In the news

by Kurt Schuler March 31st, 2013 10:16 pm

Jeff Hummel in the Wall Street Journal on the Federal Reserve; his article is titled "The New Central Planning."

A Business Week article on Divisia money supply measures, a subject I have touched on in a few of my posts.

Skepticism about the Cyprus Bitcoin ATM story.

That will have to do for now since I am working on the galley proofs for a hardcover edition of the book I edited with Andrew Rosenberg, The Bretton Woods Transcripts, currently available only in electronic form.


FinCEN Head Elaborates on New Payment System Regs

by Bradley Jansen March 20th, 2013 4:05 am

The head of the Financial Crimes Enforcement Network (FinCEN) spoke recently to an anti-money laundering conference and elaborated on their thinking for the new regulations on new payment systems such as Bitcoin and e-precious metals.

Here is an excerpt of her remarks:

Emerging Payment Systems
I’d like to begin today by discussing how FinCEN’s analysts are working hard to stay ahead of the curve in understanding emerging payment systems and related financial flows and vulnerabilities and to put that information into the hands of those customers who need it most.
As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce.
These new systems have also expanded the boundaries of “money transmission” as more sophisticated payment systems have become available. And the inherent added complexity of these systems opens them to potential misuse by criminals.
FinCEN’s analysts are continually working to understand the schemes and methods used to exploit emerging payment methods for money laundering and terrorist financing, and to develop related guidance for law enforcement. This guidance provides law enforcement with information on key sectors’ operations, recordkeeping practices, and efforts to identify and counter vulnerabilities.
Partnership is key. As our analysts develop their understanding of these new systems, they are significantly aided by working directly with the financial industry. This partnership enables them to better follow financial trails and realistically understand financial mechanisms.
For instance, FinCEN’s analysts are working to finalize a bulletin that will explore the relatively new payment technology of digital currency systems. FinCEN’s bulletin will help “de- mystify” the digital currency realm by explaining to the broader law enforcement community how these systems work. The bulletin will also address the role of traditional financial institutions as intermediaries.
We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems.
To date, FinCEN’s analysts have explored and produced reference products for law enforcement on many traditional and emerging payment systems. These include: cross border funds transfers and correspondent accounts, money transmitters, online payment systems, prepaid cards, and mobile payments. FinCEN’s analysts then follow up this work by providing in-person analysis and training to thousands of investigators each year.
In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas.
In fact, just yesterday, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them.
FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.
The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance. Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers arealready registered with FinCEN as MSBs, though not necessarily as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities.

The whole speech is here:


US Treasury Updates Bitcoin Regulations

by Bradley Jansen March 19th, 2013 8:06 am

Congratulations, Bitcoin, you've made the big time!  How do we know?  Easy, the Feds have you in their sights.

I'm leaving today on a trip, but I'll have more on my analysis later.  Keep in mind that it was the anti-money laundering laws that brought down e-gold and stifle currency competition.  Let's hope this won't be the case moving forward.

Here's the key part, "A user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person."

They explain the terms here, "This guidance refers to the participants in generic virtual currency arrangements, using the terms “user,” “exchanger,” and “administrator.”6 A user is a person that obtains virtual currency to purchase goods or services.7 An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency."

The Financial Crimes Enforcement Network (FinCEN) is the bureau of Treasury that enforces the Bank Secrecy Act (which requires banks to spy on their customers for the government).

FinCEN Issues Guidance on Virtual Currencies and Regulatory Responsibilities

To provide clarity and regulatory certainty for businesses and individuals engaged in an expanding field of financial activity, the Financial Crimes Enforcement Network (FinCEN) today issued the following guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance is in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use convertible virtual currencies or make a business of exchanging, accepting, and transmitting them. Convertible virtual currencies either have an equivalent value in real currency or act as a substitute for real currency. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN's definition of MSBs.

News Release: http://www.fincen.gov/news_room/nr/pdf/20130318.pdf

Guidance: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf

I wrote a good background on the anti-money laundering laws for Dr. Paul here:



I've written extensively on FinCEN previously here:


Here is the guidance:

FinCEN Bitcoin Regulation


Gary Becker on the Austrian unease with equilibrium

by Kurt Schuler March 17th, 2013 10:10 pm

Gary Becker gave an interview published last year that I only saw recently, through a link from the Marginal Revolution blog. In it, he remarks (page 83, 11 pages into the interview) that “Economists from the Austrian school hate equilibrium analysis in some sense, but I never understood their criticism.” He the interviewer then go on to discuss the usefulness of equilibrium analysis.

Equilibrium and other key concepts in economics are metaphors, as one of Becker’s former University of Chicago colleagues, Diedre (formerly Donald) McCloskey, has stressed. The question is how far we can fruitfully stretch the metaphor. As one of my graduate school classmates said, if the milkman skips his morning delivery, does that throw a general equilibrium out of kilter? Just before he criticizes the Austrians, Becker seems to make a similar point when he says, “You do not need to use the concept of a complete equilibrium.” Whether he knows it or not, Becker shares some of the Austrian unease about equilibrium.

In a complete general equilibrium, there is, among other things, no need for money. That we have money, and that the details of how the monetary system works can create problems that ripple throughout the economy (discussed on this blog, among other places), is one reason that Austrians think mainstream economists stretch the metaphor much too far. The Austrian focus on the market process is a competing metaphor, admittedly not as successful among academic economists, but one whose implicit message is that understanding the process is more important than achieving the goal of equilibrium, which Austrians view as impossible to identify with certainty because the knowledge involved is distributed across billions of minds.

By the way, Becker wrote a 1956 paper discussing a kind of free banking. He briefly updated his views half a century later. Here is a discussion by another economist, Ludwig van den Hauwe; to see Becker’s paper itself, apparently you will have to go to the library. It was not published at the time and as far as I know did not appear in print until the 3-volume set, Free Banking, that Larry White edited in 1993, published by Edward Elgar.

ADDENDUM: Here is a column in which a physicist offers a jaundiced view of the use economists make of equilibrium.


Armen Alchian and Alfred Marshall

by Kurt Schuler March 10th, 2013 10:39 pm


This post has no connection to free banking, but it is a footnote to the history of economic thought that would otherwise find no outlet.

Armen Alchian recently died at the ripe age of 98. His work showed how much could be accomplished by thinking deeply using basic economic ideas that are taught to college freshman but that even few experienced economists have thoroughly in their bones. Years ago I read Alchian's influential textbook with William Allen, University Economics, and a volume of his collected writings, Economic Forces at Work; the latter has been superseded by a two-volume collected works, which I have not read.

Alchian is known, among other things, for the so-called Alchian-Allen theorem, which first appeared in his textbook. Here it is as Alchian and Allen stated it (1964 edition, page 75):

"Suppose that grapes are grown in California and that it costs 5 cents a pound to ship grapes to New York whether the grapes are "choice" or "standard" ... suppose further that in California the "choice" grapes sell for 10 cents a pound and the standard for 5 cents a pound... If grapes are shipped to New York, the shipping costs will raise the costs of "choice" grapes to 15 cents and of "standard" grapes to 10 cents. In New York the costs of "choice" grapes are lower relative to "standard" grapes (1.5 to 1) than in California (2 to 1)... New Yorkers faced with a lower price of "choice" grapes relative to "standard" will consume relatively more "choice" grapes than Californians will."

What I have never seen mentioned in any of the recent or older papers on the theorem is that there is an anticipation of it in Alfred Marshall's Money, Credit and Commerce, published about 40 years earlier (Book III, chapter 1, section 3):

"Again, if two sorts of the same commodity are of unequal usefulness, but cost the same for carriage, the better sort is likely to be chosen for long-distance transport. Where wood is plentiful, thick beams of quick-growing inferior wood may be preferred to thin beams of better wood, which perhaps cost twice as much: but if both have been imported from afar, the cost of carrying the thick beams may cause preference to be given to thin beams of superior wood....

