Why do free
bankers believe that central banks should be abolished and that banks should be
free to issue competitive currency?
1. According to Carl Menger and free bankers, money has
evolved organically over time. Gradually,
human societies adopted precious commodities such as gold and silver as their
medium of exchange or money. In this
Mengerian story of the evolution of money, there is no role for government - “money is not an invention of the state. It is not the product of a legislative act”
(Carl Menger, “On the Origin of Money”)
2. Free
bankers argue that the reason governments establish central banks is financial
self-interest. The early central banks
(Bank of England and Banque de France) were clearly set up for fiscal reasons
as they had
to invest most of their capital in government bonds and provide cheap finance
whenever required. According to free
bankers, this is the only rationale for central banks. The mainstream view on central banks is that
they exist to stabilise the banking and financial system.
3. Free bankers argue that central banks with a monopoly
issue of the currency results in unstable banking systems. The free banking position is that
banking panics are a product of legal restrictions on currency issue and on the
banking system. In the absence of these
restrictions, the invisible hand of market forces would produce a panic-free
banking system. In addition, the
presence of lenders of last resort and deposit insurance also has a tendency to
destabilise the banking system.
4. Free bankers argue that central banks with a monopoly
issue of the currency results in inflation.
Such an outcome would not occur in a free banking system where banks
issue a competitive currency fully redeemable for gold. According to Selgin and White (1994), this redemption of competitively-issued currency for a precious
commodity ensures that the cost of any over-issue of liabilities is internalised
by an errant bank, and thus banks have an incentive to issue only the optimum
quantity of liabilities, with the result that there is no inflation. Ultimately, the price level in such a system
will be determined by the market for gold.
According to free bankers, as demand shifts in the gold market are met
entirely by adjustments in quantity and not the purchasing power of gold, a
gold standard monetary system will result in a relatively stable price level in
the long run.
Some further reading:
