rules versus discretion

Posts Tagged 'rules versus discretion'

Larry White on the Gold Standard and Me

A little over three months ago on a brutally hot day in Washington DC, I gave a talk about a not yet completed paper at the Mercatus Center Conference on Monetary Rules for a Post-Crisis World. The title of my paper was (and still is) “Rules versus Discretion Historically Contemplated.” I hope to post a draft of the paper soon on SSRN.

One of the attendees at the conference was Larry White who started his graduate training at UCLA just after I had left. When I wrote a post about my talk, Larry responded with a post of his own in which he took issue with some of what I had to say about the gold standard, which I described as the first formal attempt at a legislated monetary rule. Actually, in my talk and my paper, my intention was not as much to criticize the gold standard as it was to criticize the idea, which originated after the gold standard had already been adopted in England, of imposing a fixed numerical rule in addition to the gold standard to control the quantity of banknotes or the total stock of money. The fixed mechanical rule was imposed by an act of Parliament, the Bank Charter Act of 1844. The rule, intended to avoid financial crises such as those experienced in 1825 and 1836, actually led to further crises in 1847, 1857 and 1866 and the latter crises were quelled only after the British government suspended those provisions of the Act preventing the Bank of England from increasing the quantity of banknotes in circulation. So my first point was that the fixed quantitative rule made the gold standard less stable than it would otherwise have been.

My second point was that, in the depths of the Great Depression, a fixed rule freezing the nominal quantity of money was proposed as an alternative rule to the gold standard. It was this rule that one of its originators, Henry Simons, had in mind when he introduced his famous distinction between rules and discretion. Simons had many other reasons for opposing the gold standard, but he introduced the famous rules-discretion dichotomy as a way of convincing those supporters of the gold standard who considered it a necessary bulwark against comprehensive government control over the economy to recognize that his fixed quantity rule would be a far more effective barrier than the gold standard against arbitrary government meddling and intervention in the private sector, because the gold standard, far from constraining the conduct of central banks, granted them broad discretionary authority. The gold standard was an ineffective rule, because it specified only the target pursued by the monetary authority, but not the means of achieving the target. In Simons view, giving the monetary authority to exercise discretion over the instruments used to achieve its target granted the monetary authority far too much discretion for independent unconstrained decision making.

My third point was that Henry Simons himself recognized that the strict quantity rule that he would have liked to introduce could only be made operational effectively if the entire financial system were radically restructured, an outcome that he reluctantly concluded was unattainable. However, his student Milton Friedman convinced himself that a variant of the Simons rule could actually be implemented quite easily, and he therefore argued over the course of almost his entire career that opponents of discretion ought to favor the quantity rule that he favored instead of continuing to support a restoration of the gold standard. However, Friedman was badly mistaken in assuming that his modified quantity rule eliminated discretion in the manner that Simons had wanted, because his quantity rule was defined in terms of a magnitude, the total money stock in the hands of the public, which was a target, not, as he insisted, an instrument, the quantity of money held by the public being dependent on choices made by the public, not just on choices made by the monetary authority.

So my criticism of quantity rules can be read as at least a partial defense of the gold standard against the attacks of those who criticized the gold standard for being insufficiently rigorous in controlling the conduct of central banks.

Let me now respond to some of Larry’s specific comments and criticisms of my post.

[Glasner] suggests that perhaps the earliest monetary rule, in the general sense of a binding pre-commitment for a money issuer, can be seen in the redemption obligations attached to banknotes. The obligation was contractual: A typical banknote pledged that the bank “will pay the bearer on demand” in specie. . . . He rightly remarks that “convertibility was not originally undertaken as a policy rule; it was undertaken simply as a business expedient” without which the public would not have accepted demand deposits or banknotes.

I wouldn’t characterize the contract in quite the way Glasner does, however, as a “monetary rule to govern the operation of a monetary system.” In a system with many banks of issue, the redemption contract on any one bank’s notes was a commitment from that bank to the holders of those notes only, without anyone intending it as a device to govern the operation of the entire system. The commitment that governs a single bank ipso facto governs an entire monetary system only when that single bank is a central bank, the only bank allowed to issue currency and the repository of the gold reserves of ordinary commercial banks.

