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Let’s have the debate on gold

by Kurt Schuler August 29th, 2012 11:56 pm

Steve Horwitz has a post at Coordination Problem. Since he has not brought attention to it here, I will do it for him.

I detect in the article to which Steve was replying, and in other recent articles by liberals and conservatives alike, an unhealthy attempt to foreclose debate about the gold standard. So you think it would be a bad idea. After the experience of the last several years, not just in one or two countries, but in quite a few of the richest countries, are you really so sure that fiat money is superior to the gold standard? As I pointed out in my previous post, Britain is now in a slump longer than it suffered during the Great Depression. If circumstances like these aren’t enough to make you reconsider the potential desirability of the gold standard, are there any circumstances that would? If the answer is “no,” we can conclude that you are mere dogmatists.

Among those wishing to foreclose debate I see many clever scribblers, but nobody who shows evidence of having studied in detail the history and workings of the gold standard, as it existed both inside and outside the United States. If you adopt this attitude and you have not read at least a dozen scholarly books on the gold standard,* you can’t even begin to claim expertise on the subject and your opinions are no more worthy of notice than your opinions on aeronautical engineering.

*Some of them, not all equally correct but worth reading: William Adams Brown, Jr., The International Gold Standard Reinterpreted; Barry Eichengreen, Golden Fetters; Eichengreen, editor, The Gold Standard in Theory and History; Ralph Hawtrey, The Gold Standard in Theory and Practice; Lawrence Officer, Between the Sterling-Dollar Gold Points; Melchior Palyi, The Twilight of Gold; the U.S. Gold Commission Report; Leland Yeager, selected chapters of International Monetary Relations. As far as I remember, all of these focus on central banking; I know of no book that gives other monetary authorities their due.


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Same and different

by Kurt Schuler August 24th, 2012 9:38 pm

The Great Depression in Britain versus the current slump

Great Depression (1929-31) Current (since 2008)
Length of contraction 6 quarters (1930Q2-1931Q3) 6 quarters (2008Q2-2009Q3)
Time to surpass previous peak output 4 years (1930Q1-1934Q1) 4 years plus (since 2008Q1)
Monetary policy Gold standard (to September 1931 trough), then floating Floating, with inflation target
Monetary authority Central bank (privately owned) Central bank (state-owned)

Sources: James Mitchell and Solomos Solomou, “Monthly GDP Estimates for Inter-War Britain” (working paper, 2011); U.K. Office for National Statistics.

Discuss among yourselves.

And now for something completely different. Having mentioned Ayn Rand in my previous post in connection to Paul Ryan, I direct your attention to a New York Times Magazine article last weekend about the influence of Friedrich Hayek on Ryan. The article describes Hayek as “largely ignored,” which is comical given that the staff writer on economics at The New Yorker -- yes, The New Yorker -- has described the 20th century as "the Hayek century."

Finally, for readers who may  be wondering what is the opposite of this blog, I give you a site I just came across today, the American Monetary Institute. Here is a description of some themes of its upcoming conference:

"What are these broad national parameters supported by over 3000 years of history? That the control of the money system must shift away from private control toward governmental control. Away from commodity money notions; away from fractional reserve banking – using debt for money. Towards money issued interest free by government and spent into circulation for the common good. All serious reformers understand that we must replace our private credit system with a government money system, ending what is known as fractional reserve banking."


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The Economist On Money and the State

by George Selgin August 21st, 2012 11:44 pm

I couldn't help being glad to see The Economist refer to Carl Menger's theory of the origins of money just as I was about to explain that theory to my undergraduate classes. Nor did I at all mind having Menger's ideas contrasted with those of another of my favorite economists, Charles Goodhart. I was, however, sorry to see that venerable publication, whose first two editors, James Wilson and Walter Bagehot, were among the more important 19th-century proponents of free banking, embrace Professor Goodhart's "Cartalist" theory of money, and do so on grounds that won't stand up to critical scrutiny.

Menger, of course, famously argued that commodity money, far from having to be deliberately designed, can evolve spontaneously or, as The Economist puts it, "is a market-led response to barter costs."

