THE RATIONALIZATION OF CENTRAL BANKS

Charles Goodhart's The Evolution of Central Banks represents a rare an d welcome attempt to spell out those shortcomings of 'free banking'' t hat supply a rationale for the establishment of central banks. However , one of Goodhart's principal arguments - that central banks are pract ically inevitable outgrowths of the ''natural'' tendency for bank rese rves to become concentrated in a dominant ''bankers' bank'' - understa tes the role legal restrictions have played in sponsoring the emergenc e of bankers' banks, including the Bank of England. Some of Goodhart's other arguments against free banking rest on an exaggerated view of t he likelihood of business cycles and financial crises under free banki ng as compared with central banking.