It’s hard to write a short description of a system that covers all possible permutations in the system. While I think Larry is correct in noting the difference between the commitment made by any single bank to convert – on demand — its obligations into gold and the legal commitment imposed on an entire system to maintain convertibility into gold, the historical process was rather complicated, because both silver and gold coins circulating in Britain. So the historical fact that British banks were making their obligations convertible into gold was the result of prior decisions that had been made about the legal exchange rate between gold and silver coins, decisions which overvalued gold and undervalued silver, causing full bodied silver coins to disappear from circulation. Given a monetary framework shaped by the legal gold/silver parity established by the British mint, it was inevitable that British banks operating within that framework would make their banknotes convertible into gold not silver.

Under a gold standard with competitive plural note-issuers (a free banking system) holding their own reserves, by contrast, the operation of the monetary system is governed by impersonal market forces rather than by any single agent. This is an important distinction between the properties of a gold standard with free banking and the properties of a gold standard managed by a central bank. The distinction is especially important when it comes to judging whether historical monetary crises and depressions can be accurately described as instances where “the gold standard failed” or instead where “central bank management of the monetary system failed.”

I agree that introducing a central bank into the picture creates the possibility that the actions of the central bank will have a destabilizing effect. But that does not necessarily mean that the actions of the central bank could not also have a stabilizing effect compared to how a pure free-banking system would operate under a gold standard.

As the author of Free Banking and Monetary Reform, Glasner of course knows the distinction well. So I am not here telling him anything he doesn’t know. I am only alerting readers to keep the distinction in mind when they hear or read “the gold standard” being blamed for financial instability. I wish that Glasner had made it more explicit that he is talking about a system run by the Bank of England, not the more automatic type of gold standard with free banking.

But in my book, I did acknowledge that there inherent instabilities associated with a gold standard. That’s why I proposed a system that would aim at stabilizing the average wage level. Almost thirty years on, I have to admit to having my doubts whether that would be the right target to aim for. And those doubts make me more skeptical than I once was about adopting any rigid monetary rule. When it comes to monetary rules, I fear that the best is the enemy of the good.

Glasner highlights the British Parliament’s legislative decision “to restore the convertibility of banknotes issued by the Bank of England into a fixed weight of gold” after a decades-long suspension that began during the Napoleonic wars. He comments:

However, the widely held expectations that the restoration of convertibility of banknotes issued by the Bank of England into gold would produce a stable monetary regime and a stable economy were quickly disappointed, financial crises and depressions occurring in 1825 and again in 1836.

Left unexplained is why the expectations were disappointed, why the monetary regime remained unstable. A reader who hasn’t read Glasner’s other blog entries on the gold standard might think that he is blaming the gold standard as such.

Actually I didn’t mean to blame anyone for the crises of 1825 and 1836. All I meant to do was a) blame the Currency School for agitating for a strict quantitative rule governing the total quantity of banknotes in circulation to be imposed on top of the gold standard, b) point out that the rule that was enacted when Parliament passed the Bank Charter Act of 1844 failed to prevent subsequent crises in 1847, 1857 and 1866, and c) that the crises ended only after the provisions of the Bank Charter Act limiting the issue of banknotes by the Bank of England had been suspended.

My own view is that, because the monopoly Bank of England’s monopoly was not broken up, even with convertibility acting as a long-run constraint, the Bank had the power to create cyclical monetary instability and occasionally did so by (unintentionally) over-issuing and then having to contract suddenly as gold flowed out of its vault — as happened in 1825 and again in 1836. Because the London note-issue was not decentralized, the Bank of England did not experience prompt loss of reserves to rival banks (adverse clearings) as soon as it over-issued. Regulation via the price-specie-flow mechanism (external drain) allowed over-issue to persist longer and grow larger. Correction came only with a delay, and came more harshly than continuous intra-London correction through adverse clearings would have. Bank of England mistakes boggled the entire financial system. It was central bank errors and not the gold standard that disrupted monetary stability after 1821.

Here, I think, we do arrive at a basic theoretical disagreement, because I don’t accept that the price-specie-flow mechanism played any significant role in the international adjustment process. National price levels under the gold standard were positively correlated to a high degree, not negatively correlated, as implied by the price-specie-flow mechanism. Moreover, the Bank Charter Act imposed a fixed quantitative limit on the note issue of all British banks and the Bank of England in particular, so the overissue of banknotes by the Bank of England could not have been the cause of the post-1844 financial crises. If there was excessive credit expansion, it was happening through deposit creation by a great number of competing deposit-creating banks, not the overissue of banknotes by the Bank of England.

