Bryan Caplan  

Are Central Banks the Most Efficient State Enterprise? Hummel's Answer and My Explanation

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Two weeks ago, I relayed the following story:

Yesterday at the FEE seminar, I got to hear the excellent Jeff Hummel thoroughly debunk the crazy Rothbardian view that fractional reserve banking is "fraudulent." It was a fun (and funny) lecture, but the target was too easy. So during the Q&A period, I decided to see whether Hummel would embrace a far greater heresy. My challenge for him:

Agree or disagree: In developed countries during the last 10-15 years, central banks have become (close to) the most efficient state enterprise.
Now you can hear Jeff's response (as well as the full lecture): Although he favors the abolition of central banking, his answer to my question is basically Yes. And I agree on both counts. Another rough patch may be coming, but it would be hard to improve over the 2-3% inflation combined with stable output and employment that central banks delivered in the 90s and 00s.

But why have central banks have out-performed other state-owned enterprises? My best guesses:

1. The public exaggerates the harm of inflation, and angrily punishes incumbents who allow inflation to spike. Normally, such exaggeration encourages politicians to inefficiently make large sacrifices for small gains. Luckily, though, low inflation turns out to be, in the long-run, a free lunch. The public's inflation paranoia conveniently drives politicians to accept this free lunch.

2. The people who run central banks are usually economists. Whatever their problems, economists are - compared to other government officials - unusually likely to adopt economically efficient policies if you give them a chance. So contrary to Rothbard's populist complaints, giving independence to central bankers has relatively good results.


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COMMENTS (5 to date)
Renato Drumond writes:

I wonder if there is a slow version.

Matt writes:

I agree with Brian.

Ben writes:

Are most central banks state-owned? As far as I was aware, at least the US's Fed is NOT state-owned.

jomama writes:

Are Central Banks the Most Efficient State Enterprise?

Is it more efficient to poison someone with
arsenic or strychnine?

Niccolo writes:

I haven't been able to fully listen to the podcast, but I think that it's somewhat disingenuous to say that fractional reserve banking is not, at least, in some sense exploitative - or if you'd like to use a less biting word, deceptive.

I have listened to him pose the question about whether the people at the FEE conference believed the banks held all of their money, but give me a break. Talk about the wrong crowd to ask that question to - at least for truth sake. Ask the average person whether they believe their bank is there to hold their money, and they'll scratch their heads and say, well... yeah.

I do not at all believe that Rothbard was this golden-god of economics like the Mises Institute, but I can't help but get the feeling that Prof. Caplan has a tendency of cutting Rothbard off at the knees unfairly.

Furthermore, I'd like a more formal written account of what exactly makes fractional reserve banking economically superior to full reserve banking. For the record, I am on the fence about it and am open to any interpretation, I'm merely asking the same question that I typically ask someone that advocates a full reserve system.

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