I have been busy writing a paper that I will summarize in a later post, so I am only now making a belated reply to comments by David Glasner at his worthwhile blog, Uneasy Money, disputing my claim that central banking is a form of central planning. I will take one last shot at the subject for now because the idea that central banking is a form of central planning is a crucial part of free banking thought, and because I am amazed by Glasner’s view given that he once wrote a book on free banking,
Central planning need not extend to every economic activity. It is enough for the government to control key institutions, which Vladimir Lenin called “the commanding heights” of the economy. The monetary system is obviously one such institution. A monetary system that is not under government control is incompatible with central planning because it gives people a powerful and easy means of making decentralized exchanges that circumvent the plan.
As I wrote in a previous post, centrally planned economies have monobank systems, in which commercial banking is a government monopoly, whereas in more market-oriented economies, commercial banking is competitive. Even if a monetary system has competitive commercial banking, it remains true that central banking injects substantial elements of central planning. The whole point of central banking in the form in which it has existed since about World War I is to monopolize the monetary base; consciously use the monopoly to affect conditions throughout the economy; do so through a centralized, government institution; and prevent challenges to the monopoly that might end its power. None of these elements are present in a free banking system.
Glasner claims that in Hayek’s monograph Denationalisation of Money, “Hayek’s dismissal of central banking was crucially and explicitly dependent on an argument that private competitive banks would issue their own currencies defined in terms of units of their choosing not redeemable in terms of any outside asset not under the control of the issuing bank.” The monetary system Hayek discussed Denationalisation of Money was one of competing, bank-issued fiat currencies, but Hayek was also aware of the existence of competitive banking systems based on gold. Much earlier in his career he supervised Vera Smith’s dissertation, The Rationale of Central Banking, which discussed some historical episodes fitting that description. Hayek, like his teacher Ludwig von Mises, had an extraordinarily wide range of intellectual interests, of which monetary theory was only one. They did much, but left much still to be done by successors who were willing to focus on monetary theory alone. That helps explain why the building blocks of the idea that central banking is a form of central planning are present in Mises and Hayek, but not until Lawrence H. White and George Selgin in the 1980s did Austrian economists use the building blocks to construct a detailed argument.
We can agree that central banks are run by intelligent people who have good intentions. We can debate whether there is some element of natural monopoly in money that means certain tasks are better done by a central planner than by competitive markets. (If it really is a natural monopoly, why does the law need to forbid competitors?) It should be evident, though, that central banking is indeed a kind of central planning.