The words “money” and “constitution” are not often heard in the same sentence. Given, however, the role played today by institutions like the Federal Reserve, the European Central Bank, and the Bank of England in tackling questions that go far beyond monetary policy’s traditional parameters, more than one person has suggested that central banks effectively function as a fourth branch of government and that this fact should be given constitutional recognition.

In the ECB’s case, its powers received a type of constitutional affirmation in the Treaty on European Union. This establishes the ECB’s independence and defines its “primary objective,” according to Protocol (No 4), Chapter 2, Article 2, as “price stability.” The same article also specifies that “Without prejudice to the objective of price stability, it shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.”

That 44-word qualification has been the basis upon which the ECB has consistently engaged in activities that have little to do with price stability since 2008. No less than the ECB’s former chief economist, Jürgen Stark, has charged the ECB with pursuing a goal of “fiscal dominance,” bailing out insolvent states, and operating a de facto transfer union without the legitimate authority to do so. Germany’s Federal Constitutional Court has even found that the German government has violated Germany’s Basic Law by failing to call the ECB to account for engaging in a quasi-fiscal policy. This has led to a deep fracture between the Bundesverfassungsgericht and the European Court of Justice. At issue is the matter of whether the EU is a unitary state or a union of sovereign states. But also lurking in the background are unhappy German memories of Weimar hyperinflation.

The proper object of monetary policy, it seems, has more to do with legal and constitutional issues than we realize. This becomes less surprising once we recognize, as Peter J. Boettke, Alexander William Salter, and Daniel J. Smith state in their new book Money and the Rule of Law: Generality and Predictability in Monetary Institutions (2021) that “money is one of several foundational institutions” for “social order and civilization.” Given that constitutions express and organize the fundamental principles that predetermine the proper functions of a society’s core political and legal institutions, it is a wonder more consideration hasn’t been given to money’s place vis-à-vis constitutional order.

Reflection upon monetary policy’s institutional underpinnings became a lively topic for discussion following the 2008 Financial Crisis and Great Recession when central banks found themselves suddenly responding in real-time to a series of interrelated and unanticipated upheavals. In the aftermath, questions were raised about the adequacy of constrained discretion: the approach to monetary policy which allows more or less independent central banks some leeway in responding to economic shocks and other unanticipated developments while maintaining a strong commitment to price stability. According to Boettke, Salter, and Smith, this discretion facilitates two problems.

The first is that central banks inevitably make serious errors when exercising constrained discretion in responding to crises, and those errors store up more economic and financial problems for the future. It is impossible for them to know everything they would need to know if they were to design optimal responses to existing difficulties. Their actions subsequently generate situations whereby the official firefighters create fuel for arson by private actors, governments, and even themselves further down the line. The second problem is that monetary policymakers responding to crises often engage in unauthorized extensions of their powers. Put bluntly, they act unlawfully.

Rules, Rules, Rules

For Boettke, Salter, and Smith, the solution to these challenges is to ground money and the conduct of monetary policy explicitly in the rule of law. By rule of law, they mean three principles. The first is the axiom that general rules are equally applied to all. The second concerns predictability in the sense that the rules are “created and enforced in a non-arbitrary fashion.” A third principle is what the authors call “robustness”—whether a rule will “work well even when those subject to the rule have limited knowledge and confront opportunistic incentives.”

These three rule-of-law principles reflect liberal constitutionalism’s commitment to equal treatment of all individuals, its emphasis upon protecting all citizens’ liberty, and a concern with rendering certain rules immune from either populist pressures or privilege-seeking special interests. Boettke, Salter, and Smith also believe that it is through tightly binding monetary authorities within these rule-of-law constraints that long-term macroeconomic stability can be established.

Crucial in that regard is the setting of expectations. When individuals and groups know that the rules in place give policymakers little to no room for meaningful discretion, particular expectations are set and others are discouraged. To use a crude example: If a bank or a government knows that the monetary authority will not bail them out because it is explicitly prohibited from doing so, it’s more likely that these actors will manage their risk-taking better.

In support of the economic side of their arguments, the authors marshal a vast array of evidence that demonstrates how central banks have contributed to serious macroeconomic problems while using their discretion to fight financial fires. They also show that non-constitutional constraints like inflation-targeting have not prevented central banks from moving beyond their already often-ambiguous official remits without formal approval from legislators or the citizenry. Such restraints fail, the authors contend, because they are “pseudo rules” and thus easily worked around, modified, or ignored. Hence, the imperative of tying monetary policymakers to limitations that proceed directly from the rule of law is not just a question of restoring sound monetary policy. It is also about reestablishing a constitutional order that binds those who exercise power as much as those subject to these powers.

