Over the years George Selgin has dished out quite a bit of abuse in various and sundry blog posts to Murray Rothbard and those who hold that fractional reserve banking is inherently unstable and cycle-generating. I must concede Selgin is enormously entertaining in his balls-out, over-the-top ferocity in defense of something that he lately has been calling “monetary freedom.” Danny Sanchez noted Selgin’s most recent rant in his blog yesterday. Delivered in George’s trademark serioso, ill-humored style, I must admit it made me smile over my morning coffee. Here is a sample:
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.
Moronic cult? Clownish? Now these are great polemics and I love George’s style; if he did not exist, I would invent him. But he is notoriously prickly when confronted with criticisms of his own position. He regularly trolls the Mises Community blogs sniffing out and trouncing one or another twenty-something Rothbardian “loony” (a favorite Selginian term of derision) who has worked up the temerity to utter even the mildest criticism of his idiosyncratic brand of “free banking.” But, entertainment value aside, this is unseemly behavior for a senior scholar of Selgin’s status. And it has caused Selgin to be seen as a parody of the aging and addled pedant running to and fro frantically trying to stamp out heresy but whose hilarious antics only invite further attempts to rattle and provoke him. Indeed, he has become something of a standing joke among many younger students of Austrian economics who proudly boast of being “flamed” by Selgin. Some already are joking about fashioning a T-shirt proudly displaying: “I Am a Member of a Moronic Cult.”
Given his hypersensitivity to criticism, I should hope George would be somewhat empathetic that a Rothbardian like myself responds to some of his abuse in a sharp and less than polite manner. Somehow, I doubt this though. George takes himself VERY SERIOUSLY and never seems to be in good temper, or to show the slightest shred of good will toward his opponents.
So let me briefly tell the Selgin story in less than flattering terms.
To cut to the chase Selgin’s conception of the nature and aim of “monetary freedom” can be summed up as follows:
1. He adopts the New Keynesian position that nominal price rigidities cause any change in the reservation demand for money relative to the supply of money to generate a (positive or negative) excess demand for money that requires a prolonged adjustment process involving either deflationary depression or inflation.
2. Following the New Keynesians, he uses the loaded term “demand shocks” to describe the voluntary decisions of individuals to alter the amount of money they desire to hold. For Selgin, any change in what he and the Keynesians call “aggregate demand,” i.e., total spending, even if it is the result of the voluntary actions of businesses and households, destabilizes the economy.
3. Like any garden-variety Keynesian, Selgin sees these fluctuations in aggregate demand as a market failure that must be offset by Fed policy. He thus advocates that the Fed implement a “productivity norm” that boils down to a nominal income target, a policy first proposed by Keynesian economist Benjamin Friedman in the 1970s. In Selgin’s case he would have the Fed target zero growth in aggregate demand, thereby maintaining the circular flow of money spending and income constant. Most Keynesians would target a higher rate of growth in nominal income to allow for real output growth plus a small inflationary cushion against deflation. But this is a minor difference. The outcome is that in Selgin’s world prices would trend downward by a few percent per year rigidly mirroring the productivity-driven growth in real income; in the New Keynesian world prices would trend up by a few percent a year. In both cases this would be achieved by Fed manipulation of the money supply (and interest rates)
4. In other words, Selgin wants the Fed to continually expand or contract the supply of money in order to exactly offset any change in the social demand for money. This is why Selgin, right along with Mankiw and other New Keynesians, was a proponent of QE1 and (maybe) QE2.
5. But binding a central bank to a “productivity norm” is a second best solution to economic instability for Selgin. His preferred policy is something called “free banking” or “monetary freedom.” Under the Selginian regime of monetary freedom, banks would be permitted to operate without any central bank or legislative interference, while subject to general contract law under which they would be obligated to convert their note and deposit liabilities into gold (or other market chosen commodity) on demand. In particular, banks would be able to determine their own cash reserves necessary to meet these obligations. The result would be that the supply of money is automatically adjusted to the demand for money by market forces. Furthermore, foretells Selgin, this system may evolve to the point where gold is completely expelled from monetary circulation into nonmonetary uses while a small amount is retained in quasi-monetary use as an interbank clearing asset. This evolutionary process would thus involve a massive expansion of the money supply. Moreover at the end of this process, bank money will in effect become a fiat money. But rest assured, at every step of the way seemingly infallible bankers will ensure a constant aggregate stream of money spending.
Given these views, it appears to me that what Selgin means by ”monetary freedom” is attaining Keynesian ends via market means. But I do not think Selgin’s story is plausible in the least. In fact, in my recent Congressional testimony, I gave another account of the likely outcome of a Selginian free banking system, which I advocated as the most practical means of getting rid of fractional reserve banking and suppressing the further issue of fiduciary media, that is, unbacked bank notes and deposits. Both Mises and Rothbard advocated free banking for the same reasons. In his last major publication on the subject, Rothbard proposed free banking under a genuine gold standard as an “excellent [albeit second-best] solution” to the problems of inflation and the business cycle.
