Where was the Tom Woods Show when Hayek Needed It?

by George Selgin March 20th, 2015 5:37 pm

Tom Woods and Joe Salerno

Tom Woods and Joe Salerno

This morning Justin Merill alerted me, via Facebook, to a recent episode of The Tom Woods Show titled “Against Market Monetarism and NGDP Targeting.” The episode consists of an interview with Austrian monetary economist Joe Salerno, in which Salerno takes issue with Market Monetarists and, especially, with those current or former Austrians, including Larry White and me, who share Market Monetarists’ view that a well-functioning monetary system should avoid fluctuations in aggregate spending.

In the course of the interview Salerno, egged on by Woods, * suggests that when ostensible free banking proponents like Larry White and me treat stability of spending (MV) as a desirable monetary policy outcome, we implicitly endorse a centrally-planned money supply. Evidently it doesn’t occur to him that we like free banking precisely because we consider it, when combined either with a metallic standard or a frozen (or otherwise absolutely limited) stock of fiat (or "synthetic commodity") base money, an excellent device for achieving a stable level of total spending, and far superior in that respect to discretionary central banking. But you can hardly blame him for the oversight: after all, Larry and I have only pointed out this connection in just about every one of our writings on free banking, including my Theory of Free Banking, the first part of which is almost entirely devoted to showing how a free banking system tends automatically to stabilize spending.

It gets worse. When Salerno challenges what he refers to as “Larry White’s program” for having M change so as to offset opposite changes in V, Episode 361 of the Tom Woods Show graduates from scurrilous to spurious. “As people who believe in Austrian business cycle theory will tell you,” Salerno declares, “any creation of money by the Fed always goes through credit markets. That pushes interest rates down below their natural level. And that brings about the series of events that we know as the Austrian business cycle theory. So we think that is not a good policy; it’s a dangerous policy.”

The only problem with this argument is that at least one person who most certainly believed in Austrian business cycle theory would not have agreed with it. No biggie, right? Well, it wouldn't be, were it not for the fact that the person in question happens to have been ... Friedrich Hayek, the Austrian business cycle theory's most important elaborator and exponent.

Though before he put the finishing touches on his famous theory Hayek shared Salerno’s preference for a constant money stock, he changed his mind in the course of writing his best-known works on the subject. Hayek’s mature understanding made its debut in the first English edition of Prices and Production (1931, p. 297), where Hayek observes that “[a]ny change in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral toward prices.” Somewhat later, in his essay on “Saving” (1933), Hayek observed that “Unless the banks create additional credits for investment purposes to the same extent that the holders of deposits have ceased to use them for current expenditure, the effect of such saving is essentially the same as that of hoarding and has all the undesirable deflationary consequences attaching to the latter.” Apart from minor modifications, this remained Hayek's theoretical position throughout the remainder of the 1930s and for some time beyond.

So, if Larry White doesn’t know his Austrian business cycle theory quite as well as Joe Salerno does, he shouldn’t feel too bad about it: after all, he’s in pretty good company.
*Apologies to Tom for my inaccurate first impression.

Addendum 1(3-21-2015): As some readers have misunderstood me on the point, let me make clear that I do not mean to suggest that Hayek himself favored discretionary central banking as a means for implementing his ideal! His position resembled White's in that he favored a rule-based system founded on gold convertibility while viewing central banks as the main cause of the then-existing system's failure to approximate his ideal. In fact Hayek resisted calling for monetary expansion in the 30s despite the collapse in spending that had occurred--though he came to regret having done so. The fact remains that Salerno's characterization of the Austrian business cycle theory is inconsistent with Hayek's own understanding.

Concerning Salerno's suggestion that it is wrong for White and others to endorse or rationalize expansionary central bank action even as a "second best" alternative, see my previous post on the matter, the gist of which is that it's meaningless to suggest that a central bank, assuming one exists, "do nothing." Consequently it's impossible to avoid implicitly endorsing a second-best alternative that could be construed as offering "advice" to a central planner. That is what Joe Salerno effectively does in arguing for a constant-M ideal. It is also, in effect, what Hayek did, to his ultimate regret, when he opposed Bank of England expansion in the early 1930s. My point isn't to condemn the implied advice in either case, but simply to point out that saying that a central bank should "do nothing" can also be construed--unfairly--as endorsing a particular monetary central plan.

Addendum 2(3-21-2015): Bill Woolsey weighs in on Salerno's notion of monetary neutrality.


Reclaim Your Liberty Dollars

by Bradley Jansen March 13th, 2015 11:15 am

Our friend Bernard von NotHaus sent out an email yesterday advising everyone who had their Liberty Dollars confiscated by the Feds to petition to get them back.  Larry White offered Congressional testimony on the issue; read about it in his post here praising currency competition.  Also, Kurt Schuler posted about the case and a Forbes article with another post here on free banking referencing the Liberty Dollar and another one pointing out a few of Larry White's papers which also get into the Liberty Dollar case.

There are lots of posts on the similar precedent of the e-gold case (with more background on the e-gold case from me farther back here and on forfeiture here).  Unfortunately, those depositors didn't get their gold back from the Feds after their accounts were confiscated.  This time the Department of Justice may give some Liberty Dollar claimants an opportunity the e-gold ones didn't.

So with no further ado, here is the pertinent information from the Liberty Dollar newsletter:


New Developments from the DOJ regarding your Petition to recover your wrongfully seized Liberty Dollar property. 

Dear Liberty Dollar Supporters!

A Liberty Dollar Supporter received this text in an email yesterday.


"Enclosed you will find the Amended Preliminary Order of Forfeiture in the criminal case in which Bernard von NotHaus has now been convicted. Also enclosed is a Notice informing you of how you must go about filing a petition with the court if you think that you have a forfeiture interest in any of the forfeited property.

Because you have previously contacted this office by email and did not include a postal address, this notice is being sent by email. However, this office will not accept any further communications by email. All communications must be by postal mail at the address given in the Notice." 

Thomas R. Ascik
Assistant United States Attorney
100 Otis Street
Asheville, North Carolina 28801
828-271-4661 - main
828-271-4670 - fx


Please read these two documents very carefully before filing your Petition:

 and the

Please make special note that the Notice of Forfeiture requires all Claimants to file TWO COPIES OF YOUR PETITON. One address to the Court and that address is on the Sample Petition I already sent to you.
And send a SECOND COPY sent to:
Thomas R. Ascik
Assistant United States Attorney
100 Otis Street
Asheville, North Carolina 28801
Both copies must be NOTARIZED.

