The Central Bank as Responsible Guardian

When Alexander Hamilton first proposed a Central Bank of the U.S., he was met with adamant opposition from many quarters, mostly by the Jeffersonian Republicans. The idea of an essentially privately-owned and operated bank with broad reaching powers both frightened and enraged Jeffersonians. The First Bank of the United States did not initially have its twenty-year charter renewed, consequently. It was revived in the Second Bank in 1816, but was killed again amidst much fierce political drama by President Jackson in the 1830s. It was not until the early twentieth century that the idea of a national bank was brought back by the Federal Reserve System.

Although true Jeffersonian Democratic-Republicans are no longer a force in U.S. political society, there are still those who view the Fed with antipathy or downright hatred. Much of this feeling centers on the fact that the Fed, unlike Hamilton's Central Bank, regulates the money supply. Critics claim that this is Constitutionally a right reserved to the Congress (Article I, section 8), and that the privately-owned Fed has the interest of the bankers (and specifically, the Board of Directors) at heart, not the interest of the nation. The implication is that Congress would be more responsible, that through Congress the control of the nation's money supply would be in the citizens' hands, where it belongs. Though this is a compelling, and perhaps theoretically superior, argument, the governance of nations can not be based on theory and idealism alone. Let us examine a current case of a state in which the money supply is controlled by the government, as opposed to a central bank.

Zimbabwe has been ruled by ruthless strongman Robert Mugabe since 1980. Among the many undesirable aspects of his government is that it controls the money supply. Inflation has long been a problem in this one-party state, but in the economic upheaval that followed Mugabe's seizing of white farmers' lands in 2000, things really got bad. As inflation rose, the government's answer to the problem was to simply print more money. Of course, this flood of curreny only made matters worse. The more readily money was made available, the less value it was deemed to have. Prices now double every few months in Zimbabwe, and the inflation rate topped 1000% back in April. Unemployment may be as high as 80%. This is the result of a government (or in this case, one man) in charge of a nation's money supply.

Although Zimbabwe is, admittedly, an extreme example, it is instructive nonetheless. Do we really want to place the money supply of a nation (and hence, the national economy) in the hands of government officials? A government which is truly fiscally responsible is a marvel indeed. Even if they were capable of such a task (which I find highly unlikely), government officials can never be entirely objective in a democracy; at the end of the day, whether in Africa or the United States, government officials are concerned about retaining their own power. A private board of banking directors, who have risen to the top, not via a semi-informed electorate, but through a lifetime of merit and achievment in the economic sphere must be recognized as a more practical solution. It was this solution which was proposed by Hamilton back in 1790, supported by President Washington, and passed by Congress. And it is this solution that we have today, in modified fashion, in the Federal Reserve System.