Both Mises and Rothbard were therefore “currency school” free bankers–as I consider myself to be–who believed that the money supply should behave like a purely metallic currency and who rejected the “stabilization” of aggregate statistical constructs like the price level or total spending. For currency school free bankers, free banking is a means for suppressing all political influence on the supply, value and distribution of the money commodity and allowing these variables to be determined exclusively by market forces. Period. Selgin on the other hand reveals himself as a Keynesian free banker who wants to stabilize a meaningless aggregate by employing a peculiar scheme. In Selgin’s scheme, a certain narrow class of banker-entrepreneurs are uniquely privileged as error-free automatons and the particular market in which they operate, in contrast to all other markets, is “efficient” in the neoclassical sense of almost instantaneously adapting supply to demand.
N.B. In this response to George I never once alluded to the issue of whether fractional reserve banking is fraudulent or not, a question that he seems to be fixated on.
Follow Circle Bastiat
Mr. Salerno,
(1) do Austrians accept the claim that there are nominal rigidities in the economy?
(2) why do Austrians object to fractional-reserve banking, if it is voluntary? Why do you portray potential free bankers as a “narrow class of banker-entrepreneurs [...] uniquely privileged as error-free automatons” when in fact they would be operating in a competitive market with free entry?
If I may,
(1) Yes there is rigidity in the economy and nobody claims otherwise. But according to free market economists, this is a problem as much as the lack of perfect information for everyone in the market is a problem. Rigidity in the economy is based on human choices, and nature. And I also think when it comes to wage rigidity there are cultural reasons too. Many people are used to inflationary conditions so they naturally resist any decreases in wages. But imagine that you are born in a society where price deflation is the norm and you see your fathers nominal wages decrease but purchasing power increase all your life. Then wage decreases would be the cultural norm.
(2) Fractional reserve banking is a Ponzi scheme. It is the promise of a bank that can not be kept, both to the depositors and credit customers at the same time, Yes it might be sustainable for a while for some cases, and that is the only defense given by Selgin and others, but that doesn’t change the fact that two contracts one with the depositor and the other with the credit customer can not both be be honored. In classic Ponzi schemes the schemer offers high interest in order to attract new comers since that is the only source of interest paid. But this rate, while it must be above any sustainable rate, doesn’t have to be one fixed rate. A Ponzi that offers 10% year may be more sustainable than a Ponzi that offers 20% a year.
Yes there have been historical instances where this ponzi called fractional reserve worked. The banks because of fear couldn’t go over the board with the ponzi and expanded the money supply too much. But regardless of how long you can keep up the scheme it is still fraud and inflationary. Also this mechanism once culturally accepted feeds on itself and we are already witnessing where it evolved.
Free banking? Yes. But fractional reserve notes and fractional demand deposits should be labeled not as a certificate of property but as a promise of payment. This would assure that 100% reserve notes and demand deposits versus such promises of payment as non fungible titles. Would they be exchanged at par value? Would contracts establishing a price to be settled in 100% reserve demand deposit be the same as being settled in a promise of payment (fractional reserve notes)? Would not the good money (100% reserve) drive not so good money (fractional reserve + credit risk ) away?
While “Keynesian” is a clear mislabel, that’s only part of it: From One to Ten…
Jonathan,
Whether “price rigidities and the theory of nominal monetary shocks predate both the New Keynesian school and John Maynard Keynes” has no bearing on whether those things are characteristic of New Keynesianism. Are you contending that those things are not characteristic of New Keynesianism?
“Simply put, when Selgin writes things like maintaining ‘aggregate demand’ or ‘total income,’ what he is actually supporting is something in line with Misesian or Rothbardian monetary theory.”
No, at least according to Horwitz, aggregate demand basically means MV in the equation of exchange, which both Mises and Rothbard rejected.
And Selgin himself says that the transition to his system would involve a one-time inflation.
Noting affinities with Keynesianism is a useful short-hand. It is true that it itself is not a refutation. But the refutations of the Keynesian notions listed above have been done elsewhere. For people who have already read and who agree with those refutations, it is useful to know how much Selgin’s story depends on those notions.
Daniel, whether New Keynesians use price rigidities in their models has no bearing as to whether or not Selgin’s theory is New Keynesian (or Keynesian). And what is noting similarities with Keynesians a short hand for? Keynes believed that capital is heterogeneous and that production takes time. Should we abandon these beliefs?
This is a formal way of saying maintaining the money supply in circulation intact. An increase in V, in this case, is an increase in the demand for money, or leaving money presently unspent.
I am sorry , but I must have misunderstood something:
“An increase in V, in this case, is an increase in the demand for money”
As far as I read from Slegin and Horwitz, an increase in the demand of money is an increase in the demand for people to hold money, not to spend money. It is a decrease in V, not an increase.
You’re right, typo on my part. But, substitute ‘decrease’ for ‘increase’ and my the substance of my comment is the same.
And I do not understand something.
1. Why should we maintain a certain amount of money in circulation?
2. How can you put in accord a theory of prices with the demand of keeping the same quantity of money in circulation (how do you determine that quantity, it’s distribution etc.)? Prices are determined by people buying and selling and, very important, keeping goods. Even if you say that money are a special kind of good, it is irrelevant, because it is a good, subject to same laws of the market as other goods (all goods are special, some are more special than others).
