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.