Exclusive Interview
George Selgin on Austrian Finance, Central Banks and the Virtues of Free Banking
The Daily Bell is pleased to present an exclusive interview with George Selgin (left).
Introduction: George A. Selgin is a professor of economics in the Terry College of Business at the University of Georgia, a senior fellow at the Cato Institute in Washington DC, and an associate editor of Econ Journal Watch. Selgin formerly taught at George Mason University, the University of Hong Kong, and West Virginia University. Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School, which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency. A central claim of the Free Banking School is that the effects of government intervention in monetary systems cannot be properly appreciated except with reference to a theory of monetary laissez-faire, analogous to the theory of free trade that informs the modern understanding of the effects of tariffs and other trade barriers. Selgin is also known for his research on coinage, including studies of Gresham's Law and of private minting of coins during Great Britain's Industrial Revolution, and for his advocacy of a "productivity norm" for monetary policy – a plan that would have policymakers target the growth-rate of nominal gross domestic product at a level that would allow the overall price level to decline along with goods' real (unit) costs of production.
Daily Bell: How did you develop your interest in economics?
George Selgin: The story of my becoming interested in economics is actually rather complicated. My childhood dream was to be a marine biologist or oceanographer, and those remained keen interests of mine through college. I ended up adding an economics major partly at my father's urging. In fact my father absolutely loathed Friedman and Rand and all the free-market people, and looked forward to my becoming a socialist. So he was very disappointed when my beliefs turned the other way.
Daily Bell: Did he eventually relent?
George Selgin: Yes, his own thinking changed after the collapse of socialism, so he was actually proud of me when, a few years before he passed away, I showed him the copy Milton had sent me of his letter recommending me for tenure!
Daily Bell: You studied Ayn Rand's philosophy as a young man. How much of an Ayn Rand fan are you?
George Selgin: Like so many others I became a fan of free markets by reading Atlas Shrugged as an undergraduate. But I didn't consider myself an objectivist for very long, if indeed I ever thought of myself as one. Encounters with self-styled objectivists while I was studying economics at NYU finally settled the matter for me. Their way of arguing reminded me of so many talking dolls – the same catch phrases would keep coming up, that were supposed by the objectivists to be unanswerable, but which mainly left me scratching my head. One I recall was, "You cannot have a market for a market." That was the explanation for why anarcho-capitalism wouldn't fly.
Daily Bell: What did it mean?
George Selgin: I still don't know what it was supposed to prove. Since them I've met many objectivists who seemed perfectly reasonable; but then I also became increasingly unwilling to identify myself with ideologies or labels of any sort.
Daily Bell: Do you consider yourself an Austrian economist?
George Selgin: While at NYU I did consider myself an Austrian and, more precisely, a Misesian. Despite the influence Hayek's Denationalisation of Money had on me, I came to regard him as rather too namby-pamby for me! But that attitude didn't survive my first few years in the profession, which taught me that, if I was really going to be a scholar – and by then that was what mattered to me most – I needed to forget all about schools of thought and such. That is, I decided that I preferred being an independent thinker to being a representative-in-good-standing of this-or-that school or ideology. What's more, I decided that having an ideology or identifying with any school was just going about things the wrong way, by starting with a set of answers before researching a question.
Daily Bell: That sounds like a tough road – "less traveled."
George Selgin: I no longer refer to or even think of myself as an Austrian economist, or as any sort of "free market" economist. If other people think I'm one of those things, that's fine – but I don't conduct my research with any thought of making such labels fit. There's a cost to this, of course: people may think I'm being ungrateful; and I certainly feel very lonely at times. But it's the only way I know in which to stay true to my values.
Daily Bell: Tell us how you developed your interest in free banking.
George Selgin: After college I first tried to combine my main interests by working toward a degree in marine resource economics at the University of Rhode Island. The program turned out to be a disappointment to me – neither fish nor free-markets, you might say; just one Hamiltonian equation after another.
Daily Bell: We have trouble visualizing you as a marine biologist.
George Selgin: To keep my brain from rotting I decided to spend my spare time reading up on economic subjects I hadn't had a chance to study in college. I started with monetary economics simply because I wanted to get what seemed to me the hardest subjects out of the way first. I read everything I could get my hands on, particularly concerning inflation (which was the big issue back then). Some of the books were very bad indeed; others less so. But then I read Henry Hazlitt's The Inflation Problem and How to Solve It, and the scales fell from my eyes! Next came Mises' Theory of Money and Credit, which in turn led to my reading Hayek's Denationalisation of Money. That hooked me.
Daily Bell: You took human action?
George Selgin: I quit URI and applied to the Institute for Humane Studies for a summer grant, which allowed me to write a long essay on "Free Banking and the Monopoly of Money" that contained the germs of much of my later research. While I was working on the project the institute's president, Walter Grinder, sent me a couple chapters from Larry White's dissertation, which was itself still in process then, on the Scottish free banking system. After reading them I wrote Larry, asking him to let me know as soon as he got a job, because I intended to study with him. So we both turned up at NYU at the same time, and have worked together ever since.