As far as I know Horwitz admits there is some work to be done in this area and hints, as a start, to that paper co-authored with White and Selgin.
3. Banks don’t issue money, but claims on money. Even in our age of paper money, they still issue claims on money. So how can banks extend the real supply of money in circulation? They can not, the only thing they can do is to fool people there is real demand (backed by real money) issuing claims on non existing money.
1. In monetary disequilibrium theory (MET) it is a recommended stability; but, you don’t have to accept MET to accept free banking. One can believe, as I do, that imperfect “stability” can be achieved through spontaneous market order. By, imperfect “stability” I mean that society will develop monetary institutions to achieve monetary stability in the broadest sense.
2. I don’t understand your objection; monetary stability isn’t the same as price stability.
3. If money substitute act as money — i.e. if they’re money proxies — then increasing the quantity of money substitutes will for all intents and purposes increase the stock of money. If you think otherwise, take your objection to anybody who thinks that increasing the supply of fiduciary media is inflationary.
“If money substitute act as money — i.e. if they’re money proxies — then increasing the quantity of money substitutes will for all intents and purposes increase the stock of money. If you think otherwise, take your objection to anybody who thinks that increasing the supply of fiduciary media is inflationary.”
Yes, and increasing the amount of claims on wheat will increase the amount of wheat. A money substitute is a claim on money. Increasing the quantity of money substitutes will not increase the stock of money, just the amount of claims on money. And it is inflationary.
“This is a formal way of saying maintaining the money supply in circulation intact. An increase in V, in this case, is an increase in the demand for money, or leaving money presently unspent.”
Right, and this is a formal way of eliminating the micro-economic foundations of monetary theory and adhering to strict aggregate analysis. Steve Horwitz can have the “microfouncations” printed in even larger fonts on his book and it won’t make any difference.
First he explain the micro-economic effects of changes in the money relation (what he refers to as monetary disequilibrium), then he proceeds to quantify the “problem” in aggregates essentially reducing it down to a single aggregate (MV) that is in equilibrium when held constant and disequilibrium when changing. The theory then makes the assertion that holding MV constant is desirable and proceeds to ponder upon the problem of how to do so. “Free Bankers” then proceed to demonstrate why a free banking institution operating with fractional reserves tends to offset changes in V by expansions and contractions of credit, while central banks are quite in efficient in achieving the same task.
So what’s the difference between Selgin/Horwtiz monetary theory and the various Keynesian/Monetarist? Mere technicalities like what constants in the equation of exchange should be held constant and what means are best to achieve those ends.
You already know that I disagree with MET — if you didn’t, I make it clear in the linked response to this post by Salerno. So, let’s step away from what’s “desired.” In any case, I’m only explaining what free bankers mean when they say they want to stabilize ‘MV,’ which is a terminology they use to illustrate their more abstract argument.
And, what the difference between free bankers and Keynesians and Monetarists? It probably depends on the free banker, but Salerno apparently thinks there’s one: the latter want to increase the stock of money at some target rate. But, MET is a broadly Monetarist theory; but Monetarism isn’t Keynesianism, and MET belongs to “old Monetarism.”
” but Monetarism isn’t Keynesianism, and MET belongs to “old Monetarism.”
Well, that depends on perspective. They are both quantitative theories based on aggregates. The difference from an Austrian perspective are minor and quite superficial. This is why Hayek claimed that Friedman is a Keynesian on national TV!
“Keynes believed that capital is heterogeneous and that production takes time. ”
I’m not so sure about that, but even if it were true, it’s not what is distinctive about the tradition. But making price rigidities out to be a huge problem is distinctively New Keynesian.
“And what is noting similarities with Keynesians a short hand for? ”
Again, the refutations of the Keynesian notions listed above have been done elsewhere. For people who have already read and who agree with those refutations, it is useful to know how much Selgin’s story depends on those notions.
And regarding the equation of exchange, see DD5 below.
Keynes did believe capital is heterogeneous. It’s a major reason why he opts to define all his variables in terms of “wage-units.” In fact, Keynes cites Hayek’s “The Maintenance of Capital” in his explanation of why he chooses to focus on labor. Keynes also employs a two-stage structure of production, where he explicitly suggests that production is a process over time. So, when Austrians claim that Keynes didn’t have a capital theory, it’s a very superficial argument that doesn’t really get to the depth of the differences between Keynes’ paradigm and the Austrian’s.
In any case, I’m not so sure that price rigidity is the distinctive feature of New Keynesianism; and, I’ll repeat, New Keynesianism is not necessarily the successor of Keynesianism (just read post Keynesian literature for evidence of the rift). The concept of price rigidity predates New Keynesianism and is used by a wide array of economists, schools, and doctrines (I would argue even Austrian price theory, although with perhaps a better defined integration). So, to call something New Keynesian just because it uses the concept of price rigidity is disingenuous.
What Keynesian notions have been refuted? Surely many, but I don’t think price rigidities is one of them.
“What Keynesian notions have been refuted? Surely many, but I don’t think price rigidities is one of them.”
Jonathan, the mere existence of price rigidities is not what’s in question.