This hypothesis about the source of England’s cyclical instability is far from original with me. It was offered during the 1821-1850 period by a number of writers. Some, like Robert Torrens, were members of the Currency School and offered the Currency Principle as a remedy. Others, like James William Gilbart, are better classified as members of the Free Banking School because they argued that competition and adverse clearings would effectively constrain the Bank of England once rival note issuers were allowed in London. Although they offered different remedies, these writers shared the judgment that the Bank of England had over-issued, stimulating an unsustainable boom, then was eventually forced by gold reserve losses to reverse course, instituting a credit crunch. Because Glasner elides the distinction between free banking and central banking in his talk and blog post, he naturally omits the third side in the Currency School-Banking School-Free Banking School debate.

And my view is that Free Bankers like Larry White overestimate the importance of note issue in a banking system in which deposits were rapidly overtaking banknotes as the primary means by which banks extended credit. As Henry Simons, himself, recognized this shift from banknotes to bank deposits was itself stimulated, at least in part, by the Bank Charter Act, which made the extension of credit via banknotes prohibitively costly relative to expansion by deposit creation.

Later in his blog post, Glasner fairly summarizes how a gold standard works when a central bank does not subvert or over-ride its automatic operation:

Given the convertibility commitment, the actual quantity of the monetary instrument that is issued is whatever quantity the public wishes to hold.

But he then immediately remarks:

That, at any rate, was the theory of the gold standard. There were — and are – at least two basic problems with that theory. First, making the value of money equal to the value of gold does not imply that the value of money will be stable unless the value of gold is stable, and there is no necessary reason why the value of gold should be stable. Second, the behavior of a banking system may be such that the banking system will itself destabilize the value of gold, e.g., in periods of distress when the public loses confidence in the solvency of banks and banks simultaneously increase their demands for gold. The resulting increase in the monetary demand for gold drives up the value of gold, triggering a vicious cycle in which the attempt by each to increase his own liquidity impairs the solvency of all.

These two purported “basic problems” prompt me to make two sets of comments:

1 While it is true that the purchasing power of gold was not perfectly stable under the classical gold standard, perfection is not the relevant benchmark. The purchasing power of money was more stable under the classical gold standard than it has been under fiat money standards since the Second World War. Average inflation rates were closer to zero, and the price level was more predictable at medium to long horizons. Whatever Glasner may have meant by “necessary reason,” there certainly is a theoretical reason for this performance: the economics of gold mining make the purchasing power of gold (ppg) mean-reverting in the face of monetary demand and supply shocks. An unusually high ppg encourages additional gold mining, until the ppg declines to the normal long-run value determined by the flow supply and demand for gold. An unusually low ppg discourages mining, until the normal long-run ppg is restored. It is true that permanent changes in the gold mining cost conditions can have a permanent impact on the long-run level of the ppg, but empirically such shocks were smaller than the money supply variations that central banks have produced.

2 The behavior of the banking system is indeed critically important for short-run stability. Instability wasn’t a problem in all countries, so we need to ask why some banking systems were unstable or panic-prone, while others were stable. The US banking system was panic prone in the late 19^th century while the Canadian system was not. The English system was panic-prone while the Scottish system was not. The behavioral differences were not random or mere facts of nature, but grew directly from differences in the legal restrictions constraining the banks. The Canadian and Scottish systems, unlike the US and English systems, allowed their banks to adequately diversify, and to respond to peak currency demands, thus allowed banks to be more solvent and more liquid, and thus avoided loss of confidence in the banks. The problem in the US and England was not the gold standard, or a flaw in “the theory of the gold standard,” but ill-conceived legal restrictions that weakened the banking systems.

Larry makes two good points, but I doubt that they are very important in practice. The problem with the value of gold is that there is a very long time lag before the adjustment in the rate of output of new gold will cause the value of gold to revert back to its normal level. The annual output of gold is only about 3 percent of the total stock of gold. If the monetary demand for gold is large relative to the total stock and that demand is unstable, the swing in the overall demand for gold can easily dominate the small resulting change in the annual rate of output. So I do not have much confidence that the mean-reversion characteristic of the purchasing power of gold to be of much help in the short or even the medium term. I also agree with Larry that the Canadian and Scottish banking systems exhibited a lot more stability than the neighboring US and English banking systems. That is an important point, but I don’t think it is decisive. It’s true that there were no bank failures in Canada in the Great Depression. But the absence of bank failures, while certainly a great benefit, did not prevent Canada from suffering a downturn of about the same depth and duration as the US did between 1929 and 1933. The main cause of the Great Depression was the deflation caused by the appreciation of the value of gold. The deflation caused bank failures when banks were small and unstable and did not cause bank failures when banks were large and diversified. But the deflation was still wreaking havoc on the rest of the economy even though banks weren’t failing.

Cluelessness about Strategy, Tactics and Discretion

Published May 5, 2015 Ben Bernanke , Henry Simons , John Taylor , Milton Friedman , Ronald Dworkin 16 Comments
Tags: gold standard, Paul Volcker, rules versus discretion, Taylor rule

In his op-ed in the weekend Wall Street Journal, John Taylor restates his confused opposition to what Ben Bernanke calls the policy of constrained discretion followed by the Federal Reserve during his tenure at the Fed, as vice-chairman under Alan Greenspan from 2003 to 2005 and as Chairman from 2005 to 2013. Taylor has been arguing for the Fed to adopt what he calls the “rules-based monetary policy” supposedly practiced by the Fed while Paul Volcker was chairman (at least from 1981 onwards) and for most of Alan Greenspan’s tenure until 2003 when, according to Taylor, the Fed abandoned the “rules-based monetary rule” that it had followed since 1981. In a recent post, I explained why Taylor’s description of Fed policy under Volcker was historically inaccurate and why his critique of recent Fed policy is both historically inaccurate and conceptually incoherent.

Taylor denies that his steady refrain calling for a “rules-based policy” (i.e., the implementation of some version of his beloved Taylor Rule) is intended “to chain the Fed to an algebraic formula;” he just thinks that the Fed needs “an explicit strategy for setting the instruments” of monetary policy. Now I agree that one ought not to set a policy goal without a strategy for achieving the goal, but Taylor is saying that he wants to go far beyond a strategy for achieving a policy goal; he wants a strategy for setting instruments of monetary policy, which seems like an obvious confusion between strategy and tactics, ends and means.

Instruments are the means by which a policy is implemented. Setting a policy goal can be considered a strategic decision; setting a policy instrument a tactical decision. But Taylor is saying that the Fed should have a strategy for setting the instruments with which it implements its strategic policy. (OED, “instrument – 1. A thing used in or for performing an action: a means. . . . 5. A tool, an implement, esp. one used for delicate or scientific work.”) This is very confused.

Let’s be very specific. The Fed, for better or for worse – I think for worse — has made a strategic decision to set a 2% inflation target. Taylor does not say whether he supports the 2% target; his criticism is that the Fed is not setting the instrument – the Fed Funds rate – that it uses to hit the 2% target in accordance with the Taylor rule. He regards the failure to set the Fed Funds rate in accordance with the Taylor rule as a departure from a rules-based policy. But the Fed has continually undershot its 2% inflation target for the past three years. So the question naturally arises: if the Fed had raised the Fed Funds rate to the level prescribed by the Taylor rule, would the Fed have succeeded in hitting its inflation target? If Taylor thinks that a higher Fed Funds rate than has prevailed since 2012 would have led to higher inflation than we experienced, then there is something very wrong with the Taylor rule, because, under the Taylor rule, the Fed Funds rate is positively related to the difference between the actual inflation rate and the target rate. If a Fed Funds rate higher than the rate set for the past three years would have led, as the Taylor rule implies, to lower inflation than we experienced, following the Taylor rule would have meant disregarding the Fed’s own inflation target. How is that consistent with a rules-based policy?

It is worth noting that the practice of defining a rule in terms of a policy instrument rather than in terms of a policy goal did not originate with John Taylor; it goes back to Milton Friedman who somehow convinced a generation of monetary economists that the optimal policy for the Fed would be to target the rate of growth of the money supply at a k-percent annual rate. I have devoted other posts to explaining the absurdity of Friedman’s rule, but the point that I want to emphasize now is that Friedman, for complicated reasons which I think (but am not sure) that I understand, convinced himself that (classical) liberal principles require that governments and government agencies exercise their powers only in accordance with explicit and general rules that preclude or minimize the exercise of discretion by the relevant authorities.