But while The Economist allows that Menger's account offers "a good description of how informal monies, such as those used by prisoners, originate," it claims that the theory comes up short when it comes to explaining the origins of the most convenient of all commodity monies: those consisting of precious metals. Why? Because metals only make for convenient money once they have been packaged into coins, and "history shows that minting developed not as a private-sector attempt to minimize the costs of trading, but as a government operation." Consequently, the article continues, "another theory is needed, in which the state plays a bigger role." Cartalism is one such theory, according to which money, and efficient money especially, is a creature of the state, which invented coins with the ulterior motive of enhancing its revenues by making taxes payable in them and by occasionally resorting to debasement.

But is it true that minting developed, and could only develop, as a government operation? Goodhart's article is supposed to offer proof that this was so, by pointing to two instances in which the collapse or withdrawal of government coinage gave way, not to private coinage but to barter (in the former Roman empire) or to the use of a non-metallic money (rice in 10th-century Japan).

One needn't be a logician to recognize the inherent shortcomings of such a "proof by example." That the withdrawal of state-run mints has sometimes failed to prompt the establishment of private ones hardly establishes that private mints have never existed, much less that they never could exist. One may, on the other hand, disprove the claim that private mints have never existed by means of a single, contradictory example.

As a matter of fact, there have been numerous episodes of private coinage, including some very successful ones. What's more, it is far from clear that the very first coins ever made--the famous electrum lumps of Lydia, in Asia Minor--were government products. On the contrary: according to Thomas Figueira, one of the leading experts on the subject today, “It is uncertain whether it was someone endowed with political authority acting on behalf of his community or an individual acting on his own behalf who conceived of the idea of coinage.” Indeed, no one is even sure what those early coins were for, or even whether they ought to be called "coins" at all, since they were uniform in weight alone, but varied considerably in their gold and silver blend.

Of course it's hardly likely than any Tom, Dick, or Harry would have been able to have his markings treated as credible certifications of weight or purity or anything else. Whoever made the first coins had to be some sort of big shot, or its corporate equivalent. Being a tyrant might suffice; but that hardly means that it was essential. Nor does the fact that almost every coin produced since the obscure beginnings of coinage has come from a government mint mean that only governments were fit to coin money. It could instead mean that governments found the fiscal gains to be had by monopolizing coinage too good to pass up. That governments frequently took advantage of their coinage monopolies, not to mint good coins, but to mint lousy ones that they then compelled their citizens to accept, would seem to favor the latter hypothesis.

It ought to go without saying that there is no technological reason why coins couldn't have been a private invention, or couldn't have been privately manufactured at any time to the same standards, if not better ones, than their government-made counterparts . "A mint, Sir" Edmund Burke once reminded Parliament, "is a manufacture, and it is nothing else." A factory, we would now say. And since when are governments very good at, let alone uniquely capable of, running factories? As for state-sponsored enterprises generally doing a better job of quality control than their private-sector counterparts, if you believe it I must see about coming up with a few tons of ca. 1958 Chinese steel to sell to you.

In fact, all of the most significant coinage-related inventions--the manual screw press and its steam-powered counterpart are only the most famous examples--came from the private sector, and most were taken up by governments only reluctantly and after (sometimes deadly) resistance from government mint authorities. How often, on the other hand, have government authorities themselves been responsible for technological breakthroughs? (No, Tang wasn't invented by NASA.) Were it to come to a wager, I for one would much sooner keep a grip on my money than stake it on Croesus or Pheidon or any other ancient king.

But why speculate? In fact, Goodhart's contrary suggestion notwithstanding, there have, as I've already noted, been occasions on which coinage was handled by the private sector, and in the best documented ones the coins that resulted were not only as good as but superior to those from the government's own mints. That was certainly the case in the U.S. after the Appalachian and Californian gold discoveries, when private mints sprung up to supply convenient coining services to miners who would otherwise have had to send their gold to Philadelphia or (after 1835) to either Philadelphia or Charlotte for coining. The high quality of the private gold coins produced during these episodes is attested to, both by the extant coins themselves, and by the fact that the U.S. Mint, having failed to put the West Coast mints out of business merely by finally opening a San Fransisco branch, relied instead on coercion to do the trick.

