Glossary: Central bank
, by Percy L. Greaves Jr.
, Mises Made Easier
Definition of central bank, based on Mises' The Theory of Money and Credit
"An ideal type (q.v.) rather than a scientific term since no two central banks are precisely alike. Almost all modern countries have a central bank which is a large bank operating either as a direct governmental institution or as a private institution whose management is strictly controlled by the government. Most central banks were established by law as the result of a national financial emergency, such as the collapse of a prior credit expansion (U.S. Federal Reserve Banks), or the desire of the government for more funds than it cares or dares to raise through taxes or private loans (Bank of England). Central banks usually attempt to control interest rates, reserve requirements and note issues of the nation's banks and act as the bank of last resort when other banks are pressed for funds while holding investments which the central bank will discount on demand. By such technical procedures, the central bank attempts to control the quantity of 'money in the broader sense' (q.v.) and thus indirectly influence prices, production and employment. Central bank policies are usually determined by a desire to (1) prevent financial panics, recessions or depressions, usually by the expansion of circulation credit (q.v.), and (2) provide the government with funds to cover any deficits not fully covered by funds from private sources."
Competing Money Supplies
, by Lawrence H. White, The Concise Encyclopedia of Economics
Discusses the arguments in favorand against free banking, with multiple private banks issuing their own notes, including historical precedents and proposals for the medium for note redemption
"Some economists recommend abolishing many or even all of these legal restrictions. They attribute significant inefficiency and instability in the financial system to the legal restrictions on private banks and to poor central-bank policy, and they view competition as a potential means for compelling money suppliers to be more responsive to the demands of money users. While many economists would like to restrict the discretion given to central banks, the small but growing number of free-banking advocates would like to abolish central banks entirely."
Don't Blame the Thermometer for the Fever
, by Sheldon Richman
, Future of Freedom
, Jan 1999
Discusses President Clinton's calls for worldwide regulations limiting capital movements and for a global regime similar to the New Deal
"Like the Great Depression itself, big fluctuations result from government mismanagement of money and credit. Let it not be forgotten that the Great Depression occurred 16 years after the Federal Reserve was set up. The problem is central banking, and the solution is a fully market-based monetary system, including free, competitive banking and the private issuance of currency. ... In light of the real causes of inflation and depression, what we need is the repeal of central banking everywhere, deregulation of capital, and full respect for property rights, without which no human rights are possible."
Gold Policy in the 1930s
, by Richard Timberlake
, The Freeman
, May 1999
Discusses U.S. government monetary policies during the 1930s, in particular, the Gold Reserve Act (1934) which allowed FDR to devalue the dollar, the Banking Act (1935) which reformed the FRS and the misguided policies of Treasury Secretary Morgenthau
"The operations of just about any monetary system, and especially one with a central bank, are always puzzling to the layman. Consequently, when things go wrong owing to monetary mismanagement by central bankers or some other political intervention, the instigators can ring in 'market failure' as an excuse for their personal failures to make the right decisions. ... A central bank, like a gold standard, can assume many institutional forms that differ markedly from one another. The 1913 Fed Banks, for example, were regionally autonomous; the Board in Washington was relatively powerless."
Interview with Adam Smith [via Edwin West]
, by E. G. West
, The Region
, Jun 1994
Professor Edwin G. West stands in for Adam Smith and answers questions from the Federal Reserve Bank of Minneapolis banking and policy issues magazine
"Government regulations have restricted the free trade in money. In the 19th century, many people came to believe that a state-sponsored monopoly in the note issue was an indispensable condition for monetary stability because private issuers had no incentive to restrict their issue. ... The striking fact is that subsequent experience has shown that the danger of overissue is far greater with central banking!"
Related Topics: Banking
, Economic Freedom
, Educational Freedom
, Hong Kong
, John Stuart Mill
, Minimum Wage Laws
, Adam Smith
Ludwig Edler von Mises
, by Roger W. Garrison, Business Cycles and Depressions
Describes how Mises integrated ideas from the Austrian (Böhm-Bawerk), Swedish (Wicksell) and British Currency schools to develop his business cycle theory and offers explanations as to why the theory has not been accepted within mainstream macroeconomics
"Mises recognized, as did Wicksell, that enlightened bank policy would avoid credit expansion, thus minimizing the divergence between the bank rate and the natural rate. Believing, however, that central bank policy as formulated by government officials would be ideologically biased towards cheap credit, Mises favored institutional reform in the direction of free banking."
Ludwig von Mises: An Economist for Freedom and Free Enterprise
, by Richard Ebeling
, 29 Sep 2016
Discusses three major themes in the works of Mises, namely, business cycle theory, his critique of socialism and the unfettered market economy; includes list of suggested additional readings
"The gist of Mises's argument is that the booms and busts of the business cycle are not inherent in the workings of the market economy. Such macroeconomic fluctuations in employment, output, and prices have their origin in central bank mismanagement of the money supply and resulting manipulations of interest rates that throw savings and investment out of balance, bringing about investment and related spending patterns that are often found to be unsustainable in the long run."
