Mises, Rothbard, and others in French

by Kurt Schuler April 17th, 2014 10:06 am

Nearly two years ago I mentioned the French economist Philippe Nataf and his small but active publishing house, Editions Charles Coquelin. Its namesake Charles Coquelin was a 19th-century French classical liberal who wrote on banking and business cycles, among other topics. The publishing house issues works by French and other thinkers in the classical liberal tradition to the present. I recently saw Philippe again, and he informed me that Editions Charles Coquelin has now published translations of Ludwig von Mises's Theory of Money and Credit and part of Murray Rothbard's Man, Economy and State, with more to come. Among the older works of the publishing house is a 2005 biography of Jean-Baptiste Say. Readers interested in ordering these works can do so through the site of Editions Charles Coquelin or, for at least some books, Amazon France.

While I am on the subject of books translated into French, it is worth mentioning that George Selgin's Theory of Free Banking was translated and published by Les Belles Lettres in 1991. It is now out of print, but used copies are available, though at high prices. Perhaps the publisher can at least bring it back as an e-book? Those who cannot read French but are interested in the French classical liberals should be aware of the 2012 book French Liberalism in the 19th Century: An Anthology, edited by Robert Leroux and David M. Hart. Here is Hart's Web page on the book.  As usual, if you want the book, do not order it directly from the publisher; you will find lower though still quite elevated prices here and here.


Free banking conference announcement

by Kurt Schuler April 16th, 2014 7:49 pm

Call for papers:
Conference: Free Banking systems: diversity in financial and economic growth
Lund University School of Economics and Management, September 4 – 5, 2014

Department of Economic History, Lund University, Sweden
For more info on the venue please see: http://www.ekh.lu.se/en

Travelling: Most conveniently to Copenhagen Airport (Kastrup)
There are frequent trains from Copenhagen Airport (Kastrup) to the city of Lund. Travelling time is approximately 35 minutes and the cost for a single journey is around 12 Euros. For more info on travelling please see: http://www.lunduniversity.lu.se/o.o.i.s/24936

Paper proposal deadline: April 30, 2014
We invite all scholars interested in participating to submit an abstract of approximately 400 words and a short bio to the main organizer Anders Ögren on e-mail: anders.ogren@ekh.lu.se

Notification of acceptance: May 30, 2014

Paper deadline: August 15, 2014
Note that as this is a pre-conference to the session S10133 at the WEHC in Kyoto August 3 – 7, 2015 papers can be preliminary at this point in time.

Conference rationale

In 1992 Kevin Dowd edited the important book “The Experience of Free Banking” gathering several historical episodes of Free Banking in a “historical laboratory”. This collective volume aimed at evaluating Free Banking as a way of achieving both banking stability as well as monetary stability. It was found that the problems usually attached to Free Banking, such as rapid inflation and banking instability, in fact were not at all the consequence of Free Banking, underlining instead that these results questioned the idea that the Central Bank’s monopoly on currency issuance is a natural monopoly. In a way this book was a continuation of the theoretical development on Free Banking made in influential works such as Smith’s “The Rationale of Central Banking” (1936), Hayek’s “Denationalization of Money” (1978), White’s “Free banking in Britain” (1984) and Selgin’s “The Theory of Free Banking” (1988) (to name a few).

As a result of the recent crisis Free banking as a way of achieving both banking stability as well as monetary stability is back on the agenda for scholarly debates. Again there are those who argue that Free Banking systems are more prone to banking instability and banking failures with less positive impact on growth than banking systems operating under a state sponsored Central Bank. But to the contrary there are those that argue that banking and monetary instability and slumps in growth due to crises are results of the increased importance of central banks.

