Destabilizing asymmetries in central banking: With some enlightenment from money in classical Athens

Drawing on theory and empirical evidence this paper establishes that the U.S. Federal Reserve System, and for the same matter central banking in general, is associated with four classes of asymmetries. These emanate from informational, structural, instrumental, and systemic misalignments. The latter one is particularly destabilizing because the U.S. Federal Open Market Committee, i.e. the Fed, by assuming the risks of bad and good banks alike, cultivates among them incentives of moral hazard, which exacerbate the risk of the banking system. By implication, if anything is certain this is that another 2008-type financial crisis, if not bigger, will occur and at a time that will be least expected. That is why, acting prudently recommends replacing the Fed with a monetary system free of these asymmetries. To contribute in this direction, this paper presents and assesses the properties of the model of free banking that emerged in classical Athens, the merits of which can be hardly overstressed. In particular, the money market functioned as a fully decentralized monetary system. The state served the common good by providing the institutional setup for establishing the Attic drachma as a symbol of its ever-lasting reputation, whereas the quantities of silver currency and money, along with the interest rate and the reserve ratios of banks, were determined competitively in private markets. Moreover, monetary policies generated no asymmetries because the commodity nature of the currency, the flexibility of relative prices, and the openness of the economy, assured price stability.