Central Banking in a Free Society

101 Pages Posted: 19 Jun 2009 Last revised: 29 Jan 2011

See all articles by Tim Congdon

Tim Congdon

Institute of Economic Affairs (IEA)

Date Written: March 26, 2009

Abstract

The author covers the Northern Rock affair and the subsequent instability in the UK financial system in the context of the history and desired future role of the Bank of England as a central bank. Tim Congdon, a respected monetary economist, shows how the Bank of England failed in its duties to provide Northern Rock with proper lender-of-last resort facilities. This helped bring down the bank itself and created instability in financial markets. Congdon argues that the mistakes by the Bank of England arose directly from Gordon Brown's decision to dismember the Bank in 1997. As a result, the Bank lost all its experience in commercial banking. Furthermore, the government and the Bank were unable to coordinate their actions in the way that had been envisaged by the government when it reformed the Bank of England. Congdon proposes a radical new settlement. The Bank of England should be privatised; its capital should be provided by the commercial banks; and it should regulate banks as well as providing them with lender-of-last-resort facilities. He shows how this new structure provides just the right incentives to regulate the banking system in a way that will ensure financial stability whilst allowing banks to provide efficient services to the public.

Keywords: bank bailouts, Bank of England, bank regulation, financial crisis, Financial Services Authority, central banking, credit crunch, lender of last resort, Northern Rock

JEL Classification: E58, G21, G24, G28, G33

Suggested Citation

Congdon, Tim, Central Banking in a Free Society (March 26, 2009). Institute of Economic Affairs Monographs, No. HP 166, 2009. Available at SSRN: https://ssrn.com/abstract=1421288

Tim Congdon (Contact Author)

Institute of Economic Affairs (IEA) ( email )

2 Lord North Street
London SW1P 3LB
United Kingdom

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