Another instance of successful private coinage is one with which Professor Goodhart is now familiar, though he didn't know of it in 1998, when he published the article to which The Economist refers. It is the episode of private token coinage in Great Britain that is the topic of my book, Good Money. Professor Goodhart did me the honor of writing that book's introduction. And although he makes clear there that the story I tell did not at all cause him to abandon Cartalism, I am sure that he would agree that it proves that, in at least one instance, the state's withdrawal from coining did in fact lead to private entrepreneurs rushing in to fill the void.

That private coiners didn't always or even often rush in whenever governments failed to supply coins is itself hardly surprising in light of the fact that unauthorized coining, even of coins not meant to imitate official ones, has almost always been illegal, and has more often than not been a capital crime. So the absence of acknowledged private mints following both the fall of Rome in the 5th century and the Japanese government's abandonment of copper coinage in the 10th might prove nothing more than that no one wanted, literally, to stick his neck out.

Might. Except for the fact that the claim that no private coinage took place in either of these instances doesn't seem to be true. I do not merely mean that there was surreptitious private coining, that is, counterfeiting: despite the death penalty Japanese copper coins were aggressively counterfeited. I mean that after the Japanese government got out of the business of making coins--after having, that is, debased its coins until they were more-or-less worthless--legitimate privately minted substitutes, manufactured by local clans and wealthy merchants, did in fact take their place, along with Chinese coins and (yes) rice. That, at least, is what it says on the website of the Bank of Japan's Currency Museum. Nor is it true that coinage simply gave way entirely to barter after Rome fell. No doubt it did so to some degree everywhere, and perhaps to a large degree in some places; but private coinage also took place, and did so notoriously in Merovingian Gaul, where thousands of local mints supplied coins modeled (sometimes crudely) on their Roman predecessors, and bearing the names of coiners very few of whom were known rulers. In short, it seems that, even as proofs by example go, those offered by The Economist are rather paltry.

Yet I suppose that we will never see the end of the myth that only governments are fit to coin money. Were bread a government monopoly long enough, Herbert Spencer once remarked, people would react with horror to the suggestion that it might instead be supplied, and supplied with better results, by the private sector. Spencer was probably right. I'm just glad I'll never live to see The Economist prove it.


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Ryan, Rand, and gold

by Kurt Schuler August 16th, 2012 8:55 pm

David Glasner has fallen into Krugman’s Bog, a poorly mapped but vast region of the Internet where the choler is so thick one cannot slog through it. David’s post is called “Where Does Paul Ryan Go When He Thinks About Monetary Policy?” The answer, he thinks, is Ayn Rand, and in particular a passage from The Fountainhead [correction: Atlas Shrugged, as a commenter pointed out; my mistake] where the character Francisco d’Anconia makes a speech about the merits of gold as a monetary standard. As Ryan has said, he read Rand when he was young and, like many of her readers of that age, was heavily influenced by parts of her message. (He explicitly rejects other parts.) However, David cites no direct evidence that Ryan shares d’Anconia’s views (which are pretty clearly Rand’s) on gold. Instead, David cites another blogger whose views are pure speculation.

Here is a rope that travelers who have fallen into Krugman’s Bog can use to pull themselves back onto the High Road of Informed Commentary. Thomas, the legislative tracking service of the Library of Congress, shows what bills a member of Congress has sponsored. In my search, I found that Ryan sponsored two bills on monetary policy: the Price Stability Act of 2008, which would have required the Federal Reserve to establish an explicit numerical definition of “price stability” and to maintain a monetary policy that effectively promote it; and the International Monetary Stability Act of 2000 (also 2001), which would under certain conditions have allowed the sharing of seigniorage with countries that used the U.S. dollar as their official currency. Neither bill passed--the fate of most proposed legislation. My reading of the Price Stability Act is that it would in principle permit nominal GDP targeting (David’s favored approach) if the Federal Reserve defined “price stability” in a way compatible with that approach. I did not find that Ryan sponsored bills to re-establish any type of gold standard, though if others do, let me know in the comment section.

