World War I and free banking

by Kurt Schuler July 30th, 2014 10:38 pm

The 100th anniversary of the start of World War I was two days ago. Earlier this year I skimmed through a number of New York newspapers from just before the war and during its first few months. It is apparent how great a shock it was. The Christian great powers of Europe had been mostly at peace for nearly a century (though they had been gnawing at the Ottoman Empire), and suddenly they were embroiled in a vast continental war over a matter that from their perspective should have had little importance.

World War I began a rapid decline in free banking. None of the belligerents had free banking in 1914. In the United States, which did not become a belligerent until 1917, 1914 saw the Federal Reserve replace the previous system of government issue of currency alongside heavily regulated issue of notes by banks. The war and its aftereffects also disrupted the monetary systems of countries with free banking such that most adopted arrangements that gave governments a good deal more discretionary control over the monetary system.

There is a hole in free banking theory with respect to war. Free banking, like free trade more generally, is inherently a peacetime system. The question for its political durability is whether, like trade, it can be bent during wartime but prove sufficiently elastic to return to something like its old shape afterwards. If free banking is a peacetime-only system, politically it cannot persist, because war is an unfortunate reality of human existence.


House Committee Passes Audit the Fed Bill

by Bradley Jansen July 24th, 2014 5:34 pm

The House of Representatives Committee on Oversight & Government Reform today passed by voice vote HR 24, the "Federal Reserve Transparence Act of 2014".  More background and video of the hearing available here.


Text as passed here:



Federal Reserve Transparence Act original text



EDIT:  The text of the substitute bill considered and passed includes some formatting and technical changes as well as some substantive ones:





The substitute passed includes some substantive changes.

In the original text, Section 2 (b) (c) is changed from

"REPEAL OF CERTAIN LIMITATIONS.—Subsection 20  (b) of section 714 of title 31, United States Code, is 21  amended by striking the second sentence.

To this:

(c) REPEAL OF CERTAIN LIMITATIONS.—Subsection (b) of section 714 of title 31, United States Code, is amended by striking all after ‘‘in writing.’’.

I don't know offhand the significance of this change.  Also from this:

(d) TECHNICAL AND CONFORMING AMENDMENT.— Section 714 of title 31, United States Code, is amended by striking subsection (f).

to this:

2. 23  Section 714 of title 31, United States Code, is amended— (1) in subsection (d)(3)—
(A) in subparagraph (A)—

(i) by striking ‘‘or (f)’’;

(ii) in clause (i), by striking ‘‘or (f)’’; and

(iii) in clause (ii), by striking ‘‘or (f)’’; and

(B) in subparagraph (C), by striking ‘‘or (f)’’; and

(2) by striking subsection (f)

Also, the  "SEC. 3. AUDIT OF LOAN FILE REVIEWS REQUIRED BY ENFORCEMENT ACTIONS" has been struck from the original text:

SEC. 3. AUDIT OF LOAN FILE REVIEWS REQUIRED BY EN- FORCEMENT ACTIONS. (a) IN GENERAL.—The Comptroller General of the United States shall conduct an audit of the review of loan files of homeowners in foreclosure in 2009 or 2010, re- quired as part of the enforcement actions taken by the Board of Governors of the Federal Reserve System against supervised financial institutions. (b) CONTENT OF AUDIT.—The audit carried out pur- suant to subsection (a) shall consider, at a minimum— (1) the guidance given by the Board of Gov- ernors of the Federal Reserve System to inde- pendent consultants retained by the supervised fi- nancial institutions regarding the procedures to be followed in conducting the file reviews;

(2) the factors considered by independent con- 2 sultants when evaluating loan files; 3 (3) the results obtained by the independent con- 4 sultants pursuant to those reviews; 5 (4) the determinations made by the independent 6 consultants regarding the nature and extent of fi- 7 nancial injury sustained by each homeowner as well 8 as the level and type of remediation offered to each 9 homeowner; and 10 (5) the specific measures taken by the inde- 11 pendent consultants to verify, confirm, or rebut the 12 assertions and representations made by supervised 13 financial institutions regarding the contents of loan 14 files and the extent of financial injury to home- 15 owners. 16 (c) REPORT.—Not later than the end of the 6-month 17 period beginning on the date of the enactment of this Act, 18 the Comptroller General shall issue a report to the Con- 19 gress containing all findings and determinations made in 20 carrying out the audit required under subsection (a).


