One day George Selgin is picking a friendly fight with the Market Monetarists, the next day he is picking a fight with the Rothbardian Austrians. You will have to respect George for always being 100% intellectually honest and behaving like a true gentleman – something you can not always say about his opponents. His latest fight is over the old story of fractional reserve banking versus 100% reserve banking.
Personally I never understood the 100%-crowd, but I am not going to go into that debate other than saying I agree 100% with George on this issue. However, I want to do a bit of PR for George’s posts and the response to his posts.
Here is George’s first post: 100-Percent Censorship?
Here is Joseph Salerno‘s response to George: The Selgin Story (Warning: This is typical Rothbardian style)
And George’s response to Salerno: Reply to Salerno
When you read an exchange like this you will realise why Rothbardian style Austrianism is completely marginalised today and George is a well-respected monetary historian and theorist.
Larry White also has a good post on fractional reserve banking – and why it is the true free market outcome in an unregulated market economy.
If you are interested in this discussion then you should have a look at Larry and George’s classic article “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians”.
Related post: I am blaming Murray Rothbard for my writer’s block
Update 1: The fist fight continues – here is a not too clever attacks on George from the comment section on Economic Policy Journal (which has nothing to do with a Journal) and here is George’s response: More Dumb Anti-Fractional Reserve Stuff
Dustin
/ July 13, 2012Selgin has great courage to be punching that bee’s nest again. The venom of vespa rothbardbro is painful, or so I’ve heard.
I just bought Horwitz’s book Microfoundations and Macroeconomics, and so I’ll just sit here quietly and read and ignore the carnage.
Lars Christensen
/ July 13, 2012Dustin, keep reading! Steve’s book is excellent.
Mike Sproul
/ July 13, 2012“”States have never established fiat monies through ‘social compacts,’. ..but
rather have had to create them at first by taking convertible cornrnodity-
based monies that were already in circulation and ‘depriving them of their
essential characteristic of permanent convertibility.”‘
Yeesh! The Massachusetts shillings, issued in 1690, were issued by a colony that was nearly bankrupt, had virtually no silver shillings. The colony did not offer to make the paper shillings convertible into silver shillings, except to accept them at par in tax payments. All the American colonies subsequently followed suit.
Becky Hargrove
/ July 13, 2012To someone who has not looked at monetary issues very long, the differences between George and the Rothbardians may actually seem subtle. But the closer one gets, the more important those differences are as to potential outcomes. Even though there is a non funny side I got a good laugh at George’s encounter with the wasps, whose nests I learned to avoid last year despite too many rough encounters elsewhere! However, George has his work cut out for him. Some of us still live where the books of the Rothbardians have conquered local shelf space in the bookstores.
Lars Christensen
/ July 13, 2012Becky, the problem is really that everybody should be reading Austrian economics, but many is scared away by cultism of some modern day Austrians. But any economist should of course read Hayek and Mises. I could not imagine have gotten to my present economic views had I not read Mises’ Human Action or Hayek’s Price and Production.
Mises and Hayek’s participation in the so-called Socialist Calculation Debate was extremely important and I think we can learn a lot from studying that debate.
And finally, my own political philosophical have been hugely influenced by Murray Rothbard – particularly The Ethics of Liberty. However, in terms of economic theory I don’t think that Rothbard made any lasting contribution.
Jon Finegold
/ July 13, 2012I would actually argue that the differences in theory are subtle; it’s the differences in interpretation that are broad, because as we’ve seen many full reservists are apparently unable to understand what they’re criticizing. A big influence in my — what stimulated me to become a professional economist (still on that route) — was Mises.org and I soon read Huerta de Soto’s Money, Bank Credit, and Economic Cycles, along with other critiques of FRFB. After several “debates” (e.g. Selgin schooling me on my blog and elsewhere) I finally decided to read The Theory of Free Banking, and realized that what these full reservists were criticizing is a straw-man. It seems ridiculous to me that these misunderstandings between economists can exist for so long, so I really have no explanation for it. Salerno’s response shows this misunderstanding (along with a poor grasp of the relevant history of economic thought).
Btw, if anybody wants to read a “middle of the road” response (since I’m not a market monetarist, or do I agree with MET): “From One to Ten…“
Lars Christensen
/ July 13, 2012Jon, thanks for the feedback and I am happy to see that you are trying to find some common ground and equally important try to make this a bit more civilized exchange.
Jens Hansen
/ July 13, 2012As a layman, I simply wonder how on earth a bank will have any money to lend out if it must keep a 100 % reserve. (Remember, please, that it must also hold a share capital – in Europe 8 % of the balance). And if they cannot lend out the money, why would anyone want to run a bank?
Jon Finegold
/ July 13, 2012Historically, banks may have originated as warehouses, where the depositor pays a fee. So, banks would profit on charges and sooner or later they might decide to lend out their own capital. But, banks are firms and therefore run by entrepreneurs, and so it makes sense for them to evolve the institution into what is now modern day banking. They can intermediate other people’s capital as well and pay a fee (what some might call an interest fee) on different types of deposits.
Lars Christensen
/ July 13, 2012Jens, see Jon’s reply.
nickik
/ July 13, 2012The idea the 100ers have is that you can tell the bank that they can lend out X amount of your money but in this time you are not able to get at it. So you can not get your money from a ATM at that time.
James in London
/ July 13, 2012100% reserve banks don’t lend they just act like safety deposit boxes. Which have a function. I like the idea as it helps educate people, “depositors” in fractional reserve banks that they should realise that they are really “investors” in other people’s debts.
