1) It helps to maintain price stability
2) It helps prevent deflation
3) It can accelerate economic growth
I could ramble on for hours as to why this logic is incredibly flawed, and indeed is part of the root of the problem with our current monetary and financial systems. Instead, however, I will let this article outline it for me, so I can move on in order to piece together more on the articles I'm working on.
Enjoy, and check out the full article, whose link can be found below.
“Price stability” actually makes the task of entrepreneurs more, not less difficult. The changing price of money, regulated by people’s demands, can easily be anticipated by entrepreneurs in the same way that the prices of goods and services change. “Entrepreneurs can earn profits and avoid losses by anticipating these changes just as well as changes in prices of other goods. If they anticipate rising prices for goods overall, then they will increase their demands for resources by bidding up wages today. Likewise, lenders will insist on higher interest rates today.” Additionally, “two of the periods of most rapid economic growth in U.S. history were from 1820-1850 and 1865-1900,” where the purchasing power of the dollar doubled.
Central banking supposedly prevents price deflation, where consumers withhold their consumption in anticipation of even lower prices, which then restricts production and employment. Herbener smashes this Keynesian fallacy, arguing “people in the real world can only obtain the services of goods by buying them. They choose at some point, to buy a good even if they expect its price to fall further. This happens every day in markets for consumer electronics as people buy tablet computers, cell phones, and so on knowing that prices will be lower and quality higher in the future.” Falling prices of consumers goods, which benefit the middle-class and poor, are actually one of the best aspects of a recession! Unfortunately, the Federal Reserve, especially in the housing market, keeps trying desperately to keep prices artificially high.
Lastly, there is the claim that a central bank accelerates economic growth. But by regulating interest rates by political consideration and not the market, the Fed produces boom-and-bust cycles, not real growth. “Credit expansion suppresses interest rates below the levels determined by people’s time preferences and increases funds for investment beyond the amount determined by people’s preferences for saving.” Capital comes not from a printing press, but from production and savings, in that order. From the extraction of raw materials to the purchase of the final product at the register, every step must pass the profit-and-loss test. This is how capital, and real economic growth, is created.
Read more here.