The South Royalton conference, 1974

by Kurt Schuler June 24th, 2014 10:25 pm

We are just past the 40th anniversary of a conference in South Royalton, Vermont that marked the start of the revival of the Austrian School of economics. John Blundell and Richard Ebeling, who attended, have both offered reminiscences. Almost everyone who would be important in Austrian economics in the United States over the next half generation was there, and Milton Friedman stopped by to boot.

Ebeling notes that in a lecture on the Austrian theory of money, "Professor [Murray] Rothbard suggested three areas for possible future research: (1) how to separate the state from money; (2) the question of free banking vs. 100-percent-gold dollars; and (3) the defining of the supply of money." Rothbard saw the issues clearly; it is unfortunate that he was subsequently so closed to approaches other than his own. Monetary theory was in my view Rothbard's weakest area. His preferred master narrative of good guys versus bad guys is a poor fit for understanding monetary institutions, such as the gold standard, that are to a substantial extent not the result of intentional design.

The conference volume, The Foundations of Modern Austrian Economics, was the book that made me into an Austrian when I read it in 1978. Tom Palmer, who lived down the hall in my college dormitory, already as a sophomore had a large book collection that took up most of the double room he had all to himself. Tom's collection included all the important Austrian works published at the time, including the Foundations, which he lent me. I was so taken with it that I ordered my own copy to mark up. The topics and the analysis impressed me as the kind of thing that I wanted to do. The volume was edited by Edwin Dolan, who was also the conference director. I met Ed about 15 years later and thanked him for his role, the results of which had turned out to be so important to me.


Two old French references to free banking

by Kurt Schuler June 20th, 2014 9:46 pm

New to me, however.

1. "Adam Smith et la banque libre," by Laurent Le Maux, Brussels Economic Review (Cahiers économiques de Bruxelles), 2002, vol. 45, issue 1, pages 3-36.

English abstract: Smith is the forerunner of the free banking theory. Smith develop the law of reflux which asserts that private banks cannot over-issue because the convertibility rule and the market mechanism induce banks to supply just the amount of money that public want to hold. The real bills doctrine of Adam Smith has been misinterpreted and just propose a solution to the law of reflux. Smith is a forerunner too of information asymmetry theory. He shows that banks are confronted with information asymmetry when they discount doubtful bill, and it is in their interest to control actively the quality of their claims.

2. Economie monetaire by G. Bramoulle and Dominique Augey (book, 1998). The description of the book reads (in loose translation), "This book treats both the theoretical and institutional aspects of money. It is aimed at [French economics students in the equivalent of their junior year in college]. In-depth treatment of monetary theories, integrating the microeconomic foundations of the behavior of the supply and demand for money, along with the arguments of the debate between monopoly central banks and free banking systems, offers readers intending to specialize in monetary analysis a synthesis of recent work in the subject."  Would that there were a widely used money and banking textbook in English whose author was astute enough to devote more than a page or two to free banking, because the contrasts between free banking and central banking throw light on a number of issues in monetary economics.



Leaving Athens

by George Selgin June 18th, 2014 11:52 am


Well, that's that. I've made up my mind to leave Athens. It wasn't that hard, actually: thanks to John Allison and a number of generous contributors, Cato is establishing a new center for monetary studies (the formal name has yet to be determined), and I'm going to direct it. The idea is one that John and I have been talking about since before he came to Cato, so it amounts to having had the opportunity to write my own job description. You can't ask better than that! I'll also be affiliated with GMU and Mercatus, so as to be able to occasionally teach and otherwise get involved with graduate students working on monetary topics, which is something I haven't been able to do at all lately here at UGA. Larry White, on the other hand, has more students up there than he can shake a stick at, and so could use some help!

Yet the occasion isn't without a fair measure of melancholia. Twenty-five years is a long time to get settled into a place--longer by far than I've ever spent elsewhere. When I contemplate the tangle of roots I've put down during that time, it brings to mind the long battle I waged with the paper mulberries in my back yard at 460 Meigs, whose roots (OK, rhizomes) seemed as sturdy, and also as long, as power lines.

I eventually won that battle, more-or-less, and fought and won countless others besides, making my old house and garden conform to my personal (OK, eccentric) idea of what a home should be. Now there's scarcely an inch of the place that I haven't altered according to my whims. And, my friends here will assure you, that's not hyperbole.

Of course those friends also make departing bittersweet, as does the fact that my brother, Peter, now lives less than two hours from Athens, in Milledgeville. (The back route there is, incidentally, just the thing for a 450cc motorcycle, adding to the regret.)* Luckily for me its easy to travel between DC and Atlanta (itself not all that far from Athens), and DC has plenty of attractions, so I can plan on returning often, and also on having my former companions remain just as close, if not quite so constant.  It also helps to have many friends, and a half-sister, awaiting me in DC. That gives me plenty to look forward to, even if it can't quite make up for the sadness of having to say adieu to my buddies here.