Daily Bell: Can you please compare Austrian economics and free banking.
George Selgin: I suppose that all self-styled Austrian economists favor "free" banking, understood to mean banking with no special government regulations or barriers to entry. However [free-market Austrian economist] Murray Rothbard believed, and his followers continue to believe, that in the absence of special government interference all banks would hold 100-percent reserves – presumably of gold or silver coin or bullion –against any of their notes or deposit balances redeemable on demand.
Daily Bell: You don't hold that view?
George Selgin: Larry and I and other non-Rothbardian students of "free banking" generally take for granted that unrestrained market forces would favor "fractional" reserve banking. The disagreement has given rise to numerous articles from both sides. As these are readily available there's no point in my trying to summarize them.
Daily Bell: It's been a passionate debate because Murray Rothbard has proven a very powerful force in Austrian economics, especially in the US.
George Selgin: I am always shocked when I read some Rothbardian assertion to the effect that "if we had real freedom in banking, banks would be forced to hold 100 percent reserves, or something close to that," as if the question were entirely hypothetical and there was no empirical evidence to draw upon. In fact, there have been many past episodes of free banking, or of banking that was approximately free, and every one of them refutes the claim in question.
Daily Bell: That brings us to Scottish free banking.
George Selgin: In the Scottish free banking system, which flourished from roughly the mid 18th century to the mid-19th, banks often held gold reserves equal to less than 2 percent of their combined notes and demand deposits. Yet the system performed very well, with what were (in comparison to other arrangements both then and since) very meager banknote and deposit-holder losses. The Scottish people were in fact so trusting of their banks that they considered it a nuisance to be handed a gold coin rather than a Scottish banknote.
Daily Bell: Can you be more specific on some points of controversy?
George Selgin: At one point Rothbard wrote an article in which he made several claims to the effect that the Scottish system wasn't truly free. In particular, he suggested that Scottish banks relied upon the Bank of England as a lender of last resort. The claims – particularly the one mentioned here – were generally untrue; and Larry wrote a couple articles pointing this out, the gist of which he later incorporated into the second edition of Free Banking in Britain. Yet several of Rothbard's followers continue to repeat his old arguments, ignoring Larry's detailed rejoinders. This gets pretty tiresome after a while!
Daily Bell: Give us some background on US "free banking."
George Selgin: No less tiresome is some mainstream economists' habit of claiming that free banking was tried in the U.S. before the Civil War, where it flopped. But although its true that a number of U.S. states passed so-called "free banking" laws, those laws didn't provide for "free" banking in the literal sense. They established something like general incorporation procedures. But they also subjected banks to some onerous regulations. For example, they all disallowed branch banking while requiring banks to back their notes with particular assets. Economic historians have since shown that these and other regulatory restrictions were the most important cause of failures among U.S. "free" banks.
Daily Bell: Why hasn't free banking caught on, worldwide in the modern era?
George Selgin: There are two reasons, in my opinion, why genuine free banking has not "caught on," despite its past successes. The first is that central banking, which entails, among other things, the monopolized supply of paper currency, is a boon to national governments, which obtain routine financial favors from their central banks in return for rewarding them with currency monopolies. To the question "qui bono" asked with respect to central banking, the most obvious answer is always: the national treasury. But this doesn't really get to the heart of the matter, for if their fiscal advantages alone could sustain privileged monopolies of any kind, we might still have government-sponsored salt monopolies and such.
Daily Bell: The second reason?
George Selgin: The fundamental reason why central banks, which are essentially mercantilist institutions, survive today is because they have managed to secure economists' blessing. This blessing in turn reflects economists' tendency to treat monetary instability as a problem inherent to free markets, which only central banking can address, instead of seeing central banks themselves as a principle source of monetary instability, as they might were they to study monetary history more carefully than most do. Consequently economists have come to apologize for government currency monopolies, despite having long condemned such monopolies in other realms, and for good reasons.
Daily Bell: How do you see the near-term future of free-banking?
George Selgin: I'm convinced that, if we are ever going to see progress toward free banking, and away from our present reliance upon central banks, we must first work to alter the conventional wisdom among economists. Until that wisdom is itself modified, there's no point in trying to change the minds of policymakers. Policymakers aren't in the business, after all, of adopting radical ideas, that is, ideas that find little favor among academic experts. Free banking can perhaps gain popular support once it ceases to be a radical idea among academics, but not before.
Daily Bell: Give us an update on your current research and professional activities.
George Selgin: Although I remain committed to my original research program, devoted to exploring the workings of market-based monetary systems, I've been increasingly inclined to steer away from the broadly "macroeconomic" topics that were my main preoccupation until a decade ago or so to more specific "microeconomic" inquiries, that is, and especially ones devoted to up-close examination of various historic arrangements.
Daily Bell: What subjects are you writing on?
