The futility of central banking.

• Author: Selgin, George A.
• Position: Essay

From Anguish to Triumph and Back

It has been more than three decades since Arthur Burns (1979) gave his famous Per Jacobsson lecture on "The Anguish of Central Banking." In it he declared that

the persistent inflation that plagues the industrial democracies will not be vanquished--or even substantially curbed--until new currents of political thought create a political environment in which the difficult adjustments required to end inflation can be undertaken. Coming from a recently retired Fed chairman, this was a remarkable statement. It amounted to an admission that the Fed was quite incapable of performing its most fundamental task, and that the problem was, not any lack of material means on the Fed's part, but simply the will to do what needed doing given political incentives then at play.

Just over a decade later, Paul Volcker (1990) felt able to answer Burns' pessimism by making "The Triumph of Central Banking?" the title of his own Per Jacobsson lecture. Volcker went so far as to speak of a "renaissance" of central banking--an era of newfound accord between central banks and governments, in which the former were allowed to exercise scientific control over money, unconstrained by pressure for fiscal accommodation.

To his credit Volcker understood that the triumph of which he spoke might prove ephemeral. Hence, the question mark in his lecture's title. Volcker warned that

a conclusion that central banks happen to be in relatively good repute today isn't the same thing as convincing evidence that those institutions have now, in fact, equipped themselves to assure greater price and financial stability in the years ahead. To make that case will require something more lasting than a demonstration that, at one perceived point of time, they could squeeze a good deal of inflation out of the system. Nor is one exceptionally long period of economic expansion--a period that followed a deep recession--conclusive. What's more, Volcker said, "Even the partial victory over inflation is not secure."

Alas, Volcker's warning proved 'all too prescient: reports of the passing of monetary mismanagement were indeed premature. We now know that the "triumph of central banking" was but one successful campaign in a war comprising an 'almost uninterrupted sequence of monetary calamities--from the post-WWI inflationary binge to the Great Contraction of the 1930s to the present subprime boom and bust. And that one undeniable success is now less secure than ever.

Perhaps no central banker will ever be so bold as to give a Per Jacobsson lecture on "The Futilty of Central Banking." Yet the time has come for someone to speak on that topic. For it should now be clear, in case it wasn't long ago, that central banks generally, and the Federal Reserve in particular, not only are unable to prevent financial and monetary catastrophes, but are unable to resist pursuing policies that inadvertently help to cause such catastrophes.

Central Banks Are Inherently Discretionary

One might reply that central banks' many failures have been, not failures of central banking per se, but failures of discretionary central banking that might have been avoided by commitment to the right sort of monetary rules. But plausible as this view may appear, I believe it to be mistaken. For insofar as it takes the presence of a central bank for granted, the very idea that a choice exists between monetary...