Are central banks really necessary?

Some analyst argue that a central banking system is only necessary when an economy operates with paper money. Others think that isn't always the case. 

By , Guest blogger

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    A journalist holds a gold ingot next to a security officer of the German Central Bank, right, in Frankfurt, Germany. A Wall Street Journal piece argues that central banks are only needed when an economy is based on paper money.
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Gerald P. O’Driscoll’s hard-hitting piece in today’s Wall Street Journal, "Debunking the Myths about Central Banks" is well worth reading. Among others, O’Driscoll addresses the myth that “central banks are intrinsically necessary for market economies.” As O’Driscoll points out, however,

"A gold, or any commodity, standard places a natural limitation on money creation, which is the resource cost of extracting the commodity. It is only with fiat (paper) money that central banks are necessary to control the money supply." 

One should not conclude from this that O’Driscoll fallls prey to the myth of a central bank that is able to scientifically control the supply of fiat money independently of politics. In fact, he explodes this myth by pointing to the Fed under Chairmans Martin, Burns, Volcker, and Bernanke all of whose polices were powerfully shaped by the interests of the Presidents they served under. O’Drisoll concludes: “A central bank is necessary as long as an economy is wedded to a fiat currency. And it may at times behave independently—but not in the face of large-scale budget deficits, as we have today.”

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