Abstract
Buchanan’s reflections on monetary issues have been mostly neglected, despite their great interest both per se and for a deeper understanding of his general constitutional endeavour. We will thus propose a comprehensive assessment of Buchanan’s writings on this topic, focusing in particular on the different political models that have been developed to argue in favour of constitutional constraints on the governmental power to create money and on the implications that one can draw from our author’s monetary papers for the structure and the objectives of his constitutional discourse more generally.
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Notes
Vanberg and Buchanan (1988).
Brennan and Buchanan (1980).
In the light of the recent revival of political economy, one may opt, perhaps, for a less controversial statement to the effect that, even if economists do not really believe in the government’s benevolence, they still often proffer policy advices as if they did.
The power to tax, cit., p. 159.
Bailey (1956).
Naturally, his constitutionalism would prevent Buchanan from endorsing such a claim, since fiscal rules and/or institutions are to be assessed over an extended time period.
The power to tax, cit., p. 157 (italics in original).
The power to tax, cit., pp. 149–150, as well as Sect. 13 in Brennan and Buchanan (1981).
A book-length critical discussion of the Keynesian legacy is contained in Buchanan and Wagner (1977).
For the sake of completeness, Brennan and Buchanan also mention the possibility that a well-meaning government will refrain from keeping the capital value of the money stock, deciding instead to give it back to money holders, through a gradual deflation.
Brennan and Buchanan (1985).
That the political model they are considering in the Reason of rules is different from that used in the Power to tax to justify the imposition of tax limits is explicitly acknowledged by the authors themselves. In their earlier work taxes were ‘too high’ due to the “revenue-maximizing proclivities of government, which was modeled as one player in a two-player game with taxpayers. In that analysis, there was no dilemma aspect […], and the set of questions concerning the time horizon for adjustment did not arise.” (The reason of rules, cit., p. 95, note 2)
The reason of rules, cit., p. 92.
Kydland and Prescott (1977).
Although not everyone is convinced of the relevance of the issues involved to the practice of contemporary central banking: see, for instance, the sceptical remarks from Alan Blinder’s Central banking in theory and practice quoted in Kydland and Wynne (2002). Scepticism aside, the debate on time inconsistency and the so-called inflation bias is considered by Blinder to be over and so these issues are not dealt with in the sixteen questions about monetary policy today mentioned in his (2006).
Rules rather than discretion, cit., p. 481 (italics in original).
The reason of rules, cit., p. 104.
Cf. Sect. VI of Buchanan and Lee (1982).
Dynamic inconsistency and credibility are closely related. For “a policy is credible when the private sector believes it will be carried out and when it is correspondingly in the interest of the public sector to carry out the policy once the private sector has acted on its beliefs. Equivalently, a policy is credible if it is not dynamically inconsistent.” (Fischer 1995, p. 33)
Buchanan (1962).
This is probably the best place to note two (maybe self-imposed) partial limitations of Buchanan’s analysis. Firstly, it is exclusively concerned with the problem of protecting the purchasing power of the money unit against the inflationary consequences of monetary mismanagement on the part of the government. However, there are other issues that could (or should) be dealt with in a monetary constitution—credit and saving, for instance. Secondly, it assumes that inflation is an utterly monetary matter and hence that constraining the discretionary behaviour of government will suffice to ensure price stability. On both counts, see Forte (1984).
Buchanan and Tideman (1975). Interestingly, in note 20 of this article Buchanan maintains that also his earlier essay on Predictability was “implicitly based on the contractual model”. We think, however, that such a claim is simply due to a distortion in retrospective autobiography, which creates a theoretical continuity even where there may be none. Indeed, in that paper predictability is defended on the grounds of economic efficiency and economic growth and the only reference to agreement is to the hoped-for monetary scholars’ consensus on a single criterion for judging monetary institutions.
One can either assume that rules are to last for such a long time as to ensure uncertainty about future individual positions (as postulated by Buchanan and Tullock in the Calculus of consent) or else choose the normative attitude that is behind Rawls’s ‘veil of ignorance’ in the original position.
Gold, money and the law, cit., pp. 411–412.
See note 12.