George Selgin: My most recent book, Good Money, is an example – it explores in considerable detail the origins and workings of a private coinage arrangement that sprung up during Great Britain's Industrial Revolution; and I've recently finished a first draft of a paper examining the circumstances surrounding the turn to fractional-reserve banking by London's 17th-century goldsmiths. But not all of my work is either so focused or so exclusively concerned with history. One of my other projects, which Larry is also working on, is a general assessment of the Fed's performance since its establishment in 1914. We hope it will convince people that, whether free banking seems worth pursuing or not, there's every reason to be dissatisfied with our present arrangement.
Daily Bell: Thank you for taking the time to share your views with our readers.
George Selgin: It was my pleasure.
George Selgin, along with his mentor Lawrence White, blazed an original trail in the late 20th century that virtually resuscitated the concept of free-banking. Free-banking is simply the idea that a bank (or any entity operating as a bank) is free to accept deposits and loan money beyond the deposits it has on hand. This banking methodology is known as fractional banking and evokes strong feelings within the free-market universe.
The United States economy was in a sense based on free-banking, even after the Civil War, and until the advent of the Federal Reserve in 1913. However, the US never offered an entirely free-banking economy – given the Constitutional definition of money-as-silver – and bank owners often found they could not be chartered without buying a good deal of municipal (local) debt.
Famous free-market economist Murray Rothbard has suggested that local American debt was often questionable and made bank balance sheets unstable – leading to bank runs. This gave American free-banking a bad name, leading to the appellation "wildcat" banking. Thus we could argue that untrammeled free-banking was never implemented in the US.
Where are we now? Today, in America and around the world, banks function with fiat-money fractional reserves, and Ben Bernanke has suggested doing away (recently), even, with those. The idea is that within a central bank money environment, banks are basically distribution centers for debt-based money and it does not matter whether they have additional "funds" within their coffers or not.
Bernanke's position in fact is simply a recognition that the banking system, not based on gold and silver money, is really only an imitation of what once existed. Today, the Fed and other banks could just as easily disburse paper and electronic money directly to businesses and consumers – but that would mean bypassing the banking system that is a main feature of modern societal power and control.
The current system obviously does not work very well. Free banking would be one solution. Yet free-banking – which Selgin and others believe has proved viable for long periods of time in the past, especially in Scotland, and less well in the US (to the degree that it was implemented) – remains a controversial subject.
Free banking arouses strong passions. Anti-free bankers have suggested than anything other than a 100 percent gold standard – when it comes to securing money in banks – would be something of a criminal endeavor, even in a free-market society. Beyond that, and regardless of the degree of criminality, the position of anti-free bankers remains that the marketplace itself would immediately reject a banking system that did not back deposits fully with precious metals.
The crux of the argument within free-market circles, therefore, is whether or not free-banking (fractional reserve banking) is (1) an acceptable behavior and (2) a practical one. Free-banking backers (and we are partial to free-banking) would respond that (1) the market should be allowed to decide whether free-banking is acceptable and (2) the practicality of free-banking has been proven by past episodes.
Ultimately, we don't believe that money is so complicated as people make it out to be. Money, historically, is gold and silver and governments (historically) have done anything and everything in their power to control money and to substitute paper and – now – electronic media in its place. But inevitably substitute money media is abused and inflated and history shows us that sooner or later gold and silver tend to circulate once again within the context of an honest money standard.
So here is the question. What would be a default standard in a truly free-market economy? We would suggest that one answer might be free-banking where anyone is able to offer a warehousing service for gold and silver and issue paper notes (receipts) that may be accepted at least locally as cash. Additionally, we would suggest individuals or entities doing the warehousing would be entitled to pursue fractional reserve banking so long as it was disclosed.
Is it wrong to let the market decide on what kind of banking works? Free-banking, fractional reserve banking, even central banking (or a variant thereof) all seem logical to us so long as they are pursued within a free-market context. It may even be that the marketplace would determine a 100% gold reserve to be ideal. But the point is, let the market decide. The problems begin when government steps in. Then distortions, bad-dealings and destructive inflation (and price-inflation) are inevitable when they do. In our opinion, a private marketplace for money would sort out these problems through competition and people's natural inclination to be prudent (for the most part) about their hard-earned money. See, maybe it's not so complicated after all.
Dr. Selgin's interview was edited on receipt. Bio excerpted from Wikipedia.
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Posted by Jon Matonis on 04/23/10 06:42 PM
I have followed Selgin/White for years and I agree with the position that fractional banking would exist and compete alongside 100%-reserve banking in an Austrian free banking environment. Since there would be no legal tender laws, the currency attributes most demanded would succeed. It is not fraud if the fractional-type banks state their currency features/backing in an upfront policy, such as broader circulation, higher interest rates earned, better counterfeiting detection, etc, etc.
An excellent audio on the topic is Jeffrey Rogers Hummel, "Why Fractional Reserve Banking Is More Libertarian than the Gold Standard" (July 15, 2008) and I have the link with a thorough bibliographical section at:
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Posted by Raptoreyes on 04/21/10 02:53 PM
Your response to my earlier post is interesting in several ways.
