I have great sympathy for your argument, and agree with the gist of it.
What you are describing is pretty close to the free banking eras of eg Scotland and Canada.
> The central bank is unregulated [...]
That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
> [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...]
It's probably more productive to think in terms of the total money supply, and less in terms of interest rates.
For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up.
Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.
What you are describing is pretty close to the free banking eras of eg Scotland and Canada.
> The central bank is unregulated [...]
That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
> [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...]
It's probably more productive to think in terms of the total money supply, and less in terms of interest rates.
For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up.
Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.