I will continue to keep you advised of any changes or developments regarding this Gordian Knot!

I will also do my best to be of assistance. But please don't email me unless you must.
I am swamped!

With the right work, you should get your property back.

I am deeply grateful for your kind support and concern.

Bernard von NotHaus
Monetary Architect

That email followed this one sounding the call to pass the word for anyone to literally exercise their First Amendment right to To Petition the Government for a Redress of Grievances!


You Must Take Prompt Action Before Your Wrongfully Seized Liberty Dollars Are Forfeited and Gone Forever!

Dear Liberty Dollar Supporters!

I strongly urge you to send this message out to your fellow Liberty Dollar supporters, email list and your news groups so as many innocent third parties as possible can get their wrongfully seized Liberty Dollar property back as possible. 

ATTENTION: I was just informed that the DOJ is planning to mail notification to 1000 to 2000 potential claimants (out of 10,000+ potential claimants), regarding their property on March 10. Don't wait! Start getting your info together now. If you are not one of the "lucky ones" to receive a letter from the DOJ then file your Petition as per this email.

After six months of strenuous effort to find the way for you to get your wrongfully seized Liberty Dollar property back, I can report that the results are mixed: There is both good news and bad news.

Here's the good news: You can get your property back. The bad news is that each individual claimant must file a separate Petition claiming their property. The filing process is tedious and requires excellent records of your confiscated Liberty Dollars and when you bought them. I know this will be difficult for many of you, especially if you only have a few Liberty Dollars.

Sadly, there is nothing more l can do to help you other than to provide the attached sample Petition, the instructions for your Petition below and a copy of the statutory language from the Cornell Law School.

Going forward, my efforts will remain focused on exposing this terrible travesty and to do what I can to bring sanity and stability back to the money we all depend upon.

DO NOT let the Federal "Justice" System victimize you and steal your property.

Now, the time has finally come for you to take action to prevent the government from forfeiting (i.e. stealing) your innocent third party Liberty Dollar property. Regardless of how wrong this may seem to you or what a pain it may be, if you don't take action, you WILL LOSE YOUR PROPERTY. Recovering your property is the closing act of the long nine year drama regarding the Liberty Dollar warning, raid, arrest and conviction of BVNH.

Please note that only metal property (gold, silver, platinum or copper) can be returned for:
1. Paper warehouse receipts
2. Digital warehouse receipts that were electronically held in your online account
3. Your personal property was held at the Liberty Dollar Fulfillment Office.
Or cash repayment for unfulfilled orders could be repaid from the Liberty Services bank account that was seized.

Now that Judge Voorhees has entered a Preliminary Order of Forfeiture, he will Order an announcement to be posted and/or mailed regarding an Ancillary Hearing for all third party claimants. Each claimant will be permitted to testify, call witnesses and present evidence to establish their claim for their wrongfully seized Liberty Dollar property.
The recovery process begins with each Claimant filing a Petition with the Court.

Please note a sample Petition is attached.

Please write your Statement in plain English that includes:
2. Statement: "I, your name, hereby state under oath and penalty of perjury that the follow information is true and correct to the best of my knowledge."
3. Your mailing address
4. List of properties with a description and quantity of each (i.e. so many $10 one ounce paper Silver Certificate warehouse receipts, one $500 paper Gold Certificate warehouse receipt and the latest balance in your ELD digital warehouse receipt account)
5. The date of purchase of each property if known. If you don't know the date of each purchase, state: "I bought such and such property on or about… and include date or year." As all ELD accounts are closed simply use the closing balance of your ELD account if indeed that is possible. All digital warehouse receipts are at the $20 Silver Base)
6. State the number of ounces for each type of property
7. State that you bought your property with your own money and were not party to any criminal activity for which the property was seized.
8. State you are a bona fide purchaser for value of the right, title, or interest in the property and at the time of purchase was reasonably without cause to believe that the property would be subject to forfeiture.
9. It is very important to show proof of your purchase and substantiate your claim with any paper work or records that you have. Please attach any and all proof of your purchases and the value of your digital Liberty Dollar account. Of course that is very difficult for your digital Liberty Dollar account that is not available, a great amount of time has transpired or you may have received the paper warehouse receipts in trade, barter or commerce. DO NOT surrender your paper warehouse receipts until you a absolutely sure you are going to receive the gold and silver.
10. Point out that you have been waiting for a very long time and request an urgent resolution of this matter.
11. State that you are an innocent third Claimant and demand your property be returned to you without any cost to you as all wrongful seizures are to be returned at no cost to Claimants.
12. MOST IMPORTANT: Editorializing about the case, your property or any monetary issue would be out of place and a serious deterrent to recovering your property.

Please note a sample Petition is attached.

The 30 day time period for you to file the Petition will begin very shortly. Regardless if you receive a letter or read the Official Notice published in the local newspaper in Charlotte, your Petition must be received within the 30 days after the Notice is published. One petition has already be filed and recorded as Document 294. Each Petition will be identified with its own Doc number. PLEASE DO NOT WAIT. Start now! Start looking for your records and working on your Petition now! Please note I am barred from assisting with anyone's Petition.

Remember: Your Petition must be Notarized. 

Your notarized Petition must be filed with the Federal Court in Charlotte, North Carolina and I strongly recommend your Petition be sent with tracking that confirms it was sent and received. For that reason, I suggest you mail your Petition via US Priority Mail and retain the receipt with the tracking number for your records. Please note the Court's address is included on the Sample Petition.

I encourage you to file a Petition - regardless of how little was taken from you. This the final act of the Liberty Dollar and every Petition is a show of support and very important.

Please keep a copy of the Notarized Petition for your records.

I know that this has been a very long exhausting experience. I know you have been seriously wronged by the Federal government. We have all suffered for taking legal citizen action to rightfully and peacefully return our country's once great monetary system to its original founding principles. It is now time to get your property back.

I am doing my best to be of assistance. But please don't email me unless you must. I am swamped!

Thanks again for your outstanding action for those ideals we share in common.

I am deeply grateful for your kind support and concern.

I apologize for having failed you. Good luck!

Bernard von NotHaus
Monetary Architect


Good luck to all of our Liberty Dollar friends!

UPDATE:  Bernard corrects me (thanks, Bernard!):

Thanks Bradley!  Well done... Except that some e-gold account holders did get reimbursed in USD for their e-gold.  I was one and Richard Timberlake was another... Actually there were quite a few who were able to jump through a pile of hoops and actually get their money (not gold) back.  Bernard


CMRE Dinner March 25th in NYC

by Bradley Jansen March 13th, 2015 2:26 am

In another bit of housekeeping, I wanted to point out that free banking blogger extraordinaire George Selgin and fellow blogger here Walker Todd will be joining Thomas Hoenig, vice chairman of the FDIC and formerly president of the Federal Reserve BANK of Kansas City, at the next Committee for Monetary Reform and Education (CMRE) dinner.

Other announced speakers include John Browne, former Conservative MP, advisor to Margaret Thatcher, and vice-president of the UKIP party and Edwin Vieira, Constitutional scholar and long-time CMRE contributor.  For more information and to register and buy tickets online, please go here:


CMRE dinner



On a personal note, I'll be helping at the door so please feel free to introduce yourself and mention you heard about it here!


The Folly of Fed Obeisance

by George Selgin March 10th, 2015 8:29 pm


As if to get my work week off to rotten start, my otherwise good pal Don Boudreaux greeted me first thing Monday morning with a link to Robert Samuelson's Sunday evening Washington Post op-ed on "The Folly of Fed Bashing." In it, Samuelson takes the Fed's conservative critics to task for their "misinformed" attacks on the Fed, faulting them for failing to appreciate how much more transparent the Fed's operations are today than they were some decades ago, and for not understanding that its actions, however undesirable they may seem, are generally "necessary for the nation's long-term economic health." As for the perception that "the Fed is a large and aloof agency that needs to be tamed," it rests, Samuelson says, on a "simplistic" view of the Fed's history.

Well I can't speak for others, but I know something about the Fed's history. And I've come to the conclusion, informed by careful consideration, over the course of several decades, of that history, and the history of numerous other monetary arrangements in the U.S. and elsewhere, that the Fed is actually...a large and aloof agency that needs to be tamed.

True, the Fed is in some respects more transparent than it used to be. But it has also been doing things that it never used to do. The ordinary Fed publications and disclosures to which Mr. Samuelson refers shed no light at all on many of these novelties. Not for nothing did Dodd-Frank provide for a special, one-time audit of the Fed's crisis-related undertakings. Among other things, that audit pointed to some serious conflicts of interest that might otherwise have escaped censure. Yet according to Mr. Samuelson's supposedly up-to-date Fed history, it should have been just as unnecessary as the recurring audits Fed "bashers" have been calling for.

Would such recurring audits themselves be otiose? The Dodd-Frank audit covers the Fed's actions up to July 21, 2010. Consequently the GAO isn't allowed to look into any of the Fed's unorthodox measures since then, including later rounds of Quantitative Easing, Operation Twist, and its enhanced overnight reverse repo program, not to mention its stress tests and other financial-regulatory measures. More importantly, under existing law it can't be asked to look into any "emergency" steps the Fed might take in the future. Should we always have to rely on special legislation after the fact to allow Congress to scrutinize unusual Fed actions?

Mr. Samuelson complains about simplistic history. Allow me to complain instead about simplistic conjectures about the future--conjectures to the effect that the Fed will never again engage in the sorts of activities that warranted the Dodd-Frank audit. Such conjectures are after all implicit in claims, like his, to the effect that a permanent enhancement of the GAO's Fed-auditing powers would only serve to "fulfill conservatives' political agenda" by allowing Congress to "harass" the Fed and to otherwise undermine its ability to do its job.* Does Mr. Samuelson believe that the GAO "harasses" the other government departments and agencies over which it has unlimited auditing powers? If not, why does he worry that it would harass the Fed? Conservative agenda? Does he think that only conservatives (or conservatives and libertarians) distrust the Fed, and welcome GAO scrutiny of its unusual activities? If GAO officials themselves argue for relaxing present limits on their agency's Fed-auditing powers, must they be part of a conservative plot?

Samuelson also sees "no obvious advantage" in a measure that would compel the Fed to choose and stick to a monetary rule, such as a Taylor Rule or NGDP growth rule. But while the advantage of such a rule may not be obvious to him, others may find it obvious enough. Either a Taylor or a Sumner-style NGDP growth rule would have called for less expansionary monetary policy in the mid-2000s, and for more expansionary policy in late 2009--reason enough to wonder whether, in complaining (in Samuelson's words) that a rule "might make policy too inflexible," Janet Yellen bothered to consider how in practice policy tends to "flex" the wrong way.

Finally, although he recognizes that the Fed isn't infallible, and even suggests that the recent financial crisis was proof of its fallibility, Samuelson remains convinced that the Fed's unhindered exercise of almost unlimited discretionary powers has contributed more than rule-based arrangements might to "the nation's long-term economic health." On what, I wonder, is this judgment based? Certainly not on recent experience. But a longer view is just as hard to square with the assertion, as Milton Friedman and Anna Schwartz went to great lengths to demonstrate. Mr. Samuelson worries that Fed "bashing"--by which he seems to mean any criticism of the Fed that seeks to justify a reduction of its considerable power--"adds to uncertainty and subtracts from confidence" upon which economic growth depends. In truth, the Fed's actions are themselves often unpredictable, and especially so when it comes to their influence on the long-run course of prices and spending. Were the Fed really a sort of Ambrose Light of financial markets, as Mr. Samuelson imagines it to be, Fed watching, instead of being a growth industry, would be about as useful--and as boring--as watching paint dry.

But the Fed needs more than mere watching. It needs scrutiny. It needs criticism. Above all, it needs to be reined in--not for conservatives' sake, but for everyone's. Mr. Samuelson may not like it. But I, for one, intend to keep bashing away.
*Like many commentators who take the Fed's side in the "audit the Fed" debate, Samuelson suggests that there only two possible kinds of GAO audits to which the Fed might be subject: simple "do the books balance" audits, as are already provided for, and ones by which the GAO would "second guess" the Fed's conduct of ordinary monetary policy. In fact, the Fed does a lot more than engage in ordinary monetary policy, and, as the special audit provided for in Dodd-Frank illustrates, there are correspondingly many ways in which the GAO might scrutinize it's conduct. The real debate is about these other sorts of scrutiny. To represent it as a debate about whether the GAO (or "Congress") should be allowed to interfere with the Fed's conduct of monetary policy is missing the point, if it isn't something rather worse than that.