1. You assume I want gold to be "legal tender". This is the normal authoritarian default thinking tragically common to all humans I suppose. Allow me to clarify my position on this. I would abolish all legal tender laws (except that any backing would have to be in the form of a durable commodity) The nice thing about gold silver platinum and palladium is the low cost of storage. Build a vault and hire some security guard in a country with a strong culture of moral rectitude and banking privacy {such as Switzerland for example} and your costs of storage are manageable, along with the customers storage fees.This is all due to the superb resistance of these metals to rust and corrosion. In effect the only form of commodity savings you could will to your children before chemical processes destroyed the commodity in question. Very few chemical elements fit the description of a retirement account but the precious metals DO.
2. This brings me to your idea of a "calorie bank", a proposal I first heard from a gentleman I met in Thailand recently. (who knows perhaps your him, as I do not remember his name and I did mention this site during the exciting conversation). My prognosis is that the idea is a great one but the support technologies have not caught up to it yet. Grain and other energy forms have some substantial storage hurdles that mimic the effects of high inflation. Most food needs to be stored in ultra low temperature refrigeration (lower then a typical home refrigerator) or packed with heart stopping amounts of salt to be ready to eat after an extended period of years. (food cryonics :-))
Add to the costs of a vault and security guards, the huge costs of electricity to keep the food from becoming inedible and you have what amounts to high storage fees which mimic inflation. Outside the western world, their isn't enough extra electricity per person to keep food in good condition. (calories could not be international as metal money is) This idea however has merit once we have thorium reactors, cheap fusion and electricity is MUCH cheaper, as a percentage of the average world income then it is today. These "calorie dollars" would have to drop in value over time to reflect the cost of electricity needed to keep them pristine.
Right now the costs of storage over a 40 years to retirement period of a given source of edible calories is very high. The technology of plenty that would allow food to become money does not appear to be here yet. However if new tech is invented we should reevaluate your statements. (Even just barely edible canned goods, can have rather low shelf life's when stored in hot places like the tropical regions of the world)In normal times grain cannot be used as money, because money tends to be based on luxury goods. (during a crisis however things change very temporary) Anything too common will have too low a unit value.
Among farm products fruit has the highest unit value as its sweet and enjoyable to eat. Even so prices of 6 cents a pound are not uncommon for fruit fresh off the tree. Energy commodities also have very volatile seasonal prices. This trouble too would have to be solved very carefully. However I think it can be solved once electricity becomes dirt cheap enough. In the age of energy shortages that day might NOT be very close.
3. Excess reserves? Remember that a banks excess reserves are a depositors LIFE SAVINGS at stake. Just because the banker considers them a nuisance, does not mean they aren't a matter of life and death for the customer. This is not to say the customer could not choose to have the bank loan out a portion of his money by explicit consent instead of the shady implicit consent that banks engage in today. The bank and customer would split the profits of the loan. However the customer should not have access to the funds he chose to loan out until the principal of the loan is paid by the debtor. Too many times in our computer generated world we process transactions instantly without finding the willing counter party till later (if ever in the case of some types of fraud).
Transactions should not be processed until those willing to take the other side of the transaction give their consent to that particular transaction. Putting this law in place would help ensure the finance industry did not create currency out of thin air. The trick is making the market actually work the way Joe Six Pack naturally assumes it works, so that everybody (not just those who work in law or finance) know what game is being played. Right now the laws are too complex with too many hidden favors to this group or that for anyone to know how the system works. Thus in the land of the blind the man with one eye becomes king. Lets try to avoid this outcome.
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Posted by Martin Brock on 04/20/10 01:12 PM
Property rights are forcible impositions, for better or for worse, often for worse. Markets are not effective if the property rights are wrong, if that makes any sense.If we simply declare Saddam Hussein proprietor of everything, then we'll all bargain with Hussein or his agents for everything, but this "market" isn't very attractive to me.
States establishing less comprehensive monopolies also impede efficient, utilitarian organization, and as Selgin points out, a monopoly of monetary authority is no exception.
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Posted by Martin Brock on 04/20/10 12:33 PM
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Posted by Martin Brock on 04/20/10 12:29 PM
Regardless of the childlike sense of entitlement inculcated in many Americans, mandating 100 reserves in durable commodities is an incredible proposition. I support free banking as Selgin does, but this mandate is the antithesis of free banking.
I can't support any durable commodity, gold or anything else, as a legal tender either, because a legal tender becomes a standard of value in practice.
If I had the choice, I'd rather support a free banking system fixing the price of durable commodities or some concrete but substitutable property of durable commodities, like the calories in staple grains.
I'd hold banknotes entitling me on demand, or within specified periods, to a given number calories in grains of standard quality, corn, wheat, soybeans, rice, etc. The notes would promise calories, not particular grains, so the price of a calorie, not the price of particular grains, would be fixed.
