Economist James M. Buchanan – born: 1919, Nobel Prize: 1986 – should not be called upon or expected to enter the political trenches, to simplify or pretty things up for the masses or for striving politicians, nor to construct elaborately evidenced proofs for skeptics. We can be grateful when, as in his short essay “The Constitutionalization of Money”, he writes with the kind of magisterial abstraction that, if at times difficult, provides the rest of us with new, unexpected work to do on the most fundamental problems of economics and politics.
I got to Buchanan’s essay (h/t to Rex Carruthers) just after finishing Gordon Wood’s The Creation of the American Republic, and my reading of Wood forces me to resist Buchanan’s thinking in one respect. Buchanan relies explicitly on a Hobbesian – i.e., pre-American – understanding of politics as a social contract between ruler and ruled, in which the latter give up fundamental rights to the former in the interest of general security and stability. Within this framework, he locates American sovereignty in the Constitution – the law prior to and above all other laws.
This perspective is helpful to Buchanan, and may even have helped to universalize his discussion for the audience of international economists who initially received “The Constitutionalization of Money,” but Wood’s perspective may be more useful. For Wood, the “American Science of Politics” – a set of ideas that seem to have originated collectively amidst the debates and empirical tests of the Revolutionary Era rather than in any one thinker’s writings – rests on the realization that sovereignty could belong to and perpetually reside with the people as a whole rather than to or with any government, much less any instrument of government. For the Framers of the Constitution, the goal was not a social contract between “rulers and ruled.” The Constitution would be a contract between equal citizens who never divest themselves of ultimate power: In the American system, we merely delegate some of our power, in carefully delineated and delimited portions, to our servants in government.
Understanding this aspect of our system and of all “democratic republicanism” may make the eventual implementation of Buchanan’s ideas easier to envision and to justify. Putting Wood and Buchanan together, we can offer the following hypothesis: We have not yet fully applied the Framers’ logic to this most basic aspect of our economic lives. We can also say that the earlier and traditional concept of money – money tied to the value of a precious metal or in the form of precious objects – corresponds to the traditional or classical concept of political sovereignty that Hobbes innovatively explained. Yet it appears that the modern, fully abstracted concept of money – first propounded by Adam Smith in The Wealth of Nations, in 1776 (coincidentally enough) – has yet to be brought in line with the modern concept of politics. Instead, we have crept over the course of generations to a full embrace of Smith’s abstraction without bringing its concrete implementation under democratic control.
Buchanan is therefore able to situate us in an extended, uneven, failure-prone, effectively un-guided transition phase between antithetical economic concepts. In the modern concept, money is what Marx, following Smith, defined as the “universal equivalent”: It’s not a property of gold or any other particular precious material. Money is an abstraction, like words or computer code. All the same, even as an abstract accounting principle that assigns rather than possesses value, money still plays, to say the least, a central, very concrete role in most people’s lives. “Backing” money with gold or other precious metals therefore also makes intuitive sense, and would have made even more sense to people of the Founders’ era: At the time the word “dollar” was officially adopted for U.S. currency, it referred colloquially to a widely used gold Spanish coin marked with the pillars of Hercules and a scroll – the origin of the “$” symbol. As society shifted from use of such precious metals to paper bills – a problematic issue during the Revolutionary Era – it made people confident in their transactions to know that, in theory, they could exchange their intrinsically worthless paper for something tangible. For the same reason, the inability of a government to make good on this pledge was always a sign of crisis – economic and political crisis, a crisis of sovereignty. Even in normal times, the requirement to maintain sufficient reserves imposed discipline, including material limits on government spending as well as on the availability of money for private transactions.
Without such limits, or whenever we begin to step beyond them – as frequently during the days when the gold standard was still nominally in effect – we are plunged into the initially uncontrollable and unaccountable play of abstractions. Buchanan calls this condition “financial anarchy,” which among other things allows politicians, agencies, and the banking system itself – independently or together – to create monetary unpredictability, the potential at almost any time for an unexpected, unwanted aggregate re-valuing of everyone’s wealth. To illustrate how vastly deleterious for economic life the consequences can be, Buchanan points both to the Great Depression and to the Financial Crisis of 2008. Taking an even longer view, we can begin to understand the vulnerability of the American economic system, from the earliest days to the present, to panics, depressions, bank runs, and other crises and imbalances.
In short, our gradual movement away from the gold standard has been accomplished with only an incomplete, conceptually flawed, and anarchistic replacement for it at hand. By now, in a familiar historical irony, we have reacted to the regular succession of financial crises by further institutionalizing their causes. We have attacked periodic crises by instituting a permanent deeper crisis.
In a manner that, once you penetrate the abstractions, tells a familiar story, Buchanan explains how the basic processes of our banking system allow for an unjustifiable and unnecessary multi-layered leveraging of value that affects everyone’s lives – “generates changes in real values” – yet escapes sovereign control. He then sums up the “modern dilemma”:
[W]e are left with a massive resource-using, financial-banking structure that has a functional purpose quite different from that which is widely accepted. The system in existence emerged from a historical process, the characteristics of which were partially appropriate for a monetary standard defined in terms of some commodity base, but which, ultimately, make no sense under a fiat system.
What he proposes to solve this problem is a constitutional amendment empowering an independent agency to guard the value of money:
Clearly some defined process and institutional structure must be established, with genuine constitutional authority, over and beyond that of democratic majoritarian politics. Something analogous to the independent judiciary, under the Supreme Court, seems required—a monetary authority that is independent of politics, but which remains itself bound by the parameters set out in the constitution itself.
This result would be a system in which a constitutionally empowered agent in effect took the place of commodity backing. The monetary system would still benefit from the logic of the fiat system, but would also benefit from the virtues of the commodity-backed system: Orderly and predictable values constrained not by material gold or other reserves, but by the (effectively) irrevocable rulings of an agency placed beyond and before politics – that is, on the constitutional level.
The elegance of Buchanan’s solution goes back to a basic American understanding – the primacy of the Constitution. For Americans, constitutionalization is approximately as real as gold, in some respects more real because without it there is no system, and without the system, we’re in some variant of the Hobbesian state of nature. At the same time, Buchanan also shows us how, on this issue, the work of the Framers can and needs to be completed, for we are in this crucial sense still in the post-Revolutionary “Critical Period” of increasing doubt about the entire enterprise. In this light, Buchanan’s proposal for amending the Constitution seems even more fitting.
Yet we can see with Wood that the problem goes even deeper than the Constitution. Constitutionalization happens to be how the abstract American national idea concretizes itself, but it is not that concept – the Constitution is not America. As Woodrow Wilson put it, in a widely misused observation, “Justly revered as our great Constitution is, it could be stripped off and thrown aside like a garment, and the nation would still stand forth in the living vestment of flesh and sinew… ready to recreate constitutions and laws.” Extending our control over the basis of our economic system is critical, and the Constitution is arguably the best means for achieving it, but the problem with our hybrid monetary system isn’t that it escapes the Constitution: It’s that it escapes us.
Just as the Framers did not merely negate or invert Hobbes, but synthesized his insights on “classical politics” in a modern way (in a way that arguably defines modern politics), Buchanan’s proposal also connects and synthesizes the seemingly incommensurable rationalities of abstract and concrete money. But the issue isn’t improvement of the Constitution or expansion of its sovereignty. The issue is, as it’s always been in America, of the people asserting control over their own political and economic destiny.