The interdependence of interests, however, may not be enough to reach consensus on general rules of a constitutional nature, because of the way many individuals really make their choices. Some scholars question the thesis that consensus at the constitutional stage may be favoured by the fact that at this stage the conflicts of interests of ordinary decision-making would fade. Their arguments are based on an ‘expressive’ view of politics, according to which individuals generally would not act instrumentally in collective decision-making. They would instead take advantage of the possibility of expressing opinions or identifying with particular causes without having to bother too much about the consequences of their stance. Since constitutional issues are even more likely to encourage expressive voting than ordinary politics, it follows that, contrary to common wisdom, they risk exacerbating the emergence of conflicts of opinions that may hinder the ‘harmonization’ of interests. As for monetary rules, one may then ask the interesting question whether and how much the principle of monetary stability could be subject to a conflict of opinions in different countries, in different times. On ‘expressive constitutionalism’ see the seminal paper by Brennan and Hamlin (2002).
Commenting on the proposal by Buchanan and Wagner of an amendment requiring the Federal Reserve Board to add to the monetary base at roughly the same rate as the rate of growth in real output, a scholar explicitly noted that “[t]he amendment in question is not just a constitutional rule but a specific constitutional rule. It thus goes beyond procedure to include end state or outcome as well—something that is, of course, not in keeping with Buchanan’s normal approach. Strictly speaking, one democratically-established rule is as good as another in the perspective of constitutional political economy, provided that it is properly pre-announced and enforced.” (Reisman 1990, p. 188, note 80 (italics in original))
Cf. Gold, money and the law, cit., pp. 413–414.
Gold, money and the law, cit., p. 417.
The quotation that follows may count as sufficient evidence: “A monetary decision maker is in a position only one stage removed from that of the directly elected politician. He will normally have been appointed to office by a politician subject to electoral testing, and he may even serve at the pleasure of the latter.” (Democracy in deficit, cit., p. 121). Even accounting for institutional differences across countries, Buchanan still believes that monetary authorities are ultimately dependent on legislatures, which can reduce the extent of their powers, in case of insuperable disagreements.
Cf. Predictability, cit., pp. 408–409. The citations that follow in the text are taken from there.
For the sake of completeness, we should add that in Monopoly in money and inflation Brennan and Buchanan seem to be more concerned about the potential disadvantages of a commodity standard. They observe that the velocity with which the supply of money will adjust to various disturbances depends on the price elasticity of the supply function for the monetary commodity: a low value for the coefficient of elasticity would hamper substantially the operation of market forces, with painful consequences for the economy in the short-run. Furthermore, a pure commodity standard is likely to degenerate into one with fractional reserves, thus creating potential profits for both the government and private banks at the expense of ordinary citizens.
An identical position is re-affirmed a few years later in Buchanan (1994), where it is claimed (p. 207): “Nor should a single currency and a single central bank be part of the whole competitive federalism scheme […] Each nation’s central bank should be allowed to issue its own currency, as it does now, but each and every citizen of Europe should be constitutionally protected in their liberty to make contracts in any currency, including the payment of taxes. Just think what discipline that would impose on the central banks.” The last sentence is especially notable.
Europe’s constitutional opportunity, cit., pp. 111–112.
Buchanan refers, in particular, to Bernholz (1986).
The relevance of constitutional strategy, cit., p. 516.
Buchanan and Tullock (1962).
The notion of the status quo, with special reference to the work of James Buchanan, is the focus of the collection of articles in the June 2004 issue of Constitutional political economy.
For a general introduction to positive constitutional economics a useful (and sympathetic) reference is Voigt (1997).
Cf. Democracy in deficit, cit., pp. 182–183. All three citations that follow in the text are taken from there.
See Sect. 4.1 above and especially note 24.
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Acknowledgements
I would like to express my gratitude to Professor Francesco Forte for his helpful comments, generous suggestions and continuous encouragement.
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D’Amico, D. Buchanan on monetary constitutions. Constit Polit Econ 18, 301–318 (2007). https://doi.org/10.1007/s10602-007-9027-z
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DOI: https://doi.org/10.1007/s10602-007-9027-z