Editor's note.

• Author: Dorn, J.A.
• Position: Federal Reserve Board and monetary policy - Editorial

This special issue of the Cato Journal stems from the Cato Institute's 29th Annual Monetary Conference--Monetary Reform in the Wake of Crisis--held in Washington, D.C., November 16, 2011. At no time since the founding of the Federal Reserve nearly a century ago has it been more important to reconsider the role of monetary policy in a free society. In particular, as F. A. Hayek noted, "All those who wish to stop the drift toward increasing government control should concentrate their effort on monetary policy."

The financial crisis that began at the end of 2007 has greatly expanded the Fed's discretion, resulting in two rounds of quantitative easing, the allocation of credit, the distortion of interest rates, and the politicization of monetary policy--which has become a tool of fiscal policy. Keeping rates low to help finance government debt and to incentivize risk-taking is misguided and imprudent. Pretending that money creation can permanently lower unemployment and increase economic growth is dangerous. The stagflation of the 1970s should have been a lesson that full employment is best left to markets, not to central bankers.

Yet, the Fed has a dual mandate--to achieve price stability and maximum employment. In addition, it is expected to keep interest rates low. That is asking too much. One consequence of the Fed's policies has been to increase the size and scope of the federal government, not to increase real economic growth.

The central issue addressed in this volume is how to make the transition from the current regime of discretionary government fiat money to sound money or what Richard H. Timberlake calls "constitutional money." In particular, what types of monetary reform would help prevent future crises, limit government power, increase the range of choices open to individuals, and safeguard the long-run value of money?

The first step toward fundamental reform would be to think about the kinds of rules that could best generate money of stable value without an interventionist central bank. In thinking about 'alternative rules, one should keep in mind the admonition of James...