Instead of the Fed

by Jerry O’Driscoll


For the month of November, Cato Unbound features an essay by me on “The Fed at 100.” Over the course of a week, there will be comments by Larry White, Scott Sumner and Jerry Jordan. I will respond to these as appropriate.

“End the Fed” has become a political slogan. Long before that, however, there was a serious academic literature on the prospects for competitive banking. I examine that literature in my posting. One interesting aspect of that literature is that important papers on free banking came out of Federal Reserve banks in the 1980s.

I argue that “the literature on free banking demonstrates the viability of private, competitive banking without a central bank.” But we now have a system of central banking almost everywhere. The fact that the road not taken would have been a viable path does not mean that we can retrace our steps and take that path now.

I devote roughly half the posting to consideration of what it would take to end the Fed. It would be a formidable but not impossible task. It is generally acknowledged that to be viable, a system of competing currencies would need convertibility into something that is in inelastic supply. Historically that has been a commodity, and I suggest gold is as good as any (though many disagree about that). What are the prospects for a return to a commodity standard?

Central banking is historically linked to governments running deficits and needing them to be financed. That is equally true today. Central banks cannot be abolished until permanent deficits are abolished, and governments are shrunk down in size. What are the prospects for that?

I have just returned from a very important conference at the Mercatus Institute at George Mason University on “Instead of the Fed: Past and Present Alternatives to the Federal Reserve System.” As the title suggests, alternatives to central banking in the past and the future were discussed. All three discussants of my posting also participated in important roles at that conference. I was a discussant of three papers, including one by Scott Sumner. So I imagine we will be continuing our dialog at Cato Unbound.

One of the most interesting discussions was among advocates of Fed abolishment and of Fed reform. All agreed that we need better monetary policy now and into the future, regardless of our differences on the issue of free banking versus central banking. I will observe that it was encouraging that people as diverse as George Selgin, Scott Sumner, Ben McCallum and I were able to arrive at a consensus.

I invite everyone to visit Cato Unbound this month and follow the conversation.


3 thoughts on “Instead of the Fed

  1. Thanks for your kind remarks about the conference, Jerry. I’d like to suggest a qualification I would make to your statement regarding those papers on “free banking” that the Fed published during the 80s. They were in fact all about the U.S. “free banking era,” in which banks did not actually enjoy the freedom to branch and issue currency that was crucial to the success of more genuinely free banking systems such as those of Scotland and Canada. What’s more, Fed writers, and Rolnick and Weber in particular, for the most part completely ignored both the Scottish episode and work on it, and on systems like it, by Larry, Kevin Dowd, and me. There’s a story behind this, but the sad, bottom line is that there was never any serious attempt by the Fed to grapple with the workings of a genuinely unregulated banking and currency system. Fed writers did shed new light on U.S. experience, but they might have done much more had they considered what might have happened had U.S. banks, or some of them at least, ever been as free as their Scottish and Canadian counterparts.

  2. Jerry O’Driscoll’s essay “The Fed at 100” convincingly shows the growth of central banking as the sovereign’s response to a need to finance deficits incurred for luxury, warmaking, and entitlements. From this he draws the conclusion that the Fed and other central banks can’t be dispensed with until deficits are severely reduced. This pessimistic conclusion comes as bitter medicine to free banking supporters, but his argument seems sound, as does the case he makes that free banking would best be supported by a commodity standard, such as gold.

    My one reservation about “The Fed at 100” is that it leaves the reader with the impression that the future of free banking must await the ending of the Fed, which in turn will depend on government deficits becoming minimal. That seems like a recipe for putting off free banking to End Times.

    Why can’t we have free banks issuing their own commodity-based currencies during the transitional period before the minimization of government deficits has been completed and the Fed legally terminated? Wouldn’t a widespread move to commodity-backed currencies and the free banks issuing them help hasten the decline of the Fed and its fiat money?

  3. I consider Richard Schulman’s comments to be a friendly amendment. There are many legal barriers to private currency issues, and these would need to be addressed.

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