The Link Between Central Banking and the Abandonment of Commodity Money Is Worth Stressing

The establishment of fiat money, in turn, means unlimited scope for a privileged bank to further abuse its powers in pursuit of narrow political and financial ends. Such was, broadly speaking, the history of the growth of central banks and fiat money throughout much of the world during the present century. This history has set the stage for price level, interest rate, and exchange rate movements such as were never seen under the gold standard. These fluctuations have spelled doom to thousands of private banks. The link between central banking and the abandonment of commodity money is particularly worth stressing, because so many past economists wrongly perceived central banks as devices for securing monetary stability. The evidence presented here suggests, on the contrary, that central banking is incompatible with monetary stability. Free banking grounded in strict rules of contract and bankruptcy law would have provided a much stronger bulwark against the flood of paper money.

—George Selgin, “Are Banking Crises Free-Market Phenomena?” Critical Review: A Journal of Politics and Society 8, no. 4 (Fall 1994): 603.