Calorie banks would hold calories in reserve (actual grain in elevators or contracts for delivery of the grains) and extend credit by issuing these banknotes. T
he notes could and would exceed the supply of grains in reserve, because banknotes created to extend credit do not represent the value of reserves. They represent the value of loans, including the value of collateral securing loans.
A bank need not hold the grains, because it may exchange loans, or the collateral, for the grains to replenish reserves if necessary.
Commodity backed money is not simply a warehouse receipt for the banked commodity. The commodity is only the standard of value. Commodity backed money denominates the value of everything, relative to the value of standard commodities, not only the value of the standard commodities.
Until scholars like Selgin inform people of this fact, commodity backed money threatens to evoke disastrous monetary policies, like requiring banks to hold excessive reserves.
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Interesting insights, thanks.
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Posted by Fred Foldvary on 04/20/10 10:13 AM
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Thanks for the link. Good job. Well done.
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Posted by Raptoreyes on 04/20/10 05:19 AM
It becomes impossible for many to make informed choices for themselves because the legal system is unfathomable to all (except a tiny priesthood of super elite lawyers that might understand one tiny piece of the whole better then the regulators that wrote the particulars of the law).
The legal system as we have it today turn everybody into a child to one degree or another with regard to understanding the law. For this reason alone it should be mandated by law that banks have 100 reserves in "durable commodities" if they are holding deposits for the joe six pack public.
Otherwise the legal system can be perverted into a weapon against anyone without access to the type of lawyers who work for a retainer of 1million or more a year. As Bob pointed out in the first post... word games could become the end of our civilization if a carefully crafted stop isn't put to it. Click to view link
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Posted by Clayton on 04/20/10 03:08 AM
This is nothing less than what common sense would require of investing in a mutual fund. Just this weekend, another local bank was taken over by the F.D.I.C. and merged by fiat with one of its larger and better healed competitors. What was this bank? It turned out to be a highly leveraged Mortage Backed Security fund, masquerading as a depository.
I hope they had fun while it lasted, but there seemed to be no sense of regret that their misuse of customer accounts has now become a liability to the taxpayer.
Going back to my earlier postings concerning the effect of the information revolution on monetary phenomena, the low cost and high efficiency of clearing transactions at this point in time has made it possible to monitor on a moment to moment (real time) basis the financial position of even a high complex intermediary.What the financial industry in general needs is self-policing and insuring of its risks.
This is what the Scotish banks did to a large degree in the period mentioned by Dr. Selgin. This would put people in the industry, who were knowledgible about the workings of the specific institutions in question, in charge of assessing their risk.
Without government interference, the incentive would change from serving the folks in DC to protecting the capital of the institutional matrix of finance. Open to competition, risk assessing firms would compete openly. Some would end up serving the interest of the corporations and others, like Consumer Reports, would serve the interest of the investing public. As a result, a real dialogue would evolve. And with the benefit of the internet, it might (as the conversation we are having is) become interactive.
This would assist in generating a dynamically intense espistomologic reevaluation of what is known as money.As for the depository institutions that I spoke of. In concurrance with Dr. Hans Hoppe, I feel that private insurance firms would be more than sufficient to enforce the claims of the depositors. In our current poluted system of so-called justice, if a fraud is committed by a federally insured financial firm and then found out and successfully prosecuted, the losses are made up by the taxpayers and the payments made to the depositors. In the system that I am talking of, the losses would be made up by the insurance firm.
Having been trained in auditing during my formal education for accounting, I feel confident that I could put together an auditing system that would give ample early warning of misdoings at such an institution. And this auditing procedure would be certainly a necessity of purchasing insurance from any legitimate insurance firm.
Its cost would be part of the policy. All parties would be privately owned and the transactions would be voluntary. Contracts would be binding on all the principles to them and the methods of remedy would also be explicitly spelled out in advance, including the firms that would provide the acts of enforcement.
All this is in accordance with the principles of a private law society, where no exogenous unrelated parties could impose their will upon the adjudication of disputes.Now, who would place their actual money in an uninsured depository, when an insured one is available? I am not suggesting that an uninsured depository could not exist, but given a free market in advertising such services, I think a savey business man would see the virtue in providing insurance. Openness and competition are the keys.
Finally, I do not believe that police presence is prima facia un-libertarian. Enforcement of contracts is essential to a complex divison of labor and deployment of capital assets.
Human society is filled with no goods, who will find every opportunity to live off the fruits of other mens' labor and ingenuity. I have lived with and worked with a number of them. I spent several years working in the financial services industry. I have encountered numerous fallen souls, thieving away at their telephones, destroying the hope and happiness of their faceless victims, and then moving on with non-chalance to the next one.
I am a realist. The question becomes whether or not there exists a free market in security services, versus the one we have today that is dominated by territorial monopolies.A free market economy will not perfect the nature of man, but it will remove a major inpediment to his moral improvement, namely the capricious intrusion of government into his affairs. It might also reduce the temptation to "get together and behave in a governmental manner."
