Reader’s Guide to Central Banking

Asad Zaman
3 min readApr 19, 2020

[RG1-Readers Guide 1] This is an introductory post of a sequence on the history of Central Banking, built around Charles Goodhart’s book on the Evolution of Central Banking. We would plan to read one chapter a week and discuss it on posts and/or comments on posts on this blog. Those who formally register on the Google Form: History of Central Banking will be put on an email discussion group for the book, and also get a link to download a copy of the book itself. We will start with the first chapter of the book (view at: Goodhart Chapter 1) Some motivation for why it is worth reading this book is given below:

Conventional Macro teaches us that Money is a VEIL — It hides the working of the real economy. Conventional Macro Models currently in use are RBC — Real Business Cycles — in which there is no role for money.

This is exactly the OPPOSITE of truth. Money is at the HEART of economics. We cannot understand the economy without understanding the role of money in the economy. However, conventional economics with its math and models actually HIDES the role of money. The best way to understand money is to study the EVOLUTION of role of money — how it started to be used and how this used changed with time.

For this purpose, it is convenient to start with a study of the history of CENTRAL BANKING — because Central Banks are at the heart of how money operates. The way money works has changed radically, several times, over the twentieth century, But to understand what happened in the 20th Century it is useful to go back to the beginning, and trace developments.

Although a lot of work is involved in getting a deep understanding of these matters, you can start by watching my video lecture on the history of money. This will give an overall picture — but the lecture is highly condensed and goes over a huge amount of material in a very short time.

https://youtu.be/HugE171zNj8

For the proposed reading course, it is not required to watch this 90 minute lecture — it will give you a broad perspective on what we hope to do, but it is not essential background.

This sequence is meant to guide readers through the book by Charles Goodhart called the Evolution of Central Banking. (See Google Form: History of Central Banking to register for an email group and get access to book). Subsequent posts are labeled RG1, RG2, and so on, where RG stands for Readers Guide. You can read the book in conjunction with the Readers Guides at your own pace.

I will use this material as the basis for an online course on Central Banking. Questions and comments on the post would be most welcome as they will provide me with useful feedback on how to improve the final version. This material should be required for anyone who wishes to understand monetary policy — what it is, why it is, why do we use discount rates today, instead of the quantity of money which is supposed to be the target of monetary policy according the macro textbooks.

This material is what SHOULD be taught in a macro course. Unfortunately, due to majorly mistaken ideas about methodology, this is not done. One of the most important reasons for this is “Physics Envy” (see John Rapley: Few Things are as Dangerous as Economists with Physics Envy ). The idea that economics should be a “Science” led to the forgetting of history, which was a disaster for the discipline. For more details about this disaster, see Method or Madness? The only path to recovery involves learning institutional history (for starters), which is what this reading course intends to do.

Originally published at http://weapedagogy.wordpress.com on April 19, 2020.

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Asad Zaman

BS Math MIT 74, MS Stat 76 & Ph.D. Econ 78 Stanford