Kurt Schuler over at the Free Banking Blog takes issue yet again with my earlier posts in which I disputed the identification increasingly made by ideological opponents of the Federal Reserve Board that central banking is a form of central planning. I don’t have much to add to my earlier posts (here, here, and here), and interested readers can go back and have a look at what I have already said on the subject. Readers may also want to have a look at Lars Chistensen’s blog in which he gives a brief summary and commentary of the debate between Kurt and me and provides links to the relevant posts as well as to a post by Bill Woolsey on his blog supporting my view. Lars actually finds Bill’s argument, quoted at length, more persuasive than mine, which is OK, because I think that Bill spells out what I wanted to say by way of a specific example illustrating the difference between central planning and government ownership of, or a legal monopoly over, an economically critical service.
But I will take this opportunity to reply to the following passage from Kurt’s post expressing surprise that, having published a book on free banking, I would now dispute that central banking is a form of
free banking central planning, a proposition, according to Kurt, crucial to free-banking thought.
the idea that central banking is a form of central planning is a crucial part of free banking thought, and because I am amazed by Glasner’s view given that he once wrote a book on free banking,
I did indeed write a book nearly 25 years ago in which I advocated free banking. The truth is that I still believe that most of what I wrote in my book was correct, but I would admit to having greater doubts than I did then about the practicality of adopting a free-banking system. The main source of my doubts is that I don’t think that we have yet come up with a model for dealing with insolvent or even illiquid banks. I suggested in my book that money market mutual funds provided a workable model for free banking, but the experience of September and October 2008 in which a run on money market mutual funds that had invested heavily in the commercial paper backed by mortgage backed securities issued by Lehman Brothers and others was a key part of the financial panic suggests to me that we need a more fundamental redesign of monetary institutions than I had imagined if we are to shift to a monetary system without a lender of last resort. I understand all the arguments about the distorted incentives that regulation and other interventions created, promoting risk taking by too-big-to-fail financial institutions, but I don’t know if there is any way of showing that a system of free banking would not entail a higher level of systemic risk than our current system.
But forget about that very big question mark in my mind about the potential instability of a free-banking system. In my book I argued that a system of indirect convertibility under a labor standard could ensure a socially optimal time path for the price level while a free-banking system would provide the public with just as much money as they wished to hold, thereby eliminating socially undesirable fluctuations in economic activity. Just because free banking under a labor standard could outperform central banking doesn’t mean that central banking is central planning; it means that central banking is a less effective way of arranging our monetary system than a possible alternative. There may be some infringements on liberty associated with central banking, with certain types of transactions being prohibited. But is every infringement on liberty the same as central planning? The identification of central banking with central planning suggests to me a certain kind of rhetorical extremism, a casual tendency not merely to disagree with or to criticize, but to vilify and to demonize, our current institutions and political leaders, that I find a tad scary. To see what I mean, have a look at the comments on Kurt’s post on the Free Banking Blog. Comrade Bernanke, first a traitor, now a commie.