Monetary policy and libertarianism - by Scott Sumner

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Monetary policy and libertarianism<br>More specifically, pragmatic libertarianism

Scott Sumner<br>May 01, 2026<br>∙ Paid

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At the risk of oversimplification, I see two types of libertarians:<br>Dogmatic libertarians start from the premise that voluntary private sector activities are superior to government coercion.<br>Pragmatic libertarians notice that in the vast majority of cases government intervention into the economy is counterproductive. When I came to this realization, I thought to myself; I guess that means I’m sort of a libertarian.<br>At a recent Reason magazine weekend event, I was interviewed in a session entitled Should the Fed Be Abolished? I anticipated that my answer — “No” — would not be what most participants expected and/or hoped for. The interview was conducted by Leonard Gilroy, who was kind enough to send me a tentative list of nine questions. We did not get to all of the topics, but I thought it might be useful to provide some written responses here, especially given that I can write more coherently than I can speak in front of a large crowd.<br>Leonard’s questions will be italicized, and I will only cover the topics that I believe readers would find of interest:<br>(1) Before we dive in too deep, let’s touch on some definitions first, in order to ground things for later.<br>What is monetary policy, and is that a loaded question?

What is the “monetary base” and why is it important?

What is the Federal Reserve, and what are its primary responsibilities?

The monetary base is US currency in circulation plus bank deposits at the Fed. I’ll skip the question of what the Fed does, which most of you already know. Instead, I’ll focus on the question of what is monetary policy?<br>Let’s start with what monetary policy is not—interest rates. Rates move around for all sorts of reasons, not just monetary policy. And that’s true even if the Fed is targeting rates. When the equilibrium interest rate moves up or down, the Fed is eventually forced to follow along to prevent the economy from spiraling into hyperinflation or extreme deflation. These rate adjustments don’t represent “monetary policy” in any sort of useful sense of the term. For instance, the high interest rates of the 1970s were not a “tight money” policy, rather they represented the market reaction to high inflation that had been caused by an ongoing expansionary monetary policy.<br>A better argument can be made that changes in the monetary base represent monetary policy. But there are also problems with this view. Start with the fact that hardly anyone monitors the base—they don’t seem to view it as important. Base growth stalled in late 2007 and early 2008, and yet hardly anyone saw this as “tight money”. (It was!) In many cases the Fed injects or removes money merely to accommodate changes in the public’s demand for money, and these actions often have no impact on interest rates, inflation or exchange rates.<br>In my view, the most useful way to evaluate monetary policy under a fiat money system is to focus on the specific nominal aggregate being targeted. Because the Fed’s dual mandate can be best achieved with stable nominal GDP growth, I look at NGDP (and especially market forecasts of future NGDP) as the most useful indicator of the stance of monetary policy. In this framework, above target growth in NGDP is an expansionary policy and below target growth in NGDP is a contractionary policy. During certain time periods, alternative measures such as total labor compensation can represent an even more useful policy indicator.<br>This approach does not work when there is a commodity money standard and the government’s ability to target NGDP is limited. In The Midas Paradox, I used changes in the government’s gold reserve ratio as an indicator of monetary policy during the 1920s and 1930s. For 1933-34, I used changes in the price of gold as a policy indicator.<br>Libertarians occasionally object that NGDP targeting is “central planning”. It isn’t, it is money planning. The 19th century gold standard was also money planning—a government set price of gold.<br>(2) How would you evaluate the usual libertarian concerns about fiat currency, such as that it is inherently inflationary and self-debasing, declining by over 90% in value since the early 1970s? Are these critiques fair, or would you offer a challenge?<br>Libertarians are correct that Fed policy has been far too inflationary for much of the period since the 1970s, indeed since the mid-1960s. (The US finally left gold in March 1968, when the $35 gold price peg was dropped.) I do not believe, however, that fiat money is “inherently” inflationary. Here’s the Swiss price level, which rose by less that 20% between 1995 and 2025:

That’s about 0.6%/year, which is roughly the bias that many economists see in consumer price indices. In other words, Switzerland has had 30 years of inflation that is within the margin of...