascendia:
- Would have one of the most stable currencies on the entire planet.
- Would have extremely low inflation.
- Would have a government that was further pressured to stay reasonably small.
- Like countries such as Switzerland and Singapore, it would attract money and investors from all over the world.
Again, there are problems with the system I just described, but there are problems with all monetary systems, so again, we’re seeking least-bad here, within the framework of a libertarianish nation.
Next installment coming soon.