I referred to “making price rigidities out to be a huge problem”
And Salerno said “the New Keynesian position that nominal price rigidities cause any change in the reservation demand for money relative to the supply of money to generate a (positive or negative) excess demand for money that requires a prolonged adjustment process involving either deflationary depression or inflation.”
“Selgin himself says that the transition to his system would involve a one-time inflation.” It would IF you started from a pure gold standard. Starting from a fractional system, implementing 100 percent reserves would involve a one-time deflation. So there.
I will respond to Joe at greater length when it isn’t so late. But for now let me point out that I am not “fixated” on the fraud issue: I bring it up only in response to others (like Ron Paul, in his post that was the object of my recent blog) who raise it among other arguments against FRB. Surely Joe you must concede that Rothbard made a great deal about that argument, that his claims are frequently repeated, by MI writers among others, and that no proponent of FRB would ever have had reason to discuss the matter. And if the MI no longer regards the fraud argument as valid, I of course expect them to publicize the fact, as they have been the main source of the opposite claim in the past.
Salerno above does not say anything about whether it is valid. He simply said you seem to fixated on it. It’s not about the argument’s validity, but about its relative importance. Elsewhere he has said that the fraud argument is not “the fundamental theoretical challenge” to free banking:
“The main question is not about the ethical-legal issue of whether or not fractional-reserve banking is “fraud” under all circumstances. Nor, ultimately, is it even about fractional-reserve banking versus 100-percent reserve banking. It is about whether the creation of fiduciary media, fraudulent or not, produces the sequence of phenomena we recognize as the business cycle.”
George, I do indeed concede that Rothbard, qua political philosopher, made a great deal about the ethical case against FRB. I further concede that he expounded this ethical case in many of his works dealing primarily with monetary theory and history. However, he also presented a formidable and purely economic case against FRB, that we economists should be more concerned with. Moreover in almost all of his works treating money and banking topics, he always maintained approvingly that truly free banking (no central bank, no deposit insurance, no legalized suspension of specie payments, etc.) on an FRB basis had rigidly limited scope for expanding credit and causing business cycles. In The Mystery of Banking (p. 124) he wrote, “We conclude that, contrary to propaganda and myth, free banking would lead to hard money and allow very little bank credit expansion and fractional reserve banking.” This is exactly the same view that Mises, as a neo-currency school proponent, held. And it has always been the view that I have held and the one I presented in my Congressional testimony two weeks ago.
This brings me to my second point. I find troubling your statement: “And if the MI no longer regards the fraud argument as valid, I of course expect them to publicize the fact . . . .” The Mises Institute takes no official position on the validity of the fraud argument–never has and never will. I guess as Academic Vice President, I would naturallly be the one to express the official policy positions of MI. If there are any, I never got the memo. Of course I do not deny that there are a number of scholars associated with MI who have made the ethical argument that FRB is fraudulent. Others, including myself, have never expressed themselves in writing on the topic. This is as it should be for a scholarly institute that seeks to promote the seach for truth rather than to have its policy recommendations implemented by those in power.
A funnier t-shirt idea would be “I Survived Selgin” or “I Survived George.”
As someone with a passing (20 year) interest in the topic, I just LOVE this little tiff between “scholars”. Hopefully the comments will get to 100 and Prof Selgin and Prof Salerno will ask each other to “step outside” this blog for a direct “chat”.
Relentlessly censored on Wikipedia, I resorted to cutting and pasting my work on FRB on the competing Mises website here. Thank God for the Mises Institute! Check it out: http://wiki.mises.org/wiki/Criticism_of_fractional_reserve_banking
Why does something as bland as fractional reserve banking generate such appalling conduct amongst otherwise buttoned-down academics? I love Prof Selgin’s delivery in his talks and his scholarship on coinage is delightful but his obsession with smacking down 100 percenters is bordering on the bizarre for a supposed free thinker.
To add my devalued dime’s worth:
1. The fraud argument is a debatable issue. I don’t have a definitive view either way but can hold two arguments in my head at the same time without my brain exploding. Rothbard’s “It’s wrong because it’s fraud” argument can’t be ruled out. It depends on whether a “reasonable” depositor (not an economist or banker) should know her money isn’t in her account.
Stories are coming out about banks raiding “allocated” accounts around the world. MF Global is just one example. Surely Selgin would admit these cases appear to amount to fraud – the segregated account shouldn’t be touched even under MF Global’s own rules and yet the money isn’t there. The fact that MF Global directors are not being prosecuted doesn’t mean fraud didn’t occur. It means fraud pays if you pay off the prosecutors.