I have had some small acquaintance with Ryan. More than a decade ago, I was a staff economist on the Joint Economic Committee of the U.S. Congress, of which Ryan was one of the members. I worked with his staff on the International Monetary Stability Act, which was sponsored in the Senate by my boss at the time, Connie Mack III (father of the current Republican candidate for Senate from Florida). The few times that I briefly met Ryan, he impressed me as having a combination of intellect and energy that is rare in Congress. Though I have not met him since, I have followed his career and have been confirmed in my impression of long ago. On financial issues, broadly construed, Barney Frank has been over the last decade the only other member of the House of Representatives in the same league in terms of providing intellectual and legislative leadership, though of course Ryan and Frank are poles apart on most policies. I could offer you criticisms of both — after all, nobody except me does exactly what I would do as a member of Congress — but I would start from their legislative records, not from what some other blogger thinks about them.

[ADDENDUM: See David Glasner's reply in the comments. I was mistaken to say that there's no direct evidence that Ryan shares d'Anconia's views. In the post David cites, Ryan does say that he goes back to d'Anconia's speech when he thinks about monetary policy. I should have been more accurate and written that there is no readily apparent connection between the speech, with its emphasis on gold, and the legislation on monetary topics that Ryan has sponsored. Thank you for the correction, David.]


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Let’s not get rid of our wallets just yet

by Kurt Schuler August 13th, 2012 9:56 pm

The idea of purely electronic money, without notes and coins as hand-to-hand currency, has received attention not just for its potential convenience, but also for its potential to extend the range of central bank control in monetary policy, which some people consider a good idea.

I see three drawbacks. First, are we so confident in our computer systems, including the electric power that they run on, that we don’t want any backup? Imagine the recent north Indian power blackout, or the U.S. mid-Atlantic blackout, lasting for a month. Unlikely, but not so unlikely that it needs no emergency plan.

Second, a forced switch to an all-electronic currency means a forced reduction in financial privacy. Maybe, as Oracle Computer founder Larry Ellison has said in a broader context, “The privacy you’re concerned about it largely an illusion.” If so, it is an illusion I wish to try to preserve a while longer.

Finally, it ignores consumers. If people want purely electronic money, the costs of provision are low, and there are no legal obstacles to purely electronic money, that’s what they will get. If people continue to hold notes and coins, it means that hand-to-hand currency provides services for which purely electronic money is not a perfect subsitute.

(Hand-to-hand currency is disproportionately used in illegal activities. It is an argument for another time to what extent switching to purely electronic money would reduce illegal activities. Payment for illegal activities can still occur outside the formal financial system without cash.)


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Walter Bagehot's driver's license

by Kurt Schuler August 13th, 2012 9:50 pm

Even though Walter Bagehot died in 1877, before the age of the automobile, for $200 he (or you) can still buy a fake driver's license. While he's at it, maybe he can go vote. I look forward to seeing driver's licenses for other long-dead proponents of free banking. Adam Smith, however, might have a harder time picking up a six-pack of beer or talking his way out of a speeding ticket because his 18th-century wig looks a tad more out of place today than Bagehot's impressive 19th-century beard does. (Thanks to Bill Stepp for the tip.)

For a more serious take on modern technology, see my next post.


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In Which I Reveal What is Wrong with Most Books by Academics Today

by George Selgin August 11th, 2012 2:29 pm

For an upcoming conference I've been writing a brief history of the gold standard in the United States. So naturally I've been reading or re-reading books on the subject, both new and old, and discovering or rediscovering their merits. My overarching discovery is, not to put too fine a point on it, that almost all of the newer books are a great bore, and none too informative at that.

Why is that so? A clue is that these books are all written by academics, and mainly by academic economists and historians, whereas at least some older ones were written by amateurs, which is to say, by people who considered writing itself their craft, and who had no reason to expect their books to be purchased and read if the books weren't reasonably entertaining as well as informative. But even the older books by academics aren't so bad. It's only relatively recent academic books (which for me means ones written during the last twenty years or so) that are almost uniformly godawful. And the reason for this, I suddenly realized, is that the real subject of recent academic books is, not the subject their titles advertize, but the books themselves.

