Do we need a central bank?

This is the question asked by Andre Johnston Phijuntjitr over at the IEA blog. He writes,

I will use the Federal Reserve as a case in point as it is a relatively new institution. Interestingly, the US survived until 1913 without a central bank and enjoyed robust growth. Since then the Fed has essentially failed in its objectives of ensuring monetary and financial stability. Interest rates have fluctuated between zero and 21 per cent, prices have continued to rise, and financial crises have been frequent.

Vigorous booms in the US are generally characterised by an artificial expansion of credit followed by a proportionately vigorous bust (the more unremarkable recessions of yesteryear, although more frequent, tended to be shallower). Recessions or depressions that have corresponded to central bank manipulations have produced substantial shifts in the economic sub-structure - we have seen multiple sectors of the economy suffer in the current crisis. In the past, business cycles were just that. Their cyclical configuration led to redundant institutions being liquidated and growth continuing again. Since the Great Depression, however, this kind of cycle has in effect been prohibited though big government and big bank initiatives. But when a boom and bust has happened, it has had much deeper effects on the whole economy.

As the Federal Reserve has tried to prevent recessions, economic growth on average has slowed. While there may be many reasons for this, the assumption that central banks bring both stability and growth is questionable. Indeed, it could be argued that the attempted suppression of the business cycle has been a source of weakness to the US economy.

The recent crisis and the response to it only highlights the shortcomings of the current banking system based around a central bank. If we want innovation and growth in the economy we do not want the impetus of artificial credit. Saving and production, not debt and consumption, are the drivers of economic growth. Robert Higgs at The Beacon looks at the actions of the Fed in the recent crisis. He writes,

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.

If markets work for other commodities, why not money?