Making the case for a ‘free’ banking system, the report authored by Professor Anthony J. Evans and published by the Adam Smith Institute said the strongest argument for the central bank to be scrapped is that it would have made the global financial crisis ‘impossible’.
The paper draws inspiration from the monetary economics of Nobel Prize winners Milton Friedman and Friedrich Hayek, who both argued that central bank discretion tended to push the economy away from rather than towards stabilisation.
Writing in the report’s foreword, professor of finance and economics at Durham University Kevin Dowd, said the recommendations offered a major challenge to the ‘failed’ conventional wisdom of central banking which it blamed as a ‘root cause’ to current economic problems in the UK.
The report also proposed that the UK should work towards a nominal GDP average growth target of 2%, which it said would deliver stronger price stability over the long run.
This would replace the MPC which sets monetary policy and the Bank’s 2% inflation target which the report criticised as providing a ‘smokescreen’ for the absence of a monetary policy rule.
Furthermore, quantitative easing should replace interest rates as the Bank’s main tool for conducting policy, it said.
Evans, the paper’s author, said: “Since the financial crisis the Bank of England has made important changes to how it conducts monetary policy – such as the introduction of quantitative easing and forward guidance – and the government have made bold interventions into the banking system. However, these drastic measures have failed to identify the root cause of the problem, which is the monetary regime.
“While inflation targeting has been discredited, and all but abandoned, it has not been replaced by a coherent and consistent strategy. This paper not only provides constructive advice on how to reform current policy, it places this in the context of a more comprehensive programme for sound money.”