To be clear: if the title of a modern academic book is "The History [or theory or whatever] of X," the real subject is "My book on the History [or whatever] of X." Such books are, in other words, not so much contributions to history or economics or whatever as they are exercises in literary criticism where the critic just happens, conveniently, to be the author of the book under appraisal, or (more accurately) the would-be author of the "urbook" that the actual book appraises, which urbook has not actually been written, and generally never can be, because if it were it would be an article rather than a book, and most likely a trite or banal article at that.

Once you realize what most academic books today are about, recognizing one of this sort is a piece of cake. You might, of course, infer that you're reading one from the fact that, as you slog through it, you don't seem to learn much at all about X, and so are tempted to skip, first paragraphs, then pages, and finally entire chapters in the hope or finding the place where the author gets to the point. What's more you may never find that place, or it may prove so fleeting that you skip past it. That of course shouldn't happen if the book you are reading really is about X; but if the book is really a critique of a book about X, what you are looking for, without realizing it, is what critics sometimes disparagingly call a "plot summary"--disparagingly because it's the sort of thing one finds in mere book "reviews" rather than in works of "higher" criticism; and academics' criticism of their own urbooks strives to be nothing if not "high."

But as the test above, besides being painful to administer, doesn't distinguish the true academic book-about-itself from a merely thoroughly bad book about X, there are other, surer clues to look for. These include endless throat-clearing introductory materials, announcing over and over again the book's "purpose" and telling how the author intends to go about achieving it ("though maybe not just yet," an honest author might add), followed by a no less endless disquisition on how the book's arguments differ importantly--really!--from those to be found in other (also academic) books, followed at last by concluding chapters saying more or less the same thing as the introductory ones, only tossing in a little sprig of "told you so!" triumphalism.

Imagine, for a still clearer picture, a great, classic work that really is about X. Once upon a time, though far less often today, a genuine critical undertaking might have consisted of the preparation of a new edition of the work, undertaken not by the (usually deceased) author but by an editor well-versed in the whole literature on the subject. That editor might author a lengthy introduction to the new edition, and numerous footnoted commentaries on the text, some perhaps rather arcane, and an explanatory appendix or two.

Well, your modern academic book writer erects the same sort of critical scaffolding, but does it, not for someone else's book, but for a 'classic' that exists only in his own head. He then serves up the scaffolding alone, packaged to look just like the imagined classic, much as the scaffolds one occasionally sees around Baroque buildings in Europe are disguised by tromp l'oeil curtains meant to fool people into mistaking them for the buildings themselves. The difference is that those tromp l'oeil-curtained scaffoldings disguise a real work in progress, whereas the academic equivalent surrounds so much hot air.


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Friedman on flexible exchange rates

by Kurt Schuler August 5th, 2012 10:06 pm

Lars Christensen’s blog The Market Monetarist, which I make sure to read regularly, used the recent centenary of Milton Friedman’s birth to discuss Friedman’s views on exchange rates. The standard view of Friedman was that he was an advocate of flexible exchange rates, pure and simple. I think this view is based on an incomplete reading of Friedman, as Steve Hanke argued several years ago. (Anna Schwartz told Hanke she disagreed strongly with his interpretation of Friedman, but I think it's the only way to view Friedman's pronouncements on exchange rates as consistent over the years.)

Friedman wrote his most frequently cited essay on exchange rates, “The Case for Flexible Exchange Rates,” as a proposal for a quick way for Western European countries to eliminate the exchange controls that they had established before World War II and that persisted in the early 1950s. Exchange controls hindered trade. Flexible exchange rates could allow countries to remove their exchange controls quickly, Friedman thought, thereby improving opportunities for international trade and the wealth created by the international division of labor.

In the same essay, though, Friedman also discussed the sterling area, a zone of rigid exchange rates with the pound sterling. He wrote, “In principle there is no objection to a mixed system of fixed exchange rates within the sterling area and freely flexible rates between sterling and other countries, provided that the fixed rates within the sterling area can be maintained without trade restrictions.” At the time, the sterling area included most of Britain's colonies and protectorates as well as India, Pakistan, Australia, and New Zealand. It therefore extended over a considerable portion of the globe. Friedman likewise showed no objection to, or even praised, fixed exchange rates on a number of other occasions, cited in Hanke’s article.

The key to reconciling Friedman’s apparently contradictory positions is to understand that clean fixed and clean floating exchange rates, though differing in their degree of nominal rigidity, are similar in that both give market forces free rein. Under a clean fixed exchange rate, the nominal exchange rate is fixed and market forces determine the nominal monetary base. Under a clean floating exchange rate, the nominal monetary base is in the short term fixed (or perhaps a better word would be "set") and market forces determine the nominal exchange rate. Under intermediate arrangements where the monetary authority intervenes in the foreign exchange market to influence the nominal exchange rate and the nominal monetary base simultaneously, market forces do not have free rein and market adjustment is to some extent frustrated.

The overall impression Friedman's statements on exchange rates leave is that he considered flexible exchange rates to be the system most desirable and most politically sustainable for large and medium-size economies that were politically independent and able to keep inflation relatively low. In his policy advice, which took account of the particular circumstances of various countries, he did not, however, advocate flexible exchange rates across the board, nor were the cases where he thought fixed exchange rates would work acceptably mere unimportant exceptions.


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The Cobden Survey

by George Selgin August 4th, 2012 2:19 pm

In June, 2010 the Cobden Centre in London released a report on "Public Attitudes on Banking," based on a questionnaire to which 2000 Britons responded. The findings of that report have since been offered, both by the Cobden Centre itself and by others, as proof that many people today believe that banks store rather than lend money surrendered to them in exchange for deposits payable on demand.

This week, for instance, a blogger named James Miller (whose article appears as well at Mises.ca and ZeroHedge, among other sites) wrote:

[U]sually depositors don’t fully realize that their funds are not really there in whole. In a 2010 study commissioned by The Cobden Center, it was found that 74% of U.K. residents polled believed they were the legal owners of their banking deposits. And while 61% answered that they wouldn’t mind if their money was used for additional lending, 67% responded that they wanted convenient access to what they saw as their money. Whether or not one regards fractional reserve banking as a clear case of fraud, it seems that a good portion of the public is wrongly informed on the mechanics of modern day banking.

But as even a careful reading of Miller's own summary of it should make clear, whatever else the Cobden survey may demonstrate, it most certainly does not demonstrate that most depositors think that the money they hand over to banks sits in the banks' vaults (or perhaps in those of a central bank) until some or all of it is either withdrawn or transferred to specific others by order of the original depositors.

Unless the questions they pose are chosen very carefully, survey results can easily mislead, and are indeed sometimes designed precisely with that end in mind. That isn't to say that the Cobden survey was intended to mislead--I am in fact inclined to believe that it wasn't. But it misleads nonetheless, thanks to the utter ambiguity of several of the questions it poses.

Consider the first survey question: "Why do you keep some of your money in a current account?" 15% of respondents answered "For safekeeping" and 67% answered "For convenient access," while only 10% answered "Because it earns interest." The predominance of the first two replies over the third might appear to suggest that most people suppose that their money is being stored. But the responses may be just as readily interpreted to mean that they consider fractionally-backed deposits to be both more convenient and safer than cash kept on one's person, at home, or in a cash register. Indeed, in these days of deposit insurance, it is hard to see why anyone concerned with safety, even exclusive of other considerations, would hesitate to prefer a fully-insured demand deposit balance to cash, while being perfectly indifferent to the dangers stemming from the lending of "their" deposits.

In reply to the survey's second question, "Who do you think owns the money in your current account(s)?", 74% answered "The account holder," while only 8% said "The bank." Another 20% answered, "Both the bank and the account holder." Proof that many British bank depositors don't know what their banks are about? Hardly. The responses instead prove nothing more than that the question posed can be interpreted in two different ways, depending on the meaning given to the word "money." Cobden Centre types, steeped in Austrian monetary economics, may insist that "money" ought to mean what others call "base" or "high-powered" money; but the fact remains that for most people, including most economists, a fractionally-backed bank deposit or note is itself "money." The latter, more common usage is implicit in standard working measures of national money stocks such as M1, M2, and so forth.

