Central banks and their monopoly on notes issuance have been around for quite a while. The Bank of England, perhaps the oldest institution of its kind, was established at the end of the 17th century. La Banque de France was established in 1800 by Napoleon to help him, among other things, finance his military conquests. The Federal Reserve System was established in 1913 to help avoid bank runs and panics and “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes” (the latter includes striking a balance between private interests of banks and the centralized responsibility of government). The Reserve Bank of New Zealand (deemed one of the best central banks in the last twenty years) was established in 1934.
Overall, as many have argued, including Milton Friedman, central banks’ track record in the last two hundred years has been pretty abysmal. In a previous post on the Reserve Bank of NZ, I posted a graph showing the inflationary effect of fiat money in New Zealand (and there was no need for econometrics to argue the case). Repeatedly in history, the government monopolization of note issuance, as well as financial regulations, have been the sources of bad money and bad monetary systems. While central banks have done a better job in the last two decades of the 20th century (because of better incentives thanks to a greater independence from political power), the fundamental problems remain the same: they grope in the dark regarding the amount of real balances a system needs.
Today central bankers around the world decided, one more time, to make (bank) credit cheaper (see Pete’s post from this morning), as if more liquidity could solve the current problems. The fundamental issue is one of savings and real balances. Loanable funds become more abundant ultimately because of productivity increases, not because central banks create money by fiat.
How much more evidence do we need? There are now voices rising against the idea central banking (see Jim Rogers for instance), calling for the abolition of the Fed and the return to the gold standard. Austrian economists are extremely well placed to make the case, since this has been at the center of monetary theory in the Austrian tradition since at least Mises’s Theory of Money and Credit in 1912. Lawrence White and George Selgin are among the best monetary theorists alive today and they could help policy makers around the world transition to the gold (or other commodity) standard.
Austrian economists from all countries, unite! Let’s petition for the abolition of central banking before this idea destroys, one more time, our savings and our lives.