Ways to reduce discretion in monetary policy

Friedman’s money growth rule, which would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, Friedman defines the stock of money as including currency outside commercial banks plus all deposits of commercial banks. He "would specify that the Reserve System should see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5" (Dollars and Deficits, p. 193). 

A gold standard is another reform aimed at reducing arbitrariness in monetary policy. Former Chairman of the Federal Reserve, Alan Greenspan, once defended gold because of its ability to act as a restraint on government.

"The idea behind a gold standard," Reed observes, "is to remove from the hands of politicians or their political appointees the discretion of determining a nation's supply of money". Under a gold standard, individuals have a legal right to redeem the notes they hold for gold from the central bank’s vaults. As a result, the central bank must have reference to the amount of physical gold before changing the money supply. By contrast, under the current prevailing fiat paper standard, monetary authorities have complete discretion: they can inflate or contract the money supply at will.

Another means of eliminating discretionary power in monetary policy is to legalise free banking, a system where private banks are permitted to issue their own notes. Since free banking does away with the need for a central bank (there is no ‘lender of last resort’), monetary policy is denationalised and decentralised away from state control, removing the ability of a few individuals sitting on a monetary policy board to control a nation’s money. Under a regime of free banking, commercial banks are lightly regulated and are treated the same as any other business, subject only to the general company law.