Today Sam Gregg’s article ‘Whither Central Banking?’ appeared in the blog of the Whitherspoon Institute, Public Discourse.  In light of Germany Chancellor Angela Merkel’s criticism of central banking Gregg takes a thoughtful analysis on improving central banking to help aid our recovery from the financial crisis we currently face.

Gregg addresses an important political question that must be addressed when determining the roles of central banks:

The bigger political question, however, is the place of central banks in democratic political orders. Insulating central banks from excessive political influence reflects recognition of the truth that even in a democracy there are many public-policy decisions that should not be made by legislative or popular votes. Most democracies, for example, embody constitutional limits on the ability of governments and legislatures to interfere with the judiciary’s operations. This is usually derived from awareness that the common good normally requires some separation of powers in order to prevent excessive centralization of power.

Another problem of central banks, argued by Gregg is:

The problem is that when it comes to the economy, governments have legitimate reasons for being concerned about and involved in the development of economic policy. This inevitably raises questions about how to maintain the autonomy of central banks and what ought to constitute the content of that autonomy. Governments committed to pursuing populist and socialist policies have no qualms about dramatically limiting or even abolishing such autonomy.

Gregg does not only address the problems, but he also suggests a solution.  Read more of Gregg’s essay at Public Discourse.


  • http://www.reenchantment.net Ken

    A couple of weeks ago, William Bennett hosted a conversation on his early morning talk show with James Allison of BB&T. Mr. Allison is a clear thinker and his bank has just announced that it is paying back the money it was provided by the federal government. In the interview Mr. Allison voiced his opinion that we should not have a central bank. I agree but how we get there is a BIG question. It was a big question for Allison too.

    After all, Barney Frank and Franlin Raines and Roger Mudd’s little boy — all players in the Fannie and Freddie debacle — are all walking around with smiles on their faces. Geitner gave up $400K a year to work at Treasury yet scoffs at executive pay at companies that actually produce a product.

    Sharp has announced a new LCD plant and investors are scrambling to get a piece of the profits but unless Ray Bradbury’s “screen parlours” are legislated there are only so many tvs to sell and like the housing bubble this too will pass. Do we then have a bailout based on everyone’s right to a tv just as we did with the oversold “everyone’s right to a home?”

    The 1913 central bank law was aimed at flattening out the peaks and valleys — the vagaries — of an economy. But ebb and flood are a feature of nature and the adage of “not screwing with mother nature” comes to mind.

    Merkel’s brave act of warning off central banking may have been due to upcoming elections in Germany but it also reminds me of that scene in an old movie when the drunken husband longing for yet another pint rushes around the kitchen in a rage, opening up cupboards in his search for the hidden tin full of money that his dutiful, haggard but wise wife has ratted away. Merkel’s and that woman’s plea to the monster is, “what about the children?”

    That movie is playing at “theaters” around the world.

  • Roger McKinney

    The independence of the Fed is less important than its understanding of monetary policy. The Fed continues to follow the outdated and faile “Real Bills Doctrine.” That ideology, and not independence, is the real problem with the fed.

  • Clare Krishan

    “now is as good a time as any to rethink the practices and institution of central banking”

    If a bank is merely a business enterprise, under a liberal system of free trade — where they provide a service of fiduciary safekeeping of deposits of savers and mediate financial transactions between partners in commercial exchanges — why are they privileged to print money ex nihilo and act as “central planner” of the private wealth of the citizens?

    Acton has never really grappled with this profound inconsistency. What other commodity in traded by aggregate “policy” and not individual decisions of marginal utility? A central depot for milk? Oops, no of course not, fractional reserve wouldn’t work too well with that commodity right? Babies fed diluted formula would die of malnutrion, as in China… Well, think about it, its no different with money – the corruption of “banking practices and institution of central banking” has permitted an obscene immoral transfer of wealth from those who intrepreneurial genius created the wealth from production based on material resources, to those who simply skim off the cream in the financial spigot (our economy is unsustainable on a 40% market share in financial chicanery, we need to be “making” “things” of superior value at lower prices not shafting savers of their hard-earned capital.

