« Stealing from the Oil Companies | Main | Another Success Story in the U.S. War on Drugs »

May 20, 2006


Mike Huben

"I note simply that the U.S. did not have a central bank until 1914, yet its economy grew at an impressive rate over the period up till 1914."

Wow, talk about a misleading statement! It's amazing how many misinterpretations this single sentence can lead to. (And this sort of practice is typical of libertarian discussion.)

First, and most logically egregious, is the implication that this corellation is due to cause. Else why would he bring it up?

Second is the omission of any other desirable goals of central banks other than growth: for example, preventing depressions and bank runs.

Third is the omission of the fact that other government agencies performed the functions of a central bank before 1914 (though arguably less well):
"The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791. Later, in 1816, the Second Bank of the United States was chartered. From 1837 to 1862, in the Free Banking Era there was no formal central bank, while from 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank runs later provided the impetus for the creation of a more centralized banking system."
Wikipedia US Federal Reserve article

However, Miron needs to work harder to cram even more misleading ideas into his sentences. Here's an example of seven issues in 24 words.

Gabriel Mihalache

Good answer Dr. Miron but it would mean A LOT more if you'd give some reasons for your answers (with which I agree totally).

Also, in what sense are Greenspan and Bernanke libertarians? Isn't a Bernanke a neo-keynesian? What am I missing here?

Far from preventing depressions, central banks cause them:

Milton Friedman and Chairman of the Federal Reserve Ben Bernanke, the economists who have paid most attention to the history of the 1930s, stress the negative role of the Federal Reserve System. It cut the money supply by one-third from 1929 to 1932. There was much less money to go around, businessmen could not get new loans--and could not even get their old loans renewed. They had to stop investing. Not because they did not want to (as the Keynesian model said), but because banks could not lend them the money they needed.



I have a few other questions. Most economists, whether libertarian or not, believe that prices serve as an important way of transmitting information. Why doesn't this kind of thinking also apply to the price of credit? That is, why do many economists believe that a central bank's habit of printing money and manipulating the price of credit will not have distortionary effects? How is a fed funds rate target any different than a price control? Does investment stimulated by loose monetary policy have the same effects as investment stimulated by people saving toward future consumption?


Pro central bank folks often claim that a central bank is a necessary condition for growth. The observation about growth pre 1914 casts doubt on this without any correlation / causation assumptions. You're right that the central bank might have all manner of other goals in mind besides growth. However, depressions and bank runs don't occur for lack of a central bank.

Mike Huben

Anon, there has not been another depression since Keynes, despite there being cenral banks. The wikipedia article lists Friedman's theory as one of many, and who knows which is most credible? Certainly not me.

James, I think you are mischaracterizing "Pro central bank folks": they tend to claim that central banks provide price stability which is important to growth. Can price stability occur otherwise? Yes, but not as well, they would claim.


I highly recommend Fischer Black's book "Business Cycles and Equilibrium." The first chapter "Banking and interest rates in a world without money: the effects of uncontrolled banking" makes clear the nature of money.

The comments to this entry are closed.