Recently, I finished my coursework in my graduate program. This means I spent the last two years reading a lot of books and articles. In light of world events over the past few years, one stood out as worth recommending to a broader group of people due to its timely message and solid fundamentals. Money and The Rule of Law, by Boettke, Salter, and Smith, delivers a compelling case for a rules based approach to monetary policy. The book leans heavily on economic giants such as F.A. Hayek, James Buchanan, and Milton Friedman to tout the theoretical merits of a rules based system. Additionally, the authors use past data to dismantle pro-discretion arguments (including the monetary response to the COVID pandemic). In addition to showing the reader the value of rules, the book also reveals the devastating implications of discretionary mistakes made by central bankers.

The two obstacles any policy maker needs to overcome, according to the authors, are the knowledge and incentive problems. The knowledge problem encapsulates the insurmountable task of collecting the right data, in its totality, discerning the right way forward based on knowledge of how people will react to the new policy, and observing how quickly the intended changes take effect. The Fed simply cannot accurately collect all of this knowledge or even know what data is really relevant. Even if Fed officials could collect all the data they wanted, it’s possible (maybe likely) they collect the wrong data, leading to the wrong conclusions.* Additionally, the Fed faces an incentive problem. While promoted as independent, time and again, the Fed’s officials prioritizes the short term to benefit those currently in power, regardless of what appears to be best for the economy. With their hands on the economy’s wheel, the Fed’s governors are incentivized to pursue their own short term political ends at the expense of the nation’s long term economic well being.** Because of these two issues, discretion leads the Fed down an ineffective path.

Instead of discretion, the authors suggest a rules based approach which forces the Fed to follow pre-determined practices based on economic inputs. While the specific policies the Fed should implement are still a significant matter of debate, I believe the case they lay out clearly demonstrates that law beats discretion every time. As believers, this should come as no surprise because we believe man is limited in his capability. It is easy to be duped by the grandiose promises of central planning, but it is essential that we remind ourselves that man is limited in his understanding and fallen in nature. This means, there’s no discretion friendly solution to the knowledge and incentive problems when dealing with imperfect people (as we always must). As we continue to navigate intense inflation along with an election year, it will be interesting to see how the Powell and the rest of the Fed’s governors handle their roles. Reading this book will help you gain a greater appreciation for the role the Fed plays in financial crises in the US and understand what choices may lead to better outcomes.

Carter’s rating: Add a used hard copy to your personal library.

*Getting It Wrong is an insightful look into how the Fed collects data. Barnett describes many of the Fed’s shortcomings in data collection and selection which help the reader gain a greater appreciation for the complexity of economic figures.

**As I have hinted at in the past, I believe that the members of Federal Reserve Boards are all political figures. They face an incentive to satisfy the elected officials in the Executive and Legislative branches who can help or hinder their career goals.