Will Luther on Sound Money

by George Selgin March 9th, 2015 8:04 pm

Over at Atlas's Sound Money Project, Cato Adjunct Scholar (and Larry White student) Will Luther tells us what "Sound Money" means to him. A sample:

For me, the important aspects are the ability to facilitate exchange—which any money will do but some might do better than others—and the degree of macroeconomic stability enabled by that money. When comparing monies along these margins, then, we must establish a benchmark. In what follows, I’ll try to establish a benchmark for the second of those aspects: namely, the degree of macroeconomic stability enabled by a money.

Read on to discover just what Will means by "macroeconomic stability." I find his approach convincing--but I suppose I might be a tad biased.


Backing, Shmacking

by George Selgin March 4th, 2015 12:14 pm

Somali Shilling

I really ought to know better by now than to complain about the "backing" theory of money--the view that the value of, not just some sorts of money, but money of any sort, depends on the assets commanded by the money's suppliers. I've never been able to convince the theory's more determined proponents of the error of their ways, and I risk provoking them to mount their hobby horse every time I bring it up.

But the backing theory keeps rearing its ugly head whether I mention it or not, as it did in the pages of Monday's Wall Street Journal, in an article asking "Do Cryptocurrencies Such as Bitcoin Have a Future?" And I'll be damned if I'm going to just sit idly by while it threatens to amble its way into some as-yet uninfected brains.

The specific perpetrator in this instance was one Eric Tymoigne, an assistant professor of economics at Lewis & Clark College, who invoked the ghastly fallacy in defense of his assertion that "There is no financial logic behind bitcoins’ face value":

Monetary instruments are securities. As such, they have a term to maturity (instantaneous) and an issuer—often a central bank or private banks—that promises to pay the bearer the full face value. Gold coins are a collateralized form of such security. Paper, cheap metal, and electronic entries are the forms such securities take today. The characteristics of these securities allow them to circulate at a stable nominal value (par) in the right financial infrastructure and as long as the creditworthiness of the issuer is strong. This provides a reliable means to complete transactions and, more important, service debts.

Bitcoins, meanwhile, violate all of the rules of finance. There is no central issuer guaranteeing payment at face value to the bearer; in fact, there is no underlying face value, and subsequently no imputed value at maturity, which means they are completely impractical for use in servicing of debt. The fair price of bitcoins as measured by the discounted value of future cash flows is zero.

Although Mr. Tymoigne never actually uses the word "backing," his argument is standard "backing" fare, distinguished only in being more explicit than some other statements in referring to all forms of money as "securities." This explicitness is welcome, for it is precisely in treating all forms of money this way, whether expressly or only tacitly, that the "backing" theory goes awry.

Many types of money are, to be sure, properly regarded as securities, that is, as IOUs or promises to pay. Bank deposits fit this description. So do competitively issued, non-legal tender banknotes, like those issued by Scottish banks today, and by almost all commercial banks a century or more ago. Central-bank-issued notes qualified as well back when they were themselves convertible claims to some underlying form of money, such as gold or silver coins. Finally, a paper currency which, though temporarily irredeemable, is expected eventually to be redeemed in some other kind of money--what von Mises terms "credit money"--also qualifies. Examples of the last include Bank of England pounds during the Bank Restriction period, and U.S. Treasury notes ("Greenbacks") before 1879.

Of course "backing" matters in the case of exchange media that either are convertible into some more basic form of money, or are expected to become convertible into such at some future date. The likelihood that a bank will be able to honor its promises to pay obviously depends on the quality of the assets "backing" its IOUs. When the expected present value of those assets ceases to equal or exceed the value of its liabilities, the bank is insolvent, and its creditors face the prospect of not having their debts paid in full. Likewise, the prospects for resumption of payments on temporarily suspended monetary IOUs vary with the value of their issuers' non-monetary assets. The announcement of the Peace of Amiens substantially boosted the value of the paper pound, while that of renewed hostilities had the opposite effect. All of this is indeed perfectly in accord with the logic concerning how securities of all sorts are valued.

But in imagining that other sorts of money are also securities, proponents of the backing theory commit what philosophers like to call a "category mistake." Free-floating "fiat" moneys are not securities. Precious metal objects are not securities. Finally, bitcoins and altcoins are not securities. These actual or potential exchange media aren't claims to some underling medium into which they are, or are expected to become, redeemable. Consequently their values don't depend on the likelihood that they can be converted into something else, or on their providers' overall wealth as it informs that likelihood. Instead, their value depends on their own supply, and on the demand for them as exchange media (and for other uses, if they have such), with no role for calculations or speculation concerning the prospect of their being converted into something else.

The assets possessed by a fiat-money-issuing central bank--that is, by a bank that issues inconvertible paper, with no promise to ever redeem it in a specific amount of some other money--play no part in determining its currency's purchasing power. Such a central bank might, therefore, swap all its better assets for junk, without influencing that purchasing power in the slightest. And guess what? The Fed and the ECB have done just that in recent years, jettisoning their good assets to make room for doubtful mortgage-backed securities and Greek bonds; yet far from seeing their currencies depreciate substantially, as the backing theory predicts would happen, both, and the ECB in particular, struggled to keep them from appreciating excessively relative to stated inflation targets. It's hard to imagine a cleaner refutation of the "backing" theory than this. Oh, wait! I almost forgot about the "disowned" Iraqi Swiss dinars that remained in use in northern Iraq years after being repudiated by Iraq's Central Bank, and the "orphaned" Somali shillings that continued to be valued and used long after looters gutted the Central Bank of Somalia. Alas, no amount of empirical evidence appears sufficient to refute the backing theory in the eyes of its more obstinate champions.

To be fair to those champions, they are merely giving their intellectual stamp of approval to a view that has always had a substantial popular following. Consider, for example, the dummies.com definition of a fiat money system as one "based on a government’s mandate that the paper currency it prints is legal tender for making financial transactions. Legal tender means that the money is backed by the full faith and credit of the government that issues it. In other words, the government promises to be good for it."

