Independent central banks or no central banks?

In the US a number of economists have signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” In support of this defense of the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments:

1. central bank independence has been shown to be essential for controlling inflation.
2. lender of last resort decisions should not be politicize. (Why, I ask, is there a lender of last resort at all?)
3. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

Robert Higgs at The Beacon looks at these three arguments. He writes,

First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.

Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?

Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support Congressman Ron Paul’s bill to audit the Fed.

But perhaps the takeaway message from the Higgs piece is this bit,

Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.

Is it time for a call for free banking? The recent actions by central banks and their implication in causing the current crisis, including New Zealand's, make me think that the issue should, at least, be raised and seriously discussed.