Supporters and skeptics of Free Banking alike are using historical episodes as laboratories for empirical testing of their ideas. But to what extent are the features of the alleged Free Banking episodes comparable, not only between different historical episodes but also in relation to theory or in relation to Central Bank based banking systems. Historically many varieties of banking exists between what would be the theoretically pure Free banking system and a Central bank based system. All these varieties provides essential information about how a banking system works and why it obtains certain results in terms of banking and monetary stability and in extension in growth. Thus comparing the diversity of the development of Free Banking systems allows us to understand their different impact on economic growth.

Thus the idea with this conference is to continue the work to make historical cross country comparisons on Free Banking episodes and theories – aiming at understanding what features that are required for different stages of free or central banking and to disentangle the impact of these different variables on banking and monetary stability. We welcome scholars working on empirical cases of what is suggested to be Free Banking – whether their results seem to support Free Banking or Central Banking or a hybrid between the two.

This conference is an open pre-conference to the session S10133 at the WEHC in Kyoto August 3 – 7, 2015. Due to time constraints participation in this conference does not necessarily imply participation at this session at the WEHC conference.


Anders Ögren
Lund University
E-mail: anders.ogren@ekh.lu.se

Andres Alvarez
Universidad de los Andes

Masato Shizume

[Thanks to Lars Jonung for notification about the conference]


Why don't we have that for free banking?

by Kurt Schuler April 12th, 2014 5:49 am

In the 1990s I wrote extensively on currency boards with Steve H. Hanke of Johns Hopkins University. The subject had a vogue among economists for several years, but faded after the crash of Argentina's "convertibility" system in late 2001 and early 2002 (which I analyzed here).  Steve and I remain interested in currency boards. With Nicholas Krus, at the time an undergraduate at Johns Hopkins, we conceived the idea of a Digital Archive on Currency Boards. Nick did the most work to make it a reality, spending many hours photographing source material in libraries in Washington DC, London, and even in Canberra during a semester as an exchange student there. A number of Steve's other students also worked on the archive, for which I thank them.

The archive collects the annual reports of currency boards, financial statements in government gazettes, and other important historical sources of material. There is also a companion working paper series, not limited to currency boards, from the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at Johns Hopkins. (The institute's mouthful of a name reflects that it ranges over the interests of its founders Hanke and Louis Galambos, a professor of history at Johns Hopkins who has written on everything from the Eisenhower presidency to the drug company Merck.) One of the working papers is a guide to the archive that catalogs its contents and documents the applicable copyright law in the countries of publication. Another is a study I did with a former Johns Hopkins undergraduate, Charles Weinberg, on the Paper Currency Department of the Indian government, which existed from 1862-1935 and operated as a quasi currency board for part of that period. Charlie digitized the data from source material that Nick Krus had collected and wrote an analysis. I contributed a history of legislative developments. A forthcoming issue of the Indian Journal of Economics and Business will carry an article that is a shorter version of the working paper. Other working papers have likewise made some digitized data available, and later this year far more digitized data will be released.

It would be desirable to have an analogous  archive on free banking. The task of gathering the source material would be different, because there was no single issuer of currency as there was in most currency board systems. (In a few currency board systems, currency boards issued notes alongside banks. Bank notes were sometimes restricted to larger denominations, giving the currency boards a monopoly of small denominations. The Digital Archive on Currency Boards does not cover the banks in such cases.) Annual reports of banks, financial statements published in government gazettes or commercial newspapers, reports of government bank inspectors, and other sources exist in great quantity, waiting to be collected and organized. As with the material on currency boards, most of it is out of copyright and therefore could be posted on the Internet. Material remaining under copyright could still be collected for individual use, then posted as copyright expires. This site would be one possibility for the location of the archive. I lack the time to  undertake such a task, which I think would need to be a cooperative undertaking among widely scattered scholars rather than a project that owes most of its content to just one person. A spontaneous order awaits a catalyst. Is somebody out there equal to the challenge?