Friedman’s confusions about his k-percent rule were deep and comprehensive, as a quick perusal of Friedman’s chapter 3 in Capitalism and Freedom, “The Control of Money,” amply demonstrates. In practice, the historical gold standard was a mixture of gold coins and privately issued banknotes and deposits as well as government banknotes that did not function particularly well, requiring frequent and significant government intervention. Unlike, a pure gold currency in which, given the high cost of extracting gold from the ground, the quantity of gold money would change only gradually, a mixed system of gold coin and banknotes and deposits was subject to large and destabilizing fluctuations in quantity. So, in Friedman’s estimation, the liberal solution was to design a monetary system such that the quantity of money would expand at a slow and steady rate, providing the best of all possible worlds: the stability of a pure gold standard and the minimal resource cost of a paper currency. In making this argument, as I have shown in an earlier post, Friedman displayed a basic misunderstanding of what constituted the gold standard as it was historically practiced, especially during its heyday from about 1880 to the outbreak of World War I, believing that the crucial characteristic of the gold standard was the limitation that it imposed on the quantity of money, when in fact the key characteristic of the gold standard is that it forces the value of money – regardless of its material content — to be equal to the value of a specified quantity of gold. (This misunderstanding – the focus on control of the quantity of money as the key task of monetary policy — led to Friedman’s policy instrumentalism – i.e., setting a policy rule in terms of the quantity of money.)

Because Friedman wanted to convince his friends in the Mont Pelerin Society (his egregious paper “Real and Pseudo Gold Standards” was originally presented at a meeting of the Mont Pelerin Society), who largely favored the gold standard, that (classical) liberal principles did not necessarily entail restoration of the gold standard, he emphasized a distinction between what he called the objectives of monetary policy and the instruments of monetary policy. In fact, in the classical discussion of the issue by Friedman’s teacher at Chicago, Henry Simons, in an essay called “Rules versus Authorities in Monetary Policy,” Simons also tried to formulate a rule that would be entirely automatic, operating insofar as possible in a mechanical fashion, even considering the option of stabilizing the quantity of money. But Simons correctly understood that any operational definition of money is necessarily arbitrary, meaning that there will always be a bright line between what is money under the definition and what is not money, even though the practical difference between what is on one side of the line and what is on the other will be slight. Thus, the existence of near-moneys would make control of any monetary aggregate a futile exercise. Simons therefore defined a monetary rule in terms of an objective of monetary policy: stabilizing the price level. Friedman did not want to settle for such a rule, because he understood that stabilizing the price level has its own ambiguities, there being many ways to measure the price level as well as theoretical problems in constructing index numbers (the composition and weights assigned to components of the index being subject to constant change) that make any price index inexact. Given Friedman’s objective — demonstrating that there is a preferable alternative to the gold standard evaluated in terms of (classical) liberal principles – a price-level rule lacked the automatism that Friedman felt was necessary to trump the gold standard as a monetary rule.

Friedman therefore made his case for a monetary rule in terms of the quantity of money, ignoring Simons powerful arguments against trying to control the quantity of money, stating the rule in general terms and treating the selection of an operational definition of money as a mere detail. Here is how Friedman put it:

If a rule is to be legislated, what rule should it be? The rule that has most frequently been suggested by people of a generally liberal persuasion is a price level rule; namely, a legislative directive to the monetary authorities that they maintain a stable price level. I think this is the wrong kind of a rule [my emphasis]. It is the wrong kind of a rule because it is in terms of objectives that the monetary authorities do not have the clear and direct power to achieve by their own actions. It consequently raises the problem of dispersing responsibilities and leaving the authorities too much leeway.

As an aside, I note that Friedman provided no explanation of why such a rule would disperse responsibilities. Who besides the monetary authority did Friedman think would have responsibility for controlling the price level under such a rule? Whether such a rule would give the monetary authorities “too much leeway” is of course an entirely different question.

There is unquestionably a close connection between monetary actions and the price level. But the connection is not so close, so invariable, or so direct that the objective of achieving a stable price level is an appropriate guide to the day-to-day activities of the authorities. (p. 53)

Friedman continues:

In the present state of our knowledge, it seems to me desirable to state the rule in terms of the behavior of the stock of money. My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, I would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks. I would specify that the Reserve System shall see to it [Friedman’s being really specific there, isn’t he?] that the total stock of money so defined rises month by month, and indeed, so far as possible day by day, at an annual rate of X per cent, where X is some number between 3 and 5. (p. 54)

Friedman, of course, deliberately ignored, or, more likely, simply did not understand, that the quantity of deposits created by the banking system, under whatever definition, is no more under the control of the Fed than the price level. So the whole premise of Friedman’s money supply rule – that it was formulated in terms of an instrument under the immediate control of the monetary authority — was based on the fallacy that quantity of money is an instrument that the monetary authority is able to control at will.

I therefore note, as a further aside, that in his latest Wall Street Journal op-ed, Taylor responded to Bernanke’s observation that the Taylor rule becomes inoperative when the rule implies an interest-rate target below zero. Taylor disagrees:

The zero bound is not a new problem. Policy rule design research took that into account decades ago. The default was to move to a stable money growth regime not to massive asset purchases.

Taylor may regard the stable money growth regime as an acceptable default rule when the Taylor rule is sidelined at the zero lower bound. But if so, he is caught in a trap of his own making, because, whether he admits it or not, the quantity of money, unlike the Fed Funds rate, is not an instrument under the direct control of the Fed. If Taylor rejects an inflation target as a monetary rule, because it grants too much discretion to the monetary authority, then he must also reject a stable money growth rule, because it allows at least as much discretion as does an inflation target. Indeed, if the past 35 years have shown us anything it is that the Fed has much more control over the price level and the rate of inflation than it has over the quantity of money, however defined.

This post is already too long, but I think that it’s important to say something about discretion, which was such a bugaboo for Friedman, and remains one for Taylor. But the concept of discretion is not as simple as it is often made out to be, especially by Friedman and Taylor, and if you are careful to pay attention to what the word means in ordinary usage, you will see that discretion does not necessarily, or usually, refer to an unchecked authority to act as one pleases. Rather it suggests that a certain authority to make a decision is being granted to a person or an official, but the decision is to be made in light of certain criteria or principles that, while not fully explicit, still inform and constrain the decision.

The best analysis of what is meant by discretion that I know of is by Ronald Dworkin in his classic essay “Is Law a System of Rules?” Dworkin discusses the meaning of discretion in the context of a judge deciding a “hard case,” a case in which conflicting rules of law seem to be applicable, or a case in which none of the relevant rules seems to fit the facts of the case. Such a judge is said to exercise discretion, because his decision is not straightforwardly determined by the existing set of legal rules. Legal positivists, against whom Dworkin was arguing, would say that the judge is able, and called upon, to exercise his discretion in deciding the case, meaning, that by deciding the case, the judge is simply imposing his will. It is something like the positivist view that underlies Friedman’s intolerance for discretion.

Countering the positivist view, Dworkin considers the example of a sergeant ordered by his lieutenant to take his five most experienced soldiers on patrol, and reflects on how to interpret an observer’s statement about the orders: “the orders left the sergeant a great deal of discretion.” It is clear that, in carrying out his orders, the sergeant is called upon to exercise his judgment, because he is not given a metric for measuring the experience of his soldiers. But that does not mean that when he chooses five soldiers to go on patrol, he is engaging in an exercise of will. The decision can be carried out with good judgment or with bad judgment, but it is an exercise of judgment, not will, just as a judge, in deciding a hard case, is exercising his judgment, on a more sophisticated level to be sure than the sergeant choosing soldiers, not just indulging his preferences.

If the Fed is committed to an inflation target, then, by choosing a setting for its instrumental target, the Fed Funds rate, the Fed is exercising judgment in light of its policy goals. That exercise of judgment in pursuit of a policy goal is very different from the arbitrary behavior of the Fed in the 1970s when its decisions were taken with no clear price-level or inflation target and with no clear responsibility for hitting the target.

Ben Bernanke has described the monetary regime in which the Fed’s decisions are governed by an explicit inflation target and a subordinate commitment to full employment as one of “constrained discretion.” When using this term, Taylor always encloses it in quotations markets, apparently to suggest that the term is an oxymoron. But that is yet another mistake; “constrained discretion” is no oxymoron. Indeed, it is a pleonasm, the exercise of discretion usually being understood to mean not an unconstrained exercise of will, but an exercise of judgment in the light of relevant goals, policies, and principles.

PS I apologize for not having responded to comments recently. I will try to catch up later this week.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner

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