There should be no taxpayer-backed deposit insurance schemes for them. Or of their banks.
If you want a return, interest, then you have to take some risk.
George Selgin
/ July 13, 2012Mike Sproul’s complaint about my assertion is valid–I ought to have allowed for the very exceptional case of Massachusetts’ paper money. But like other colonies Massachusetts at the time lacked adequate money of any sort, and so was quite unlike the “typical” case of an economy initially well equipped with commodity money to which the paper MS quotes from refers. Moreover, as Dror Goldberg has shown, the story of the Massachusetts shillings was unique even in Colonial experience. The soldiers and others whose pay was in arrears following the abortive occupation of Quebec, were offered the paper shillings, and could either accept them or settle for no payment at all; even then they did so at first only because the gov’t agreed to receive the same bills in payment of taxes, and because it made vague promises, which it later retracted, to the effect that the bills would eventually be redeemed in specie.
Mike Sproul
/ July 13, 2012George:
The Massachusetts shillings weren’t that exceptional. Remember that every other American colony issued paper money in pretty much the same way. So did Quebec when it issued playing card money in 1685. The American Continental dollar was never quite convertible in any significant way; same for Confederate dollars. You might even say the same about John Law’s paper livres.
It’s an interesting empirical question: How many paper currencies started out convertible into some other money, and how many were never really convertible? I’d guess that it’s close to even.
Of course, convertibiliity is a matter of degree. One paper currency might promise gold convertibility in 10 years. Another might set a convertibility rate that declines 2%/year, while another might just make vague promises about claims to future tax revenues. That’s why I think that the biggest mistake monetary theorists ever made was to look at currencies whose convertibility does not meet the strictest standards of gold convertibility, and carelessly conclude that the currency was unbacked. The whole idea of fiat money rests on nothing but this simple non sequitur.
George Selgin
/ July 13, 2012Here I think you are on thin ice. My understanding is that most of the other currencies of which you speak were convertible when first introduced. Certainly that was true of Law’s money. And I have never taken the view that, just because a currency is inconvertible, it is therefore “unbacked.” Backed and convertible are quite distinct things. Fed notes are certainly “backed” by assets, some OK and some lousy. But of course they aren’t convertible.
Mike Sproul
/ July 13, 2012George:
From Eric Newman, The Paper Money Experiment, p. 7:
” The second colony to issue paper money was South Carolina, whose military expedition against the Spanish and Indians in Florida brought about an emission in 1703. Expenses of colonial participation in Queene Anne’s War (1702-13) resulted in paper money issues in 1709 by New Hampshire, Connecticut, New York and New Jersey, followed by Rhode Island in 1710. North Carolina began its issues in 1712 to defend its frontiers against Indian raids…the justification for paper money was, in effect, a borrowing for a specific public expenditure rather than an issuance of a circulating medium.”
Now, I’ll admit that Newman was just the first thing I could lay my hands on, and he doesn’t specifically say that none of these paper currencies were strictly convertible into metal. But it’s evident from the emergency nature of the issues that the colonies were in no position to offer metallic convertibility. I’m 99% sure that I could find something more pertinent somewhere in the works of Brock, McCusker, or A. McFarland Davis.
But before we start talking at cross purposes, we have to remember that ‘convertibility’ can mean many things. For example, if a colony declares that it will accept its paper shillings in lieu of 1 silver shilling, then I would say that those paper shillings are convertible (and backed by the assets of the colony) even if that colony never pays redeems a single paper shilling for a silver shilling. I certainly wouldn’t call those shillings fiat money, but a lot of people (you?) have.
Mike Sax
/ July 14, 2012Lars reading Major Freedom over at Sumner is enough to demonstrate why Rothbardianism is completely marginalized!
Jon
/ July 22, 2012The ethical concerns on fractional reserve banking stem from the alchemy of banking. Banks borrow short and lend long, but they also sell a story about risk. This is something nick Rowe has written eloquently about, and he not opposed to fractional reserve banking.
Indeed, to understand what is going on in this debate, the key point is that rothbards complaint would be resolved if only the bank promised to deliver you money back not on demand but only at a certain time, and if you did demand the withdrawal before then to surrender your share of the assets directly.
With that stroke, the ethical substance of rothbard would be addressed… And that shows that the criticism of rothbard is both right and overdone at the same time. In short Selgin is an idiot for overplaying his hand.
Now Rothbard makes another claim and that claim is about the money multiplier. Selgin faceplants on the money multiplier by again taking too strong a position. The Rothbard view on the multipler is that it is a source of insability. Selgin tries to argue there is no multipler.
Lars, I find it interesting that you discuss the British monetarists interest in broad money but don’t fault selgin’s error here. If broad money matters, the multiplier is a problem because it means the CB is decoupled from the economy. There is room to argue the multipler doesnot matter–Scott argues that the base is the only thing that couples to inflation for instance.
Ive never found Scott’s point of view on broad money wholly convincing. If it is true, it feels as if it has something to do with the fairly strong presumption against borrowing to pay your present interest costs. Indeed under many loan conventents that sort of behavior is synomous with bankruptcy and the courts get called into mediate whether debtor is insolvent or just momentarily illiquid.
For this reason, the base is the transactionally relevant money supply for interest payments and therefore is constraining. This also explains though why interest rates and broad money appear so well connected to asset prices which are really a different beast from the price level of newly produced goods that is entangled with the base.