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Whose Central Bank?

BERKELEY – Broadly speaking, for at least 115 years (and possibly longer) – that is, at least since the publication of the Swedish economist Knut Wicksell’s Geldzins und Güterpreis (Interest and Prices) in 1898 – economists have split into two camps with respect to what a central bank is and the purposes it should serve.

One camp, call it the Banking Camp, regards a central bank as a bank for bankers. Its clients are the banks; it is a place where banks can go to borrow money when they really need to; and its functions are to support the banking sector so that banks can make their proper profits as they go about their proper business. Above all, the central bank must ensure that the money supply is large enough that mere illiquidity, rather than insolvency, does not force banks into bankruptcy and liquidation.