The question then becomes: Does the “average” depositor think her account acts like an allocated account, or a warehouse receipt, as Rothbard believes it should? That is an empirical question. Let’s ask. No one really does this. Let’s ask. I guarantee most people (meaning more than 50%) believe it does. The banks hide this stuff in the small print. If depositors are all “moronic” “idiots” (to use Selgin’s redundant put down) to beleive this, then the banks are engaged in misleading conduct and should put this in simple language on every deposit account application and on their websites:
WARNING: THE MONEY YOU PUT INTO THIS ACCOUNT MAY BE SWEPT UP AND TAKEN BY THE BANK AT ANY TIME TO LOAN OUT TO ANYONE IT WANTS. ACCORDINGLY IF THE BANK GOES BUST ANY MONEY IN THIS ACCOUNT WILL MOST LIKELY BE LOST FOREVER. HOPEFULLY THE PATHETIC INTEREST EARNED ON THIS ACCOUNT WILL COMPENSATE YOU FOR THIS INHERENT RISK. BUT IF IT DOESN’T AND YOU END UP A SUCKER IT WILL BE YOUR STUPID FAULT. ALTERNATIVELY YOU CAN KEEP THE MONEY IN HARD ASSETS (GOLD, SILVER) OR KEEP IT IN YOUR FREEZER UNDER THE PEAS. CALL THE TOLL FREE FDIC NUMBER LISTED BELOW IF YOU HAVE ANY QUESTIONS. WE’VE SUB-CONTRACTED THIS PROBLEM TO THEM. HOPEFULLY THEY CAN DEAL WITH YOUR CRYING. UNDER NO CIRCUMSTANCES CALL US ABOUT THIS ISSUE.
ALTERNATIVELY CALL GEORGE SELGIN. HE WILL TELL YOU HOW MUCH OF A “MORON” YOU WERE TO TRUST US WITH YOUR MONEY. IF YOU BELIEVE THIS ACCOUNT IS THE FUNCTIONAL EQUIVALENT OF AN ALLOCATED/SEGREGATED GOLD ACCOUNT YOU ARE AN IDIOT. GUESS WHAT – SOMETIMES WE EVEN TAKE THE MONEY OUT OF THOSE ACCOUNTS. HA HA HA!
2. 100% reserves is a perfectly legitimate view to take on the issue if you are focusing not on economic effects but on property rights. However let’s all admit that a transition to 100% reserves – or the removal of FDIC – would cause a massive depression with access to capital immediately constrained and some banks going bust with bank runs worldwide. I frankly think the long term benefits outweigh the costs, but let’s not kid ourselves about what would happen in transition. That’s why FRB is so dangerous. Once the cat is out of the bag, the cat cannot go back without the cat scratching everyone in the room to death.
3. Iceland got through the crisis by: 1. Killing bad banks (not taking those liabilities on to the public debt and creating zombies) 2. Granting some debt relief at the consumer level 3. Jailing some bankers.
Whilst debt relief creates distortions, the distortions are already so appalling I don’t know why more Austrians aren’t advocating it. Rothbard advocates national debt repudiation. Why not “illegitimate” private debt? If FRB is fraud, perhaps some (many?) borrowers didn’t realize the bank was creating the money they loaned from them and whole thing is a monetary Ponzi scheme.
See Ellen Hodgson Brown and Michael Rowbotham for more information. Yes, most of their ideas are “moronic” (to use Selgin’s term) but this kind of strategy would ease the transition costs to free banking (or 100% banking). Strategy would be:
1. Debt relief and/or a one-off “compensation” payment to all citizens of the country. This could involve the disgorgement of socialized gold reserves to the citizenry with small gold coins.
2. Abolition of central banks and FDIC.
3. Free banking with the ability to deposit and pay in gold.
4. Repudiation of some or all of the national debt.
Then watch the fireworks.
It won’t happen – but it’s fun to dream.
I strongly suggest everyone read Dr. Salerno’s testimony (the others as well). Professor Salerno advocates as a reform a true banking freedom system – banks treated as an ordinary business sans all special priveleges and protections and sans a support from a CB. His PREDICTIVE, not prescriptive, conclusion – “In short, on a free market, fractional reserve banking would slowly wither away.”
A very reasonable conclusion, and Misean conclusion, driven by economic analysis.
My reply to Joe
Very nice plots.
First of all, you are trying to prove the existence of “price stickiness” without even being able to objectively define it. What constitutes price stickiness and what does not? If you can’t define it by some non arbitrary means, then this cannot be the subject of scientific inquiry.
Second, how exactly do you control for all the government interventions in the economy when analyzing those graphs and quite amazingly inferring from it all that you have just proved “price stickiness”?
Karmaisking, surely you don’t imagine that I deny that any bank has ever been guilty of fraud, just because I insist that FR banking as such isn’t fraudulent?
DD5, I never claimed that government policies played no part in making prices and wages sticky. If anything my post claims that government is partly to blame. But how does that being so somehow make it legitimate to argue as if prices and wages are in fact perfectly flexible?
Try harder to resist twisting my beliefs into nonsensical ones, fellows. It is that sort of thing that brings out the nastiness in me.
One would have to define what “perfectly flexible” would mean first so that we don’t argue passed each other. All that one can say is that absent government intervention, actors are free to engage in exchange however they want and so prices, being just the other side of the coin here, are also perfectly free to change accordingly.
You on the other hand imply much more then this. There is some known goal for which the market should move and yet it’s not moving fast enough. Well, if there is such a problem, then surely you can tell me what in your book constitutes fast and and what doesn’t. Otherwise, how do you possibly incorporate something in your [scientific] theory that cannot even objectively define?
The only thing worse than a lawyers thinking they are philosphers is an economist thinking he is a lawyer.
