Ron Paul recently showed how he is very open to debate, by having both Professor Joseph Salerno (a 100% reserves advocate) and Professor Larry White (a “free banker”) testify before his sub-committee on the subject of fractional reserve banking. (See my Misesians in Mordor posts here and here.)
However, as he made clear in this post in his Congressional web site, Ron Paul is very much on Salerno’s side of the debate.
George Selgin is none too happy about this, and Ron Paul’s post has elicited from him a quite vituperative comment. Selgin goes so far as to accuse 100% reserves advocates as being a “moronic cult.”
Selgin, in a post commenting on his own comment, says:
Although the first priority of every believer in monetary freedom must be to combat bogus arguments for monetary central planning, we cannot do this effectively unless we are just as relentless in exposing the 100-percent reserve movement for the moronic cult that it is, to keep its clownish convictions from giving the entire movement for monetary freedom, if not free market economics more generally, a bad name.
Selgin is obviously endorsing two approaches to advancing fractional-reserve-friendly free banking. There is the “argumentation” approach he leads off with. And then there is the “expose the cult” approach he insists must not be neglected. But what exactly does he mean by that?
Nowhere in Selgin’s original post does he make any kind of pscyho-sociological case for the anti-fractional reserves set qualifying as a cult, much less a moronic one. He asserts that they’re in error (and vaguely references economic refutations against them made elsewhere, without giving a hint as to their content). But it is doubtful that he means that refuting them is how he means to expose them as a cult, because then it wouldn’t really be a separate approach from the first approach he brings up.
When a commenter on his blog called him to task for his incivility, Selgin gave tell as to what he might mean by “exposing” his intellectual opponents.
Rest assured, Pedro, I am no more interested in being “nice” to 100-percenters than I am interested in being so to central bankers. Nor am I intent on persuading them about anything–I’ve tried that, as have others, to no avail. Ridicule is no more than their just deserts.
So perhaps, what Selgin means is to “expose” his opponents by ridiculing them. Perhaps his aim is to prevent his opponents from achieving what he thinks of as undue influence and notoriety by simply calling them names. In other words, he aims to “expose” his opponents as a moronic cult by the mere act of calling them a moronic cult. It’s not like this approach never works. If, in middle school, one student calls another “an idiot” enough times, that will often cause other students (especially the first student’s followers) to write the second student off as one. What is ironic is this kind of social strategy is itself more typical of cults than anything. Not that I would ever accuse Selgin of being a cultist. I’m not even an academic, and even I know that would be unbecoming of one.
Follow Circle Bastiat
Some people really don’t like insults. They don’t like insults to the point of taking the time to write entire blog posts about them. In fact, they dislike insults so much, that they deliberately ignore a long history of substantive arguments previously made by the insulter just to focus exclusively on the offending insults.
So here we have two people, one whose mind is preoccupied by the emotion of name calling, and another whose mind is preoccupied with the emotion of name calling after delivering a long carefully researched history of substantive argument.
Which would you rather be?
Okay, both sides have produced “a long and carefully researched history of substantive argument.” That fact doesn’t preclude an individuals’ departure from the social expectations of what it means to have a civil debate (Selgin). Attacks ad hominem are inadmissible, even if one believes they have laid forth an impenetrable argument. Mises never engaged in attacks ad hominem, and he had no reason to do so, because he was a classy gent and he had reason on his own side. The fact that Selgin resorts to such tactics not only associates him with Marxist polemics, but also evinces an inability (or unwillingness) to counter his opponents arguments with rational refutation. Sanchez himself pointed out that Selgin offered no “substantive” criticism of 100% reserve policy in this post, but only referenced others who had criticized such policy. This is another logical fallacy, to wit, the argument by authority.
Now I don’t want to be unfair to Selgin, he could be correct in his theory, I am no expert. But I have read Money, Bank Credit, and Economic Cycles, and Huerta de Soto at least offers the theory that 100% reserve banking is in keeping with the common law tradition and the concept of the “tantundem” which is the expectation that 100% of what is given to the money warehouse and kept available for demand deposit use should necessarily be available at any given moment for withdrawal. If one holds that this is not necessarily the case, then at least consider the idea, for a moment, that there might be a sort of fraud going on if one denotes deposits as “demand deposits” and then doesn’t have that sum “on demand” for withdrawal. It is not a cooky argument to say that the police power should, as a guarantor of the sanctity of contract, verify that demand deposits are truly available for withdrawal and not loaned to third parties without notification, compensation, and suspension of withdrawal privileges.
David, there’s no puzzle about what you call my “strategy.” I believe in trying to convince people by offering arguments, and in doing so with civility–up to a point. But when I hear the same bogus claims repeated again and again from the same sources, after the errors have been pointed out many times to them, I know I’m dealing with dogma; and if I seek to expose such it’s for the sake of preventing others from wasting their time. As I explained on my post, I do not have in mind persons who have merely been taken in by the hard core Rothbardians of whom I speak, who simply aren’t aware of the criticisms to which their beliefs are subject. I refer only to the established true believers; and I speak of them as I do only after many years of observing their methods.