Ludwig von Mises, socialism's greatest enemy
, by Jim Powell
Lengthy biographical essay on Mises, including details on Menger and Böhm-Bawerk
"Everywhere the Great Depression was blamed on capitalism, but Mises countered with Die Ursachen der Wirtschaftskrise: Ein Vortrag [The Causes of the Economic Crisis, 1931]. He made a case that central bank policies were responsible for the Great Depression. Namely, artificially stimulating the economy by holding interest rates below market levels and inflating the money supply. When this process slows down, businesses which had become dependent on it face a financial squeeze, and they begin laying people off. Monetary contraction would bring on a severe crisis."
Related Topics: Austria
, Eugen Böhm von Bawerk
, Foundation for Economic Education
, Gold Standard
, Henry Hazlitt
, Carl Menger
, Ludwig von Mises
, Mont Pelerin Society
, Ayn Rand
Money and Banking
, by Lawrence H. White, The Encyclopedia of Libertarianism
, 15 Aug 2008
Discusses some of the issues regarding money, whether state- or privately issued, and banking, including central banks, such as the Federal Reserve, fractional reserve banking and free (fully unregulated) banking
"Central banking is prone to causing either an oversupply or undersupply of money, the effects of which are business cycles. Competition would better regulate the supply of money. British 'Free Banking School' economists in the 19th century sharply criticized Parliament for protecting the Bank of England against failure and for giving it a monopoly of banknote issue, privileges that turned it from a commercial bank into a central bank. In the United States, Jeffersonian and Jacksonian classical liberals opposed the special privileges of the first and second Banks of the United States."
Money in the 1920s and 1930s
, by Richard Timberlake
, The Freeman
, Apr 1999
Attempts to set the record straight on the economic and monetary events of the 1920s and early 1930s, arguing against both the Austrian view (as expressed by Murray Rothbard) and those who put the blame on stock market speculation
"Through the offices of their associated central banks, states monopolize the machinery of money. Each central bank determines within very close tolerances just how much money an economy has and the rate at which the current stock of money will change. ... the Fed managers had become enthralled with the idea that production of goods and services initiates and promotes the production of money. Economists sometimes refer to this as the 'real bills doctrine.' While it has a grain of truth in it when a true gold standard is in place, it has no validity at all in a system dominated by a central bank."
Rothbard, Murray (1926-1995)
, by Brian Doherty, The Encyclopedia of Libertarianism
, 15 Aug 2008
Biographical and bibliographical essay
"In 1963, Rothbard published America’s Great Depression, applying Misesian business cycle theory to the depression of 1929. His thesis was that a credit inflation in the 1920s, caused by the Federal Reserve and unnoticed by many because it did not manifest itself in higher consumer goods prices, created malinvestments that made the initial crash inevitable. He further argued that the various government interventions of the Hoover administration exacerbated and extended the depression. ... He wrote various essays, pamphlets, and a book, The Mystery of Banking, analyzing the inflationary effects of central banking."
The Origin of Economic Theory: A Portrait of Richard Cantillon (1680-1734)
, by Mark Thornton
, 3 Aug 2007
Examines the sections of Cantillon's Essai
relating them to episodes in the author's life, then delving into several Austrian economics insights that can be found in the work
"Cantillon ... saw the problems of general banks of a public and private nature such as the South Sea Company, the Bank of England, and the yet-to-exist Federal Reserve System. He closed his Essai with an indictment of John Law and his system ... 'It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus payoff the State debt. But these refinements ... are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. ...'"
To the Opponents of Fractional Reserve Banking: It's not what you think
, by Steven Horwitz, 2 Dec 2010
Explains why fractional reserve banking is not, by itself, the source of the money-multiplier process
"So how does new money ever get created and multiplied on net? By injections of new reserves. Only one entity can create new reserves in a fiat money system with a central bank: the central bank. When the Fed conducts open-market operations it adds new net reserves to the system, which enables the money-multiplier process with no offsetting loss in reserves elsewhere. The central bank and only the central bank can do this."
Under the Shadow of Inflationomics
, by Hans Sennholz
, Mises Daily
, 1 Jun 2006
Explains how inflation has its roots in central banking and fiat money, and describes the influence of Keynesian economics on the policies of U.S. presidents from Richard Nixon to George W. Bush
"Inflationomics is a basic ideology of our time. Its intellectual roots are very old, growing in Europe during the 17th and 18th centuries ... They produced strong central governments with monetary powers as a means of economic well-being and with central banks to control the money of the country. The Bank of England, which was founded in 1694, set the example for all others. Most European countries followed suit during the 19th century. The United States established the Federal Reserve System in 1913. Today, nearly every country has a central bank or is a member of a central bank system."
GMU's Lawrence H. White on Free Banking and the Gold Standard (11/18/10)
, by Lawrence H. White, 18 Nov 2010
Central Banking vs. Free Banking and the Gold Standard, presentation by Lawrence H. White, Professor of Economics, George Mason University, at the Cato Institute's 28th Annual Monetary Conference
Steven Horwitz at FFF: "Do We Really Need a Central Bank?"
, by Steven Horwitz, 2 Dec 2009
Covers the history of U.S. banking up to 1913, the track record of the Federal Reserve since then and what are the alternatives to central banking; includes Q&A period