11.30.2010 0

Why Do We Have a Central Bank?

  • On: 12/08/2010 09:08:35
  • In: Monetary Policy



    ALG Editor’s Note: In the following featured oped from the Wall Street Journal, the Cato Institute’s Gerald O’Driscoll questions whether central banks are even necessary for economic vitality and prosperity:






    Why do nations have central banks? Countries have developed without one, and sophisticated financial systems have evolved in their absence. Some countries with a central bank have suffered for having one. Zimbabwe comes to mind.

    The Federal Reserve System was created by an act of Congress only in 1913. It then presided over a great wartime inflation followed by a major depression in 1920-21. The 1920s were an era of prosperity, due as much to Treasury Secretary Andrew Mellon’s wise fiscal policies as anything the Fed did. The Fed’s performance in the Great Depression was disastrous, a judgment shared by its current chairman, Ben Bernanke.

    The Canadian banking system weathered the Great Depression without a central bank. Instead of the thousands of small, undiversified banks that the United States had, Canada had a small number of banks (with many branches across the country) that were able withstand localized downturns. Even in the Great Depression, banking failures in the U.S. were concentrated in specific regions. Canada’s central bank, the Bank of Canada, was created in 1935 in part because of pressure from the rest of the world. Canada had survived without it quite well.

    In short, central banking has been neither necessary nor sufficient for the development of a modern economy and financial system.

    Get the full story from the Wall Street Journal: http://online.wsj.com/article/SB10001424052748704700204575643092628424622.html

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