Without wanting to pull rank, sadly I am a lawyer.
Fraud is a legal (and empirical) issue. It is not axiomatic that FRB is not fraud. It is a question of intent and belief. Banks commit fraud by taking money from allocated gold accounts. And they may be fooling people into believing checking accounts act as allocated accounts even though they don’t. There is an emerging concept in the law called misleading and deceptive conduct. It’s a very well established concept in Australia (google it) and it does not involve fraud strictly speaking but rather involves misleading people into believing a set of facts that do not exist.
It is possible Prof Salerno does not want to enter into the debate because he is a not a lawyer and it’s not the primary concern to him as an economist.
To encourage further debate down the rabbit warren of legalities over the definition of fraud and the application of the concept to FRB is to invite further “moronic” discussion from people who are not lawyers.
I therefore repeat my comments above: this should be solved not by academic debates but by real surveys regarding depositors’ beliefs about the status of their deposits.
To say FRB is by definition NEVER fraudulent is frankly the worst kind of axiomatic thinking.
I’m sorry Karmaisking but despite your rank you don’t seem to understand the issue, which is whether bankers, in lending out part of the cash deposits made over to them, thereby commit fraud, because they are supposed to be storing the money. Of course intentions do have something to do with it; but the simple, legal facts of the matter, of long standing, is that cash “deposited” with a banker becomes the banker’s property, which in tunr means that the banker is free to do with it what he pleases, including lending it out. His obligation’s to the depositor are solely those implied in the contract or on the face of a bank notes, to wit: to pay all or part of the sum owed “on demand.” The point at issue was addressed long ago, with great clarity, by Henry Dunning Macleod, who also knew his law, in his Elements of banking; I supply further details, citing some relevant legal authorities, in my paper, “Those dishonest goldsmiths,” forthcoming in the Financial History Review. I do not believe that you will find any satisfactory rebuttal of the evidence presented in either among the writings of the “fraudists.”
Joe:
“Both Mises and Rothbard were therefore “currency school” free bankers–as I consider myself to be–who believed that the money supply should behave like a purely metallic currency ”
So do you agree with this from Adam Smith?
“What a bank can with propriety advance to a merchant or undertaker of any kind, is not either the whole capital with which he trades, or even any considerable part of that capital; but that part of it only which he would otherwise be obliged to keep by him unemployed and in ready money, for answering occasional demands. If the paper money which the bank advances never exceeds this value, it can never exceed the value of the gold and silver which would necessarily circulate in the country if there was no paper money; it can never exceed the quantity which the circulation of the country can easily absorb and employ….”
If you do not agree with that, then turn in your bullionist badge. If you do agree with it, then tell me: If a merchant owns a shop worth $1000, and he routinely keeps $5 in his cash register, “for answering occasional demands”, then as a banker would you limit your loans to that merchant to $5? Or would you be willing to lend him several hundred dollars based on the value of his shop?
In response to Prof Selgin above (the system won’t allow my to reply within that conversation):
I am well aware of the law, and just for the record I fully acknowledge there exists a long line of legal cases both in England and the US dating back to the 19th century establishing that FRB is neither legally fraud nor embezzlement. It is (currently) completely “legal” and is not “fraud” within the legal code of any country to my knowledge. Check out this nice summary of the issue:
http://kingwatch.co.nz/Christian_Political_Economy/bank_deposits_loans.htm
So you understand the current “law” (positivist law). What you don’t seem to understand is legal argument (or legal philosophy). Whether the law is “right” or not is a separate normative – not positivist – question, and that is what de Soto and Rothbard are screaming about. They are saying the law is “wrong” (from either an analytical, normative or moral perspective).
To get you to understand this normative (rather than positivist) perspective:
Just like Obamacare has been declared 100% “legal” as a tax, we can legitimately debate whether that was in fact the “right” decision. Any lawyer who said “Anyone who thinks Obamacare is not a tax is a MORON” would not only be considered kooky but a clear supporter of Obamacare and not a reasonable lawyer. Newspapers are full of legal commentary from respected lawyers and academics arguing that the Supreme Court got it “wrong”. What does “wrong” mean when the law is out there and Obamacare is now legal? Are they all morons? Isn’t the right over now that the Court has ruled? Why are they wasting their breath? They are like Rothbard screaming about FRB as fraud? How stupid can they be!
I personally think that the suggestion Obamacare is a tax is a ridiculous and untenable legal argument but a majority of the Supreme Court bought that pathetic convoluted argument and so here we are. Does that make me a moron? Only to Obamacare supporters and some judges on the Supreme Court of the United States. Perhaps I’m a bad sport. Or perhaps the Court got it DEAD WRONG and it will be overturned someday. That’s the hope, however remote that hope is.
Similarly, courts in the past have declared deposits the property of the bank (as de Soto laments in his book, Money Bank Credit and Economic Cycles). But many consider these old cases as “wrong” as the Obamacare decision and they are not morons for thinking so. They just hope the law would change, either by legislation or by less corrupt judges hearing banking cases in England and in every other major jurisdiction of the world. Slavery was declared “legal” and there were “morons” who wanted to change the law because they thought it was “wrong”. They eventually won. See how the law works? It’s not static but changes according to society’s values. What you want to do is keep a law that was made during the time of slavery “valid” forever. That’s not how it works my friend.
