A sound monetary and banking system is the foundation of economic growth and industrial progress. Our central bank, the Federal Reserve, claims, by mandate, to maintain “stable prices” and “full employment.” Yet its record is one of chronic monetary instability.
Because money is the essential link between all the diverse, coordinated sectors of our economy, this instability is the root of the painful boom-bust cycles that have repeatedly undercut economic growth over the last century. Fortunately, the idea that the Fed should be radically reformed or abolished is starting to gain currency among Republican politicians.
But that raises the question: What is the alternative?
“The gold standard” is not a sufficient answer. Which gold standard? One administered by a central bank like we had from 1913 to 1933? One hindered by onerous and distortionary banking regulations at the federal and state levels like we had before that?
The ultimate question, in fact, is not so much about what ought to be the monetary standard—the reserve asset, if any, used to back the currency. The ultimate question is who should decide which asset should be used to back whose currency.
The real alternative is between central banking on the one hand and a fully free system of money and banking, on the other. In a free system, banks are free to issue their own currency, backed by whichever reserve asset they choose, in order to compete for depositors who are free to deal with whichever bank they choose.
Perhaps the best way to learn about this alternative is to look at the actual history of banking systems around the world. It’s valuable to see the difference among, for example, the regulated banking system of the U.S. before 1913, the fully centralized system after 1913, and the relatively free banking system enjoyed in Canada before 1935.
There is no better expositor of this history, and the theory behind it, than George Selgin, economics professor at the University of Georgia, whose own work in the late 1980’s was critical to the reemergence of free banking ideas.
Here he is enlightening a room full of congressional staffers on the subject: