The hobbyhorse rides again

by Kurt Schuler January 29th, 2013 11:33 pm

The latest issue of the Cato Papers on Public Policy has an article by Douglas Irwin of Dartmouth focusing on the behavior of the French government and central bank during the Great Depression (video here; paper forthcoming in a conference volume here, but the latest issue doesn’t seem to be on sale yet and mine is apparently an advance copy).

Irwin and the discussants of his paper (Charles Calomiris of Columbia and James Hamilton of the University of California-San Diego) avoid what to me is the heart of the matter: the Bank of France and the Federal Reserve were central banks. Blaming the Great Depression solely on “the gold standard” does not make sense because it does not explain why the gold standard worked pretty well before World War I. That, as regular readers will know, is one of my hobbyhorses about economists’ usual treatment of the gold standard. The gold standard, or any other internationally shared standard of rigid exchange rates, transmits monetary disturbances across borders in a way that floating exchange rates do not, but whether those disturbances occur depends heavily on what kinds of monetary systems exist within the participating countries. (Floating exchange rates also transmit disturbances across borders, as we know from abundant experience, but the way they transmit disturbances is different.)

Free banks have no incentive to build up the huge, noninterest-earning gold reserves that the Bank of France accumulated during the Great Depression, and I am aware of no historical case where free banks accumulated gold on such a scale, relative to the size of the economy and over so short a period, as the Bank of France did. It is hard to see how the Depression could have happened had the United States and France still had free banking, as they did in some form earlier in their history.

Another complaint: in an article and two comments focusing on France (though with some discussion of the United States), there is not a single reference to any publication in French, and only a couple references to publications that have been translated from French. It’s like writing a paper about the United States and not citing anything published in English. French is still the second language of scholarship, far behind English now in general but certainly not as regards the study of France itself. Economists who are native speakers of English don't know any better, to their shame, but historians do, and economic historians should try to combine the virtues rather than the flaws of both disciplines.


Other free banking blogs: results

by Kurt Schuler January 21st, 2013 11:23 pm

Here a list of other blogs that sometimes discuss free banking usefully, in my experience or in that of readers whose comments I requested in my previous post.


Cato@Liberty, http://www.cato.org/blog (Cato Institute, wide variety of topics, free banking pops up once in a while)

The Circle Bastiat, http://bastiat.mises.org (Mises Institute, multiple contributors)

Coordination Problem, http://www.coordinationproblem.org/ (multiple contributors of the Austrian School)

Free Market Money, http://www.monetary-freedom.net/blog (perhaps Thomas Greco, Jr.--no author seems to be explicitly listed)

The Market Monetarist, http://marketmonetarist.com/ (Lars Christensen)

Meng Hu’s Blog http://menghusblog.wordpress.com/tag/free-banking/

Moneyness, http://jpkoning.blogspot.com/ (John Paul Koning)

Monetary Freedom, http://monetaryfreedom-billwoolsey.blogspot.com/ (Bill Woolsey)

The Monetary Future, http://themonetaryfuture.blogspot.com/ (Jon Matonis)

Free Radical, http://realfreeradical.com/ (Mike Freimuth)

Uneasy Money, http://uneasymoney.com/ (David Glasner)

Gold and Silver and Money and Creidt, http://keithweiner.posterous.com/ (Keith Weiner, gold-focued)

Other languages: German

Remember that for the foreign-language blogs listed below, you can use Google Translate or similar services to get a rough idea of the contents.

These are the suggestions of a German commenter, which I have not examined in any depth:

Forum Ordnungspolitik, http://www.forum-ordnungspolitik.de

Ludwig von Mises Institute Deutschland, http://www.misesde.org

Friedrich August von Hayek Gesellschaft http://www.hayek.de/

Freiheitswerk, http://freiheitswerk.org/about/

Freitum http://www.freitum.de/,

Liberales Institut, http://www.libinst.ch/ (material in multiple languages, including English)


Punto de Vista Económico, http://puntodevistaeconomico.wordpress.com/ (multiple contributors who are Argentine members of the Austrian School)


Some other pages you may find interesting:

Economics of Bitcoin blog, http://www.economicsofbitcoin.com/ (Peter Šurda and Iain Stewart)

Electronic money page by Roy Davies, http://projects.exeter.ac.uk/RDavies/arian/emoney.html)

Free Banking FAQ by Daniel Ust, http://mars.superlink.net/~neptune/BankFAQ.html

Free Banking Bibliography by John Zube, http://www.panarchy.org/zube/freebanking.index.html


Market Monetarism and the Monetary Constitution

by Steve Horwitz January 12th, 2013 12:45 pm

An important post from Lars Christensen at The Market Monetarist this morning.  Lars argues that many folks have misunderstood the argument for monetary easing in order to target NGDP growth by framing it in terms of discretionary policy.  The market monetarists, he argues, are not imagining a world in which the central bank is constantly fiddling with the money supply, nor does their view reject the idea that sometimes monetary policy can be too expansionary.  They are neither "doves" nor "hawks," because both of those are, again, couched within a framework of discretion.

Instead, he argues that what they want is what Buchanan wanted:  a monetary constitution.

Buchanan was a constitutionalist. He was concerned about one thing and one thing only and that was how to define the rules the game – also in monetary matters. This to me is what Market Monetarism to a large extent is about (or at least should be about).

We want central banks to stop the ad hoc’ism. In fact we don’t even like independent central banks – as we don’t want to give them the opportunity to mess up things. Instead we basically want as Milton Friedman suggested to replace the central bank with a “computer”. The computer being a clear monetary policy rule. A monetary constitution if you like.

The problem with today’s monetary policy debate is that it is not a Buchanan inspired debate, but a debate about easier or tighter monetary policy. The debate should instead be about rules versus discretion and about what rules we should have.

Obviously Market Monetarists have been arguing in favour of monetary easing in both the US and the euro zone, but the argument is made within the framework of NGDP level targeting. We not always “dovish”. In fact most of us would probably have argued that monetary policy in the US and in most Europe have been overly easy for the last 40 years. But that is besides the point. The point is that we really should not have a discussion about easier versus tighter monetary policy. We should debate the rules of the game – James Buchanan would have told us that.

Free banking types might wonder whether NGDP targeting really does operate "like a computer" give the complexities of ensuring that a given change in the monetary base will have the desired effect.  However, Lars does make an important point in arguing that NGDP targeting is a rule and that debates over the desirability of further monetary expansion (which Lars, I believe, does not favor at this time) should be framed in terms of what we would want a good "monetary constitution" to generate, rather than our preference over what sort of discretionary path the Fed should take.

I have written on free banking, Buchanan, and the monetary constitution in "Do We Need a Distinct Monetary Constitution?" which is part of the Buchanan symposium in JEBO.  The ungated SSRN version is here.

Cross-posted at Coordination Problem.


My Own 2 Cents Concerning Trillion-Dollar Coins

by George Selgin January 11th, 2013 12:11 pm

[Note: This is a revised and amended version of an original post which, as several critics pointed out, failed to address the legal argument for using platinum.]

The only sort of coin that can address the debt problem is, of course, a fiduciary or token coin, worth more than its cost of production; moreover, any unnecessary expense incurred in making such a coin, by making it out of a precious metal or otherwise, merely serves to reduce the difference between its nominal value and its cost, detracting correspondingly from the profit or seigniorage the Treasury might gain by depositing it at the Fed.

True, if the coin were intended to circulate along with many others of the same sort, its cost of production would serve as a deterrent to counterfeiters, though the deterrent would still be small in proportion to the coin's fiduciary component. No one, however, imagines that a trillion-dollar coin will actually circulate; and even if it did it would do so only after the most exacting of inspections determined that it was the real McCoy rather than some aftermarket fake. In short, for the Treasury to bother making it out of anything so precious--and so intractable--as Platinum (the high melting point and hardness of which make it a very difficult material for fashioning high-quality and therefore counterfeit-resistant engravings) would be perfectly foolish. Given the coin's purpose, it would be far wiser to fashion it out of the same junk now used to make pennies, or for that matter out of plastic, or out of cardboard made from recycled copies of the Congressional Record.

Indeed, if the thing is never to leave the Federal Reserve's vault, it might as well consist of nothing more than a cover from one of those little ice-cream tubs--you know, the ones with the wooden spoon underneath--on which Congressman Walden Nadler has scribbled the words "$1 Trillion" along with some appropriate legend. In case the good Congressman is reading this, perhaps he will consider my proposal for such. It is: "In Idiots We Trust."

Addendum: On Facebook Jacob Levy observes that the proposal to use platinum is solely due to the fact that enabling legislation already exists for making a trillion-dollar coin using that metal. That is of course true; but the significance of this "loophole" seems to me much exaggerated, for it only allows the Treasury to "mint and issue platinum bullion coins and proof platinum coins." The rub is this: a "bullion coin"" is, according to the U.S. Mint's own glossary, a "precious metal coin traded at current bullion prices," which is to say, traded at its bullion value rather than its face value, whatever the latter may be. So the Treasury could not gain much if any seigniorage by exploiting the "bullion coin" component of 31 USC 5112. A "proof platinum coin" might, on the other hand, be made of any sort of platinum alloy, which needn't correspond to that of circulating coins of which the proofs are special representatives. So far, so good. The rub here is that a proof coin itself is not a circulating coin, and hence is not legal tender, so that the Fed would again have no business crediting it at its (arbitrary) face value assuming that it finds a way to give any credit for it at all.

On the other hand, the Fed might conceivably purchase, and the Mint might sell it, a cardboard commemorative or proof piece just as readily as it might a platinum (or platinum-alloy) one, and do so for an arbitrarily high price--just as the Fed has purchased all kinds of securities for more than their presumed market value. The specific denomination of the piece needn't matter; indeed it needn't even bear such. And neither need the Fed deal directly with the Treasury: the Treasury might, for instance, sell the commemorative to a private person--say, a large financial firm or insurance company or auto manufacturer--which could in turn seek Fed support on the grounds that it is Too Big To Fail and that the purchase, although it seemed like a good idea at the time, will otherwise force it into bankruptcy.

So far as I know, there is no rule concerning what prices the Mint may accept in outright sales of its commemorative and proof pieces, whatever those may be made from. As for the rest, the precedents are perfectly well established. :) (Smiley face added to assist the humor-impaired.)


More Problems with the Trillion Dollar Coin

by Steve Horwitz January 11th, 2013 10:59 am

A few folks have already chimed in on this topic in other places. Lars Christensen has one of the better posts over at Market Monetarist, if for no other reason than rightly pointing out how this gimmick undermines the rule of law and the idea of rule-based monetary policy.  I agree with pretty much everything he says there and just want to make an additional point or two here, including noting why it is more likely to be inflationary than open market operations.

My co-bloggers can correct me if I'm wrong on anything below, but it seems to me that minting a trillion dollar coin as a way around the debt ceiling, though gimmicky, is just a more naked form of monetarization than the Fed normally engages in.  However, it does carry with it a greater risk of inflation as well as setting a precedent for finding even cheaper ways for the US government to continue its fiscal profligacy.

If the assumption is that the Treasury mints the coin and then the Fed purchases it for $1T, the difference with normal open market operations is just a matter of what's on the asset side of the Fed's balance sheet and the bypassing of the banking system.  Normal open market operations, or even quantitative easing, involve purchasing either government bonds or mortgage backed securities or whatever else the Fed is authorized to purchase these days. The Fed buys those from organizations who take the proceeds and put them in their banks, and the banks get credited for that amount in their reserve account at the Fed. The Fed gains the asset of the financial instrument and the liability of the new reserve deposit they owe the bank. When the Fed buys currently existing government bonds, it returns the interest to the Treasury which enables it to issue an equivalent amount of new debt at the same cost. That’s why money creation through normal channels facilitates new borrowing.

With the coin, what the Fed gets on the asset side is the coin and the liability is a direct credit of $1T to the Treasury.  At least that's how I presume it would work.  Notice that the end result is identical to open market operations:  the government can now spend $1T more than it could previously without having to pay any more interest on new debt.  The coin involves no new debt at all - just the straight out creation of $1T in new money directly to the Treasury's account.  In open market operations, new debt can be issued but those interest payments are (largely) canceled out by the Fed returning to the Treasury the interest on the bonds it purchased.  The Treasury gets the $1T not as a direct injection ex nihilo from the Fed, but through the public's willingness (presumably) to buy the newly issued debt.

And this is one major objection to the coin:  it's straight monetization.  Rather than relying on the willingness of the public to continue to support large deficits by purchasing newly issued debt, it simply creates a trillion dollars and hands it to the Treasury. The Treasury does not have to worry about whether it can sell the new debt it would have had to issue with standard open market operations.  And it does not have to worry whether the interest demanded by the public on that new debt is greater than the interest returned to it on the old debt the Fed buys up.  The coin is pure, naked monetization that removes any semblance of cost constraints on the Treasury.

The inflationary potential is also great, and moreso than open market operations, because the Treasury will with certainty spend the new funds, while banks might let them sit in their reserves.  Note too that injecting a trillion dollars through the banking system is more expensive because those new bank reserves now earn interest.  A quarter point doesn't sound like much, but when it's 0.25% of $1,000,000,000,000, you're talking real money.

The trillion dollar coin is a really bad idea for several reasons:

1.  It violates the rule of law and undermines anything like a rules-based central bank policy.

2.  It further encourages US fiscal profligacy by finding a way to fund excessive government expenditures that does not even bear either the cost of paying interest on reserves or any interest differential between new and old debt, as the Treasury would if the Fed used standard open market operations.

3.  It has a much greater inflationary potential than open market operations because a direct infusion to the Treasury will definitely be spent while injections of reserves into the banking system will likely not enter the spending stream.

Bottom line:  this is a really, really bad idea as it manages to simultaneously undermine any semblance of sanity in both monetary and fiscal policy simultaneously.   That it is being seriously discussed, if not endorsed, by Nobel Prize winners is a sign of how far economics has fallen as well as how much of a mess US fiscal and monetary policy has become.


James Buchanan, RIP

by Kurt Schuler January 9th, 2013 11:58 pm

James Buchanan died today at the age of 93. He is best known as the founder, with Gordon Tullock, of the "public choice" school of economic thought, which uses ideas that had been applied to market exchange and expands them into nonmarket decision making, especially politics.

The effect of public choice thought has been, at least among many economists and political scientists, to dispel misplaced romance. Public choice is built on the simple but profound insight that men do not cease to be self-interested merely because they work in a government office rather than in a business. Failing to understand the pervasive nature and consequences of self-interest leaves a country's citizens open to endless disappointment as they expect from government purity of motives and effectiveness of outcomes that it cannot deliver, including, of course, in monetary matters.

Even though public choice is a broad field, Buchanan's interests were broader still. He reflected deeply on the foundations of the market economy and the implications for economic analysis of the subjective nature of costs. Most relevant for this blog, he dabbled provocatively in monetary theory. He only half jestingly proposed basing a monetary standard on the brick as a unit less subject to tampering than national currencies (see this summary, pages 12 onward).

I never took a course from Buchanan while I was a student at George Mason University. Before I enrolled I had already absorbed some key elements of the public choice outlook. Besides, he had just won his "Nobel" Prize and was doing what most of the winners have done: spending a lot of time taking his message to the wider audience around the world that he had earned. I did attend seminars where Buchanan was present, public lectures he gave, and other events he attended, and heard about him from my classmates who took classes with him. He impressed me as someone who had had wisdom for a long time, well before its usual appearance near the end of one's career. Such people are  even rarer in universities than in the world at large.

Lars Christensen has collected some links about Buchanan.


Ron Paul--get it before it disappears

by Kurt Schuler January 2nd, 2013 9:57 pm

Ron Paul's Monetary Policy Anthology may not be posted at its original site for long. If interested, download it now. Somebody should ensure that it finds a permanent home on the Internet.

UPDATE (September 2014): Available via the Carl Menger Center for the Study of Money and Banking.


Other free banking blogs

by Kurt Schuler January 1st, 2013 11:27 pm

What other blogs do you read, comment on, or (in a few cases) write that focus on or at least sometimes discuss free banking at length? I will assemble a consolidated list from your comments and post the results above the fold. Because I am interested in how much overlap in readership other blogs on free banking have with this one, I would appreciate you listing all the blogs you read that deal with free banking, not just those omitted by previous commenters.