And without in any way demeaning your excellent work and your wonderful captivating delivery as a lecturer, I prefer de Soto’s analysis to yours.
Some bedtime reading for you, if you really want to become a lawyer:
http://en.wikipedia.org/wiki/Jurisprudence
@Karmaisking:
Somehow I doubt that your post will be the cause for Prof. Selgin changing careers anytime soon, thankfully.
As one lawyer to another, I submit your analysis is faulty.
Fraud involves the misrepresentation of material facts, intended to induce reliance, and upon which the victim actually relied to his detriment.
The case to which you refer was decided some time ago, and has been a fundamental feature of the deposit transaction ever since; the depositor holds no property interest in the funds deposited in a bank, unless those funds are rendered “non-fungible” by explicit prior agreement. Consequently, every depositor understands (if he can read the contract, or more likely through common knowledge) that his deposited funds are fungible with all other internal bank funds, and that he has no say in how the bank deploys them. The terms of withdrawal and services to be provided are explicitly conveyed at the time the account is opened. The act of deposit confirms the consent to these terms. Therefore there is no misrepresentation, no detrimental reliance, and thus, no fraud.
What you are really object to is the Federal Reserve Act, as amended by Glass-Steagall, Gramm-Leach-Bliley, and most recently Dodd-Frank. It is this act which created and empowered the monopoly FRB to engage in market operations, create inflation, and provide for deep and far-reaching governmental interventions into the banking industry. It is this monopoly power which is responsible for the monetary policies that are the root cause of the business cycles and all the harm and heartache that is suffered by the distant, disconnected and disorganized citizens, and all the benefits enjoyed by the proximate, well-connected, well funded and organized beneficiaries.
You are objecting to the legislative bias that favors the latter at the expense of the former. Although this may be a moral outrage that is comparable to the offenses of slavery, it seems to me that you bring a knife to a gunfight. Of course not all positive law withstands the test of time, I agree. And not all SCOTUS decisions can be squared with my preferences for Constitutional literalism. In this regard, the ACA case is a good metaphor for the problems with market interventionism by central planners and Justices who put statesmanship above jurisprudence. But as the good professor has pointed out, the argument is against monopoly, central management, and the calculation problem as expounded by Mises and Hayek.
Those whose opinions on these matters prevail in time look like intellectual heroes in hindsight. While I gather you think of yourself as such, or at least part of some community of righteous conviction, you intend your aim to strike the heart, and instead hit your foot, legal credentials notwithstanding.
When all is said and done, the question is whether, in a post-FRB economy, fractional reserve banking would exist for standard free-market reasons. That is a matter of economic analysis that is beyond my expertise, and I leave it to the machinations of those more qualified. But the concept, while a tool of central banking to be sure, seems entirely consistent with that of the freedom to contract. The question is, if it is mutually beneficial to the free-trading actors, why should it be forbidden by positive law?
To argue it could not exist or emerge because to do so is fraudulent as between a depositor and a banker is, well…bankrupt. It seems that those who insist as a matter of positive law on 100% reserve as a precondition for permitting banking institutions and free citizens to set their own terms, have a profound burden of production and persuasion to make their case. The absolute adherence to a policy without meeting that burden has been referred to elsewhere as the conduct of “moronic cultists”. I’m beginning to see the point.
You start off so eloquently and reasonably only to ruin it at the end. Why the disrespect for 100 percenters? You can disagree with them without dismissing them as moronic cultists like the fanatical quasi-lawyer Selgin.
I agree with your definition of fraud. However I respectfully have to disagree with the “absolutist” nature of your analysis. You start with the right definition, then state that because (1) the law has been around so long and (2) people should read the fine print, that there now is NO WAY a sane person can argue FRB constitutes fraud on the public (in a normative not positivist sense).
I strongly suspect you overestimate the intelligence of the public to understand the law (and their interest in reading the fine print) – and underestimate the bank’s ability to market a deposit as if it’s like a safe deposit box by simply not being open about the true status of a bank deposit. Hence my suggested “warning notice” above (which, if used, would probably cause bank runs around the world).
This is an interesting empirical question. Let’s conduct a survey and find out. I repeat my challenge to those who keep arguing 100 percenters are a moronic cult: Let’s conduct a survey of the public’s actual factual understanding of what a deposit is. Let’s cut the talk and just ask. If you’re not willing to do that, or provide evidence from survey data, then stop calling 100 percenters morons! I will start accusing every attacker of 100 percenters “axiomatic retards” if they insist on calling us morons without the survey evidence to back up their claim no “fraud” (normative not positive law) is occurring or could be occurring or can ever occur.
I would be happy to take a bet from you that most non-lawyer non-banker members of the public (ie more than 50%) do not understand the precise true legal nature of an “at call” bank deposit. Hence the suggestion – that if we are talking about what the legal position “should be” (normative not positive law) we should start by finding out what the average Joe currently thinks the legal position is in relation to his checking account. If 95% of people think the money in a checking account is owned by the depositor and held on trust by the bank for that depositor: Are they all morons? If so, we are surrounded by zombie-idiots and they should all sent to training camps around the world to read up on banking law. They shouldn’t be allowed to vote they are so stupid.
