As I demonstrated in Part I of this essay (TOS, Spring 2013), the “end” or purpose of central banking is not to fix “market failures” in money and banking, as its proponents claim, but to help finance fiscally profligate statist governments that are unwilling and/or unable to raise sufficient tax revenues.1 By facilitating deficit spending and paper money creation, central banking unavoidably generates harmful economic and financial effects.

Here, in Part II, I will explain why and how we should “end”—as in terminate—central banking. Specifically, I will show that: (a) although central banking has accomplished its actual goal of funding statist fiscal regimes, it has failed at its putative aim of ensuring sound money, safe banking, and a robust but stable economy; (b) free banking and gold-based money worked well in the past because they served the needs of producers and traders in free (or relatively free) markets; (c) history is replete with instances in which reformers have helped societies shift from central banking and fiat money to freer banking and gold-based money; (d) the transition from central banking to free banking will require a substantial ideological change from support for statism to support for capitalism (i.e., free markets in general); and (e) given the proper ideological climate, it is possible to swiftly and safely dismantle today’s system of central banking and to replace it with a free banking system based on the gold standard.

My proposal for ending central banking—specifically, ending the Federal Reserve System in the United States—has the virtue of being a straightforward, logical reversal of the process by which central banking itself displaced free banking in America; and on a practical level it is also consistent with today’s more technologically advanced payment and credit systems. A freer monetary system cannot, by itself, restrain a fiscally profligate government; indeed, it is precisely the latter that has politicized our money and banking system. If a free system is to take hold again and survive, the current goals and scope of government will have to be sharply curtailed to pave the way. But, as we work to pave the way, it is worth our while to understand how a sound monetary system ultimately can be restored.

Let us look first at some important history.

The Success and Failure of Central Banking

In judging the effectiveness of an institution such as central banking, one must first grasp its main purpose. To know whether an institution “works,” we must know its aims. I have shown that the true purpose of central banking is to help finance the fiscally profligate state. But the question remains: Has central banking nevertheless worked to achieve its alleged goal of fixing “market failures” by fighting inflation, ensuring safe banking, maximizing employment, stabilizing interest rates, and preventing or mitigating financial crises?

A prominent financial historian representatively insists that central banks pursue three goals: “The first and most important is price stability or stability in the value of money,” the second is “high and sustainable economic growth” (including a “smooth . . . business cycle”), and the third is “financial stability.”2 It is easy to measure a system’s success or failure by such criteria relative to the track record of a previous and freer monetary system. Even the briefest glance at history reveals that, insofar as these are its goals, central banking has failed miserably. History also reveals that insofar as the aim of central banking is to finance fiscally profligate governments, it has succeeded quite well and thereby has undermined sound money and safe banking. . . .


1 Richard M. Salsman, “The End of Central Banking, Part I,” The Objective Standard, vol. 8, no. 1, Spring 2013, pp. 13–29.

2 Michael D. Bordo, “A Brief History of Central Banks,” Federal Reserve Bank of Cleveland, Economic Commentary, December 1, 2007.

[groups_can capability="access_html"]

3 The best account of the system is found in Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914 (New York: Oxford University Press, 1995).

4 Historical data on prices, interest rates, and production for the United States, Britain, Japan, Germany, France, Canada, and Italy are available in Michael D. Bordo, “The Gold Standard, Bretton Woods and Other Monetary Regimes: A Historical Appraisal,” Review, Federal Reserve Bank of St. Louis, March–April 1993, pp. 123–91 (see

5 George A. Selgin, William D. Lastrapes, and Lawrence H. White, “Has the Fed Been a Failure?,” Journal of Macroeconomics, vol. 34, no. 3, September 2012, pp. 569–96.

6 Although warfare, unlike welfare, is a legitimate function of governments, many have become financially profligate by fighting unjust wars or wars not in the national interest.

7 See Luis I. Jacome et al., “Central Bank Credit to the Government: What Can We Learn from International Practices?,” IMF Working Paper 12/16, January 2012; and Maxwell J. Fry, Emancipating the Banking System and Developing Markets for Government Debt (New York: Routledge, 1997).

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

9 George A. Selgin, “Central Banks as Sources of Financial Instability,” Independent Review, vol. 14, no. 4, Spring 2010, pp. 485–96.

10 Peter J. 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. In fact, all central banks are politicized: Christopher Adolph, Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality (London: Cambridge University Press, 2013).

11 “Legal tender” is money that government designates as legally valid in commercial exchanges, debt settlements, civil judgments, and revenue payments to the Treasury. Gold and silver can be legal tender, and indeed the U.S. Constitution says no other monies can be so. In contrast, any government that issues inconvertible fiat paper and declares it to be the nation’s sole legal tender establishes a fiat money monopoly.

12 Roy W. Jastram, The Golden Constant: The English and American Experience, 1560–2007. Edited and updated by Jill Leyland (Northampton, MA: Edward Elgar Publishing, 2009).