"Promises to be good for it?" And just what is this "it"? It is...well, nothing, actually. Because modern Federal Reserve Notes are, in fact (in former New York Fed President John Exter's famous formulation), so many "IOU nothings."

It's a bit more disappointing to find the backing theory endorsed by government officials, as it is in an otherwise competent CRS brief on the history of Gold Standard:

The U.S. monetary system is based on paper money backed by the full faith and credit of the federal government. The currency is neither valued in, backed by, nor officially convertible into gold or silver. Through much of its history, however, the United States was on a metallic standard of one sort or another

and in boilerplate included in the U.S. Comptroller General's annual Financial Report on the United States Government:

FRBs issue Federal Reserve Notes, which are the circulating currency of the United States. These notes are collateralized by specific assets owned by the FRBs, typically U.S. government securities. Federal Reserve Notes are backed by the full faith and credit of the United States Government.

In fact the only "faith" that matters for a fiat currency is the public's "faith" in the monetary authorities, that is, the public's willingness to believe that those authorities will refrain from issuing oodles of the stuff. "Credit" has nothing to do with it: once again, a piece of "fiat" money is not a credit instrument. It is not a promise to pay anything. Consequently its issuer's credit standing is of no immediate consequence. (It matters indirectly because, were the U.S. government unable to borrow by selling actual Treasury securities, it might be tempted to issue greater sums of fiat money instead, provided it could get the Fed to go along with the plan.)*

More troubling still are endorsements of the backing theory by Federal Reserve experts. Those experts are supposed to know something about how the value of the U.S. dollar is determined. Yet that doesn't prevent some of them from saying things like "Since 1971, U.S. paper money has been backed by the 'full faith and credit' of the U.S. government", or "Compared with commodity money, which has an intrinsic value, such as gold, or official fiat money backed by a sovereign entity, the current market value of bitcoin to any given user hinges entirely on her expectation of others’ willingness to accept it later at a sufficiently greater value". In truth neither bitcoin nor Federal Reserve dollars have "intrinsic" value, understood in the usual sense to mean non-monetary value. And as for governments being able to prop-up the value of fiat money by means of legal tender laws, tell that to all the governments that imagined that doing so would suffice to rule-out hyperinflation.

Most disturbing of all is the fact that some central bankers themselves appear to subscribe to the backing theory. Take, for example, Alan Greenspan's remarks concerning Bitcoin, given in the course of a December 2013 Bloomberg News interview. :

"It’s a bubble,” Greenspan, 87, said today in a Bloomberg Television interview from Washington. “It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.”

“I do not understand where the backing of Bitcoin is coming from,” the former Fed chief said. “There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.”

"Capabilities of repaying it"! Tell us, Mr. Greenspan, just when does the Fed plan to "repay" the holders of all those Federal Reserve "liabilities" created during your watch, let alone the far vaster quantity created since? And what will it "repay" them with?

If you imagine that Mr. Greenspan can answer these questions, you imagine too well.**
*Even when used, less inappropriately, in reference to actual U.S. government securities, the "backed by the full faith and credit" language is misleading: unlike private debtors the U.S. government doesn't have to possess a stock of valuable, productive or interest-earning assets in order to service its debts. Its securities are instead "backed" by a combination of (1) its power to tax and (2) its ability to rely, at least to some extent, on the Fed's willingness to monetize its debt.
**A commentator thinks I am being too harsh here, as Greenspan merely assumes that Federal Reserve dollars, being "universally acceptable," differ from bitcoins in not having to be secured by a promise of repayment. Greenspan's language isn't the easiest to follow, but I still think his statements beg the question. For my further remarks see the comments below.


What Fed Officials Really Don't Want You to Know (Hint: They are Telling You)

by George Selgin February 18th, 2015 7:55 pm


This morning I had a query from someone asking me to share my thoughts about the Federal Reserve Transparency Act, better known as the bill to "Audit the Fed." Having given him a brief answer, I thought I might say a little more here.

Although Rand Paul promises that his measure will shed much-needed light on the Fed's undertakings (the Senate version of his measure was even called "The Federal Reserve Sunshine Act"), the truth is that it's unlikely to reveal any new facts of importance beyond what existing Fed audits--including those provided by Title XI of the Dodd-Frank Act (which provides for a GAO audit of the Fed's crisis-related emergency lending)--can themselves reveal.

True, unlike existing measures Paul's bill would also let the GAO "audit" the Fed's conduct of monetary policy, including its open-market operations and financial dealings with other central banks. But if "sunshine" is the first word that pops into your head when contemplating this possibility, you probably have had a little too much of it already. Certainly you have not read many GAO reports.

Don't get me wrong: the GAO does its job's well, and a report by it on the Fed's conduct of monetary policy would probably be a much better read than most academic papers on the same topic. But if you're looking forward to seeing the GAO give the FOMC a good thrashing, or to any other sort of scintillating reading, you're barking up the wrong tree, because what you're likely to be in for instead is a bunch of charts and tables, accompanied by a competent but very measured and detached review of the Fed's activities, of the sort that might prove very handy for assessing the Fed's performance, but that is hardly likely to be the least-bit earth-shattering.

But if some dry-as-dust report is all we're talking about, why are Fed officials so up in arms about the proposal? That's a good question. Fed officials themselves claim that Paul's measure would give Congress the power to "harass" the Fed, thereby allowing it (in Dallas Fed President Richard Fisher's words) "to bend monetary policy to the will of politicians." But as my colleague Mark Calabria explains, the measure wouldn't allow anything of the sort. Evidently these Fed officials were too busy arranging the Fed's wagons in a big circle to take time to actually read the measure they were so anxious to defend their institution against. Had they bothered they might have noticed that the it calls for the GAO, and not "Congress" (or any body of "politicians") to report on the Fed's policies. They might even have taken a moment to recall that the GAO is an independent agency--just like the Fed's own Board of Governors--whose head, the Comptroller General of the U.S., is a non-partisan professional appointed by the President--rather like their own Chairman. Finally, they might have chewed a little on the GAO's own description of its mission, which is "to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people."

In short, what we have here is one independent agency of the U.S. government insisting on its right to be uniquely exempt from review by another independent agency charged with making sure that Congress and its departments and agencies perform their Constitutional duties successfully and efficiently. That's not fighting to preserve independence. It's fighting to avoid accountability.

