All Commentary
Sunday, December 1, 1996

The Central Banks

The Money Business Is Not a Place for Government Bureaucrats

Mr. French is a vice president in commercial real estate lending for a bank in Las Vegas, Nevada.

Believing that America’s central bank, the Federal Reserve, has almighty power over interest rates and, in turn, the well-being of the country’s economy, the financial press constantly focuses its attention on the actions of the Fed. Fed watching has become a thriving industry, with insiders like former Fed Governor Wayne Angell commanding $100 per minute for his take on what the Fed will do with interest rates.

In The Central Banks, authors Marjorie Deane and Robert Pringle examine whether these central bankers deserve such reverence and whether the institutions are able to accomplish their much-touted goal of price stability.

For those readers who don’t know how miserable central banks have been at stabilizing prices, none other than ex-Fed Chairman Paul Volcker breaks the news on the first page of the book’s foreword: It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with `free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.

Deane and Pringle take the reader on a central-bank history tour, beginning with Sweden’s Riksbank, born in 1668. The next stop is the Bank of England, which although not the oldest, is considered the Old Lady of central banks. They continue on to Germany’s central banking misadventures before returning home to the U.S. Congress’s century-long quest for a supply of money that could be increased at will. The search culminated in the Federal Reserve Act, signed by Woodrow Wilson on December 23, 1913.

After recounting the Bretton Woods era, which Deane and Pringle describe as the golden age of central banking, the authors race through the actual mechanics of central banking—monetary policy, supervision, lifeboat operations, and exchange rates. The authors also look at the world’s newest central banks, in various small countries and parts of the former Soviet Union.

Where do all these new central bankers learn their trade? [L]arge scale training programs for central bankers are offered by a number of central banks, the IMF Institute in Washington, and a special training school, the Joint Vienna Institute. And what personality types should apply? The authors quote American journalist William Neikirk: Central bankers are a breed apart from the rest of humanity. . . . They are aloof, secretive, frugal, independent, public-spirited, responsible and judgmental. But no matter what the training, central bankers no longer control monetary markets; the markets set the pace and it will be a scramble to keep two strides behind. And that may seem undignified. But scramble central banks should do.

In their final chapters, the authors examine whether the world needs central banks at all. Unfortunately, Deane and Pringle devote only a page and a half to free banking, mentioning the work of Kevin Dowd and Kurt Schuler as well as Vera Smith’s classic The Rationale of Central Banking. They then make the sweeping judgment that even most theorists of free banking acknowledge that given present markets and political reality, central banks are necessary, at least for any country that wants to follow an independent monetary policy. Agreed, for any country that wants to print money for political ends, having a central bank makes the task easier. However, the authors do admit that societies have managed without central banks in the past, and several of the greatest economists have been either skeptics or outright opponents of central banking. These include Adam Smith, Walter Bagehot, Friedrich von Hayek and Milton Friedman. But Deane and Pringle think they know more than these scholars.

They conclude that the primary task of central banks is price stability and that because of the complexity of world markets, central banking is no world for the amateur. But, with a quick glance at the book’s appendix, the reader comes to a different conclusion: that the money business is not a place for government bureaucrats—amateur or professional. All that central banks offer are currencies that lose value—the best depreciate quickly (50 percent in 20 years for the German Bundesbank from 1971 to 1991), the worst lose their value virtually overnight. I’ll take free banking and a gold standard outside government any time.