13 For more detail on the gold standard and free banking, see Lewis Lehrman and Ron Paul, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, DC: Cato Institute, 1982); Michael D. Bordo and Anna J. Schwartz, eds., A Retrospective on the Classical Gold Standard, 1821–1931 (Chicago: University of Chicago Press, 1984); George A. Selgin, The Theory of Free Banking: Money Supply Under Competitive Note Issue (Lanham, MD: Rowman & Littlefield, 1988); Lawrence H. White, Currency and Competition: Essays on Free Banking and Money (New York: New York University Press, 1989); Salsman, Breaking the Banks; Kevin Dowd, Laissez-Faire Banking (London: Routledge, 1993); Kevin Dowd, ed., The Experience of Free Banking (London: Routledge, 1992); Larry J. Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (Westport, CT: Quorum Books, 1993); and Gallarotti, The Anatomy of an International Monetary Regime.

14 For evidence of the pattern in the United States, see Richard M. Salsman, “Bankers as Scapegoats for Government-Created Crises in U.S. History,” chap. 4 in Lawrence H. White, ed., The Crisis in American Banking (New York University Press, 1993), pp. 81–118. The best examples of damaging financial reforms enacted in panic and haste amid wars or depressions include: 1) 1775 (the start of the U.S. Revolutionary War); 2) 1797 (the start of Britain’s war against France); 3) 1861 (the start of the U.S. Civil War); 4) 1914 (the start of World War I); 5) 1930–1934 (the Great Depression); and 6) 2008–2010 (financial crisis, Great Recession).

15 For more detail on historical resumptions of the gold standard after episodes of paper money, see Thomas J. Sargent, “The Ends of Four Big Inflations,” in Robert E. Hall, ed., Inflation: Causes and Effects (Chicago: University of Chicago Press, 1982), pp. 41–98; Alan Reynolds, “Gold and Economic Boom: Five Case Studies, 1792–1926,” in Barry N. Siegel, ed., Money in Crisis: The Federal Reserve, the Economy and Monetary Reform (San Francisco: Pacific Institute for Public Policy Research, 1984), pp. 249–69; and John H. Wood, Monetary Policy in Democracies: Four Resumptions and the Great Depression (Great Barrington, MA: American Institute for Economic Research, 2000).

16 Robert S. Getman, “Gold and the Founding Fathers,” The Objectivist Forum, October 1980.

17 Alexander Hamilton, Papers on Public Credit, Commerce and Finance, Samuel McKee, Jr., ed. (New York: Columbia University Press, 1934), pp. 83, 93 (emphasis in original).

18 Robert E. Wright and David J. Cowen, Financial Founding Fathers: The Men Who Made America Rich (Chicago: University of Chicago Press, 2006).

19 Richard M. Salsman, “The Historical Record of Free Banking in the U.S.,” chap. 6 in Breaking the Banks (1990), pp. 89–112.

20 Cited in Bray Hammond, “Jackson, Biddle, and the Bank of the U.S.,” Journal of Economic History, May 1947, p. 12.

21 M. J. Stephey, “A Brief History of the Bretton Woods System,” Time, October 21, 2008.

22 For an accurate, concise account, covering 1792 to the present, see Craig K. Elwell, “Brief History of the Gold Standard in the United States,” Congressional Research Service, June 23, 2011,

23 See Report of the U.S. Gold Commission, March 1982,

24 Robert D. Hershey, “Notion of Reviving Gold Standard Debated Seriously in Washington,” New York Times, September 18, 1981, p. A1.

25 See Alan Greenspan, “Can the U.S. Return to a Gold Standard?,” Wall Street Journal, September 1, 1981; Nathan Lewis, “Though It Nearly Strangled Reagan’s Revolution, Soft Money Conservatives Revive Friedman’s Monetarism,”, August 12, 2012.

26 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book IV, chap. 9 (1776).

27 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, chap. 2 (1776).

28 See Elgin Groseclose, “Time to Abolish the Fed?,” The Freeman, August 1981, pp. 451–55; Richard W. Rahn, “Time to Privatize Money?,” Heritage Foundation, Policy Review, Spring 1986, pp. 55–57; William A. Kelly Jr. et al, “Should We Sell the Fed?,” Cato Journal, Spring/Summer 1988, pp. 125–38; Richard M. Salsman, Breaking the Banks; Steve Hanke, “The Fed is a Failure, So Let’s Get Rid of It,” New York Times, August 10, 1992; Gerald P. O’Driscoll Jr., “Central Banks: Reform or Abolish?” Cato Institute, Working Paper no. 11, October 15, 2012; Ron Paul, End the Fed (New York: Grand Central Publishing, 2009); George A. Selgin, “End the Fed? A Not-So-Crazy Idea,” The Christian Science Monitor, August 3, 2009; and Lawrence H. White and James Broughel. “Is It Time To End the Federal Reserve?,” U.S. News & World Report, October 1, 2102.

29 Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, NY: Free Market Books, 1978), pp. 48–49.

30 Henry Hazlitt, “Twenty-Three-Cent Dollar: What Four Decades of Inflation Have Wrought,” Barron’s, October 6, 1975, p. 7.

