The End of Central Banking, Part I - The Objective Standard

This year marks the centenary of the law establishing the U.S. central bank, the Federal Reserve (Fed), so it’s an appropriate time to assess the role of central banking and the Fed’s long-term performance. Another reason to focus on central banking is its recent vast expansions in both paper-money creation and government debt monetization.

Although retrospectives on the Fed’s centenary may proliferate, few will address truly fundamental issues, such as: What is the purpose of central banking? Why did proponents of central banks seek to establish them, and what defects (if any) marred the systems they displaced? How have central banks performed historically? Have they fostered sound money, safe banking, and economic prosperity? If not, should central banks still exist? Such questions are rarely asked. Most people who write about the Fed presume central banking is a legitimate or necessary aspect of the economy and focus on how central banks now behave or might better behave in the future.

The broadest fact that few people grasp about central banking is that it is essentially central planning applied to the realm of money and banking. Central banks, in their essential features and functions, operate as branches of government to facilitate government spending and growth of the state. As government grows and spends more, politicians seek to avoid the electoral consequences of raising taxes and try to rely more on borrowing and printing money, policies that central banks uniquely facilitate. Although proponents and practitioners of central banking may deny this thesis and insist that central banks exist to cure “market failures”—and although most economists today resist the idea that the primary aim of central banking is to enable government spending—an examination of historic and economic facts reveals the truth.

The title of this two-part essay, “The End of Central Banking,” has a double meaning: The first pertains to the “end” in the sense of its purpose, the second to its “end” in the sense of its termination. Part I will elaborate the theme that central banking is a form of central planning—specifically, a means of funding fiscally profligate states—by explaining the essential features and functions of central banking, considering some candid claims from its practitioners, and examining its origin and evolution. Part II will examine the theory and practice of free banking based on gold; how it is consonant with the principles of constitutionally limited government; and how central banking, despite its current power, can be safely and swiftly dismantled and replaced with a free, economically sound monetary system. . . .

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1 Henry Mark Holzer, Government’s Money Monopoly: Its Origin and Scope and How to Fight It (New York: Books in Focus, 1981).

2 Paul A. Volcker, “The Role of Central Banks,” in Central Banking Issues in Emerging Market-Oriented Economies, A Symposium Sponsored by the Federal Reserve Bank of Kansas City (August 23–24, 1994).

3 Beardsley Ruml, “Taxation for Revenue is Obsolete,” American Affairs, January 1946.

4 Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” Remarks to the National Economists Club, Washington, DC, Federal Reserve, November 21, 2002, http://www

5 “No Chance of Default, U.S. Can Print Money, Says Greenspan,” Alan Greenspan, Meet the Press, NBC, August 7, 2011.

6 See Kevin Dowd, ed., The Experience of Free Banking (London: Routledge, 1992); and Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914 (London: Oxford University Press, 1995).

7 Charles A. Conant, A History of Modern Banks of Issue (New York: Putnam & Sons, 1927); Vera C. Smith, The Rationale of Central Banking and the Free Banking Alternative (London: P. S. King & Sons, 1936; Indianapolis, IN: Liberty Fund, 1990); Michiel H. De Kock, Central Banking (London: Crosby Lockwood Staples, 1953); Charles A. E. Goodhart, The Evolution of Central Banks (Cambridge, MA: MIT Press, 1988).

8 W. Marston Acres, The Bank of England From Within, 1694–1900 (London: Oxford University Press, 1931); John H. Clapham, The Bank of England: A History (London: Cambridge University Press, 1944); Craig West, Banking Reform and the Federal Reserve, 1863–1923 (Ithica, NY: Cornell University Press, 1977); Richard H. Timberlake, The Origins of Central Banking in the United States (Cambridge, MA: Harvard University Press, 1978) and “Institutional Evolution of Federal Reserve Hegemony,” Cato Journal (Winter 1986); James Livingston, Origins of the Federal Reserve System: Money, Class and Corporate Capitalism 1890–1913 (Ithica, NY: Cornell University Press, 1986); Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Columbus, OH: Ohio State University Press, 2005); Robert John H. Wood, A History of Central Banking in Great Britain and the United States (London: Cambridge University Press, 2008); Allan H. Meltzer, A History of the Federal Reserve, Vol. 1: 1913–1951 & Vol. 2: 1951–1986 (Chicago: University of Chicago Press, 2004, 2010).

9 Lawrence H. White, “The Rule of Law or the Rule of Central Bankers?” Cato Journal (Fall 2010).

10 Richard M. Salsman, “The Gold Standard: Scapegoat for the Great Depression,” The Intellectual Activist (January 1995).

11 Kurt Schuler, “The World History of Free Banking,” chap. 2 in Dowd, The Experience of Free Banking, p. 39.

12 De Kock, Central Banking, pp. 11, 24.

13 Goodhart, The Evolution of Central Banks, p. 4.

14 Goodhart, The Evolution of Central Banks, p. 5.

15 Richard M. Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, MA: American Institute for Economic Research, 1990).

16 Smith, The Rationale of Central Banking, pp. 169, 167, 146.

17 George A. Selgin and Lawrence H. White, “A Fiscal Theory of the Government’s Role in Money,” Economic Inquiry (January 1999): pp. 155, 163.

18 Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), p. 436.

19 George A. Selgin and Lawrence H. White, “Monetary Reform and the Redemption of National Bank Notes, 1863–1913,” Business History Review (Summer 1994).

20 See Alberto Giovannini and Martha de Melo, “Government Revenue from Financial Repression,” American Economic Review (September 1993); and Carmen Reinhart, “Financial Repression Back to Stay,” Bloomberg News, March 11, 2012.


22 See George A. Selgin, William D. Lastrapes, and Lawrence H. White, “Has the Fed Been a Failure?” Cato Institute, Working Paper (December 2010), at

23 See John Taylor, “The Effectiveness of Central Bank Independence Versus Policy Rules,” Stanford Institute for Economic Policy Research, SIEPR Discussion Paper No. 12-009, January 2013; Peter Boettke and Daniel J. Smith, “A Century of Accommodation: The Failed Record of Federal Reserve Independence,” GMU Working Paper in Economics No. 12-40, George Mason University, August 23, 2012.

24 Ludwig von Mises, The Theory of Money and Credit (Indianapolis, IN: Liberty Fund Classics Edition, 1980), p. 255.

25 Richard M. Salsman, Gold and Liberty (Great Barrington, MA: American Institute for Economic Research, 1995).


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