 Again, I'm not sure offhand what, if any, are the significance of these changes, but I do know the devil is in the details! 

Audit the Fed bill


A Qualified Defense of Goldbuggery and Some Related Observations on the Regressive Effects of Inflation

by Steve Horwitz July 23rd, 2014 2:46 pm

[Note:  This was originally posted at Bleeding Heart Libertarians and directed at that audience, but I will repost here as well.]

In my recent post responding to Matt Yglesias on the gold standard, at least one commenter was surprised to find a defense of “goldbuggery” here at BHL. I’m guessing this reaction is due to one or both of the following:  1) defenses of the gold standard are associated with more “right wing” forms of libertarianism and 2) the lack of an obvious connection between monetary policy issues and the typical concerns of bleeding heart libertarianism.  Let me try to address both of those here by doing two things.  First, I want to explain exactly the sort of thing I wish to defend when I argue for a monetary role for gold.  Second, I want to argue that such a system will do better by the least well off among us by reducing or eliminating inflation and business cycles/recession, the effects of which are disproportionately felt by the poor.

Let me note that monetary theory is one of the most complex, difficulty, and subtle parts of economics (as Yglesias’s ham-handed post shows), so there’s no way I can do justice to all of the possible nuances here, but I’ll try provide links or responses in the comments as my time allows.  I would also point readers unfamiliar with the basics of monetary policy tothis primer of mine, from which some of the material in the next section is taken.

Monetary Competition and Commodity Standards

As I pointed out in the earlier post, the term “gold standard” can mean any number of things, from a system with a monopoly central bank that redeems its money in gold, to a gold-coin or 100% gold reserve system, to “free banking” systems in which all forms of money are produced competitively and banks can make that money redeemable in whatever commodity customers appear to prefer.  All of these and others might be considered “the gold standard.” However, I want to make the case for the last of them: monetary competition or “free banking.”  (I should also note that such a free banking system should be distinguished from the “Free Banking Era” of the US from 1837-1863, as that period was anything but free of government interventions and those interventions were responsible for the problems of that system, and the National Banking System that followed it.  Central banking is not the only way in which government intervention can undermine good monetary systems.)

Over the last several decades, a growing number of economists (see my own work, which builds on the work of colleagues such as Larry White and George Selgin and others) have explored the institutional features and macroeconomic properties of free banking systems, to the point where there is now a substantial literature on the subject.  Free banking systems would do away with central banks and their monopoly privileges and allow the competitive market process to produce the kinds and quantity of money that the public demands, just as it does for so many other goods and services. Certainly one long-standing concern of left-libertarians has been an end to all kinds of monopoly privileges, and ending those of central banks are among the most important, especially given the ways in which they have been used to finance wars (about which more later).

Rather than having currency produced monopolistically by a central bank, individual banks in such a system would produce it in the same way that they currently produce their own “brands” of deposits. My checking account deposits at my bank would be held as “private money” that the bank produces competitively against the checking account dollars from your bank. Banks have developed ways of clearing those checkable liabilities through various clearinghouse arrangements, and the same was true historically in those systems where currency production was private. Banks developed very sophisticated institutions for coordinating and overseeing their behavior, even during times of crisis.

Perhaps the greatest advantage of a free banking system is its ability to avoid inflation and deflation. Free banks would want to make their currency and checking accounts redeemable in some sort of commodity as a way to assure customers of their value. Historically, this commodity has been gold, though it need not be. This is the sense in which I am defending a gold standard:  historically, the closest models to the kind of banking system I would like to see in place have been ones in which gold played this role as the preferred commodity of redemption. Again, it need not but there are good reasons to think it would, none of which have to do with any magical qualities of gold.

Given that banks will want to provide redeemable currency and deposits, they have reason, even in the absence of regulation, to hold a stock of gold on hand (in addition to the deposits they keep at clearinghouses).  Historically, banks in early 19th century Scotland got by on about 3% reserves or less with almost no bank failures. With modern electronic payment systems, banks in such a system would need to hold only a small fraction of their liabilities in the form of gold reserves, so fears that such a system would require a great deal of gold are misguided. It’s more the promise to redeem in gold than holding a great deal of gold itself that makes the system stable.  Of course the promise has to be backed up if customers invoke it, but, historical experience and theory suggest that will not happen very often.