So, who owns the "money" in someone's current account? Well, it is in fact owned by the account holder, or by the bankers, or by both depending on how money is defined. If "money" is taken to mean "base money," than when someone accepts a demand-deposit credit from a banker in exchange for "money," that person surrenders ownership of the "money" to the banker, while becoming the owner of a deposit credit--a claim against the bank--of the same nominal value as the surrendered sum. But now suppose that by "money" we mean money in the broader sense, including demandable bankers' IOUs. By this definition, of course, the depositor continues to "own" the deposited sum, because instead of merely surrendering ownership to "money" he must now be understood to have merely exchanged one kind of money for another. The banker now owns the surrendered base money, while the depositor owns broad money consisting of a redeemable deposit balance. It thus follows that all of the respondents to the survey question, including the 2% who said "I don't know," may have been perfectly well informed of what their banks were up to, differing only in their interpretation of the question, or in the extent to which they were (understandably) baffled by it.

The survey's third question is equally ill-posed. It asks respondents to say what percentage of their current accounts is (1) held as reserves; (2) lent; (3) used to speculate on financial derivatives. That 66% answered "I don't know" is surprising only because one would expect the percentage replying so to such a question, calling as it does for a specific magnitude of which even many expert economists must have been unaware, while posing as alternatives two possibilities that are not in fact mutually exclusive (money might be simultaneously "lent" and "used to speculate on financial derivatives"), to have been closer to 100! The response proves, in any event, that at least two-thirds of those surveyed were not convinced that their "deposits" were fully backed by reserves.

Oddly, we are not given (as we are with regard to the other questions) a breakdown of the other responses to question 3, and so cannot say more than this. But it is at least possible that none of the 2000 respondents actually believed that his or her current account was backed 100% by reserves. If anything, the fact that we are not told what percentage of those surveyed answered this key question in accordance with the presuppositions of the anti-FR crowd ought to lead one to suspect that the percentage was in fact very low. Survey question 4, however, asks respondents to indicate "how they feel" about their banks making loans using current account deposits, and finds that 33% think the practice wrong because "they have not given [their bankers] permission to do so." Thus support appears to be given to the upper-bound ignorance quotient of 2/3.

But here once again the question is ill-conceived, not to be sure because it is ambiguous, but because it is what survey designers call a "suggestive" question, and as such one that nudges respondents in a particular direction. The question, in full as it appears in the report, reads as follows:

You may or may not have been previously aware that banks lend out some of the money deposited within current accounts by their customers to fund loans [sic]. Which of the following best describes how do [sic] you feel about the fact that your bank lends out some of the money in your account as loans [sic]?

The subtle, implicit suggestion here, perhaps unintended, is that banks are not systematically informing their customers about what they do (so that customers "may or may not" be aware of it), and that their conduct is such as might be expected to arouse some definite "feelings" among those customers.

If you doubt that the manner in which the question is posed favors the most-frequently offered response--that is, if you doubt that the question is such as tends to favor expressions of dismay regarding what bankers' regard as business as usual--imagine getting the following message in your voicemail, where the words indicated by **** are inaudible: "Hello. You may not be aware of it, but **** has been **** your ****. How do you feel about that?" Forced to say either "fine" or otherwise, I venture to guess that you'd admit that such a message leaves you "feeling" like someone who has been decidedly, albeit mysteriously, snookered.

Addendum (August 4 at 5:05PM): I had not bothered to comment on the Cobden survey's fifth and final question, because I found it so loopy that I hardly knew where to begin. I ought to have observed, nonetheless, that 26% of those surveyed responded to it by choosing, of several alternatives, the one that said "We should ensure that banks keep reserves equal to 100% of deposits." Would the respondents have made the same choice had the response in question been lengthened by adding the words "while allowing them to collect from us annual fees of somewhere between 5% and 10% of our average balances"? Unless Cobden redoes the survey, I suppose we'll never know.