Free banking in New Zealand

by Kurt Schuler April 3rd, 2014 9:30 pm

Since the revival of interest in the history of free banking begun by Hugh Rockoff's work in the 1970s on American "free banking" of the early 19th century and Larry White's 1984 book on the far freer Scottish system of the same period, economists have studied a number of other free banking episodes in some depth. New Zealand has not been among them, though it has received passing attention. We are fortunate, then, that Harry D. Bedford's 1916 dissertation "The History and Practice of Banking in New Zealand" is now available online. Until this year only paper copies were available at the University of Otago, where it was submitted for the doctorate, and a few other libraries in New Zealand. The university has digitized the dissertation and readers around the world can now find it here.

Harry Bedford was a lawyer, social scientist, and sometime member of the New Zealand Parliament whose life was cut short when he drowned in 1918 at age 40. This brief biographical sketch makes it apparent that he had abundant physical and intellectual energy that would have led to even more notable things had he lived.

(Thanks to Michael Reddell for the pointer.)


It was 20 years ago today...

by Kurt Schuler April 2nd, 2014 9:57 pm

...not that Sgt. Pepper taught the band to play, but that Lithuania adopted a quasi currency board. Actually, it was 20 years ago yesterday, when I meant to put up this post. The Lithuanians first heard about the currency board idea from George Selgin, Larry White, and me when a delegation of officials made a trip to the United States in 1990. Lithuania was still part of the Soviet Union but like many of the other Soviet republics was chafing at the bit, and Lithuanian officials were thinking about what policies to enact if and when Lithuania regained independence. Two of the places the delegation visited were Hillsdale College in Michigan, where George and Larry were attending a seminar, and George Mason University, where I was a graduate student. It was pure happenstance that George, Larry, and I were among the then very small number of people who knew anything about currency boards. In the fall of that year, George persuaded the George Edward Durrell Foundation to pay for us to visit Lithuania. We talked to the president, prime minister, and other officials, and wrote what I believe was the first detailed proposal about how to establish a currency board in the circumstances of an economy in transition from socialism. (Unknown to us until later, there had been one or two other recent proposals for a currency board in the Soviet Union, but with fewer specifics than we provided.) We visited again in 1991 with George's colleague at the University of Georgia, Joe Sinkey, an expert on banking,  just before the coup that ousted Mikhail Gorbachev and resulted in the collapse of the Soviet Union.

Lithuania did not immediately establish a currency board, opting instead for a conventional central bank. When it did not work as well as hoped, the government took a second look at the currency board idea. Within Lithuania, the Lithuanian Free Market Institute and especially its president Elena Leontjeva had kept the idea in the debate. Outside, Steve Hanke of Johns Hopkins University had become the best known advocate of currency boards and I had written a number of works with him on applying the currency board idea to other countries. Steve was named a state counselor (a position equal to cabinet rank, though unpaid) to the prime minister. Lithuania adopted not the strict currency board George, Steve, and I advocated, but a quasi currency board retaining some discretionary features the central bank already had. The system was much less discretionary than what it replaced, however.

Twenty years later Lithuania has been through more than one storm, but the currency has remained solid. As was the case with the similar system of Estonia, Lithuania's goal is to adopt the euro, which it expects to do in 2015.

George and I considered advocating free banking for Lithuania and made a case that bank regulation should be light. We lacked confidence in the capacity of Lithuanian bankers to achieve rapidly the stability that had made the best free banking systems elsewhere highly reliable, and it turned out that we were correct. It took a number of years for the banks to become stable, during which time most of the local banks failed or were absorbed by foreign banks. In the meantime, the currency gave one element of stability to the financial system. We had hoped that having taken one step away from central banking, the success of the system would lead people to consider that taking another step, to free banking, would likewise be advantageous, but it didn' t happen.

A reminiscence I wrote for the tenth anniversary of the system is here. An interview with Steve Hanke on the 15th anniversary is here.


Vienna musings

by Kurt Schuler March 30th, 2014 11:03 pm

Before I greatly reduce the frequency of my posts sometime in April, I have a backlog of items to unburden myself of. Here's one.