And I'll miss my UGA colleagues, starting with our little group that's been meeting for lunch every Monday for some years now. Not the same group, mind you: others have left before me, and new ones have taken their place. But it seems there's always been enough to take up a table for four, if not five or six, at the good old Globe--one of several pubs here where the staff and I have long been on a first name basis. I will miss them, too.

One thing I've known all along is that, when you move from one town to another very different one, you mustn't try to recreate the sort of life you've been experiencing--or rather, your favorite bits. The challenge is to figure out the best brand new life to make out of the new materials. Its like a sculptor working first with one, and then with another very different hunk of marble. If of the first he makes a fine bust of Voltaire, it doesn't follow that the second isn't better suited for Pericles. Being happy in Athens has meant taking long bike rides (and, lately, longer motorcycle rides) on quiet back roads, playing interior-decorator with a Victorian house, and taking Penelope for long walks at Lake Herrick. In DC, I'm thinking, it might mean joining the Alliance Française, or visiting museums, or attending some black-tie event. (Perhaps I had better buy a little cocktail dress for Penelope!)

All of this, by the way, may help explain why I've done relatively little blogging here lately. It's not just that I've been busy first negotiating the new job, and then actually preparing to move--though both things are true. There's something else that's kept me from blogging, or for that matter from doing much ordinary work of any sort. It is that I've been "busy" living my usual life--hanging out with friends; spending time at home with Penelope; riding my bike; riding and toying with my Honda; hanging around my favorite bars. Although I've tried, I just can't seem to concentrate on business of any kind. Now and then I feel a twinge of guilt about it. But then, in the back of my mind, I have this voice telling me I'll end up feeling even guiltier if I quit goofing off. Yeah, I know: its dangerous to heed voices in one's head. But I'm doing it anyway. Call me crazy. Call me sentimental, even. I'll get over it.


*What one does with a 450cc motorcycle in the heart of DC is a good question--one of many on my long and ever-lengthening list of "things I'll have to figure out all over again."


Adam Smith and free banking--dissertation

by Kurt Schuler June 17th, 2014 11:09 pm

There is a new dissertation readers may be interested in, written in the Department of History at Harvard University by Tyler Goodspeed. The title is "Upon Daedalian Wings of Paper Money: Adam Smith, Free Banking, and the Financial Crisis of 1772." (This was the failure of the Ayr Bank.) Here is the abstract:

From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve requirements, and no formal limits on bank size. In support of  previous research on Scottish “free banking,” I find that this absence of legal restrictions on Scottish banking contributed to a proliferation of what Adam Smith derisively referred to as “beggarly bankers” which rendered the Scottish financial system both intensely competitive and remarkably resilient to a series of severe adverse shocks to the small developing economy. In particular, despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland’s highly decentralized banking sector effectively mitigated the effects of two severe balance of payments crises arising from exogenous political shocks during the Seven Years’ War. I further find that the introduction of regulations and legal restrictions into Scottish banking in 1765 was the result of aggressive political lobbying by the largest Scottish banks, and effectively raised barriers to entry and encouraged banking sector consolidation. I argue that while these results did not cause the severe financial crisis of 1772, they amplified the level of systemic risk in Scottish credit markets and increased the likelihood that portfolio losses in the event of an adverse economic shock would be transmitted to depositors and noteholders through disorderly bank runs, suspensions of payment, and institutional liquidation.  Finally, I find that unlimited liability on the part of Scottish bank shareholders  attenuated the effects of financial instability on the real economy.

The chairman of the dissertation committee was apparently Niall Ferguson, who comes from Scotland.


David Wessel on low inflation

by Larry White June 17th, 2014 5:32 pm

Ex-Fed chair Ben Bernanke is currently a resident fellow at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. The Center’s director, David Wessel, appeared on NPR’s Morning Edition yesterday to express views on inflation and deflation that are essentially indistinguishable from Bernanke’s.

In particular, like Bernanke, Wessel spoke as though inflation below 2% per annum, and a fortiori deflation, is always bad.

Asked to explain why it should be bad to have less of a bad thing like inflation, Wessel first responded: “I mean it sounds appealing, prices going down, people paying less at the store. But when inflation is low that means wages are going up very slowly too. That's of course not very popular.“ This sort of answer would earn an undergraduate a poor grade from any instructor who emphasizes the distinction between real and nominal variables. Workers should not applaud rising nominal wages per se; what matters for them is their real wages. When inflation is low, so too are nominal wage increases ordinarily. But that says nothing about the path of real wages, which in the long run are not determined by monetary policy.

Wessel continued: "There are a couple of problems with too little inflation. It can be a symptom of a lousy economy, one in which demand for goods and services and workers is anemic."

