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Once more: central banking is a form of central planning

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.


  1. Well said, Kurt.

    After observing the actions of Alan Greenspan I've realised that the concept of an independent central bank is a simply one more myth. It is a myth because the personal preferences of the central banker get in the way, even assuming the central banker is shielded from political interference.

    Alan Greenspan had a personal preference for greater house ownership in America. That preference distorted what should have otherwise have been purely technical decisions.

    Of course, even such technical management of money is a myth because the relevant knowledge is simply not available to the central bank.

    Even if it were, the "model" the central bank would need to use does not and cannot exist, particularly with an open economy with fluctuating exchange rates, and lagged data. The central bank simply can't get it "right".

    The idea of central banking is therefore impossible.

    A classic example of this impossibility is the Australian situation today.

    Had there been a multiplicity of well-regulated note issuing banks in Australia, its multiple currencies would all have had different exchange rates, each based on local circumstance, automatically self-adjusting. This would have eliminated the "two-speed" economy which is caused, today, almost entirely by the single, uniform dollar that operates across Australia, and the inevitably ham-handed interest rate polices of the central bank.

    Over the past few years I've come to the view that central banking is untenable, as untenable as the concept of socialist central planning.

  2. David Glasner has an "ideal type" view of central planning, according to which central planners execute One Plan according to the letter of their socialist law. I would reccomend he read Moshe Lewin's book Russian Peasants and Soviet Power (an English translation of the French edition) in which he points out that Soviet planners actually executed numerous, sometimes conflicting, plans depending on the location of the economic activity being planned, and the on-the-ground apparachiks carrying them out. So for example, one department might have allowed a fairly significant portion of the economy within its jurisdiction to evade some of the Soviet-issued diktats with a correspondingly greater scope for private property and, in effect, capitalist entrepreneurship. Meanwhile, next door, Soviet planning might have been pursued more rigorously (and brutally).

    There is no question that central bankers are central planners of a sort, even if they don't resort to the firing squad to enforce their Keynesian worldview. They must deal with the real world of markets and public opinion, but that was true for Lenin, Stalin and their henchmen as well, even if they were more insulated from it than Comrade Bernanke and his apparachiks. Mises pointed out many times that without world markets and prices the socialists would have had even more intractable problems then what they already faced. Ditto for Comrade Bernanke and his crew.

  3. Central banking seems to be a form of central planning by Glasner's standard, i.e. a central banker seeks to "override the voluntary decisions and plans of private individuals and business, compelling them to conform to the central plan rather than to their own preferred courses of action …" If the central banker has not this goal in mind, why does he bother with central banking? Why not let people extend credit however they please?

    If I have something you value, I don't need anyone else telling me whether to extend you credit or on what terms. I don't need state issued money for this purpose, unless this money is so widely demanded, particularly by the state sector itself, that I'm effectively compelled to accept and offer it in payment.

    If my decision is strictly voluntary, I extend credit by giving you what I have in exchange for your promise to provide something of comparable value, relative to some standard of value, in the future. You needn't provide something of comparable value to me. You may provide it to anyone holding a note signifying your obligation. I produce one of these notes myself when I provide you what you want, so I may bargain with your obligation with others willing to bargain this way.

    Of course, any system of credit requires policing; otherwise, I'll create these notes whenever I please regardless of any value I've provided, but this policing does not require a central bank. A central bank is one method of policing credit, but it's hardly the only method or necessarily the best one. A central banker may abuse the issuance of promissory notes as much as I.

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