A month ago I visited Vienna briefly to attend a conference. I had a couple of hours free before the conference began, so I walked around the center of the city. I was particularly curious to see two places where Ludwig von Mises had lived, identified in Jörg Guido Hülsmann's sweeping biography. Alas, Mises's boyhood home, Friedrichstrasse 4, is undergoing renovation and has a big protective mesh over it to keep the plaster from falling on pedestrians. His later home, Wollzeile 24, is an undistinguished building that looks more modern than many others around it. I assume that was where Mises wrote The Theory of Money and Credit and Socialism, at least when he wasn't writing at the office. No plaque or other marker denotes the spot.

Ludwig von Mises and his brother Richard (later a renowned mathematician who became a professor at Harvard) attended the Akademische Gymnasium, Vienna's oldest and most famous high school. It is on the Beethovenplatz in a magnificent building. The alumni list includes Franz Schubert, Erwin Schödinger, and Lise Meitner (co-discoverer of nuclear fission, should have received the Nobel Prize in Physics), all of whom are listed on plaques on the front of the building. I didn't see any for the Mises brothers...apparently they were not famous enough to make the cut.

Thinking about Ludwig von Mises and his work, it occurred to me that he rarely covered the same ground twice. Many of his works had partly overlapping subjects, but if he touched on a subject again it was as part of a different enterprise. After The Theory of Money and Credit he wrote and later discussed monetary issues in monographs, essays, and other works (notably Human Action), but did not publish another full-length book on money.  I don' t know if Mises intended from the start to be a system-builder, but looking back on the books he published during his life makes it apparent that he covered a wide ground at the intersection of economics, political philosophy, and epistemology. It was not just a collection of problems that interested him; it was a group of topics that he considered vital for the future of civilization. Considered in that light, it is not so surprising that he did not publish a second full-length book on money; his time was too precious. As I have commented in a previous post, I do not think that Mises integrated his ideas on socialist calculation and his ideas on monetary theory as well as he could have. That was left to a later generation, starting with Larry White.

While I am on the subject of Vienna, I will mention this passage I recently found in Herbert Simon's book Models of My Life on Karl Menger, the mathematician son of Carl Menger the founder of the Austrian School of economics. Karl had the good sense to leave Europe for the United States in the 1930s. Eventually he ended up as a highly honored professor at the Illinois Institute of Technology (IIT) in Chicago, where Simon taught as a young man.

Toward the end of my career at IIT, I had a luncheon conversation with Karl Menger that I cannot forget. He had started his career, he said, with a deep interest in logic and the foundations of mathematics. The publication of Goedel’s famous Impossibility Theorem (1931) struck him a blow from which he never recovered. If it was impossible, as Goedel had shown, to provide wholly rigorous foundations for mathematics, what was the meaning of mathematical certainty? Menger never again worked on the foundations of mathematics. Even thinking about the subject depressed him, and as he recounted the story, he gradually subsided into a gloomy silence that continued through the lunch. (p. 101)

Aside from the interest the passage has as a record of the encounter of two brilliant minds, it struck me that this passage implies that there may be a couple of as yet unexploited sources of material on Carl Menger. Karl Menger the son had children who are American citizens and may still be alive.  Hülsmann's biography of Mises (pp. 103, 136) cites an unpublished paper by Karl about Carl in the Carl Menger papers at Duke University. Perhaps somebody interested in the history of the Austrian School can get on the telephone and try to find Carl's grandchildren, or great-grandchildren, to ask whether there is any oral history that would add to the written record?


Have we got your back?

by Kurt Schuler March 25th, 2014 10:36 pm

Here is my long promised, though not likely long anticipated, post on the “backing” theory of money.

The modern controversy over "backing" originates from this article by Neil Wallace and Thomas Sargent. In the article they offer “ a simple model that is compatible with the principle of finance theory that assets are valued according to the streams of returns that back them” and appear to endorse that principle as a basis for explaining the value of money.