Come to think of it, perhaps Paul's proposal will reveal some deep, dark Fed secret after all. Perhaps it already has.


Fragile by Design: A Free Banker's Perspective

by George Selgin February 9th, 2015 10:02 am

My review essay, forthcoming in International Finance, on Charles Calomiris and Stephen Haber's very important book.


A Free-Banking Fantasy

by George Selgin January 28th, 2015 2:02 pm

gold atm

Everyone fantasizes about something now and then. But even I was surprised (and not at all displeased) to discover that at least one person besides me--Warren Gibson--fantasizes about...free banking! Better yet, he's invited anyone who wishes to stroll down fantasy lane with him to witness his vision of what a Wells Fargo branch might look like, if only governments would leave it and other banks alone.

I hope my readers will accept Warren's kind invitation. And the last thing I want to do is to spoil his personal pipe-dream. Still I can't help wanting to take advantage of the tantalizing picture Warren paints to dispel some common misconceptions about free banking, and especially about what a future free banking system is likely to look like.

"The first thing we notice," say Warren as we enter his fantasy bank, "is a display case showing a number of gold coins and a placard that says, “available here for 1,000 Wells Fargo Dollars each, now and forever.”

Hold it right there. In the past competitively-supplied banknotes, including those of free banking systems in Scotland and elsewhere, were convertible into either gold or silver, because back then "real" money consisted of gold or silver coins. But if you think that a return to free banking in the future would mean returning to a gold (or silver) standard, you'd better keep dreaming. Banks themselves, first of all, aren't in the business of establishing new monetary standards. A banker's job is to get people to trade whatever basic money they already employ, which is to say whichever basic money is in common use, for his or her bank's IOUs. Those IOUs will, in turn, be made redeemable in the same sort of money they were substituted for in the first place. That "Gold has physical properties that have endeared it to people over the ages—durability, divisibility, scarcity to name a few," though true, is irrelevant once some other stuff, whatever its physical properties, has come to be generally accepted in its place. The long and short of it is that, were I able to wave a magic wand right now, eliminating all obnoxious banking laws, disbanding the FOMC, and privatizing the Fed's remaining bits, including its clearing and settlement facilities, chances are we'd still find ourselves be on a paper dollar standard. Sheer momentum alone would tend to keep the dollar going, while the fact that the supply of basic dollars could no longer be expanded would, if anything, make the dollar appreciate. That's not saying that the new dollar standard would be perfect--far from it. But neither will it go "poof" and have gold appear, like magic, in its place.

So our future Wells Fargo may be allowed to issue all the IOUs it wants to, including circulating paper ones. But odds are that, unless other steps were taken to re-establish a gold standard, its IOUs will be promises to pay, not gold, but old-fashioned Federal Reserve dollars.

Warren manages, thank goodness, to avoid another popular misconception about free banking: the neo-Rothbardian claim that it would lead in practice to 100-percent reserves. "Wells Fargo," Warren says, "practices fractional reserve banking." But what, Warren imagines his companion asking, keeps Wells from issuing way more banknotes and other IOUs than it should? "The market will stop them, that’s who," says Warren. He's right, but "the market" can't work as he imagines it will. "In my scenario," Warren says,

Consumer Reports and a number of lesser known organizations track Wells Fargo and other banks. These organizations post daily figures online showing the number of Wells Fargo dollars (WF$) outstanding and the amount of gold holdings that the bank keeps in reserve to back these dollars. Premium subscribers, I imagine, can get an email alert any time a bank’s reserves fall below some specified levels. Large depositors will notify Wells Fargo of their intention to begin withdrawing deposits and/or demanding physical gold. Small depositors piggyback on the vigilance efforts of big depositors. They know it is not necessary for them to pester the bank when the big guys are doing it for everybody.

Terrific: Wells Fargo is free to go wild until Consumer Reports gets 'round to publishing its annual Fractional Reserve Bank special, in which Wells, assuming it is still around, earns it "unsatisfactory" rating, whereupon a run wipes it out at last. Runs, you see, are a little like pregnancy, in that there's no having part of one only. And if you think it makes sense for a worried depositor, large or small, to "notify" his bank before running, I strongly urge you to keep your money under a mattress. Finally, even if Consumer Reports or some other (presumably private) watchdog could somehow manage to supply real-time reports on Wells Fargo's reserve ratio, just how are consumers supposed to distinguish a reserve ratio that's just dandy from one that portends disaster? As we'll see, they can't do it by just guessing--and especially so if their guesses are as wildly off as Warren's are. (More on that below.)

If having people spy on its reserves won't suffice to keep a liberated Wells Fargo of the future in check, what will? The answer is still "the market," as Warren likes to say. But it's more precise than that: it's the competitive market for bank money, including paper banknotes, that matters. In that market a bank's notes, like checks drawn on it, make their way to (mostly rival) banks within a matter of days after being put into circulation. The rivals then return them to their source for payment. After offsetting payments are "netted out," banks' remaining dues to one another are settled in basic money. Consequently, any bank that's overgenerous in its lending doesn't have to wait for some watchdog agency to complain about its reserve ratio: it gets the message, and quickly, by seeing its reserves chipped away by its rivals.* In missing this, by the way, Warren paradoxically misses the key advantage of having multiple suppliers of convertible currency instead of just one. Free banking without a role for competition is like Hamlet...(blah blah blah).

As I mentioned, Warren avoids the misconception that a free Wells Fargo would resemble a Rothbardian money warehouse. Still, in imagining that Wells' fractional-reserve status would be "clearly outlined in the contract that depositors sign and...printed on their banknotes," he risks giving credence to the related misconception that the language on current bank depositor agreements and current and past redeemable banknotes is somehow misleading. In fact, no one who actually bothers to read a modern bank depositor's agreement can have any doubt that he or she isn't doing business with a mere warehouse. And though the phrase "fractional reserves" never appeared on past commercial banknotes, such notes, I've noted here previously, far from pretending to be warehouse receipts, were clear proof of debts contracted between their issuers and their holders.

