Dr. Jonathan Kenigson, FRSA
The Federal Reserve eliminated banks’ fractional reserve requirements (FRR) as of March 2020 in response to the sudden, critical budgetary demands of the pandemic (Board of Governors of the Federal Reserve System, 2020). Under the new system (termed “ample reserves,” or “AR”), interest rates and the stability of the money supply are both primarily managed through interest on reserve balances (IORB) held by member banks and continuous open-market operations like bond sales. While classical liberal economists consistently sought to curtail arbitrary government control over money, they also recognized the necessity of stability, trust, and economic predictability within their respective nations’ monetary systems. The Fed’s abandonment of reserve requirements in favor of an AR regime contravenes these principles by expanding the toolkit for monetary intervention in the daily operation of financial markets and eliminating natural constraints on credit expansion.
Libertarian economist Murray Rothbard, a staunch proponent of the gold standard and decentralized banking, vehemently opposed FRR as a form of state-institutionalized fraud, arguing that it allowed banks and the Fed to create money ex nihilo, enabling unsustainable expansion of credit and a ballooning national debt (The Case Against the Fed). However, despite his opposition to fractional reserves, he would have been even more critical of a system in which banks are no longer constrained by any pre-negotiated reserve requirements whatsoever. The reliance on IORB as the primary tool for managing liquidity exacerbates the inflationary risks of politically-motivated overspending that Rothbard consistently warned against during his philosophical career (What Has Government Done to Our Money?). What of the other free-market ideologues who still favored FRR as a convenient but generally productive evil? Milton Friedman was less extreme than Rothbard in his opposition to FRR mechanisms, but strongly emphasized the need for a predictable expansion of the money supply as the Fed’s preferred tool for balancing unemployment, inflation, and bond yields (A Program for Monetary Stability). He argued that monetary authorities should target a permanent, legislatively-fixed rate of annual growth to prevent contractionary spirals and cyclical recessionary trends. This fixed-rate monetary approach would indirectly squelch unwarranted expansion of government spending funded by public bonds and not offset by general taxation.
In contrast, the Federal Reserve’s recent transition to an AR framework allows continuous discretionary liquidity injections via a vast armamentarium of open market operations, interest rate adjustments, and overnight bond repurchase agreements (Federal Reserve Bank of New York, 2021). None of these mechanisms are structured to permit public, congressional, or legislative accountability, and they are untested against real recessionary pressures. Would AR mechanisms give holders of sovereign debt the transparency necessary to create portable, bond-backed securities? Could frequent changes in policy trigger debt rating downgrades that bondholders are compelled to absorb in the form of inflation? By eliminating FRR, policymakers have further detached dollar creation from consumers’ willful participation in day-to-day market activity – a shift Friedman would have viewed as exacerbating the central monetary control that classical economists still seek to mitigate (Money Mischief).
Could cryptocurrencies be a solution to such challenges for inflation-weary countries tied to the petrodollar or reliant on yields from US sovereign debt? From an Austrian viewpoint, crypto is merely a digital private currency – something that monetary theorists have studied a great deal since the 1970s. Prominent Austrians would likely find crypto-for-dollar substitution at national economic scales to be unacceptable. For instance, Rothbard persistently insisted that despite the Fed’s meddling, money should originate from concrete, scarce commodities – something Bitcoin, Ethereum, and most other cryptocurrencies do not possess as of this writing. Another of the leading proponents of private currencies, F. Hayek, emphasized currency competition and stability, but held money issuers to be accountable for maintaining trust in their currency’s value. Cryptocurrencies, particularly Bitcoin, fail this test. There are few safeguards against liquidity shocks or disruptions to monetary velocity, leaving consumers vulnerable to vast daily price fluctuations on the decentralized cryptocurrency exchanges. There is no extant legislative mechanism to ensure that such exchanges would remain solvent in case of a depression-style banking run. Moreover, exchanges are not required to meet rigorous and publicly-available stress testing criteria.
Works Cited.
Board of Governors of the Federal Reserve System. Reserve Requirements. March 2020: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Board of Governors of the Federal Reserve System. Monetary Policy Report. July 2023: https://www.federalreserve.gov/monetarypolicy/mpr_default.htm
Federal Reserve Bank of New York. Repurchase Agreements and Monetary Policy Implementation. 2021: https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation
Friedman, Milton. A Program for Monetary Stability. Fordham University Press, 1960.
Friedman, Milton. Money Mischief: Episodes in Monetary History. Harcourt Brace Jovanovich, 1992.
Hayek, Friedrich A. Denationalisation of Money: The Argument Refined. Institute of Economic Affairs, 1978.
Hayek, Friedrich A. The Road to Serfdom. University of Chicago Press, 1944.
Rothbard, Murray N. Man, Economy, and State with Power and Market. Ludwig von Mises Institute, 2009.
Rothbard, Murray N. The Case Against the Fed. Ludwig von Mises Institute, 1994.
Rothbard, Murray N. What Has Government Done to Our Money?. Ludwig von Mises Institute, 1963.
The post None is Worse Than Less: A Brief Note on Libertarian Monetarism, Ample Reserves, and the Cryptocurrency Alternative first appeared on WB News.