Besides, I like calling a spade a spade, and some beliefs (like the one that imagines that bankers are supposed to be storing your money even when they charge you nothing for the purpose, and perhaps even pay you interest) simply are idiotic.
I will be amongst the first people to agree with you that a lot of additions to the free banking debate have been absolutely horrendous, but that your opposition doesn’t accept your arguments (or that they make bad arguments) isn’t a sign of a cult. Most full reservists are no more of a cult than, say, Keynesians (and, surely, you’ve pointed out errors in the latter doctrine, as well). You might be able to accuse them of being stubborn, ideologically deep rooted, or even bad readers, but not of being members of a cult (and a moronic one, at that!). Surely, despite the literature in the free banking debate on the other side (i.e. that which suggests too much competition is unstable) and despite the fact that these authors think they’ve poked holes in your theory, you would vehemently reject any label of being a cultist?
Can you tell us those latest horrendous additions?
If you want two specific examples, Jesús Huerta de Soto’s criticism in Money, Credit, and Economic Cycles and Bagus’ and Howden’s recent criticism published in the Review of Austrian Economics. It’s not about disagreement, but about not understanding what is being criticized. (For that matter, I haven’t seen much discussion on fiduciary extension and the structure of production, by part of the free bankers.)
We must have read different books, you and I. de Soto’s criticism is completely valid. If fractional reserve banking is OK because a judge said so (this is what Selgin says) then we should just forget about economy as a science.
“are supposed to be storing your money even when they charge you nothing for the purpose”
This must be new or something in America. Here they have all kinds of forms of payments.
Dear professor Selgin,
some time ago I have come to realise that the sign of a cult is not repetition, but unwillingness to confront arguments. And regrettably, you are unwilling to confront my arguments. I already pointed them out to you in an email debate some months ago as well as in the comments on freebanking.org yesterday. You complain that I misrepresent your position while leaving my actual argument (that bank liabilities and inside money are two distinct variables and their relationship is determined by empirical features of outside money) unaddressed.
Of course, there is no reason why a distinguished professor should feel obligated to respond to a random nobody on the internet. But I am a stubborn bastard with an urge to know the truth and will keep hammering on those I believe are in error, until they either refute my arguments or admit that I’m right.
Peter, I did not mean to overlook your arguments. However the term “inside money” is one with several different meanings in the literature. In my Theory of Free Banking I made it synonymous with private bank demand liabilities; others define inside money as only those demand liabilities backed by private debt instruments. Still others define it as liabilities not backed by base money. By the latter definitions the two statistics are indeed not synonymous. So I have no problem, allowing for your using one of these last definitions, with your claim. Nevertheless it doesn’t follow that either you or Huerta De Soto characterized my views correctly in suggesting that I identified the demand for inside money with the demand for bank-provided payment services. In any event I believe I make my meanings sufficiently clear in my book and in follow up posts I’ve made concerning arguments I make in it, all to the effect that free (fractional reserve) banks do not possess the power to “create” credit, that is, to lend more than their clients savings, as represented by those clients’ willingness to retain real balances consisting of free bank’s demandable IOUs. Certainly I have engaged the 100-percenters counter-arguments at length, most recently in my reply to Bagus and Howden. That that very lengthy and considered response only led those writers to pen another lengthy article, claiming that I had failed to answer them (!), and that the second article was replete with the very sort of misrepresentations I pointed out and denounced in the first, is the sort of thing that has made me throw up my hands and vow not to waste any more time trying to move an evidently immovable object.
Dear professor Selgin,
thank you for your reply. While in retrospect I admit that my portrayal of your argument might be misleading, I still hold the opinion that in principle, the positions of the full reservists in this particular point reveal a gap in your argument (even though I disagree with them on other points).
You now admit that whether inside money is synonymous with bank liabilities depends on the definition. But the purpose of a definition is not that you can craft it in a way that makes your argument into a tautology. Paradoxically, the full reservists commit the same blunder, by defining money substitutes as “absolutely secure and immediately payable claims to money” (Mises), and then saying that you cannot simultaneously own a claim and the claimed object. That’s just defining the problem away and pretending it does not exist.
I submit another definition of inside money (well, money substitutes), which hopefully reveals the issue. Money substitutes are those goods which act as substitutes to money from economic point of view. It allows for the economist to distinguish between the amount of debt and the quantity of money (i.e. the money supply). This now paints a wholly new picture, because it means that under FRB, monies with different empirical features result in different size of money supply, relative prices and the interest rate, even if all the other variables, including the amount of debt, remain the same! Doesn’t this strike you as problematic?
As much as I instinctively feel that 100% reserve is the only antidote to the business cycle, I think that until I read Selgin’s book, I can’t disagree with him publicly and call myself informed. That’s what I hate about statists and Keynesians. They never read, and when they do read, it’s always their own garbage. Ask a Keynesian what books inform his/her philosophy. They will look at you with the deer-in-the-headlights stare, most likely.
A key libertarian concept is the prevention of fraud and a key Austrian School concept is people being misled about the nature and value of their money.