Or is this evidence that the banks are not being sufficiently clear in their communications with their customers in setting up their accounts? If so, it’s the bankers (and some of their sycophantic lawyers) who should be sent to training camp, to swat up on Honesty 101.
Instead of wasting my time with my arthritic fingers typing I merely point you in the direction of a few links on this subject:
http://kingwatch.co.nz/Christian_Political_Economy/bank_deposits_loans.htm
http://forum.newworldencyclopedia.org/index.php/2010/09/fine-print-disclosure-fraud-and-exploitation-in-a-postmodern-world/
http://www.jstor.org/discover/10.2307/1336248?uid=3737536&uid=2129&uid=2&uid=70&uid=4&sid=56306251263
http://www.americanbar.org/content/dam/aba/migrated/publiced/practical/books/family_legal_guide/chapter_9.authcheckdam.pdf
And as a lawyer, I can’t stand typos and wish my secretary could type comments on this blog (my->me, beleive->believe etc).
Salerno continues his fantasy of a 100% gold standard. He both demands a 100% gold standard and free banking – huh? Is he going to enforce 100% gold by making issuing notes in excess of gold a crime? If not then, as Selgin prefers, the market would decide.
I have illustrated before that a 100% gold standard can only exist if money is restricted to gold or registered warehouse receipts, with all money substitutes being outlawed. Two comments on this. We had a system very much like this in colonial America. Traders began using wampum, tobacco, salt, redemption certificates (during the Jacksonian era) and all other kinds of substitutes for gold currency because gold currency was scarce.
This leads us to the second point. Traders, if given a choice, will choose money substitutes. This has been true throughout history. If money substitutes are issued against only a 100% gold reserve, what happens if the substitute is destroyed or lost? Obviously that portion of gold reserve backing the money substitute will just sit idle in a vault backing a non-existent instrument. The issuer of money substitutes must always issue more than 100% or ultimately all gold in reserve will become idle, essentally leading to no money at all, which is absurd.
So by its nature a currency system that uses money substitutes must be a fractional reserve system.
> Traders began using wampum, tobacco, salt, redemption certificates (during the Jacksonian era) and all other kinds of substitutes for gold currency because gold currency was scarce.
Rothbard is not A-OK with this kind of claim. In “A HISTORY OF MONEY AND BANKING IN THE UNITED STATES”, he writes:
Note also that we are not talking about “gold” but “silver”.
But that’s just an on-the side.
I never understood why inventing another money next to gold and silver would somehow be a problem anyway. I have seen claims by leftists trying to bolster the argument for money printing that the “scarcity of money” led to hunger crises and revolt of the downtrodden masses. Doesn’t wash at all.
The catch-phrases of all monetary cranks: “idle money” and “scarcity of money”…Money in the vaults is not “idle”; if it is held in cash deposits it serves a function in an economy ( that of “insurance against uncertainty: as Mises would said). It is never “idle”. It even less could be “scarce” in any given situation – any quantity of money is equally capable of serving an economy. The very notion of “scarcity of money” is nonsense, and a usual justification for inflation.
As for “idleness” in the full banking reserve system – that’s exactly the point – gold SHOULD seat “idle” in order to allow to monetary calculation to function smoothly and prevent the distortions in the structure of production.
Finally, money substitutes (as legal claims on money) could easily exist in an 100% system; the only thing that cannot exist is the claims on money unbacked by specie, i.e. fiduciary media. There is a difference between fiduciay media and money substitutes.
Given that this discussion has apparently stopped without further put downs from the free banking crowd, could I suggest that 100 percenters remember the lessons here when the smackdowns come from the opposition:
1. Point out the difference between the law “as it is” and the law “as it should be”. Too many of us say casually “FRB Is fraud” without pointing out that although it’s undoubtedly currently legal it should be categorized as “fraud” in an ideal world and we should be working on this via legislation if the courts won’t take this step.
2. When you are pushed even on the normative issue (“the law shouldn’t ever interfere with voluntary contracts!”) point out that this is an empirical issue, and “voluntary contracts” are only enforceable if the contracting party is not deliberately misled. If most people believe money is held on trust in their own checking accounts, there is clearly a problem for the free bankers. Even if most people are “stupid” or “morons” to misunderstand the nature of their own deposit account, if most people believe it, this is relevant to the issue of whether FRB should be judged as “fraudulent”. Most opponents run away when challenged on this issue because they know darn well most people don’t understand the precise legal nature of a checking account.
“If most people believe money is held on trust in their own checking accounts, there is clearly a problem for the free bankers.”
Of course they don’t believe that.
They don’t? What do you think a bank depositor would do were the bank to reject a draw on funds, stating that the money had been lent out to someone else?
[...] much worse when professional economists commit the same intellectual infringement. In a recent blog post on free banking, Joseph Salerno categorizes certain ideas as “Keynesian.” Of course, [...]
[...] thought has been influenced by George Selgin’s theories, which, as Joseph Salerno has pointed out, also heavily stress Aggregate [...]