A key word here is symptom. A condition that can be a symptom of a problem is not the problem itself, and can also appear under healthy conditions. Wessel failed to note that low inflation need not be a symptom of a lousy economy, because he spoke only of variation in the aggregate demand for goods and services. Low inflation (or even deflation) can instead be the benign result of abundant growth in the real supply of goods and services. Under the gold standard, as Atkeson and Kehoe (2004) have reported, periods of lousy economy (recession) were not more common during deflation periods, nor vice-versa.

If the Fed were today targeting the path of nominal income, because the growth rate of nominal income is the sum of the inflation rate and the real income growth rate, low inflation would be a sign of a healthy economy with high real economic growth. Thus Wessel would have provided a more accurate analysis if he had spoken of problems with growth in nominal aggregate demand being weaker than anticipated, not inflation being below its target. (In terms of dynamic AD-SRAS analysis, unexpectedly low growth in AD moves the economy below the natural rate of output.)

Wessel’s second concern is harder to interpret favorably. Low inflation, he said, "can make it hard for the Fed to spur borrowing because it's hard for them to get the interest rate below the inflation rate." Two responses: (a) The Fed should not be trying to “spur borrowing.” Fed efforts to spur borrowing helped to fuel the housing bubble. (b) The Fed is not in fact currently finding it hard to get the interest rate below the inflation rate. The interest rate on 1-year T-bills has been below the CPE inflation rate for more than four years, since 2009’s dip into deflation (in that case due to weak demand for goods following the financial crisis).

Wessel went on the cite the problem of rising real debt burdens in deflation. That can indeed be a problem in an unanticipated deflation (Wessel never distinguished anticipated from unanticipated), but again, only to the extent that the deflation is driven by unexpectedly weak aggregate demand growth and not by robust aggregate supply growth. In the latter case, borrowers have more real income with which to repay.

In his answer to the interviewer’s last question, Wessel declared: “So it used to be that economists believed that a central bank can always create inflation by printing more money. But lately it's been -seems harder to do that than the textbooks had told us.” But what is the evidence that expanding the stock of money does not still generate inflation the way the old textbooks tell us? Surely not the experience of the Fed undershooting its target of 2.0% growth in the PCE by 0.4%, which only implies that the broad money growth rate was 0.4% lower than the rate that would have hit the target. Fortunately or unfortunately, it remains the case that the Fed can always raise the PCE inflation rate by engineering a higher rate of broad money growth, just as the textbooks explain.

By the way, today’s announced number for the May CPI raises year-over-year CPI inflation to 2.1%. The increase of 0.4% over April’s CPI, compounded twelve-fold, implies an annual rate of 4.9%. At this rate the “problem” of an undershooting PCE-deflator inflation rate will be “solved” before long.

(HT to David Boaz)


New working paper on Bitcoin

by Larry White June 16th, 2014 10:24 am

Will Luther and I have a brief new SSRN working paper entitled "Can Bitcoin Become a Major Currency?"


Larry White has three recent working papers

by Kurt Schuler June 11th, 2014 10:36 pm

"Free Banking in History and Theory"

"The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold"

"The Merits and Feasibility of Returning to a Commodity Standard"

And why the heck do I have to be the one to post about them? Come on, fellow bloggers, if you write a relevant paper, spare the two minutes to post a notice of it yourselves.


Other people's work

by Kurt Schuler June 2nd, 2014 11:18 pm

Vern McKinley will be speaking at the Cato Institute on June 4 at an event titled "Run, Run, Run: Was the Financial Crisis Panic over Bank Runs Justified?" The event will also be streamed over the Internet live and can be replayed on video later. If the Velvet Underground reference was intentional, Vern, I like it.

Larry Parks had an article called "Bitcoin's Futile Quest to Be a Currency" in the Wall Street Journal. (To be clear, Parks is not opposed to Bitcoin trying to be a currency; he says that rules adopted in March by the U.S. Internal Revenue Service stand in its way.)

Mark Spitznagel had a book that was published in 2013 but that I only found out about today, The Dao of Capital: Austrian Investing in a Distorted World. Here is a transcribed conversation between Spitznagel and Nassim Taleb that touches on the book, which I have not read.

Finally, The Gold Standard Now has begun to post the complete records of the Reagan-era U.S. Gold Commission. Portions have long been available on the Internet, but not the complete records. I suggested posting them here months ago, but the editors have not seen fit to accept any of the suggestions I have made regarding new material.

ADDENDUM: Another new book that I have not read is Brian P. Simpson, Money, Banking and the Business Cycle, in two expensive volumes. The author says, "It builds on the business cycle theory developed by Ludwig von Mises and Friedrich Hayek." Apparently the author is a proponent of 100% reserve banking.