In my first post on this blog I promised that I would address several questions in later posts. One of those questions I have not addressed until now is how writers on free banking should communicate our findings so that they receive the consideration they deserve.
For many years, it surprised me how closed the mainstream of economists was to new ideas and even to old ideas. The first case of competitive issue of notes occurred about 1,000 years ago, in China. Free banking has existed in more than 60 countries, including such major economies as the United States (in a qualified way – a subject for a later post), the United Kingdom, Brazil, India, and Italy. One would think that with such a deep and broad historical record, economists would be more curious about it. But to most economists, the past is a closed book.
There have been exceptions. The world has enough economists that some are interested in treading unfamiliar paths. If you got your ideas just from reading the standard textbooks in introductory economics or in money and banking, though, you would not know that central banking is more recent than a number of other monetary systems, including free banking; that it has not always been so widespread; and that its record regarding inflation and financial crises compares poorly to that of some other systems.
Despite the scholarly work that has been done on free banking; despite its having been advocated by Friedrich Hayek and Milton Friedman in the full maturity of their careers; despite the seriousness with which a few experts on central banking (for instance, Charles Goodhart) have treated free banking, it is not part of mainstream economics.
It is essential for established scholars who are interested in free banking to continue working on it, to demonstrate to youngsters wanting to become scholars that the topic is deep enough to spend a career exploring. I now think that while such scholarship is essential for free banking to become part of the mainstream one day, it will not the catalyst.
Instead, I think the catalyst will be the events in what one of my college professors called “the so-called real world.” Something will happen in electronic money, in economic policy, or to central banks that requires expanding the mainstream presentation of ideas to let free banking in. What has happened with the idea of nominal GDP targeting is a possible pattern. It had been discussed among economists since the 1980s, but what has pushed it into the public eye has been the determined efforts of one able blogger, Scott Sumner of Bentley University. His blog The Money Illusion became the focal point for a number of other intelligent bloggers to establish a small community that has debated the idea in detail, examining its strengths and weaknesses in a way that would have taken much longer before blogs. (A few of the bloggers who have written on nominal GDP have also written scholarly work on free banking.) Their presentation of the idea was so compelling that a number of big-name economists have also taken up the topic in newspaper articles. Among those who also write textbooks, I suspect that nominal GDP targeting will appear in the next editions. The old process, by which economics journals served as a filter and delayed new ideas from spreading into textbooks for years, is changing drastically. Articles in economics journals used to be birth announcements for new ideas; now they are more like graduation announcements.