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Thursday, March 10, 2011

"The Free-Banking vs. Central-Banking Debate"

David Andolfatto has been "the recipient of hundreds of rather nasty emails lately":

The Ron Paul Thing: I've taken down my post entitled "Ron Paul's Money Illusion" because it seems to have provoked mindless rage rather than thoughtful debate.

A part of this is my fault for saying that, while I respected many of the Congressman's libertarian ideals, I thought that he could be more circumspect at times. Well, I didn't exactly use this language, if you know what I mean. And for that, I want to apologize to the Congressman and all of his ardent supporters.

Having said this, I stand by the substantive point that I was trying to make. That column, however, was written too hastily. So I think I'll rewrite it, this time a little more carefully, and with a little less colorful language...

Here's his next post:

The free-banking vs. central-banking debate: ...As many of you can imagine, I've been the recipient of hundreds of rather nasty emails lately. I don't know any other way to describe it except as "awesome." Oh, I don't especially like being called names and being insulted, but it's no big deal (academics need pretty thick skins to survive). The awesome part is how people are so eager to express their views. ...
Now for a little story--some background, I guess. Long ago, a remarkable debate took place about the optimal way to organize an economy's money and banking system. The proponents of free-banking eventually lost out to those who favored some form of central bank regime. The nature of these debates are nicely summarized by Vera Smith in her book, The Rationale of Central Banking. ...
As an academic who has devoted a considerable amount of time on the subject, I cannot say that I presently fall strongly on either side of the debate. I can see merits (and defects) in both points of view. ...
To make a solid case one way or the other, it is important to keep the facts straight..., not to present data in a misleading light. Now, I do not think everything Ron Paul says is wrong. In fact, as I said in my original post, I appreciate the libertarian philosophy. But if one wants to promote libertarianism based on sound intellectual foundations, it does the cause no good to make and promote misguided statements about money, prices, and the role of central banks. History is replete with examples of  bad government policies in place well before the existence of central banks. In my view, it is wrong to convey the impression that something close to economic nirvana will dawn in the absence of a central bank. ...
It is my belief that Ron Paul promotes a misleading argument concerning the fact that our price-level today is much higher today than it was 100 years ago. His argument implicitly suggests that nominal wages today would be roughly where they are at even in the absence of currency debasement. This is, in my view, just plain wrong.
But for people who believe it (and evidently there are many out there that do), it provokes rage against the Fed. It is as if the Fed has stolen virtually all of their wages and that real material living standards today would be much higher if only the price-level had remained at its 1913 level. This proposition is grossly at odds with the evidence, which shows roughly 2% annual real growth in per capita income and roughly stable income and expenditure shares. There is, of course, considerable discussion about growing income inequality. But almost every paper I read about this phenomenon seems to point either to skill-biased technological change or competition from emerging economies. I'm not sure what Fed policy has to do to with those forces.
I am no defender of inflation. But the US inflation rate has been low and stable for decades now. ... Now, there may be other reasons for abolishing the institution, but if so, then why not emphasize those? As I said in my original post,... it does no service to the libertarian cause to attack the Fed with misleading arguments ... because opponents to the libertarian cause can latch on to the lame arguments and use them to discredit the more worthy ones.
The Fed was established by an act of Congress in 1913. The Fed is operating under the rules established by Congress. If you have a problem with these rules, then I encourage you to lobby your Congressional representatives to change them. Blaming the Fed for following the law as established by Congress  (and other guidelines, such as the dual mandate) seems like a rather strange way to go. But hey--power to the people.

I'm more of a central banking type.

    Posted by on Thursday, March 10, 2011 at 02:07 AM in Economics, Monetary Policy, Politics | Permalink  Comments (70)


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