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EsLibertad: “Are Central Banks Necessary?”

By: Rafael Ruiz-Monroy - Mar 31, 2014, 3:55 pm

EspañolEsLibertad — the Latin-American division of Students for Liberty — held a webinar this past week, entitled “Are Central Banks Necessary?” Directed by José Joaquín Fernández, president and CEO of the Liberty Institute in Costa Rica and a board member of the National Association for Economic Development (ANFE), the event attracted 59 attendees from all over Latin America.

Based on the direct relationship between monetary policy and inflation, Fernández explained how these dynamics affect prices and demand. He asserted that “excess monetary emission” is the only cause of inflation. His logic was that without an increase in the money supply, there can be no excess demand beyond aggregate supply, and without that, inflation is impossible.

According to Fernández, governments blame “greedy businessmen” for inflation instead of recognizing the economic impact their policies have on monetary expansion. Fernández also tied interest rates to inflation with the Fisher equation, in which higher long-term inflation necessitates higher interest rates.

Fernández argued that empirical facts show that countries with a stable currency tend to grow faster than countries with high rates of inflation. However, despite the claim that central banks have a mandate to ensure a stable currency, the Costa Rican academic said that there is no justification for the existence of a central bank, as its effects on the economy are the same as any monopoly.

He explained that money has the same characteristics as any other economic good, and its operation under “free prices” provides better results than those administered by central banks. To make his case, he cited the examples of private money issuance in Hong Kong and Scotland.

The underlying reason why central banks were created was political opportunism towards the financing of public expenditure, since these banks enabled seemingly limitless borrowing and reduced the need for more explicit or direct taxes on constituents. In addition to the moral problem of hidden taxation, such an exercise is contrary to economic rationale, as central banks prevent free entry into the market for superior competitors.

At the end of the webinar, Fernández mentioned that all objections to the closing of the central bank or the dollarization revolved around interventionist paranoia: the loss of monetary policy instruments and exposure to international “shocks.” Finally, he made an emphatic call for the non-existence of central banks in order to give poorer sections of the population greater access to credit.

Translated by Michael Cooper.