Editor's note.

• Author: Dorn, J.A.

When the Federal Reserve was created in 1913, its powers were strictly limited and the United States was still on the gold standard. Today the Fed has virtually unlimited power and the dollar is a pure fiat money.

A limited constitutional government calls for a rules-based, free-market monetary system, not the topsy-turvy fiat dollar that now exists under central banking. This issue of the Cato Journal will examine the case for alternatives to central banking and the reforms needed to move toward free-market money.

Discretionary central banking, like any sort of central planning, is not a panacea. Concentrating monetary power in the hands of a few individuals within a government bureaucracy, even if those individuals are well intentioned and brilliant, does not guarantee sound money. The world's most important central bank, the Federal Reserve, is not bound by any strict sort of rules, although Congress requires that it achieve maximum employment and price stability.

The failure of the Fed to prevent the Great Recession of 2009, or the Great Depression of the 1930s, or the stagflation of the late 1970s and early 1980s, raises the question, can we do better? To address drat question, the Cato Institute held its 32nd Annual Monetary Conference on November 6, 2014, with the title: "Alternatives to Central Ranking: Toward Free-Market Money." The papers from that conference appear in this issue of the Cato Journal along with articles by Peter Bernholz on the recent depegging of the Swiss franc and by Tyler Watts and Lukas Snyder on the resource costs of fiat versus commodity money.

In questioning the status quo and widening the scope of debate over monetary reform, the fundamental issue is to contrast a monetary regime that is self-regulating, spontaneous, and independent of government meddling versus one that is centralized, discretionary, politicized, and has a monopoly on fiat money. Free-market money within a trusted network of private contracts differs fundamentally from an inconvertible fiat money supplied by a discretionary central bank that has the power to create money out of thin air and to regulate banks and nonbank financial institutions.

There are many types of monetary regimes and many monetary rules. The classical gold standard was a rules-based monetary system, in which the supply of money was determined by market demand-- not by central bankers--versus today's pure discretionary government fiat money regime.

Cyber-currencies...