How Jim Rogers would replace the Federal Reserve

In Jim Rogers' ideal world, central banks would virtually disappear and we would return to a system of 'free banking'. It's an interesting - if slightly crazy - idea, but would it work?

When I met Jim Rogers today he was raging about the US Federal Reserve. He thinks the US central bank has been inexcusably incompetent. He thinks that Ben Bernanke and his predecessor Alan Greenspan, with their debt binges, ludicrously easy monetary policy and money printing, "have absolutely no concept" of economics, finance or currencies.

The whole thing, he says, is "mind boggling". The Fed is "one of the most dangerous things" in the world and it won't be long before there is a currency crisis in the US (although it is perfectly possible there could be one somewhere else the UK, the Philippines, take your pick - first).

So I ask him what he would do if he was chairman of the Fed. First, he says he would resign and head for the pub. I say that's not allowed. So he says he would abolish the Fed and then head for the pub. I say he isn't allowed to abolish the Fed in this particular game of 'what-ifs'. It may be a good idea - I don't know - but even for me it is a tad extreme.

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So, under pressure, he says that he would first try and sell off all the junk on the balance sheet. Then he would stand aside from the currency markets, credit markets and the bond markets and let the market set interest rates. He would target nothing right now, the Fed says it is targeting inflation, but it is really "targeting survival".

He would take the Fed back to its original purpose, making it nothing but the lender of last resort as it was supposed to be after the panic of 1907. He would lend in a crisis only and at very high rates of interest against good collateral. Other than that he would be in the pub (this, he points out, worked very well for the managers of the Bank of England in the 19th century). The market, he reckons, could do a much better job than the Fed. Why? Because the Fed quite clearly doesn't have a clue where interest rates should be; the market might.

But this isn't actually his preferred option. That really is the total abolition of the Fed and as I understand him the re-introduction of "free banking". This refers to an environment in which there is no central bank and there are no special regulations for ordinary banks no fractional-reserve ratio for example. Instead they can issue their own paper currencies as they like and the market will then set the price of money (the rate of interest) and the supply of money.

Anyone can set up a bank in the same sort of way they could set up any other kind of company (as long as they adhere to corporate law). To do so they need no special government licence, just the capital required and the public confidence in them to allow their notes to enter circulation. If they make a mess of it, they end up bankrupt and the shareholders lose everything they don't get to call on the government for special help when they need it.

Could this possibly work? It has before. Between 1716 and 1845 the Scottish had a form of free banking in which RBS and the Bank of Scotland issued competitive currencies. The US had its very own free banking era between 1837 and 1864 (although it wasn't entirely free) and Sweden had forms of free banking for much of the 19th century. Sweden's example is considered to have been pretty successful: in the 70 years before the issuing of private money was banned, only one bank went under - and that was down to fraud, not financial incompetence.

So could it work again, or is Jim Rogers just jetlagged (I meet him in the middle of a journey from New York to Singapore)? I'm not sure. I haven't yet thought around all the implications of free banking yet. But it is interesting. We spend a lot of our time arguing for free markets in most things, so why not money? Does it make sense for a central authority to spend as much energy as it does attempting to manipulate the money supply?

Free banking might be completely nuts, and I can't imagine how we would get from where we are now to a place where it might be implemented (Rogers thinks the Fed will eventually collapse under the weight of its own idiocy). But there is a chance that it might - and only might - give us more stability, less trouble with ultra-low interest rates, less credit, less inflation and more responsibility.

It might also come with one very satisfactory upside: all the people who devote their careers to second guessing the Fed (will interest rates rise or fall at the next meeting? Will there will be QEIII?) could actually start thinking about something useful instead. We've only just started thinking about this one look out for more on the subject in next week's issue of MoneyWeek magazine. If you're not already a subscriber, subscribe to MoneyWeek magazine.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.