With currency and deposits redeemable in gold, customers and other banks can take any excess balances of such liabilities to the issuer for gold.  Should any bank produce more money than its customers wish to hold, those customers will either bring it back to the bank directly for redemption or they will spend it, where it will most likely end up in the possession of a different bank. The other bank will not want to hold stocks of a competitor’s money.  Instead, it will prefer to redeem it for gold or reserves at the bank directly or at a clearinghouse, either of which will impose a cost on the competitor by taking away the gold or reserves it needs to create loans. This process of “adverse clearings” ensures that if any bank creates too much money, it will pay an economic price for it in the form of reduced reserves.  Lower reserves not only limit what the bank can lend and thereby earn in interest, insufficient reserves put the bank at risk of not being able to pay depositors. Should a bank create too little money, it will also pay a price, but in the form of having too many reserves on hand and thereby sacrificing the interest it could earn by expanding its lending. Free banks would avoid deflation because under producing money is costly. If we assume that banks are profit seekers, they would have every reason to avoid both inflation and deflation.

What a free banking system produces is the right degree of flexibility necessary for sound money. Because this system is separate from the government, we need not worry about political incentives working at cross-purposes with sound money. Free banks do not face the lag and information problems of central banks. With banks operating in a truly competitive market, they are able to make use of market signals, such as their reserve holdings and profits, to show them quickly and accurately whether they have produced the right quantity of money.  These are exactly the signals that monopoly central banks lack, which helps to explain their inability to get the money supply right. Although banks will not get the money supply exactly right at every moment, a competitive free banking system will ensure that they know they have erred and that they have the knowledge and incentives needed to correct mistakes, and it will do so better than any alternatives. A free banking system also has the advantage of being able to respond to changes in the demand for money, while still being constrained to not over- or under correct, unlike the rule-bound central bank. This “flexibility within constraints” is a product of the competitive environment that free banking creates.

Again, I can’t do justice to the full argument here. My real concern is to demonstrate that such a system fits neatly into broader libertarian arguments about the problems of monopolies and the benefits of competitive markets, and does not reify gold in the way that other proposals made by right-wing defenders of the gold standard tend to do.  Gold (really “some commodity”) plays a role here, but the key is allowing competition to drive the production of all forms of money.

Why Competitive Money Matters

If my fellow free banking theorists and I are correct about the system’s ability to dramatically reduce or eliminate inflation, then this has important implications from a BHL perspective as the damage done by inflation disproportionately harms the poor. One of the most important problems inflation creates is that it does not, in the real world, affect all prices equally.  Some go up a lot, some not as much. This injects static into communication process of the price system and makes prices much less reliable guides to producers and consumers. Most of inflation’s problems begin there.

As a result, the existence of inflation (or, more precisely, an expectation of a positive rate of inflation), imposes costs on households and firms that can only be avoided by undertaking costly defensive measures themselves.  These “coping costs” of inflation are significant and often under-appreciated.  They also harm the poor much more than the rich.  In addition, inflation redistributes toward those who get the new money first and away from those who get it last.

Once the threat of inflation is real, consumers must start to pay more attention to interest rates and the terms of contracts.  If banks start to offer adjustable rate loans, this complicates the borrowing process for consumers and might require additional expertise to make sense of the loan.  One can raise similar issues about employment contracts with cost of living clauses.  In both cases, it is likely that those with the least resources will be at a disadvantage in dealing with the changing reality of contracts.  Not only will the wealthy be more likely to have the knowledge themselves to cope with these costs, if they do not, they have the resources to hire those who do.  The result will be a net gain for the wealthy as they are able fend off these costs of inflation better than the poor.