    Price fixing went out of fashion a long time ago, why is it still fashionable where money is concerned? The purchasing power of the dollar has been decimated under less than a century of Fed “policy” so “price stability” or inflation targets” can’t be all they’re cracked up to be…

    Angela Merkel is a great lady, I lived and worked over a decade in Germany and prudence is a virtue practiced not merely preached!

  • Clare Krishan

    If we were to grant you the (dubious) principle that monetary policy is a concern of govt., consider the Bank of Japan as being further along the curve of our predicament with “centrally planned” capital, as they consider …

    … abolishing cash

    http://www.lewrockwell.com/blog/lewrw/archives/027797.html#more-27797

    to help implement their policy of NEGATIVE interest rates… is this the kind of “religion-&-liberty” we seek to emulate? The buddhist nirvana of self-annihiliation?

    “one should never believe that central banksters and politicians won’t take a broken system and make it worse.”

    Consider that while Diocletian’s persecutions of Christians may have ingrained on our memory’s the capacity for evil at the imperial level, he’s better to know to historians as the guy who took Rome off the gold standard… choosing to finance his deficits with copper instead

    “Since money was completely worthless, he devised a system of taxes based on payments in kind. This system had the effect, via the ascripti glebae, of totally destroying the freedom of the lower classes — they became serfs and were bound to the soil to ensure that the taxes would be forthcoming.”

    Sounds like what Japan has in mind, no?
    Sounds like what all central banks succumb to when the State’s seignorage spigot runs dry.

    Sound money sounds better to me – it has a ring to it no central banker can counterfeit via electronic “ring tone” legislation… indeed we are as clanging cymbals, I fear, tone deaf to the Truth.

  • Clare Krishan

    my bad missing Diocletian citation:
    “Price Fixing in Ancient Rome”
    [excerpted from
    'Forty Centuries of Wage and Price Controls: How Not to Fight Inflation' by Robert L. Scheuttinger and Eamonn F. Butler]

    http://www.mises.org/story/3498

  • Tracy

    Inspite of the good two arguments in support centralize bank the economy will not recover from the recession but fall back into the same econonmic situation again similar to Federal Government bailing out corporations and home owners. For the same reasons the government has their own political agenda that will eventually fall back into the same state the economy is in today. Just like the article states “It is hard for governments to resist the temptation to try to manipulate interest rates in order to maximize their re-election chances. It also gives governments the option of letting the inflation genie out of the bottle in order to boost short-to-medium-term employment at the expense of devaluing savings, shattering price stability, and undermining long-term employment growth”.

  • John Couretas

    Clare Krishan writes: “Acton has never really grappled with this profound inconsistency.”

    Please do your homework, Clare, before making these categorical assertions about Acton’s work. Your statement is plainly untrue and that would have been obvious to you had you done a cursory search of the Web site. Unfortunately, your latest comments are all too typical of your ill-informed, shoot-from-the-hip approach.

    You missed this:

    Debasement and tampering with weights and measures have been a temptation throughout the history of money and banking. They are the essence of the more complex methods of monetary inflation practiced today.

    Then there is fractional-reserve banking, the use of demand deposit money in lending business. Many economists, including Milton Friedman and others at the University of Chicago in earlier decades, have identified it as the source of banking instability throughout modern times. Fractional-reserve banking was censured already by Roman jurists, who found it dishonest and legally unsound. Yet modern scholarship shows that it was precisely this instability that provided the justification for inflationary central banking.
    http://www.acton.org/commentary/440_printing_money_for_wall_street.php

    And this:

    This monetary debasement taints our present monetary system primarily because the currency we use possesses no precious-metal backing. In 1933, the federal government removed the gold backing from our currency (which until that time had been convertible into gold) and forced people to turn over their stocks of gold. This was nothing other than a massive act of confiscation. The paper currency continued to circulate out of habit, so accustomed had we become to its use. But it had become convertible into nothing. Its lack of convertibility made it what economists call “fiat money,” as
    opposed to the “commodity money” we had when our currency was convertible into gold. This is all a nice way of saying that the government unabashedly violated God’s commandment not to steal. We can hardly be surprised that such disobedience should have had such regrettable consequences.
    http://www.acton.org/files/rl_v13n5.pdf

    What’s more, this little jibe of yours is completely unwarranted: “is this the kind of “religion-&-liberty” we seek to emulate? The buddhist nirvana of self-annihiliation?”

    In the future, please stick to the substance of the issue, in this case the actual commentary that was blogged, and keep to the facts. We also discuss issues here in light of the “markets and morality” framework. Please do that, if you can. Odd links to articles about Diocletian’s price fixing policies don’t cut it. Bring something more substantial to the discussion, please, than your usual pot shots.

  • Clare Krishan

    John, apologies if my shrillness quotient grates. A car alarm grates too, that’s why it works – the thief can’t abide the attention the intense pitch calls to his malfeasance and ceases his attempt at expropriating another’s property, no?

    Price fixing by central banks is EXACTLY the “something more substantial to the discussion” that Acton has not grappled with in the half decade or so I’ve been following on-line. Moral hazard would seem to me to be central to any discussion of “religion & liberty.” The “exhorbitant privilege” De Gaulle remarked upon remains, as the so-called war on terrorism is financed by borrowing from allies or commercial partners (sovereign wealth funds of China and the Gulf States cannot be said to share any meaningful allegiance with our political values, they are in it purely for the profits to be made from killing and maiming hundreds of thousands of civilians and displacing millions more, the entire population of the Swat valley in a modern day “Babylonian Captivity” gift of the people of the United States.) Just which terror are we warring here? What in heaven’s name makes our religious convictions of liberty attractive to tent dwellers dependent on international handouts to stave of malnutrition and disease? Malnutrition and disease being the same misery Diocletian’s fiscal regime led to, incidentally.

    Adhering to your kind advice to keep to the facts my citing Roman times is prescient to the Japanese situation – no revenues in Treasury? OK let’s turn to the lender of last resort: the taxpayer/laborer, ie the holder of the only productive capital not yet embezzled, his or her capital savings or future wages. Military spending bamboozled the budgets until the Roman currency was worthless – revenue was levied “in-kind” just as the Japanese Central Bank has now seen meet to do with negative interest rates. Such a Tyranny of Relativism casts an ugly pall on an American exceptionalist paradigm of freedom and religion.

    Whose religion?
    Whose justice?

    Mark my words when negative interest rates are being talked about, it won’t be long before we’ll have outpriced ourselves in the opportunity-cost of living, and euthenasia will become the order of the day for the “labor theory of value” school of Milton Friedman.

    While Acton has published on the Scholastics, natural law and free trade, it has judiciously avoided betraying the mercantilism inherent in the dollar’s global reserve currency status. This is and remains a severe weakness to your avowed goal of spreading a witness to peace and prosperity via ethical commerce. Central banking is de-facto a corrupt privilege of that sector of the economy that produces the medium of exchange legislated for taxation under legal tender laws. The world doesn’t need one more think tank on capital and free enterprise, we needs Acton’s voice as a radical witness on over-reliance on man-made wisdom (the “silent hand” that knows no concupiscence) at the expense of The Truth. We owe it to our children to explain how we got to this place. God Bless you for providing links to inform fellow readers on the material Acton has published related to this topic. More, much more, please!

  • Clare Krishan

    Banks levying “taxes” I thought that was Govt of the people, by the people, for the people?
    http://market-ticker.denninger.net/archives/1149-Congress-Has-No-More-Excuses.html