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Central Banking: the Real "Dangerous Mistake"

Kurt Schuler just alerted me to this recent FT article attacking Bitcoin, by a former Federal Reserve employee named Mark Williams. The article is noteworthy for its pie-in-the-sky view of central bankers–a view that seems to be informed by sheer wishful thinking, rather than by even the most meager recognition of how actual central banks, including the Fed, routinely botch up their economies.

Here is a sampling of the sort of pablum Mr. Williams dishes out, seemingly cooked up by his former employer's PR staff:

Keeping money stable and trustworthy has traditionally been a function of national governments. By controlling the money supply and targeting interest rates, the authorities try to promote job creation and economic growth, while preventing runaway inflation that would cause the system of market exchange to break down. Calibrating monetary policy to the needs of the economy is an enormous undertaking. Central banks such as the US Federal Reserve employ hundreds of people to analyse economic data, chart the best path for monetary policy and explain their decisions to the public.

Bitcoin, in contrast, Williams observes, appears to have been motivated by "the libertarian ideal of putting money creation beyond the reach of meddling central bankers." "Meddling?" (I imagine Mr. Williams thinking); "Where do those libertarians get such silly ideas? Don't they realize that central bankers are just technicians seeing to it that money is scientifically managed so as to maximize social welfare? Why, to listen to them you'd think that there was something in central banks' records to complain about–you know, inflation and cycles and bailouts and moral hazard and that kinda stuff. Geez, what a paranoid bunch! Why don't they read economics principles textbooks like I did so that they can understand what central banks are really like?"

For Mr. Williams it is not central banks, with their almost unchallenged currency monopolies, but Bitcoin, with its miniscule share of total payments, that we should all be worried about. For the Bitcoin set-up, with its predetermined supply schedule, "ignores the ebbs and flow of economic cycles" altogether, thus constituting a "reckless" alternative to conventional monies that "is the equivalent of a doctor giving penicillin to every patient without first checking whether they are suffering from infection, depression or mania."

Letting the clunky analogy pass, Mr. Williams has a point: the Bitcoin monetary "rule," to call it that for argument's sake, is unlikely to prove ideal, should Bitcoin ever manage somehow to become a true rival to established monies. But that hardly justifies Mr. Williams' suggestion that Bitcoin is "dangerous," or that it ought to be either stamped out altogether or (what amounts to the same thing) subjected to central bankers' control. Mr. Williams here seems to forget that, whatever its other qualities, Bitcoin, unlike, say, Federal Reserve dollars, is a voluntary exchange medium; no one is obliged to either receive or to pay it, whether by legal tender laws or by banking and other regulations. Because Bitcoin is voluntary, it doesn't carry the risk of holding an entire economy at its mercy. Only official paper monies can do that. Only such monies have done it, time and time again.

What's more, as Mr. Williams recognizes, rival cryptocurrency entrepreneurs have been busy (with the help of some prodding by yours truly) developing more macroeconomically smart alternatives to Bitcoin. But Mr. Williams, like any good technocrat (or, for that matter, any ca. 1948 socialist) is cocksure that no amount of old-fashioned entrepreneurial ingenuity can ever be a match for "central bankers who can adjust monetary policy to promote prosperity when people behave in unexpected ways," that is, for white lab-coat donning scientists who fine-tune the money stock against a backdrop of spinning gauges, bubbling Erlenmeyer flasks and steaming retorts, all according to Mr. Williams' black-and-white B-movie version of how central banks function.* No sir: we can't expect any private money to cope with "patterns of human behaviour that are too complex to capture in a simple rule." After all, real human beings, unlike Mr. Williams' sci-fi central bankers, are made of flesh and blood.

Addendum (2/12/2014, 5:50PM): Jerry Dwyer (another former Fed employee, but one who actually knows a lot about monetary policy and history, not to mention alternative currencies) responds to the same FT piece.

*As Mr. Williams served the Fed as a bank examiner, he presumably never witnessed an actual FOMC meeting, let alone the behind-the-scenes dealings of that committee's chief with senior government officials. Whether he can possibly entertain a similarly starry-eyed view of Fed bank examiners, even in the wake of the last decade's events, is a good question.


  1. I am not a great fan of Bit"Coin" – but I happened to read the Financial Times article attacking Bitcoin when it came out, and the article was so bad (both in terms of its historical claims and its economics) that it made me more sympathetic towards Bitcoin.

    For example, the article claimed that the Pound and Dollar were widely used before they became valuable – not true as both the Pound and the Dollar were originally weights of precious metal (that is why they were wildly used – so the article got the history backwards).

    As for the idea that the central mistake of Bitcoin is that one can not easily massively increase the quantity of it – on the contrary, if true, that is a good (not bad) thing about Bitcoin.

  2. “Because Bitcoin is voluntary, it doesn't carry the risk of holding an entire economy at its mercy.” In 2004,5&6, private banks in the UK were “voluntarily” expanding the amount of privately created money at a rate of about 10%pa and lending it out “voluntarily” to house owners. That was clearly unsustainable, and ended in the crises: which consisted of private banks “holding the entire economy at their mercy” (multi billion pound bail outs for private banks, etc).

    I’m not suggesting that property bubbles would totally disappear if private created money was banned, but I just can’t help getting the impression that private / voluntarily produced money exacerbates instabilities.

  3. I'm quite intrigued if whether fractional reserve banking and thus free banking would be feasible under a bitcoin standard…

    1. I am not a great fan of Bitcoin – but the basic point of it is that it (the "special numbers") are supposed to be INELASTIC.

      So there is no question of a Bitcoin "standard" – one either has Bitcoin to lend or one does not (if one only has a hundred Bitcoin one can NOT lend out a thousand). And once one has lent out the Bitcoin one has, one does not have the Bitcoin any more (the "block chain" records that one no longer had the Bitcoin) till when and IF one is paid back.

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