"Again, the commoner sorts of wine are generally consumed near  home, while the better travel far:...."

P.S. Brief Internet research for this post led me to the useful Deardorffs' Glossary of International Economics, which I had not previously seen.


Drawing the line (continued)

by Kurt Schuler March 2nd, 2013 1:04 pm

Following up on two posts ago, my own view is that the most important line to be drawn in discussing monetary aggregates is between the monetary base and everything else. The monetary base (M0) is the medium accepted for final payment within the domestic monetary system. In the United States and most other countries today, it comprises notes issued by the central bank, coins issued by the central bank, and demand deposits of commercial banks at the central bank. When held by commercial banks rather than the public, the notes and coins just mentioned count as part of their reserves, along with their demand deposits at the central bank.

In earlier posts I have stressed the importance of keeping in mind the difference between money in the sense of the monetary base on the one hand and broader measures of the money supply, which are various forms of credit, on the other hand. The public colloquially calls all of them money, and bank deposits, for instance, do serve as generalized media of exchange. The medium of exchange function is not all there is to money, though. Money as opposed to credit constitutes final payment for a good. When a Wells Fargo Bank customer writes a check to a Citibank customer, the transfer of deposit credit constitutes payment as far as they are concerned, but it is not final payment as far as their banks are concerned. Wells Fargo has to transfer reserves (monetary base) to Citibank to the extent that it lacks offsetting claims on Citibank.

There can be complications to the story. Under a gold standard operated by a central bank, for instance, the monetary base is final payment within the domestic monetary system but gold is final payment internationally. That is a wrinkle best left for another time.

Besides the distinction between final payment and less-than-final payment, another reason for distinguishing between the monetary base and the types of credit that constitute broader measures of the money supply is that historically, it has been the case often (much more often than not during the last century) that the monetary base is supplied monopolistically while the types of credit that constitute broader measures of the money supply are supplied basically competitively, though often subject to many distorting regulations such as minimum reserve requirements and government-imposed credit allocations. The credit aggregates are somewhat substitutable for one another in a way that they are not substitutable for the monetary base. One credit technology may entirely replace another, as checks and wire transfers have done to bills of exchange. A credit technology may reduce the demand for the monetary base, as interbank clearing has done, but it is does not eliminate demand for the monetary base unless trust is so perfect that banks are willing to hold one another’s IOUs perpetually instead of demand final settlement of debts outstanding.

My reading of the monetarists is that for them, the line between M0 and M1 or M2 is in practice less important than the line between M2 and M3—not neglected, just less important. They consider the statistical correlations between monetary aggregates and economic activity to be highly important, while for me they are less important than the underlying market process—or, in the case of a monopolistically supplied monetary base, the nonmarket process.

I also consider that the Divisia aggregates give a better sense of the substitutability among credit aggregates than making a strong distinction between some aggregates and others, as the monetarists have done, as Murray Rothbard did in America’s Great Depression, and as subsequent Austrian efforts inspired by his effort have done.

MISCELLANEOUS: Because of the interest my Bitcoin post aroused, I will collect my thoughts on the subject and write something substantial about it. I have also promised Mike Sproul a post or posts on the "backing" theory of money with right of rebuttal for him and will eventually get around to it. Finally, on the subject I discussed here, J.P. Koning's Moneyness blog has had a number of relevant posts and is worth reading for whatever else he writes as well.

ADDENDUM: In some countries, including the United States, coins today are issued by the treasury as notes were in the past. These details do not change the overall story. Also, the theory of free banking contends that for the monetary system to most nearly achieve equilibrium, the monetary base as well as the provision of credit based upon it should be competitive. I thought that on this particular blog, the point would be obvious, but apparently not so.