My conclusion is that fractional reserve banking will only prosper in so far as it has a government to lean on. Otherwise, it would be exposed as being not so much a bank as a mutual fund.In closing, I would hope that another and more important topic would merit some discussion, which is the financing of the long and complex chains of payables and receivables, which underlie our complex processes of bringing consumer goods into existense and into the market. This is the question monetary thinkers should be focusing on, because it is upon the success of this process that the fate of humanity rests.
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We have differences of opinion, but your erudition is formidable and we thank you, much, for contributing.
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Posted by John Forster on 04/20/10 12:07 AM
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Posted by Clayton on 04/19/10 10:57 PM
I have many objections for his so-called "Free Banking" theories, but the first is the one that should put to rest the justifications for so-called Fractional Reserve Banking.
To permit an individual or a group of individuals to issue script that is without full redeemability, and present it in exchange as though it were script that is fully redeemable is simply an act of fraud.
There is just no two ways about it, there is money itself and there are various forms of fiduciary media that act as money substitutes when in fact actual money is not available.
Fiduciary media comes in various qualities, depending on the probability that in time it may be redeemable (the claims associated with it resolved) in actual money.
Actual money is money in and of itself and does not require any further action upon it in order for it to serve in its role of exchange. In the case of gold coins, it may require an assay, but once it is determined to be what it is asserted to be, that is the end of it.
Second, when an individual or an institution issues money out of thin air, it is immaterial as to whether that institution is privately held or is some central bank, or member of some central bank. The new money issued by a fractional reserve bank immediately competes with all the previously existing money for the goods and services available, thereby driving up their price relative to their price free of the intrusion into the market place by the new money.
For those without such a mechanism for economic empowerment, who have to produce value to exchange, this nothing more than a rip off. The value of their production, as well as the attendent incentives to live a productive life, is damaged. It is a means by which the pronouncement of some loan officer can usurpt the just self-regualting activity in the marketplace.
Once such a policy is made acceptable to society at large, the immense benefits from issuing script become obvious to every unscrupulous person with the wit to understand the scheme. Soon these so-called "banks" spring up everywhere, taking in deposits with the offer of risk free above market rates of interest. They then turn around and indulge in large scale highly leveraged money printing, eventually issuing so many claims that there is no hope that these claims could be ever resolved in actual money, there being an insufficiency of actual money to make that possible.
In the end,depositors, having awakened to the disaster afflicting their finances, start calling for government, for regulation, for compulsion, and finally for edicts making the paper money, which their once actual money has been turned into, legal tender and compelling honest merchants and producers to accept it as such, or else face the impositions of the State.
As an aside, my encounters with Milton Freidman during the 1980's and early 1990's led me to conclude that although he had many good things to say of economic rationality, in the end he was no friend of ours. He was in fact a small, self-infatuated man whose intellectual progress was clearly stunted by the combination of his favorable press clipings and his avoidance of his self-contradictions.
His campaign to redeem the idea of Public (really Government) Education by the use of vouchers was the crowning statement as to his position on compulsion, taxes and entitlements.His life goes to the essence of what separates left leaning libertarian impostors from those who desire the end of government intrusion into the lives of honest, peaceful, productive people.
Additionally, the Cato Institute is falling into the mire of trying to make the system work. It is an impossible and idiotic task. It is truly a waste of time.To conclude my points, false money requires a constant propaganda campaign for it justification.
In a Gold Coin Standard paradigm, deposits would not only pay no interest, they would require a fee be paid to secure the holding of ones actual money. There being in such a system a strong likelihood of a constant gradual increase in the purchasing power of cash, this would more than compensate for the modest charges incurred.If an individual wanted to earn more on his cash holdings, he could invest them in bonds, equities, real estated, etc.
But he would be "at risk." and not be able to pretend that he was entitiled to a positve and above market rate of return without a compensating amount of risk to cash he invested.A so-called "Fractional Reserve" bank in these circumstances would be no different than a Mutual Fund, and its shares would trade on exchanges, as they do today, with their prices denominated in actual cash (ounces of gold per share).In distinction to the above, a Depository Instition, would have only those risks associated with it that would attend a warehouse and would provide for security and purchase insurance accordingly. Lending out any of the deposited assets without the prior knowledge and approval of the depositors would be a criminal act, and in a private law society, would be dealt with in the harshest manner both to provide for restitution and to set an example.
Finally, we have the last argument put forward by the Fractional Reserve Banking advocates, the insufficiency of media of exchange. Friedman had this notion that you needed to have a predetermined constant rate of growth in the money supply.Every year 90,000,000 new ounces of gold are mined and another 10,000,000 ounces are reclaimed from jewerly. This represents a growth rate of over 2 relative to the gold that has previously been mined and should suffice for a likely productivity growth rate of 2 to 3 percent per year combined with a population increase of 1 to 1 1/2 per year in the developing and developed world combined, to produce an increase value of gold as cash of about 2 percent per year.This was the case during much of the 19th century and was not a big problem, with the exception of those who made stupid investment decisions and used their political connections to get themselves special treatment.