Searching for Meta-Rules

Boettke, Salter, and Smith associate their arguments with reflections upon monetary institutional design authored by classical liberal scholars, particularly F.A. Hayek, Milton Friedman, and James M. Buchanan. All these thinkers sought to find ways to identify core rules for monetary order and protect them from populist and special interest pressures.

Buchanan went the furthest in addressing such questions explicitly within the context of constitutional order. Much of his work in constitutional economics involved establishing the rules of the game that ought to govern economic activity. Boettke, Salter, and Smith proceed along similar lines insofar as they seek to discern “meta-rules” for money and monetary policy. By this, they mean a type of “higher law” which is “rationally chosen” and helps to “stave off the effects of anticipable pernicious consequences of monetary discretion, in favor of true monetary rules.”

As a program for systematically restoring order to the mish-mash of not-so-constrained discretionary decision-making exemplified by the Fed and the ECB, the framework offered by the authors has much to recommend it. As they say, the technical dimensions and tools of monetary policy are important. But cementing into place sound meta-rules to govern use of such tools is surely the indispensable precondition for monetary order.

Yet as the ongoing political and constitutional battles surrounding the ECB and its operations since 2008 demonstrate, it’s unclear that integrating such meta-rules into constitutional forms and structures would be enough. We also need to ask questions like, “from where do these meta-rules come?” and “from what normative source do they derive their legitimacy?” Given their particular emphasis on rule of law, another question relevant for Boettke, Salter, and Smith’s project concerns the ultimate foundations of rule of law. In the case of monetary institutions, is rule of law’s authority essentially derived from its undoubted contribution to economic liberty and prosperity? And if so, is this sufficient?

I pose these questions because many scholars of constitutional economics wrestle for the most part with these issues, I believe, inadequately. Boettke, Salter, and Smith stipulate that the “higher law” of which they speak “should not be thought of in a normative sense, as is typical in the literature on the natural law, for example.” In other places, however, they invoke the language of “individual rights” and “the common good,” and refer to “unlawful money” as impeding people’s rightful exercise of their freedom. They also specify that because “Monetary relationships are property relationships . . . property rights to goods in general are also applicable to money in particular.”

The authors thus make some appeal to concepts that have been given fairly robust content by philosophical traditions unambiguously normative in their orientation ranging from Lockean natural rights to classical natural law theory. Nor do they hesitate to link their proposals with liberal constitutionalism’s moral commitment to ending legal privilege and promoting non-arbitrary decision-making on the part of political and legal institutions.

Getting Normative

The difficulty is that these observations are scattered throughout the book and not spelled out as systematically as the authors’ critique of the present state of affairs or their outline of how alternative monetary regimes might operate. This is not unusual in texts that work in the realm, as the authors write (citing Buchanan), “[b]etween predictive science and moral philosophy.” The economic tends to win out over the normative.

But not always. Twentieth-century European ordo-liberal thinkers like Walter Eucken, Franz Böhm, and Jacques Rueff articulated criticisms of how central banks of their time conducted monetary policy that parallel some of the insights of Boettke, Salter, and Smith. These scholars, however, explained in detail the normative positions that drove their thinking about the proper constitutional and legal framework for monetary policy.

Eucken and Böhm, for instance, drew on a mixture of Kantian and natural law principles. There’s some evidence that their emphasis on these principles’ normative force contributed to the relative discipline with which Germany’s Bundesbank conducted monetary policy until its powers were subsumed into the newly-created ECB in 1998. Rueff was more eclectic in his sources. He made a point, however, of grounding his proposals for monetary order upon an innovative theory that distinguished between true or real rights (vrais droits) and false rights (faux droits). On this basis, Rueff outlined a normative and legal structure that provided clear guidance for, and strong limits upon, the actions of monetary authorities.

Whatever the merits of their arguments, what isn’t in doubt is the tightness with which such scholars integrated their normative, legal, and economic claims. Boettke, Salter, and Smith are very strong on the latter two members of this trinity but less methodical about the first. Winning the economic and legal arguments is essential for substantial reform of monetary institutions. But “Getting money right,” to use Boettke, Salter, and Smith’s phrase, also requires getting the normative arguments for sound monetary policy right and then persuading others of their rightness. Therein, I suspect, may lie the next phase of the struggle for money that is good in every sense of the word.