Professor George Selgin shows why central banks, far from being bulwarks of financial stability, are inherently destabilizing. The record of past “free banking” systems, in which paper currency consisted of competitively supplied banknotes, contradicts the widespread belief that central banks play an essential part in promoting financial stability. Instead, both that record and theoretical inquiries concerning how free banking arrangements regulate the money supply suggest that central banks, far from being bulwarks of financial stability, are inherently destabilizing. In particular, a free banking reform might have proven far more effective than the Federal Reserve Act in preventing U.S. financial crises.
George Selgin explores the fiscal origins of currency monopolies and the adverse consequences stemming from their establishment, including their tendency to promote booms and busts. The talk also reviews the origins of the doctrine that they should serve as “lenders of last resort“and explains why last-resort lending tends in practice to generate moral hazard problems that lead to still greater financial instability. Some time is devoted to the particular case of the U.S. Federal Reserve System.