A Hayekian Case for Central Banking?


Over at Liberty & Power, historian Jeffrey Rogers Hummel discusses a lecture he recently gave entitled "Why Fractional Reserve Banking is More Libertarian than the Gold Standard." Delivered at one of the Foundation for Economic Education's summer seminars, the audience included a number of econ heavyweights, including reason contributor Bryan Caplan, who posed the following question: "Agree or disagree: In developed countries during the last 10-15 years, central banks have become (close to) the most efficient state enterprises."

Hummel's answer was a reluctant yes, given despite his "unequivocal advocacy of the Fed's abolition." Caplan, who of course agreed with the answer, followed-up on his own blog, offering this as one reason for such efficiency:

The people who run central banks are usually economists. Whatever their problems, economists are—compared to other government officials—unusually likely to adopt economically efficient policies if you give them a chance. So contrary to [Murray] Rothbard's populist complaints, giving independence to central bankers has relatively good results.

This pro-economist position is certainly in keeping with Caplan's thesis in The Myth of the Rational Voter, though the following response from Hummel strikes me as more convincing:

Globalization and international competition have approximated Hayek's world of competing private banks issuing fiat money. The major difference is that we have competing central banks. Investors can fairly easily move from one currency to another, which means the market immediately prices changes in central bank policy and punishes them when necessary. Central banks are still the major noise traders in the interest-rate and foreign-exchange markets. But whenever a central bank goes up against speculators and tries to seriously misprice its currency, the central bank almost always loses and the speculators almost always win. This tends to discipline central banks.

Hummel's post (with a podcast of his lecture) here. Caplan's here.