Sunday, April 10, 2016

George Selgin on abolishing the Fed

From On Free Banking, Monetary Rules, and Crusades:
In a fiat system free banking ceases to be a straightforward alternative to, or substitute for, central banking. That's so because the monopoly bank of issue is now responsible, not just for issuing paper currency, but for supplying the economy's standard money. There is, in other words, no monetary standard apart from that embodied in the central bank's liabilities. A "standard" U.S. dollar today is no longer a quantity of silver or of gold; it is a one-dollar Federal Reserve Note, or a one-dollar credit on the Fed's books.

It follows that, to simply abolish the Fed, in the strict sense of liquidating it (that is, parceling-out its assets to its creditors, and destroying and retiring its paper liabilities), would be tantamount to abolishing the U.S. dollar itself. Though it's still possible, and perhaps even likely, that some sort of new new banking and currency system would arise, that development would have to be accompanied by the prior or concurrent development of a new monetary standard or standards — a potentially fraught proposition. Some may well be willing to risk such a radical change; but no one could predict its results with any degree of confidence.

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