“Backing” clearly applies to certain cases but to my mind it just as clearly cannot serve as a general explanation of the value of the monetary base without stretching the idea so far as to make it a metaphor so vague as to have little use.

Currency boards are cases where the idea of backing is useful. Currency boards are established to provide credibility for the local currency by backing their notes, coins, and deposit liabilities (if any) 100 percent or slightly more in high-quality foreign assets. In principle, 100 percent foreign reserve backing means that a currency board can liquidate almost immediately and exchange all of its notes, coins and deposits for foreign currency at the fixed exchange rate it maintains.

For central banks, the idea of backing is less useful as an explanation of why the currencies they issue have value. Central banks can become technically insolvent with little effect on the currency, as some in fact have. (For a discussion of central bank insolvency, see this paper by Willem Buiter. Maxwell Fry’s good book Money, Interest and Banking in Economic Development also treats the subject.) As an economist I met years ago said of such cases, “The assets of the central bank are garbage; the liabilities, everyone believes in.”

There are also cases where fiat monies continue to circulate and retain value even in the absence of any politically powerful issue. Such cases happen most often during or just after wartime, when, for instance, an occupying army that has lost the war withdraws and leaves its currency behind. For example, after World War I war ended, German occupation currency continued to circulate in what are now Poland and the Baltic states during a kind of interregnum. In such cases, if the new government does nothing to hinder the currency’s use, the currency can continue to circulate even though the original issuer will not redeem it for anything.

One can reply that in the cases of insolvent central banks, occupation currencies whose occupiers have left the scene, or other examples that may be given, the currency retains value because it is either backed by the assets of the whole of the government, not just the central bank, or that in the case of an occupation currency that people expect it to receive such backing from the new ruling government. To me, that is stretching the metaphor of backing to the point of useless vagueness. A fiat currency accepted by the government in payment of taxes is not “backed” by tax revenues or even by the general assets of the government in the sense that a currency board is backed by its reserves. Holders of the fiat currency cannot necessarily redeem it for any external asset at a set rate upon liquidation.

What is the alternative, then? It is that value is based on acceptability. An unbacked currency can retain its value if people continue, for whatever reason, to accept it in payment and to hold onto it as a store of value. Conversely, a fully backed currency may not be acceptable and may not serve as a true money. As I have mentioned in previous posts, it is legal for U.S. banks to issue notes, but I cannot imagine that a bank note issue denominated in Argentine pesos, fully backed with Argentine government bonds or even with Swiss bonds segregated from the bank’s other assets, would circulate in the United States.

* * * * * * * * *

Mike Sproul has the right of a guest post in reply if he wishes to use it. After that, I may or may not offer a final comment. I am now busy with a book (on currency boards, not free banking) and other projects and will be for many months, so instead of posting approximately weekly, I will be far less frequent. Without intending it I became the most frequent contributor to the blog. The editors have received my ideas for continuing a flow of content, but it is up to them whether to keep up the flow or let the blog peter out.


Wrong Way Corrigan Strikes Again

by George Selgin March 19th, 2014 5:20 pm

Over at Zero Hedge, "Tyler Durden" reposts a piece by Sean Corrigan, the link to which appears to be non-working, in which Corrigan imagines that he is having a "Gotcha!" moment, at the expense of yours truly, because he has discovered some reputable authorities who claim that (commercial) banks are in fact capable capable of making loans above and beyond any sum of deposits they acquire.  Here are the first few paragraphs:

Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! - that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.

As an example, some few months ago, I had an exchange with the disputatious George Selgin (he of the perfervid fractional free banking bent) in which I cited – after a good twenty minutes’ research – the following authorities to that very same effect:-

Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:

The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.


Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]

Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81-2):

The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.

