George Selgin outlines strategy for the privatisation of the money supply

I have earlier argued that NGDP targeting is a effectively emulating the outcome under a perfect Free Banking system and as such NGDP level targeting can be seen as a privatisation strategy. George Selgin has just endorsed this kind of idea in a presentation at the Italian Free Market think tank the Bruno Leoni Institute. The presentation is available on twitcam.

You can see the presentation here. You need a bit of patience if you are not Italian speaking, but George eventually switch to English. The presentation lasts around 45 minutes.

I will not go through all of George’s arguments – instead I recommend everybody to take a look at George’s presentation on your own. However, let me give a brief overview.

Basically George see a three step procedure for the privatisation of the money supply and how to go from the present fiat based monetary monopoly to what he calls a Free Banking system based on a Quasi Commodity Standard. Often Free Banking proponents tend to start out with some kind of gold standard – or at least assume that some sort of commodity standard is necessary for a Free Banking system to work. George does not endorse a gold standard. Rather he favours a privatisation strategy based on a NGDP targeting rule.

Essentially George spells out a three step procedure toward the privatisation of the money supply.

The first step (and this is especially directed towards the US Federal Reserve) is to move towards a much more flexible system provision of liquidity to the market than under the present US system where the Federal Reserve historically has relied on so-called primary dealers in the money market. George wants to abolish this system and instead wants the Fed to control the money base directly through open market operations. I fully endorse such a system. There is no reason why the monetary system and the banking system will have to be so closely intertwined as is the case in many countries. A system based on open market operations would also do away with the ad hoc nature of the many lending facilities that have been implemented in both the euro zone and the US since 2008.  George is essentially is saying what Market Monetarists have argued as well and that is that central banks should be less focused on “saving” the financial sector and more focused on ensuring the flow of liquidity (and yes, that is two very different things). George discusses these ideas in depth in his recent paper “L STREET:Bagehotian Prescriptions for a 21st-century Money Market”. I hope to return to a discussion of this paper at a later point.

The second step – and that should interest Market Monetarists – is that George comes out and strongly endorses NGDP targeting – or as George puts it a “stable rule for growth of aggregate (nominal) spending” and argues that central banks should do away with discretion in the conduct of monetary policy. George directly refers to Scott Sumner as he is making this argument. George’s preferred rate of growth of nominal spending is 2.5-3% – contrary to Scott’s suggestion of a 5% growth. That said, I am pretty sure that George would be happy if the Federal Reserve implemented Scott’s suggested rule. George is not religious about this. I on my part I am probably closer to George’s view than to Scott’s view, but again this is not overly important and practically a 5% growth rate would more or less be a return to the Great Moderation standard at least for the US. It should of course be noted that there is nothing new in the fact that George supports NGDP targeting – just read “Less than zero” folks! However, George in his presentation puts this nicely into the perspective of strategy to privatise the supply of money.

In arguing in favour of nominal spending targeting George makes it clear that it is not about indirectly ensuring some stable inflation rate in the long run, but rather “stability of (nominal) spending is the ultimate goal”. I am sure Scott will be applauding loudly. Furthermore – and this is in my view extremely important – a rule to ensure stability of nominal spending will ensure that there is no excuse for ad hoc and discretionary policy. With liquidity provision based on a flexible framework of open market operations and NGDP targeting the money supply will effectively be endogenous and any increase in money demand will always be met by an increase in the the money supply. So even if a financial crisis leads to a sharp increase in money demand there will be no argument at all for discretionary changes in the monetary policy framework. (Recently I have been talking about whether pro-NGDP targeting keynesians like Paul Krugman are saying the same as Market Monetarists. My argument is that they are not – Paul Krugman probably would hate the suggestion that monetary discretion should be given up).