Warren's free-banking fantasy is also fantastically off in its suggestion that a future free bank might hold reserves equal to a very substantial fraction--he uses 40% in his illustration--of its banknotes and deposits. Such high numbers reflect the view, traceable to Henri Cernuschi and repeated by von Mises, that open competition would force banks to hold much higher reserves than they've gotten away with historically. But consider: even the goldsmith bankers of the mid-17th century, when there was no question of banks being propped-up by government guarantees, implicit or otherwise (there was as yet no Bank of England to serve them as a last-resort lender), typically kept reserves equal to less than 30% of their liabilities--and this despite having relatively few, larger clients and very few ways to diversify.

The goldsmiths were also, one must admit, not the safest bankers ever. But consider the Scottish free banking system. Once the dust settled from the Ayr Bank's fantastic collapse, that system remained almost perfectly safe for the better part of a century, and yet managed to do so on specie reserves that frequently fell below two percent of their liabilities. Here again, the banks had no lender of last resort to turn to, Rothbard's suggestion to the contrary notwithstanding: although Scottish banks naturally placed funds in, and occasionally borrowed from, the London money market, they could never expect help from that quarter when they most needed it, which was during emergencies that tended to be felt most acutely there.

When one considers all the technological progress in interbank settlement technology, together with a still-more impressive increase in both opportunities for banks to engage in liability management and to employ highly-liquid securities as secondary reserves, its hard to imagine why the reserve ratios of any future free bank would be higher than that of Scottish banks two centuries ago. It's therefore unnecessary as well to worry that, were a future free banking system somehow to revert to a gold standard after all, its doing so would involve substantial real resource costs.

Warren's vision of his imaginary Wells Fargo's way of dealing with runs is, I think, generally spot-on, though I'm not sure that clearinghouses would get involved in extending emergency credit as he imagines might happen. (They did so in the U.S.; but that was a peculiar response to artificial restrictions placed upon their members' ability to issue their own banknotes.) He's also correct in arguing that having competing banks of issue doesn't mean having multiple monetary standards, though he makes free banks' inclination to adhere to a single standard appear to be merely a matter of doing what's most convenient for their customers, rather than what they cannot avoid doing in a business dedicated in the first place to receiving, and making promises to repay, some preexisting standard money. To repeat: banks aren't in the business of choosing monetary standards. Unlike a light bulb, a bank IOU isn't something its issuer can toy around with. That's why you will never see such a note with "New and Improved!" written across it, except perhaps in reference to changes in its physical design. (And even that would be tacky.)

Finally, to end on another positive note, Warren is to be commended for arguing that, were a future free banking system to witness occasional bank runs and failures, and even were it to inflict occasional losses on bank depositors and note holders, this would be no proof of its inadequacy. "Under my free banking scenario," he says, "depositors must take some responsibility for their actions." Show me a banking system where they don't have to do so, and I'll show you one that ends up being, not a dream, but a nightmare.
*Note, please, that this "adverse clearings" mechanism for constraining rival banks of issue has nothing to do with the fallacious "real bills doctrine" or with John Fullarton's related notion that bankers would be constrained to do no more than accommodate the "needs of trade" by means of the "reflux" of excess notes via loan repayments. Call it the "bad penny" theory of credit control.


Should a Bank in Difficulties Receive Assistance?

by Kevin Dowd January 24th, 2015 5:44 am

This was the question put to me by [UK] Treasury Committee Chairman Andrew Tyrie MP when I appeared before the Committee on January 6th to give evidence on the Bank of England’s latest Financial Stability Report.

This is a question to which many of us on our side have given much thought and I believe it to be the single most important question in the whole field of bank regulatory policy.

I was nonetheless caught off-guard when Mr. Tyrie asked it at the beginning of the session – I was expecting questions on the Bank’s latest nonsense, the results of its new stress tests – and my initial response was less than it should have been. But no excuse: it was a perfectly reasonable and entirely foreseeable question – the obvious question, even – and I still didn’t see it coming. Reminds me of the blunders I would occasionally make when I played competitive chess: I obviously haven’t improved much.

Thankfully, he asked me the same question again at the close of the session, and his doing so allowed me to give the correct answer clearly, an emphatic ‘No’. However, by this point there was no time to elaborate on the reasons why a bank in difficulties should be denied assistance.

These reasons go straight to the whole can of worms and my follow-up letter to Mr. Tyrie should, I hope, help to set the record straight.

My message to other advocates of free markets is that leaving aside the usual bailouts-are-bad stuff, we really should give more thought to what an Armageddon Plan B might look like: Yes, no bailouts would be best, even in our intervention-infested system, but in that case why do we humour lender-of-last-resort and, more to the point, if the government is even considering intervention in what it (rightly or wrongly) sees as an emergency in which something-really-ought-to-be-done-NOW, then what should we advise it to do - other than ‘Don’t’?

Mark my words: if we don’t give the government constructive advice, it will do what it always does when a crisis breaks out: it will panic and the chances of any sensible policy response will be zero.

So here is the text of the letter, dated January 12th:

“Dear Mr. Tyrie,

I would like to thank you for the opportunity to give evidence to the Treasury Committee at its meeting on January 6th.

At that meeting you asked me if the authorities should assist a bank that gets into difficulties.

My answer is ‘No’ but I should like to elaborate.

Consider first a free or laissez-faire banking system in which there is no central bank, no financial regulation and no other state interventions such as deposit insurance. In such a system, competitive pressures would force the banks to be financially strong; bankers who ran down their banks’ capital ratios or took excessive risks would eventually lose their depositors’ confidence and be run out of business, so losing their market share to more conservative and better-run competitors. Bankers themselves would have serious skin in the game and therefore have strong incentives to keep their banks sound: for them, bank failure would be personally costly. Banks would then be tightly governed and conservatively risk-managed, and the banking system as a whole would be highly stable.

There would still be occasional failures due to the incompetence of individual bankers, but these would be few and far between, and not pose systemic threats.

These claims from free-banking theory are broadly confirmed by the historical experiences of the many free or loosely regulated banking systems of the past, most notably the experiences of Scotland pre-1845 and 19th century Canada.

In such a system, there is no good case for official assistance to any bank in difficulties. A bank failure would be painful to those involved, but the possibility of bankruptcy is unavoidable in any industry in a healthy capitalist economy, and this includes the banking industry. Letting a badly run bank fail also sends out the right signals – it encourages other bankers to avoid the same mistakes, it encourages depositors to be careful with the banks they choose and it avoids the moral hazards inevitably created by any policy of assistance.