Actually, Sean, I can assure you that I've read them all, and carefully; what's more, I've probably taught several thousand students about the process of multiple deposit expansion, being careful in doing so to make precisely the distinction Hayek insists upon between what individual banks on one hand and the system as a whole on the other are capable of making doing with any fresh deposits.* In fact, no individual bank involved can lend more than a part--usually the greater part--(the "excess reserves") of whatever fresh funds it is able to secure. It is precisely your misunderstanding of Hayek's point that was, I am inclined to think, the nub of our original disagreement!

*Here FYI is a screenshot of the relevant page of the class notes I give to my students:



White and Selgin at Heritage on the Fed tomorrow

by Bradley Jansen March 18th, 2014 2:36 pm

Larry White and George Selgin and Jerry Dwyer will be speaking at the Heritage Foundation tomorrow.

The Federal Reserve at 100: How Well Has It Done?

Has the Federal Reserve functioned as it was intended? How well has the Fed managed the economy and calmed business cycles? Do its successes outnumber and outweigh its failures? Join us as leading experts address these and other important questions.

RSVP to attend in person or just watch online.



Cayman Financial Review: Repeal the AMLs

by Bradley Jansen February 24th, 2014 3:23 pm

My call to repeal the anti-money laundering laws got published in the current issue of the Cayman Financial Review.  In "Repeal the anti-money laundering laws" I explain how the AMLs stifle currency competition.  I concluded:

There are political costs to consider. The increased scrutiny of politically exposed persons and sanctions greatly complicate AML compliance, increase costs and can cause unintended political by-products. In addition, to the extent the AML programs are successful, they can divert funds away from monitored channels to places with no financial intelligence. Iran trades with gold marginally reducing demand for the U.S. dollar in international trade. Individual Iranians use bitcoins as an alternative to their currency instead of the U.S. dollar. Just recently, the Cuban interest section in Washington, D.C. is closing for lack of legitimate banking options because of AML and FATCA compliance concerns.

Even when the authorities shut down the Liberty Reserve operation (an alternative electronic currency operation allegedly set up for money laundering), they admitted that most people using the site were there for the low 1 percent transaction fees for remittances or get around forex restrictions. The plight of the KenyanGuatemalan and Somali people and others around the world who depend on low-cost money transfers to survive or rise out of poverty or recover quickly from disasters should not be ignored.

AMLs stifle needed new payment systems such as bitcoin. Less regulated industries such as technology are adapting much faster than the financial system. Actors in the financial industry are often late adopters to quickly changing technologies. On the other hand, new electronic monies have been less regulated (though this is changing).

It is bitcoin, Liberty Reserve and others that are allowing faster and cheaper mobile payments to more of the world’s population, including the unbanked, than has ever been possible. These changes mean more money is reaching the people who need it most ─ and faster including situations when lives depend on it. Grafting a failed AML approach from the polyester-wearing disco music era onto the fast changing 21st Century technologies can’t end well.

In conclusion, as I cited in my 2001 Congressional testimony on what became the USA PATRIOT Act, money launderers do not have a statistically significant chance of being caught so the deterrent effect of our AML approach is negligible. Only a minuscule fraction one percent of CTRs and SARs result in criminal convictions. I know of no examples where AML reports prevented any terrorist events.

Our AMLs are a failure: the drug trade continues unabated, financial fraud is more prevalent now than ever, and terrorist groups continue to finance their operations. The greatest tragedy is what everyone knows and policymakers don’t seem to care: it is the unbanked, the poor, and the racially and ethnic minorities in rich countries (and the populations of poorer countries) that suffer these costs for such elusive benefits.

Time to reboot our AML policies to aid law enforcement, encourage innovation, cut costs and protect privacy and other human rights.

On a humorous personal note, the original story ran with a bio that added a "g" to the end of my dot org email address before I got it corrected.

Relatedly, Larry White made many of the same points in his talk at the Cato Monetary Conference last year.  Video here.

Edit: The American Banker has a white paper out calling for reform of the AMLs making similar arguments to mine.  They want to "modernize" them "using predictive analytics to pinpoint suspicious activity."

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