William J. Luther
William J. Luther is an associate professor of economics at Florida Atlantic University, director of the American Institute for Economic Research’s Sound Money Project, and an adjunct scholar with the Cato Institute’s Center for Monetary and Financial Alternatives. The Social Science Research Network currently ranks him in the top five percent of business authors.
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Fifty years after the Nixon shock, it is difficult for many to imagine a dollar connected to gold. Most Americans have never used a gold-backed dollar. They do not understand how the gold standard worked. They have not considered the merits of returning to the gold standard. The gold standard, in their minds, is a relic of a bygone era. The contributions in this volume help to bridge the knowledge gap created by fifty years of fiat money.
Select Journal Articles
In The Curse of Cash, Kenneth Rogoff lists reductions in criminal activity and tax evasion among the primary benefits of eliminating cash. We maintain that, to the extent that individuals are interested in purchasing illicit goods and services or evading taxes, eliminating cash will encourage them to switch to close substitutes. Hence, governments intent on realizing the benefits cited by Rogoff would not merely need to eliminate cash. They would also need to ban alternatives. This is especially relevant given the proliferation of cryptocurrencies, which provide a fair degree of anonymity for users.
The Federal Reserve is exposed to a greater degree of political influence under its new operating regime. We survey the relevant literature and describe the Fed’s new operating regime. Then we explain how the regime change reduced de facto central bank independence. In brief, the regime change increased the appointment power of the President and improved the bargaining power of Congress. We offer some suggestions for bolstering de facto independence at the Fed.
The Federal Reserve’s Response to the COVID-19 Contraction: An Initial Appraisal (w/ Nicolas Cachanosky, Bryan Cutsinger, Thomas L. Hogan, and Alexander W. Salter)
Southern Economic Journal, 2021. [SEJ] [SSRN]
We provide an initial assessment of the Federal Reserve’s policy response to the COVID-19 contraction. We briefly review the historical episode and consider the standard textbook treatment of a pandemic on the macroeconomy. We summarize and then evaluate the Fed’s monetary and emergency lending policies through the end of 2020. We credit the Fed with promoting monetary stability while maintaining that it could have done more. We argue that the Fed could have achieved stability without employing its emergency lending facilities. Although some facilities likely helped to promote general liquidity, others were primarily intended to allocate credit, which blurs the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.
In a recent article, Yermack (2015) argues that bitcoin is not money because it functions poorly as a medium of exchange, unit of account, and store of value. We offer a more conventional view. We maintain that the standard approach classifies an item as money if and only if it functions as a commonly-accepted medium of exchange. Then, we show that the demand for bitcoin is comparable to the demand for many government-issued monies. Finally, we argue that bitcoin is money—though perhaps only over a relatively small domain at present.
We make a distinction between centralized, decentralized, and distributed payment mechanisms. A centralized payment mechanism processes a transaction using a trusted third party. A decentralized payment mechanism processes a transaction between the parties to the transaction. A distributed payment mechanism relies on the network of users to process a transaction on a shared ledger. We maintain that bitcoin is neither a centralized nor a decentralized payment mechanism. It is, instead, a distributed payment mechanism. We then consider decentralized and centralized aspects of the broader bitcoin payment space.
Current money matching models employ either random matching or endogenous matching processes, both of which oversimplify the problem. We maintain that, although most economic interactions are intentional, some randomness remains. We offer an endogenous matching model of money with random consumption preferences. Our model preserves the intentionality of economic interactions while leaving scope for chance. We identify the conditions for potential monetary and nonmonetary equilibria and compare them to those of other endogenous matching and random matching models.
What or who governs central bank decisions? Most considerations focus on motivations. Instead, we consider the extent to which specific behaviors have adaptive value in the context of central banking. From that perspective, poor decisions are not the product of poor motivations. They are, instead, a product of the poor institutions within which central bank decision makers operate.
By declaring an item legal tender or making it publicly receivable, governments might generate sufficient demand to determine the medium of exchange. How do private actors launch a new money? There are two views in the literature. The first requires offering an item with a use value to some agents that is distinct from its role as a medium of exchange. The second suggests that agents might coordinate on an intrinsically useless item. With these views in mind, I survey the logs from the original bitcoin forum, bitcoin-list. I find that early participants in the bitcoin community understood the importance of coordination and took steps to coordinate users.