Modern banking systems differ from these systems because of the presence of extensive systems of state intervention, including a central bank, a central bank lender of last resort function, deposit insurance, capital adequacy regulation and other forms of financial regulation. In different ways, each of these interventions makes the banking system less stable: central banks through erratic and usually loose monetary policies, which create inflation and fuel asset price cycles, and generally destabilise the macroeconomy; the lender of last resort and deposit insurance by creating moral hazards that lead to excessive risk-taking by bankers; capital regulation by creating short-termist incentives for banks to reduce their capital (e.g., by playing games with risk models and risk weights); and financial regulation generally by its large compliance costs and its stifling of innovation. Over time, these interventions have made the banking system weaker and weaker, even though their usual stated intention was to strengthen the banking system rather than to weaken it.

However, even with the banking system already seriously weakened by a long history of misguided government interventions, the best policy response is still to refuse assistance to banks in difficulties. I say this for two main reasons:
• the systemic effects of bank difficulties tend to be exaggerated even in a systemic crisis, sometimes grossly so; and
• interventionist policy responses tend to make matters even worse.

The ideal response by policymakers is to refuse assistance point-blank – and to announce such a policy in advance so the bankers know where they stand.

Policymakers should follow the advice of Lord Liverpool, who was PM at the time of the last systemic banking crisis pre-2007, that of December 1825. In May that year, he foresaw the looming crisis and warned the House of Lords about the “general spirit of speculation, which was going beyond all bounds and was likely to bring about the greatest mischief on numerous individuals.” He wished it to be “clearly understood” that those involved “entered on their speculations at their own peril and risk” and he thought it his duty to declare that he would “never advise the introduction of any bill for their relief; on the contrary, if any such measure were proposed, he would oppose it” and he hoped Parliament would reject it.

In our current system such a response would require political leadership with uncommon vision and nerves of steel. When the next crisis occurs, it will explode unexpectedly, taking policymakers off guard. They will be under extreme pressure to respond quickly – probably within hours – on the basis of inadequate information, whilst bankers lobby intensely for immediate assistance: if we don’t get bailed out, the world will end, etc., the usual scare mongering. Under such circumstances, it would be extremely difficult for even the best political leadership to avoid being dragged into making the same mistakes made repeatedly in previous crises.

These mistakes include:
• panicky rescues, which are later shown to be unnecessary, ill-judged and in some cases illegal;
• the abandonment of previous ‘commitments’ to let badly run institutions fail;
• bankers being rewarded for their failures by being made personally better off than they would have been had their banks been allowed to fail; and
• more regulation or regulatory reshuffles accompanied by the usual empty promises that ‘it’ won’t happen again, made by the very people who had no idea what they were doing when they were in charge the last time round.

So how can we avert such outcomes? A good start would be an Act to prohibit future assistance: as much as possible within the confines of our constitution, we should seek to tie the government to the mast. “Much as I would like to help you”, the PM can say, “my hands are tied.”

But even with this Act in place, there is still the difficult question: if the government does respond to the next crisis, then what should it do?

To that question I would propose a publicly disclosed Plan B, whose main features would include:
• a programme to keep the banking system as a whole operating at a basic level to prevent widespread economic collapse;
• fast-track bankruptcy processes to resolve problem banks and, where possible, return them to operation as quickly as possible;
• a prohibition of cronyist sweetheart deals for individual banks or bankers;
• provisions to ensure that senior managers of any failed banks are made strictly liable to severe personal financial penalties;
• a holding-to-account of senior bankers, regulators and policymakers, including the opening of criminal investigations into the activities of any banks that fail;
• the establishment of a legal regime that imposes high standards of personal liability on senior bankers;
• the restoration of sound accountancy standards; and
• a radical programme to deregulate the banking industry.
This programme would include the abolition of the current regulatory structure including the PRA and FCA, the ending of deposit insurance, the UK’s withdrawal from the Basel system of capital regulation, and the reform (and preferably, abolition) of the Bank of England. These reforms would rein-in the out-of-control moral hazards that permeate our current banking system and restore the personal responsibility, tight governance and conservative risk-taking that are the keys to a sound banking system.

Contingency planning for the next crisis should also provide for only two possible responses by the authorities: either Plan A (i.e., do nothing) or Plan B as just set out. Any intermediate response should be prohibited, as that would merely open the door to the usual mistakes that the authorities are prone to make in such circumstances.

In short, in response to your question about whether a bank should receive assistance, my answer would be ‘No’, but if we are to avoid another bungled policy response when the next crisis occurs it would be wise to have a credible Plan B in place to address upfront the Armegeddon scenario of a possible systemic collapse. And if it does intervene, the government should use the opportunity to clean up banksterism once and for all and restore a sound banking system based on the principles of personal responsibility and laissez-faire.

Yours Sincerely

Kevin Dowd,
Durham University/Cobden Partners [etc.]”

There is a lot more to say on this subject, but one of the points that emerges most clearly for me is the pressing need for free-market narratives of the financial crisis, blow-by-blow accounts of how it should and might have been. In this context – and off the top of my head – I would particularly recommend the following (with apologies to those whose work I have overlooked):

John A. Allison, The Financial Crisis and the Free Market Cure, McGraw-Hill 2013, esp. chapters 14-17.

Richard Kovacevich, “The Financial Crisis: Why the Conventional Wisdom has it All Wrong”, Cato Journal Vol. 34, No. 3 (Fall 2014): 541-556.

Vern McKinley, “Run, Run, Run: Was the Financial Crisis Panic over Institution Runs Justified?” Cato Policy Analysis 747, April 10, 2014

George Selgin, “Operation Twist-the-Truth: How the Federal Reserve Misrepresents its History and Performance”, Cato Journal Vol. 34, No. 2 (Spring/Summer 2014): 229-263.

These are all US-oriented of course and we badly need to work on similar narratives for the UK, Ireland and Europe.

But going back to the Treasury Committee, most of the discussion was on the regulatory risk models – or more precisely, on what is wrong with regulatory risk modelling and in particular, the Bank’s stress tests. I have to say, too, that I was greatly heartened to see the skepticism of the MPs towards the models and their openness towards our ideas, much of which is obviously down to the pathbreaking work that Steve Baker is doing on the Committee. But let me come to all that in another posting.

[Slightly adapted from a blog published on the Cobden Centre website, January 20 2015.]

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