was elected president, former Federal Reserve Chairman
paid a visit to then-Fed Chairman
Burns brought a warning: The president-elect’s advisers, led by
wanted to replace the Fed chairman with a computer. He might have been biased, but Mr. Volcker opposed the idea that a complex monetary system should be governed by simple, mechanical rules, and the idea never caught on.
Decades later the Fed remains unnecessarily unpredictable. The central bank’s new leadership should consider ways to leverage recent technological innovations into a more predictable monetary policy. This isn’t a particularly radical idea: Economists like Milton Friedman favored the certitude that comes with preannounced rules. His “k-percent rule” called for the money supply to increase at a fixed rate each year, regardless of politics.
Technological innovations, including blockchains and smart contracts, have made Friedman’s vision even more plausible. Bitcoin, the world’s most successful digital currency, was issued on a decentralized blockchain. Bitcoin is precommitted to a certain inflation rate, and unless a significant portion of the network agrees, it won’t change. No more than 21 million bitcoins will be minted, and the inflation rate will halve approximately every four years. This precommitment is effected through the network’s rules, which have prohibitively high costs to change after the fact.
Countries interested in adopting a passive monetary policy could use bitcoin as a model. Such a policy would have some of the benefits of passive investing. Index funds save investors from the significant management fees active funds charge. The Fed and other central banks have their own fees, known as budgets. More significant is the macroeconomic cost of uncertainty. Businesses delay investment, and long-term planning becomes more difficult, with unknowns from the government.
Defenders of the status quo warn that it would be dangerous to commit the economy to one path, given uncertainty about the future. The solution: introduce a measure that allows for discretion if certain red lines are crossed. Quantitative easing, if policy makers find it appropriate, can be written in code ahead of time, allowing for purchases of specific assets that fall below predetermined price levels.
Whatever the case may be for passive monetary policy in the U.S., it is much stronger for states with a history of unstable monetary policy. Countries like Argentina and Zimbabwe should study tethering their monetary policy to a blockchain and using smart contracts to precommit to certain rules. Unlike economically more-influential nations, the flexibility of a small nation’s countercyclical monetary policy should not be a factor in making the decision to go passive.
Moving away from central banks is a nice analogue to the recent trend of taking money away from poor-performing active managers and placing it in index funds. No one can deny that many active managers can’t justify their fees—whether they’re bonuses or budgets.
Mr. Raskin is an adjunct professor of law at New York University.
Appeared in the March 30, 2018, print edition.