I suppose that in a future Rothbardian world, it would be possible for some depositors and some bankers to reach a meeting of the minds regarding the nature of their fractional reserve banking contract so that there is no fraud between them. At this point, the depositors must still go out and find payees who are willing to accept these fractional reserve notes with a full and complete understanding that such notes are not the same thing as 100% specie on reserve notes. Absent such an understanding on the part of the payee, I would say that the payee has been defrauded. I think that the depositor/payor is going to have a problem finding such an accepting payee with the complete understanding necessary for there to be a meeting of the minds. Nevertheless, I suppose it is conceivable that the depositor will find such a payee who now faces the same problem of finding another accepting payee. In any event, I assume that such notes would be discounted from 100% reserve notes and prices would be stated in the brand name of the notes so that no one would be misled by the prices stated in terms of such notes.
People will either understand what these notes really are and they will be able to use them without fraud or they won’t. I’m not going to lose any sleep over this.
If a man steals and another man knowingly buys from him “the fruits of his labor,” then the buyer is also guilty.
If two people agree on some form of fraud, where one says “you may use the entry of my cash in your books in order to create an illusion, while I can retain all of my money” and the other says “good, you will be the first one who will get his money when the s… hits the fan plus some interest and all my services for free,” what can I say, it must be an honest deal.
Logic based argumentation was never Selgin’s very strong side as is evident by his comments.
Keep contributing, DD5: I need all the evidence for my “moronic cult” claim that I can muster.
George, I believe in trying to convince people by offering arguments, and in doing so with civility–up to a point. But when I hear the same bogus claims repeated again and again from the same sources, after the errors have been pointed out many times to them, I know I’m dealing with dogma; and if I seek to expose such it’s for the sake of preventing others from wasting their time. Besides, I like calling a spade a spade, and you my friend are a waste of time.
The difference between you and me, tralphkays, is that I write under my own name, allowing anyone to easily verify the lengths I’ve gone to to argue with 100-percenters before finally getting fed up with them. Now, you can come out of the closet and show us how you have gone to similar lengths to convince me of the error of my ways, and so put some substance into your jocular analogy. But I doubt that you will, or that you can.
George, tralphkays is my own name, just another example of your habit of speaking from ignorance. I, like so many others, have gone to great lengths to argue with you specifically before finally getting fed up with you. Your “justification” for being rude applies overwhelmingly to yourself, but then, a man in your position can hardly be blamed for his inability to see anything. By the way, just how do you breathe in that position?
I apologize for the wrong assumption, which stemmed from not recalling your name from any forum in which I regularly take part, and from my giving you the benefit of being true to your word in claiming to have “gone to great lengths to argue” with me and others on the subject of fractional reserves,by assuming that you must have done so, if at all, under some other name. Now I can affirm that the “great lengths” consist of occasional blog comments, almost all of them on Mises.org, to which I am not a contributor. That hardly supports your claim.
And my breathing is quite fine.
Go War Eagle! LOL…That’s all I got.
Liberty, of which we’re all for, I get. This 100% reserve vs. FRB banking dealio? I’m stumped. George (or anyone else for that matter), do you have a suggestion of where I could start learning the basics of the modern banking system and the differences between what you advocate and what the 100%ers advocate? This debate is fascinating from this novice layman’s perspective, but it seems like I’m missing the basics of the argument. Thanks in advance.
Professor Selgin,
answer me this, if I may: do you agree that if bank debt (plus amount of outside money in circulation) is not equal to the money supply, then your argument collapses?
I’m curious? Perhaps someone steeped in monetary theory and history can help me. Is it possible that fractional-reserve banking could exist in the absence of statist legislation? (I know, I know, “statist legislation” is a pleonasm.) Has it ever happened?
Ned,
I think that answer is over at Free Banking. Isn’t that the entire debate between Selgin and the 100%ers?
It can at the edges of the economy, like Ponzi scheme can arise spontaneously and volunarily in an economy as well, but because they are unsustainable it will peter out quite quickly at some stage.
So FRB (like Ponzi schemes) have always been around, but because bank runs (ie the end of each Ponzi scheme) have historically been much more frequent so the misallocations of capital were never as extreme as they are now with FDIC insurance and central banking.
The process has always been as follows:
1. FRB starts on the edges, with an increase in fiduciary media over the gold stocks (tickets start circulating in the market as gold equivalents). Trust is maintained because the risk of a bank run is low.
2. Bankers get wildly rich very very quickly. Also more businesses become dependent on bank loans. So do local governments. Corrupt linkages between bankers and government officials seeking to increase their revenue base without raising taxes almost always arises early in the cycle.
3. A crisis occurs. EIther the government requires the banks to buy their bonds (that end up worthless) or the private economy collapses due to too much debt. Very few people understand what’s going on and blame capitalism, or the government, or someone (anyone) other than FRB. Bankers are bailed out, depositors are screwed and the government either steals gold from somewhere (Latin America, other countries, savers) or forces the economy off the gold standard and devalues.
See de Soto’s Money Bank Credit and Business Cycles for discussion of the history.
It’s like saying “Can cancer ever occur in a healthy body”. Yes, it can, but if it’s allowed to grow it will kill you.