Many people find it hard to imagine a country without a Central Bank because we are used to having it. I used to think it was necessary too. There are concerns about who would handle making, giving out, and managing money without it. People say it would cause chaos.
In this blog, I will argue why getting rid of Central Banks could work, using Panama as an example. Since its independence in 1903, Panama has not had a Central Bank and its economy has been doing really well.
Without a Central Bank, Panama’s economy operates on what the market decides. Panama uses the US dollar by choice. The country cannot just print money; it must earn dollars through trade or services. This system is somewhat like the old gold standard. Over the past 20 years, Panama’s inflation rate has been very low, around 1%, and sometimes prices have even gone down.
Panama’s economy has been more stable than that of other Latin American countries, avoiding financial crises and currency problems. In the 19th century, Panama used gold and silver as money. The US dollar was also used, especially after the US built a railroad there in 1855. Panama initially became independent from Spain in 1826 but later joined Colombia. It became fully independent in 1903 with US support because of the Panama Canal. Panamanians were wary of paper money due to bad experiences and wrote in their constitution that paper money could not be forced on them.
This decision led to a system where the type of money used was chosen by the people. In 1904, Panama made an agreement to use the US dollar legally. At first, Panamanians preferred their own silver peso, but eventually, the US dollar became more common.
In 1971, Panama passed a law that allowed many international banks to operate freely, which helped the economy. Panama does not tax the profits from these international banking operations. This open banking system, without strict government control, helps Panama manage its economy well, even when lots of foreign money comes in.
Panama does not guarantee bank deposits or bail out banks in trouble, so banks must be careful with their lending. This has helped Panama avoid the banking crises common in other countries. When economic downturns happen, the market naturally adjusts without the government making things worse. Panama has managed to have a stable economy with low inflation without a Central Bank.
This shows that a country can do well economically without a Central Bank and without resorting to the inflationary production of money. Panama’s success suggests that other countries could also thrive under similar policies.
Hence, political will is required to explore the possibility of countries, including my homeland the Philippines, getting rid of their Central Banks to avoid the boom and bust cycles tied to arbitrary money printing. It is time to stop these anomalous central banking practices, particularly the manipulation of money supply and interest rates, which are often accused of creating artificial economic expansions followed by painful contractions.
Abolishing Central Banks would mean countries could not print money at will, thereby stabilizing the value of money and preventing the government-induced inflation that harms savers and fixed-income earners. It would encourage financial discipline, both by governments (which could no longer finance deficits by printing money) and by individuals and businesses (which would make borrowing and lending decisions based on actual market conditions rather than manipulated interest rates). Furthermore, without a Central Bank to bail out failing banks or businesses, there would be a stronger incentive for prudent financial management and investment, leading to a more stable and sustainable economic environment.
For the Philippines, transitioning away from a Central Bank-controlled monetary system could offer several benefits, including reduced inflation, more stable economic growth, and less government debt. However, such a shift would require significant structural changes. The country would need to go back to the gold standard, adopt a stable external currency like the US dollar, or anchor its currency to a stable commodity, ensuring that money supply growth is tied to real economic activity, not arbitrary decisions. It would also need to strengthen its financial system to handle the increased risks and competition without Central Bank interventions.
While the idea is compelling, it is not without challenges. The transition would be complex and fraught with risk, but, if managed carefully, could lead to a more stable and prosperous economic future.
