"Free banking" advocate and economist George Selgin takes on what he calls "Fedophilia" in his profession: an undue love for and deference to the Federal Reserve.
The Fed's actual
record can hardly be said, after all, to supply grounds for complacency, much less for the belief that no other system could possibly do better. (Indeed that record, as Bill Lastrapes, Larry White and I have shown, even makes it difficult to claim that the Fed has improved upon the evidently flawed National Currency system it replaced.) Further, as the Fed is both a monopoly and a central planning agency, one would expect economists’ general opposition to monopolies and to central planning, as informed by theirwelfare theorems and by the general collapse of socialism, to prejudice them against it. Yet instead of ganging up to look into market-based alternatives to the Fed, the profession for the most part has relegated such inquiries to its fringe.
Selgin explores some possible reasons for this, including a basic status quo bias based on the fact that the Fed directly subsidizes and distributes so much work by professional economists. Selgin also notes that a desire to distance themselves from various bad, inaccurate, conspiratorial with insufficient evidence, attacks on the Fed keeps economists who crave respectability from joining in.
But ultimately Selgin thinks supporters of free market money face the same failure of imagination that any kind of radical libertarian notion faces: when government has taken upon itself the power to do something and shaped reality by doing so, it requires an almost science fictional imagination to see how reality could be otherwise, even for economists who are supposed to at least roughly get the whole invisible hand/spontaneous order thing:
Regarding conventional beliefs concerning the need for government-run coin factories, which he (rightly) dismissed as so much poppycock, Herbert Spencer observed, “So much more does a realized fact influence us than an imagined one, that had the baking of bread been hitherto carried on by government agents, probably the supply of bread by private enterprise would scarcely be conceived possible, much less advantageous.” Economists who haven’t put any effort into imagining how non-central bank based monetary systems might work find it all too easy to simply suppose that they can’t work, or at least that they can’t work at all well.
....In classes in monetary economics...the presence of a central bank—a monetary central planner, that is—is assumed from the get-go, and no serious attention is given to the implications of “free trade in money and banking." Consequently, when most monetary economists talk about the virtues of this or that central bank, they’re mostly talking through their hats, because they haven’t a clue concerning what other institutions might be present, and what they might be up to, if the central bank wasn’t there.
Since monetary systems not managed by central banks, including some very successful ones, have in fact existed, economists’ inability to envision such systems is also evidence of their ignorance of economic history. That ignorance in turn, among younger economists at least, is a predictable consequence of the now-orthodox view that history can be safely boiled down to a bunch of correlation coefficients, so that they need only gather enough numbers and run enough regressions to discover everything worth knowing about the past....
Selgin then points out (as I pointed out here at Reason last month in a review of The Indispensable Milton Friedman) that former Fed lovers can learn better:
The good news is that Fedophilia is curable. Milton Friedman, for one, was a recovering Fedophile: later in his career he repudiated the mostly-conventional arguments he’d once put forward in defense of a currency monopoly. Friedman, of course, was a special case: a famous proponent of free markets, he had more reason than most economists do to view claims of market failure with skepticism, even if he’d once subscribed to them himself....
Selgin goes on to supply a reading list to help economist and layman alike learn some of the history that might help them understand that a government central bank isn't the only way to get a money supply, and you should read the whole thing.
I wrote for Reason in a feature back in November 2009 about the burgeoning Ron Paul-triggered anti-Fed movement