As for the question of hoarding. Nothing is more condusive to the act of hoarding than increased uncertainty. Government by its very nature is based on caprice. More government, more fear, more uncertainty, etc. Less government, less hoarding.But real savings is not lots of cash in the drawer. It is production in excess of consumption. A society has a positive capital account when it has more productive capacity and stored usuable producer and consumer goods than it has an immediate use for.With this slack, its members can by "investing" those slack resources added productive capacity, both reduce the cost of its goods and services, as well as increase their quality, and thereby increasing what we refer to as the "standard of living."There is absolutely no need for dishonest money to facilitate this nobel process.
Reply from The Daily Bell
Most eloquent and erudite!
We agree with you about Cato and Friedman, and have written as much. But when it comes to free-banking (assuming the fractionality is disclosed) we wonder why there is so much difficulty in granting that the market ought to decide - especially if there are, as Selgin argues, viable historical precedents for such practices.
But is the alternative a grim one - of regularly policing each bank or warehouse to ensure that they are not engaging a such a practice?
And who would do the policing? And who would then shut down the offending warehouses and haul the merchants before a tribunal?
It seems to us that a determined enforcement of a fully backed banking standard might well imply a kind of police presence that is surely un-libertarian and even substitutes authoritarianism for a free-market solution.
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Posted by Weeble on 04/19/10 07:26 PM
Although Ayn Rand had her quirks, this reminds me of the 1970's Phil Donahue interview when a woman in the audience said she used to follow Ayn Rand, but is now "more educated".
Ayn shut her down, and rightly so. You cannot argue that we are on a slippery slope, as outlined in her "story".
Money is only a means to an end, not an end in itself. You cannot make money do things. People do things. Trade evolved from simple barter to money. Money could be gold and silver; easily carried and stored and always desired (therefore valuable and stable).
Once paper certificates redeemable for gold were issued, the fraud problems began.
Wanna trade a sheep for a photograph of a couple of pigs? Wanna trade a picture of a couple of pigs for a sheep(oh yes, come by anytime to pick them up).
The coming "flood" of street money will be marked by hard assets being of value again. Paper only serves the elite, as they have the facility to print unlimited amounts, so they can outbid us all..... and loving it!
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Posted by Jubilee on 04/19/10 06:50 PM
The only difference between them and the USD/FRN is the privilege of mandatory legal tender.
Has the Daily Bell come out in favor of repealing legal tender laws?
Reply from The Daily Bell
The Daily Bell is in favor of FREE MARKET money solutions. Government should stay out of the money business.
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Posted by RB on 04/19/10 01:40 AM
Click to view link
As always a good article by DB.
Reply from The Daily Bell
Thanks for the link.
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Posted by Lyfo on 04/19/10 12:19 AM
As a self-styled amateur economist, I too have puzzled over whether 'free-banking would necessarily be 100% gold backed. The standard, the competition would be 100% backed, certainly for savers who are conservative. People would demand to see not the color but the weight of their money.
But greater risk would still be optional. With accountability and responsibility REPUTATION would once again come to mean a great deal and like-minded people would be able to go out on a limb to produce something they truly believed in. Even some crazy altruistic or unproven idea! Oh Innovation, Enterprise and Invention!
All of our troubles seem so artificial! It is personal responsibility, accountability and reputation, along with being rewarded for it, that most effectively keep people to the straight and narrow. And contrary to the pessimistic views of mankind, free people in free markets would do a perfect job of it, oh yes, through trial and error, gain and loss.
Reply from The Daily Bell
Yes, free-banking would inevitably place considerable weight on the reputation of those running the warehouse.
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Posted by Greg Strebel on 04/19/10 12:17 AM
Any degree of fractional reserve lending seems to me to place demands on the unconsumed goods out of proportion with the actual quantity, thus driving inflation, and evidenced by price rises.
And any borrowing not destined for uses which self-liquidate the debt simply results in pulling future economic activity into the present. Not only will the particular transaction not take place in the future, but future spending will be reduced by the debt servicing costs.
Using the savings of others, as in the Savings = Investment economic identity, for entrepreneurial activity which, if successful, creates new wealth.
The discipline of limited availability of savings will reduce malinvestment and consumptive borrowing compared to the fractional reserve system which has discouraged savings due to the resulting artificially low interest rates, especially in view of the resulting inflation.
I am so pleased to have discovered the Daily Bell. It is most stimulating to be exposed to the wide ranging discourse. The links provided by some of your readers are provocative and often alarming. I have spent three hours today looking at information regarding government complicity in the Oklahoma City and the Bali nightclub bombings. It seems to me there is a link between dishonest money systems and out-of-control governments.
Reply from The Daily Bell
Thanks for the kind words, and for the feedback.
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Posted by Jimi BigBear on 04/19/10 12:14 AM
More than half the battles never even involved British troops! Either regulars or the hired (mercenary) Hessians. They were fought between the "rebels" - who wanted to split with England and the "loyalists" - tories who wanted to stay part of England.
