THE RATIONALIZATION OF CENTRAL BANKS

Charles Goodhart's The Evolution of Central Banks represents a rare and welcome attempt to spell out those shortcomings of 'free banking'' that supply a rationale for the establishment of central banks. However, one of Goodhart's principal arguments - that central banks are practically inevitable outgrowths of the ''natural'' tendency for bank reserves to become concentrated in a dominant ''bankers' bank'' - understates the role legal restrictions have played in sponsoring the emergence of bankers' banks, including the Bank of England. Some of Goodhart's other arguments against free banking rest on an exaggerated view of the likelihood of business cycles and financial crises under free banking as compared with central banking.