Wednesday, 11 February 2009

Three reasons why central banking doesn't work

These are from Terry Arthur at the IEA Blog. They refer to the Bank of England but the three points apply more generally.
  1. Firstly, because over the last 50 years the Bank of England has devalued its notes to the point where today’s pound is worth only 5% of that in 1958.
  2. Secondly, because (like all nationalised central banks) the Bank of England lacks the feedback mechanism of free-market banking, it responds in exactly the same manner to a public demand for more money, whether or not that demand is to hold more money or to spend more money. A more perverse monetary policy is hard to imagine.
  3. Thirdly, the Bank of England’s other main job, the setting of short-term interest rates outside the market, necessarily destroys the market’s co-ordination of the structure of production, creating the cycle of boom and bust.

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