Market Monetarists should have no problem endorsing these two first steps. However, the third step and that is the total privation of the supply on money will be more hard to endorse for some Market Monetarists. Hence, Scott Sumner has not endorsed Free Banking – neither has Nick Rowe nor has Marcus Nunes. However, I guess Bill Woolsey, David Beckworth and myself probably have some (a lot?) sympathy for the idea of eventually getting rid of central banks altogether.

This, however, is a rather academic discussion and at least to me the discussion of NGDP targeting and changing of central bank operating procedures for now is much more important. That said, George discusses a privatisation of the money supply based on what he calls a Quasi Commodity Standard (QCS). QCS is inspired by the technological development of the so-called Bitcoins. I will not discuss this issue in depth here, but I hope to return to the discussion once George has spelled out the idea in a paper.

Once again – have a look at George’s presentation.

HT Blake Johnson

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8 Comments

  1. Benjamin Cole

     /  February 4, 2012

    Interesting ideas, but I think the majesty and power of the sovereign need to stand behind money. Governments also need the right to print up money to pay off wars, or tp pay for clean-up after huge natural disasters etc (I am a peacenik, but WWII comes to mind).

    Counterfeiting? Banks going out of business?

    Reply
  2. Rob

     /  February 6, 2012

    “George is essentially saying what Market Monetarists have argued as well and that is that central banks should be less focused on “saving” the financial sector and more focused on ensuring the flow of liquidity ”

    I’m curious about this comment in the light of Selgin’s third point (privatization of the money supply). My understanding of how Free Banking will stabilize NGDP is that it will do so via the loans market (Free banks can increase lending when cash balances increase as a result of increased demand for money) How is this this reconciled with the view stated here – that the CB should ensure the flow of liquidity via OMO ?

    Reply
  3. Rob

     /  February 6, 2012

    Please ignore my comment – this is addressed at length in your later post on the same subject.

    Reply
  4. “George’s preferred rate of growth of nominal spending is 2.5-3% – contrary to Scott’s suggestion of a 5% growth. That said, I am pretty sure that George would be happy if the Federal Reserve implemented Scott’s suggested rule. George is not religious about this. I on my part I am probably closer to George’s view than to Scott’s view, but again this is not overly important and practically a 5% growth rate would more or less be a return to the Great Moderation standard at least for the US.”

    I’m curious-i understand that you don’t think this is a religious issue, but still, -why you would prefer such a lower target? That would imply very low inflation going forward even lower than the Great Moderation. Is this because you ulitmately enivsage a return to the low inflation of the gold standard-”hard money.”

    For if we presume real GDP at its historical mean this implies almost no inflation at all. The only other implication would be that you anticpate growth being much lower in the future.

    Reply
  5. Mike,

    If we were in a world that did not have any “history” and I was in charge of announce a policy rule for a given central bank. Then I would announce (I think…) a “productivity norm” where increases in productivity is allowed to lead to a drop in the general price level. I can see no reason why the central bank should aim for 2, 3 or 4% inflation (in the long run) when it can aim for zero demand inflation. That would also be a good insurance against bubbles forming. I a sense I believe that a “productivity norm” is a “natural state” of affairs and as such would lead to the lowest level of distortions to the workings of the price system.

    This is not because I would be aim for re-inducing a gold standard and by the way a gold standard would not ensure that monetary policy differentiates between supply and demand inflation/deflation. A productivity norm does exactly that. A productivity norm of course is a NGDP level target where the growth path for the target level grow in line with the long-run growth in productivity (per capita).

    Would I recommend that the Federal Reserve or the ECB introduced such policy right now? No exactly because we have a history and the history was the both the Fed and the ECB conducted monetary policy as if they were targeting NGDP growth around 4 or 5%. All private contracts were made under the assumption that the Fed and the ECB would deliver on the “promise” to deliver 4-5% NGDP growth year-in and year-out.

    Finally the first thing the Fed and ECB should of course be to bring back the NGDP level to the pre-crisis (5%) trend. Thereafter we can discuss whether we should target 3% or 5% NGDP growth.

    Reply
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