Why the Central Bank Should Not Exist: An Austrian Critique of State-Engineered Monetary Disorder

Money was transformed from a spontaneous market medium into an instrument of imperial finance

That note in your wallet or the digital balance on your screen represents not real wealth, but an artificial, encrypted promise - a fungible financial claim sustaining modern economies through illusion. Once termed chirographis pecuniarium by the Scholastics, (a mere written acknowledgment of debt),  this promise has been perpetuated and expanded over time by central and commercial banks through money creation and the mechanism of fractional-reserve lending. 

Legitimised by legal-tender laws, fiat money - what Ludwig von Mises called a money substitute—serves as a political instrument monopolising real money, historically gold.  

By distorting interest rates, it raises society’s time preference, rewarding consumption and speculation over saving and production.   

As Austrian economist Thorsten Polleit notes, credit expansion through low interest rates  has moral and political consequences, triggering a “revaluation of all values” that erodes market coordination. Manipulated interest rates falsify the signals guiding entrepreneurs through time and space, fuelling malinvestment and cyclical crises. To understand Javier Milei’s cry to “destroy the central bank” is to see it not as populist fury, but as a demand to confront the very institution at the root of monetary disorder. 

Historical Origins of the Central Bank as an Engine of Disorder 

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Modern central banking began with Stockholms Banco in 1657, the first European issuer of paper money and chirographis pecuniarium, or unsecured written debts created ex nihilo. Its collapse in 1664, following reckless note issuance, revealed the danger of money creation unbacked by real savings. Yet the lesson went unheeded: Sweden’s Riksbank, founded in 1668, institutionalised state-sanctioned credit expansion. 

In 1694, the Bank of England refined this model, financing the Crown’s war debts in exchange for monopoly privileges on note issuance. As David Graeber wrote in ‘Debt: The First 5,000 Years’, this marked the political birth of public indebtedness. Money was transformed from a spontaneous market medium into an instrument of imperial finance. Adam Smith saw the consequences clearly: central banks became “engines of the state,” enabling governments to extract resources beyond taxation or real saving. Britain’s wars were fought not with gold, but with paper illusions and the deceptive coinage of debt. 

The Peel Act of 1844 aimed to tie note issuance to gold, yet banks evaded it, expanding credit through fractional-reserve lending with minimal reserves. 

As Austrian economists such as Jesús Huerta de Soto contends, such a system violates the principle of tantundem, the obligation to return the same kind and quantity deposited, and thus constitutes a “crime of misappropriation.”  

Inflation, far from a benign phenomenon, exposes the true nature of modern money as a depreciating substitute, severing the natural link between savings, value, and real capital formation. 

Through the Cantillon effect, inflation redistributes wealth - benefiting banks, financiers, and the state while harming wage earners and savers - making central banking a systemic force of privilege and distortion. 

Financialisation as a Consequence of State-Driven Monetary Expansion 

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As economist Perry Mehrling notes, global financialisation has created a “hierarchical, unstable” Financial Society - ultimately a political outcome of state-driven monetary expansion. Central banks operate in symbiosis with governments and commercial banks: the former gain privileged access to credit, while the latter finance deficits without taxation. The abundance of fiat money depresses interest rates and sustains an economy built on debt and illusory capital. 

This system monetises debt, forming a credit pyramid where money follows politics, not markets - making central banks arsonist-firefighters, simultaneously causing and responding to financial crises. 

According to Austrian Business Cycle Theory (ABCT), artificially low interest rates distort the relationship between savings and investment, misleading entrepreneurs and consumers alike. The inevitable result is malinvestment, followed by crisis when real savings prove insufficient. 

As scholastic Juan de Lugo once observed, the “just price of money” (the interest rate) is known “only to God”(p.229).

Monetary planning, therefore, replaces coordination with distortion, generating the recurring cycles of boom and bust that define modern finance. 

Central Bank’s distortion of temporal preferences 

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Intertemporal preferences—balancing present consumption and future saving—anchor rates and coordinate investment. Across the Western world, three decades of suppressed rates eroded real savings, encouraged consumption and debt, misdirected investment into overextension and malinvestment, and produced recurrent boom–bust cycles (see graph). 

Figure 1: Distortion of macro-intertemporal preferences, adapted from Polleit’s (2023, p.231)  “A Brief Note on Bank Circulation Credit and Time Preference”.  

The diagram illustrates how monetary expansion distorts consumption, savings, and investment through artificially low interest rates. 

On the left side, the graph shows consumption (C) and interest rates (i). The black diagonal line depicts their normal relationship. Initially, the economy rests at point A′ with rate i* and consumption C*. Monetary expansion injects liquidity, shifting consumption to C₂ and lowering the rate to i₁ (point D′). Rising demand then lifts prices and consumption to point E′ (C′′). The key insight: monetary expansion lowers interest rates and artificially boosts consumption, independent of real savings. 

On the right side, we see investment (I), savings (S), and interest rates. The original equilibrium is at point A, where savings equal investment at rate i*. With monetary injection, savings appear to increase (S → S′), although this increase (ΔM) does not reflect actual deferred consumption. Interest rates fall to i₁, prompting higher investment (+ΔI) at point B.  

However, the decline in real savings (–ΔS) shifts the economy to point D, where investment is misaligned with actual capital availability through saving. Where in any economy can investment precede saving? This imbalance generates malinvestment and resource misallocation. 

In summary, central bank-driven credit expansion misrepresents the real availability of savings, distorting intertemporal preferences and triggering economic imbalances. Consumption is prioritised over savings, and businesses are incentivised to over-invest, inflating unsustainable bubbles. Modern fiat currencies, therefore, function as instruments of institutionalised debt, amplifying cycles of boom and bust and serving political ends rather than facilitating genuine market coordination. 

Conclusion 

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This article contends that central banks are not neutral stabilisers, but institutional sources of distortion sustained by legal privilege and fiscal coercion. By manipulating money and credit, they misalign intertemporal preferences, causing cycles of malinvestment and crisis. Through fiat issuance and fractional-reserve banking, they entrench financialisation, inflationary debasement, and systemic inequality. Such an analysis legitimises critiques like those of Javier Milei, not as populism but as responses to the institutional and epistemic failures of modern monetary systems. The abolition of central banks, therefore, emerges as a defensible proposition grounded in economic reasoning, historical evidence, and ethical coherence.