We employ a monetary model with endogenous search and random consumption preferences to consider the extent to which a government can ban an alternative currency, like bitcoin. We define a ban as a policy whereby government agents refuse to accept an alternative currency and mete out punishments to private agents caught using it. After identifying monetary equilibria where an alternative currency is accepted, we then derive the conditions under which a ban might deter its use. As in earlier studies, we show that a government of sufficient size can prevent an alternative currency from circulating without relying on punishments. We also show that, given its size, a government can ban an alternative currency so long as it is willing and able to mete out sufficiently severe punishments.
On March 16, 2013, Cyprus announced that it would accept a bailout that required imposing a one-time levy on bank deposits. It has been argued that, by making traditional deposit accounts seem less secure, the bailout announcement prompted some to consider — or reconsider — using the cryptocurrency bitcoin. Relying on rank data for a subset of apps, existing studies maintain that interest in bitcoin increased following the announcement, especially in countries with troubled banks. We argue that (1) focusing on a subset of apps does not allow one to distinguish a general increase in the demand for bitcoin apps from a substitution between bitcoin apps and (2) changes in rank data are a poor predictor of changes in the number of downloads. In order to address these concerns, we collect rank data for all fifteen bitcoin apps available at the time and use an established technique to estimate an index of downloads for each country considered. We find that, while downloads of bitcoin apps increased following the announcement, the observed effect was not especially pronounced in countries thought to have had troubled banking systems at the time.
The recent proliferation of bitcoin has been a boon for users but might pose problems for governments. Indeed, some governments have already taken steps to ban or discourage the use of bitcoin. In a model with endogenous matching and random consumption preferences, we find multiple monetary equilibria including one in which bitcoin coexists with official currency. We then identify the conditions under which government transactions policy might deter the use of bitcoin. We show that such a policy becomes more difficult if some users strictly prefer bitcoin because they can avoid other users holding the official currency in the matching process.
Cryptocurrencies are digital alternatives to traditional government-issued paper monies. Given the current state of technology and skepticism regarding the future purchasing power of existing monies, why have cryptocurrencies failed to gain widespread acceptance? I offer an explanation based on network effects and switching costs. In order to articulate the problem that agents considering cryptocurrencies face, I employ a simple model developed by Dowd and Greenaway (1993). The model demonstrates that agents may fail to adopt an alternative currency when network effects and switching costs are present, even if all agents agree that the prevailing currency is inferior. The limited success of bitcoin—almost certainly the most popular cryptocurrency to date—serves to illustrate. After briefly surveying episodes of successful monetary transition, I conclude that cryptocurrencies like bitcoin are unlikely to generate widespread acceptance in the absence of either significant monetary instability or government support.
The case of the Somali shilling defies the historical view that sovereign powers (i.e., legal tender status, public receivability) are necessary to explain the acceptance of fiat money at a positive value. Following the Somali state’s collapse in 1991, irredeemable paper shillings have continued to circulate at a positive value. Acceptance under statelessness is explained by a history that made continued acceptance a focal point among self-fulfilling strategies. Our explanation is consistent with an extended Kiyotaki-Wright model of fiat money. Although sovereign power may be necessary to launch a fiat money in practice, we maintain that it is not necessary for its survival.
A peculiar monetary institution emerged during the period of interregnum in Somalia from January 1991 to August 2012. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forgeries. The exchange value of the largest denomination Somali shillings note fell from US $0.30 in 1991 to US $0.03 in 2008. However, the purchasing power eventually stabilized at the cost of producing additional notes.
|April 5, 2022||NFTs and Coase Durables||APEE Annual Meeting|
Las Vegas, NV
|May 14, 2022||TBA||HGC on Sound Money|
Great Barrington, MA
Harwood Graduate Colloquium on Sound Money
American Institute for Economic Research
Great Barrington, MA
The Harwood Graduate Colloquium on Sound Money is a four-day event intended for graduate students interested in monetary economics. It consists of a combination of interactive discussions and provocative lectures based on pre-assigned readings. Participants are given ample time to interact with each other and prominent scholars. The goal is to encourage promising graduate students to push the frontiers in their understanding, forge new research collaborations, and network with their peers and established scholars.
What Students Are Saying…
“I wanted to take a minute to say thank you for teaching me this semester. It was tough but it was an honor to be in your class. This class has elevated my thinking and perspective in the world we live in today…there is so much to learn from you.”
Money and Banking
“Prof. Luther’s lectures were engaging and effective. He knows his stuff.”
Contemporary Issues In Global Macroeconomics
“Dr. Luther is a brilliant economist. I loved his lectures and the conversation that followed them.”
Contemporary Issues In Global Macroeconomics
“I really enjoyed this course and learned a lot.”
Money and Banking