Basically the Brits and Rebels fought to a stand still and then declared the war over. There is a painting in the US Capitol Rotunda depicting the "defeated" brits, leaving in full uniform and carrying their rifles! When does a defeated army get to do that?
Then there were the reparations that the Confederacy (that's right, we won the war and started "nationhood" as a confederacy) had to PAY the King! Then the problems really started with Hamilton leading the Federalists and vying at every turn for a strong central government - EXCEPT when it came to money.
What should have been a 4th major section (Article?) of the Constitution - and a 4th branch of government - the MONEY POWER - was held to a few vague sentences that are still debated to this day.In the interim - the PRIVATE banksters moved right in with the First Bank of the US and usurped the MONEY POWER from the Rightful Sovereign - We the People - and, especially since the 3rd takeover - the FED - they have created a defacto 4th branch of government under PRIVATE control - with more power than the other three branches combined and absolutely NO accountability.
Thankfully, led by the State Bank of North Dakota, the States are waking up and reclaiming the MONEY POWER from the PRIVATE banksters of the FED. This will have the added bonus of restoring a LOT of the power that has been stolen from the States over the years by the leviathan run amok federal government. Dr. Ellen Brown - who will soon be known as the Mother of Public Banking, I predict - has sparked a new revolution and there are now 9 states where there are calls for State PUBLIC Banks. See:
Click to view link
Reply from The Daily Bell
Thanks for the link. Again, the Fed is NOT entirely under private control. If it were, the federal government would not now be debating an "audit the fed" bill. Congress has ABDiCATED control. That is a different thing.
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Posted by Ralph Tamm on 04/18/10 09:12 PM
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Posted by Terry_freeman on 04/18/10 07:49 PM
When banks create "money" out of thin air and lend it, they are in that instant unable to fulfill their obligations, and vulnerable to bank runs. This inherent vulnerability, coupled with the great desire of politicians to borrow imaginary "money", leads progressively to central banking and faith-based fiat currency.
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Posted by MichaelM on 04/18/10 07:33 PM
That was the explanation for why anarcho-capitalism wouldn't fly.
Daily Bell: What did it mean?"... that an NYU student should not judge the content of a philosophy by what his fellow students fancy it says, nor devalue it because said newbies are still in their catch-phrase stage.
He should rather address the constituent ideas that must stand or fall on their own merit.
To set the record straight:Neither anarchists nor anarcho-capitalists have every argued for "a market for a market'. They argue for a free market in defensive force.
Objectivists recognize that there is a stolen concept* in that idea. The third party institution (government) that the anarchists want to replace with their free market must already exist and have monopolized and objectified the use of force in a society before any market can be said to be free. (*stolen concept: using a concept (free market, in this case) while denying its genetic root " the concept (government in this case) on which it depends -
Click to view link )
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Posted by Jimi BigBear on 04/18/10 05:45 PM
I feel that Austrian thought in general depends too much on a priori reasoning - where the conclusions are drawn first and then history viewed thru that lens - with historical facts that don't fit the preordained theories discarded.
That said (written), Professor Selgin STILL advances the Austrian idea that central banks are operated for the benefit of the government treasury - that somehow governments that "created" the PRIVATE central banks did so for their own largess and are ultimately responsible for the abominations that we all agree that they have become.
To believe this requires the aforementioned very selective view of history. This view is entirely unacceptable for the Bell by virtue of having one of the premier expose writer/researchers as contributor - G. Edward Griffin outed the CONSPIRACY that created the FED in his "The Creature from Jekyll Island."An objective view of history (which is not the same as an Objectivist's view) informs us that the MONEY POWER, as President Van Buren always wrote it in all caps, is, by Natural Law, a Right of the Sovereign of a Nation.
The Rightful Sovereign of America is the People. The MONEY POWER has been stolen from us repeatedly - the first theft by the Lords of Trade and Plantations at the behest of the owners of the PRIVATE Bank of England in 1764.
Dr. Ben Franklin ranked this as the prime cause of the Revolution, because it caused a severe deflation in the Click to view linkspite the massive counterfeiting (as an act of war) by General Howe and the loyalists in New York City, the "worthless" Continental Dollars issued by the People through their lawful government - the Continental Congress - as Thomas Paine said, were the "cornerstone" of the Revolution.
If the Founders had to rely on "free banking" or Austrian economics, the war never would have been fought. The 50 to 1 counterfeiting and speculation were the real causes of the monetary inflation of the Revolution's Continental Currency - NOT that the "government printed too much money." Also, if one searches for images of Continental Currency - you'll disprove another Austrian myth - that they weren't backed by anything.
So far I haven't seen a note over $8 in face value that didn't have engraved on its face that it was redeemable in gold or silver.
Moving on, I agree with the Bell that understanding how our "money" and banking systems work - more specifically, how they work to the advantage of the Establishment - the Global Elite in Bell parlance - is q
Reply from The Daily Bell
Thanks for the feedback. You write ...
"If the Founders had to rely on "free banking" or Austrian economics, the war never would have been fought."
But was it necessary in any case? Not for Canada ...
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