Central Banking and Central Planning Once Again

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.

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17 Responses to “Central Banking and Central Planning Once Again”


  1. 1 Lorenzo from Oz October 23, 2011 at 11:02 pm

    I would now dispute that central banking is a form of free banking Not quite what you meant, I suspect.

  2. 2 W. Peden October 24, 2011 at 4:09 am

    Agreed. I also would prefer free banking to central banking. However, I would also prefer to have slightly less thin & pale skin (non-metaphorical senses) yet I don’t regard these features of my body as “central planning”.

  3. 3 W. Peden October 24, 2011 at 4:10 am

    By the way, have you read Tim Congdon’s “Central Banking in a Free Society”?

  4. 4 gabe October 24, 2011 at 9:04 am

    So you agree that govenment sponsored monopoly of bankers(enforced with threats of violence by definition)…is what we have and you agree this is technically central planning…but you feel bad calling it this because that techincally makes Ben Bernanke a communist. When this is pointed out you find it to be scary. So to protect your feelings you will just disagree.

  5. 5 gabe October 24, 2011 at 9:06 am

    The Vatican wants a worldwide monopoly of central bankers now! I guess it is a consensus then, all the most powerful economists and religions agree that more empowerment of the illuminati is needed.

  6. 6 Lars Christensen October 24, 2011 at 11:04 am

    David, I was really convinced that I would have disagreed with you on this issue, but it very fast became clear that even though I share Kurt’s libertarian leanings I could not be convinced by the ideological arguments. If central banking is central planning then all government production is central planning. That obviously is nonsense.

    However, I would also say that we can learn a lot by studying the problems of central planning when we look at the actual practice of a number of central banks. I believe that both the Fed and the ECB have left their core business and is now trying to micromanage (parts) of the international capital markets. Thats is highly problematic.

  7. 7 Will October 24, 2011 at 2:14 pm

    It used to be that “socialism” meant state ownership and operation of some large proportion of enterprises. In those days, mixed-economy types like me could honestly say that we were not socialists and did not desire socialism. However, the word has been defined down rapidly over the last several years that it now includes apparently all social insurance and regulations. The same has happened to “central planning,” which is why we get these silly semantic arguments.

    Sure, central banking *can* be considered central planning, but if CP is defined that broadly, the gold standard would also be a kind of central planning (a price control), and the legislation governing any sort of workable free banking system would probably also be open to the charge. If we are defining it so broadly, it ceases to have a useful meaning.

  8. 8 Becky Hargrove October 24, 2011 at 2:19 pm

    I have a much greater appreciation now for the name of your blog. Perhaps the intense spotlight can come off of central banking a bit, when it finally becomes easier to actualize wealth creation at local levels.

  9. 9 Floccina October 24, 2011 at 6:07 pm

    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.

    In free banking how could a bank be illiquidity? Couldn’t it just print more money? I think that left to its own in a free banking system things would evolve to the point where a bank’s money would backed in only bank assets. Banks would be liquidated if their money fell below some par. Their money would be like preferred stock or very senior bonds.

  10. 10 David Glasner October 25, 2011 at 8:13 am

    Lorenzo, Thanks for the catch, I have revised and updated.

    W. Peden, Nicely put. No I haven’t, but I will try to get hold of it. Thanks for the clip.

    Gabe, Did I say that? I don’t know what “technically central planning” means. What scares me is that people feel the need to accuse someone they disagree with of being evil. I disagree with Bernanke; I think he’s done a really lousy job as Fed Chairman, but I think he’s a good guy, and I’ld love to have him as my next door neighbor.

    Lars, I think that you summed it up pretty well.

    Will, Central banking may share some characteristics with central planning, but we normally don’t say that two things are the same just because they share certain characteristics. Advocates of free banking and other opponents of the Fed are simply free riding on the arguments of Mises and Hayek against central planning by invoking their authority against central banking when neither Mises nor Hayek had the slightest intention of implicating central banking in their argument against central planning.

    Becky, Glad that it’s all clear to you now.

    Floccina, You are assuming that under free banking, banks could create their own units of account and issue currency in unlimited quantities in terms of those units. That is what Hayek argued in Denationalization of Money. In my book, I showed that he was wrong; a free bank without the benefit of some legal privilege could not create a new unit account but could only create money by making it convertible into an outside asset not under its control. Or, at least, so I argued.

  11. 11 Benjamin Cole October 25, 2011 at 2:50 pm

    Oh jeez. You know what? The world is not a liberal utopia, not a libertarian utopia, not a classic economist’s utopia, not Rick Perry’s utopia.

    It is what it is. Man is not only a rational animal, he is a social animal.

    We can have plenty of robust economic growth, and plenty of real innovation and commercial freedom, with central banking. And central banking, with the authority of state-managed institutions and gravitas, may provide the security that ordinary people (including myself) need.

    Maybe we can do the bitcoin thing someday. For now, can we just get to confident and aggressive, transparent NGDP targeting?

    BTW, there was a time when hundreds of state-chartered banks issued their own currency in the USA. It was something of a monetary gong-show, though it may have stimulated real growth, as so much paper currency was accepted as having real value.

    I say we invite all the offshore drug lords to live in the USA, and bring the estimated $800 billion in cash they have with them. Give them amnesty and mansions.

  12. 12 Will October 25, 2011 at 5:13 pm

    David said,

    “Advocates of free banking and other opponents of the Fed are simply free riding on the arguments of Mises and Hayek against central planning”

    Absolutely. The authority of Hayek, in particular, is used to back all sorts of arguments that Hayek probably would not have endorsed. The “End the Fed” people also have a shameful habit of misrepresenting the views of Milton Friedman on the matter. To be fair, though, I think that all three of these guys made it rather easy to do this with their libertarian posturing, which is all that the non-econ tends to know of them.

  13. 13 David Glasner October 25, 2011 at 8:37 pm

    Benjamin, I guess we all need a cause to give meaning to our lives. Libertarianism is probably not the worst choice that one could make.

    Will, Of the three, Hayek was by far the most sensible, though he allowed himself to get a bit carried away in his old age by his enthusiasm for free banking, which was not entirely wrong, but not entirely right either.

  14. 14 Lorenzo from Oz October 26, 2011 at 1:47 am

    David: my pleasure. To repeat a comment I made over at Lars Christensen’s blog, Nick Rowe has demonstrated that it is deflationists who are the real command-economists–under their approach, the central bank ultimately ends up owning everything. :)

    An excellent horrible example of financial market central planning is the way the Japanese Ministry of Finance “managed” the Japanese financial system–quite disastrously. Another vindication of the economic calculation critique.

    But also an indication of how much ordinary central banking is not central planning.

  15. 15 Kurt Schuler October 26, 2011 at 10:16 pm

    David, in my post on the Free Banking blog, I explained how central banking involves not just “some infringements on liberty,” but extensive infringements whose effects reach throughout the economy. I also explained the similarity between such infringements and those that theoreticians and practitioners have considered essential to central planning. There was nothing casual, rhetorically extreme, villifying, or demonizing about my argument, and it is unworthy of you to imply such sentiments about people who simply disagree with you.

  16. 16 David Glasner October 27, 2011 at 5:14 am

    Kurt, You are right of course, and I apologize and beg your pardon. I will just add that I was not thinking of you when I wrote those words, but, as I indicated, some of the comments on your post that made comments about Bernanke that I thought were offensive. But I should not have made a general comment that could be construed as applying to everyone that believes central banking is a form of central planning.


  1. 1 Guest blog: Central banking – between planning and rules « The Market Monetarist Trackback on October 25, 2011 at 11:52 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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