31 Richard M. Salsman, Gold and Liberty (Great Barrington, MA: American Institute for Economic Research, 1990), p. 3.

32 Richard M. Salsman, “Altruism: The Moral Root of the Financial Crisis,” The Objective Standard, Vol. 4, No. 1, Spring 2009, pp. 23–41; John A. Allison, The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope (New York: McGraw-Hill Company, 2012).

33 See, for example, John Maynard Keynes, “Alternative Aims in Monetary Policy” (1923), in Essays in Persuasion (London: Macmillan, 1931); Milton Friedman, “Real and Pseudo Gold Standards,” Journal of Law and Economics (October 1961), pp. 66–79; and Milton Friedman and Anna J. Schwartz, “Has Government Any Role in Money?,” Journal of Monetary Economics (January 1986), pp. 37–62.

34 See Robert A. Mundell, “Gold Would Serve into the 21st Century,” Wall Street Journal, September 30, 1981; Arthur B. Laffer and Charles W. Kadlec, “The Point of Linking the Dollar to Gold,” Wall Street Journal, October 13, 1981; Nathan Lewis, Gold: The Once and Future Money (New York: Wiley & Co., 2007); Sean Fieler and Jeffrey Bell, “The Gold Standard: The Case for Another Look,” Wall Street Journal, May 7, 2010; Lewis Lehrman, The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies (New York: Lehrman Institute, 2011); and Nathan Lewis, “Returning to a Gold Standard System: Why and How?,”, May 10, 2012.

35 See Murray N. Rothbard, The Case For a 100 Percent Gold Dollar (Washington, DC: Libertarian Review Press, 1974); George Reisman, “The Case for a 100-percent-Reserve Gold Standard,” in Capitalism: A Treatise on Economics (Ottawa, IL: 1996), pp. 954–63; Jesus Huerta De Soto, “A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian School Perspective,” Review of Austrian Economics (1995), pp. 25–38; and Mark Skousen, Economics of a Pure Gold Standard (New York: Foundation for Economic Education, 2010).

36 Paul, End the Fed, pp. 202–3.

37 Friedrich A. Hayek, Denationalization of Money: The Argument Refined (London: Institute of Economic Affairs, 1978).

38 The most notable is Lawrence H. White. See “Free Banking as an Alternative Monetary System” and “Free Banking and the Gold Standard” in White’s book, Competition and Currency: Essays on Free Banking and Money (New York: New York University Press, 1989), and his recent article, “Making the Transition to a New Gold Standard,” Cato Journal (Spring/Summer 2012), pp. 411–21. For a consistent case, also see O’Driscoll, “Central Banks: Reform or Abolish?”.

39 For a lengthy but fascinating treatment by the world’s most consistent advocates of free banking, see George A. Selgin and Lawrence H. White, “How Would the Invisible Hand Handle Money?,” Journal of Economic Literature, December 1994, pp. 1718–49.

40 For data, see “U.S. Treasury, Monthly Statement of the Public Debt” (as of March 31, 2013):

41 For data, see “Federal Reserve Balance Sheet” (as of March 28, 2013): http://www

42 For data, see “Assets and Liabilities of U.S. Commercial Banks” (as of March 31, 2013):

43 For data, see “Household Balance Sheet, Federal Reserve Flow of Funds Accounts, Table B100 (as of 4Q2012):

44 This exercise draws upon chapter 9 in my book, Breaking the Banks (1990), “Money and Banking Reform: The Transition from Central Banking to Free Banking,” but with slight revisions and the use of current data.

45 As in historical cases of currency substitution, the government would simply designate some future date (perhaps a half year hence) by which time holders of existing (Fed) currency must exchange it (at any nearby bank) for the new (free banking) currency. Thereafter the old currency would be unusable. The Fed has estimated that more than half of its currency is held outside the United States, but this could be redeemed at foreign banks, which redeem them, in turn, at U.S. banks.

46 For historical gold data, see the World Gold Council and the U.S. Geological Survey. In recent years the fastest-growing supply of new gold has come from China, and this is predicted to persist; such a result was not anticipated by gold mining analysts a decade ago.

47 Richard M. Salsman, “A Gold-Price Rule as a Middle-Ground Path to a Genuine Gold Standard,”, May 7, 2013,

48 In April 2013 Congressman Ted Poe (R-TX) introduced a bill (H.R. 1576, the “Dollar Bill Act of 2013”) to have the Fed operate on such a gold-price rule and to refrain from manipulating interest rates.

49 For a pro-capitalist account of the legal-constitutional aspects of gold-based money versus fiat paper money, of the relative monetary powers of the three branches of U.S. government, and of those Supreme Court rulings that might have to be revised to achieve a freer monetary system, see Richard H. Timberlake, Constitutional Money: A Review of the Supreme Court’s Monetary Decisions (New York: Cambridge University Press, 2013).

50 Salsman, Breaking the Banks (1990), p. 130.


Return to Top
You have loader more free article(s) this month   |   Already a subscriber? Log in

Thank you for reading
The Objective Standard

Enjoy unlimited access to The Objective Standard for less than $5 per month
See Options
  Already a subscriber? Log in

Pin It on Pinterest