Beyond just contracts, inflation gives both firms and households reasons to reallocate their resources, especially their financial assets, to protect themselves against inflation.  For both, either making these changes themselves or hiring someone else to do so involves real costs. And here too, those costs can more easily be borne by the rich.  In the case of firms, large firms can more easily bear these costs as they can either spread them across a larger scale of operation and/or are more likely to have in-house expertise to draw upon.  Smaller firms will find it more of a struggle to cope either by trying less efficiently to do it themselves, or by having to bear the higher average cost of purchasing such help on the market.  Though the effect may not be large, inflation imposes more costs on small firms than large ones.  The story across households is similar.  Wealthier households, who certainly have more at stake, will be more able to afford financial advice or to hire a financial planner, whereas poor households will find doing so that much more difficult.  The result is that wealthier households are better able to protect the value of their assets, while poor households see losses.

Perhaps the most damage that inflation harms the poor is the way in which those who get access to the excess money supply first gain at the expense of those who get it later.  This manifests itself several different ways.  As excess supplies of money make their way through the economy, those who get the money first are able to spend before prices rise, while those who see it later see prices rise before they see the increase in their nominal incomes resulting from the increased money supply.  The most well known example of this process is the way in which inflation harms those on fixed incomes.  Workers locked into labor contracts or retirees on pension plans that adjust annually to the cost of living are always running a year behind.  Normally, the cost of living adjustments are based on the prior year’s inflation rate, which means that for that year, these people have had no income increase even as prices were rising.  They will have been compensated, after the fact, for the past year, but for the year to follow, they will now lose if there are any inflation-driven price increases.  It does not matter whether these fixed incomes are public or private;  the issue is that they only adjust after the fact.

As inflation causes prices to less accurately reflect the tastes, preferences, and knowledge of market actors, it becomes ever more difficult for both entrepreneurs and consumers to figure out what is happening in the market, which in turn leads to more discoordination and more frustration for market actors.  As the market becomes a less reliable resource allocation process, people will, on the margin, turn toward government to address the particular problems or take over more of the responsibility for resource allocation.  In addition to the direct gain in wealth that comes from governments creating new money, there is an induced gain in government power from the chaos that inflation produces in the marketplace.  As the locus of resource allocation shifts from the decentralized nodes of market power checked by competition to the centralized nodes of monopoly power of the state, the ability of those with fewer resources to make their voices heard shrinks accordingly. Rent-seeking societies favor those with resources to access politics.

If, as Austrian school economists like myself, are correct in arguing that inflation is the cause of the boom and bust of the business cycle, we have yet another way in which a free banking system would work to the benefit of the least well off, as recession and depressions have less impact on those already better off. Concern for the least well off should drive us to find ways of minimizing or eliminating business cycles.

Finally, to the extent that the history of central banks is about being created and having their powers expanded as a way to finance government, especially its imperial adventures, without recourse to taxation or borrowing, bleeding heart libertarianism might have an interest in eliminating them if possible.  After all, war and empire have historically taken their worst tolls on the most vulnerable, both in terms of the aggressor countries and the populations they have aggressed against.

All of this adds up to a number of reasons why those sympathetic to bleeding heart libertarianism might take an interest in questions of monetary policy, and why they might reconsider a hasty dismissal of a desire to once again have gold play a monetary role as right wing nonsense.


NY Regs Threaten Bitcoin and Digital Currencies

by Bradley Jansen July 23rd, 2014 12:15 pm

The New York Department of Financial Services (NYDFS) has issued new proposed proposed BitLicense rules and regulations that would curtail not encourage digital currencies like Bitcoin.

Many years ago when I first started in Rep. Ron Paul's office, I initiated and led a fight against a similar anti-money laundering proposal called "Know Your Customer" which would have increased regulations, violated financial privacy and threatened currency competition. Lots of background on that fight here.

I and other bloggers here have written a lot on how the anti-money laundering regulations do more to inhibit currency competition now than legal tender laws do. Lots of background here. Check out Larry White's talk about these issues at Cato too:

The Chamber of Digital Commerce is calling on the Bitcoin community to submit comments to the NYDFS. Instructions on how to submit comments can be found on the NYDFS website at http://www.dos.ny.gov/info/register.htm.  More on the new Chamber of Digital Commerce here.

A new digital currency trade association is fighting the regulations. Their press release can be read here:

“One egregious aspect is that the NYDFS is only giving 45 days to comment, which is severely inadequate to proposed regulations of this scope” said Perianne Boring, President of the Digital Chamber. “We are requesting that the NYDFS extend the comment period through the end of 2014, to allow the industry adequate time to properly review and respond.”

When fighting the KYC proposal, I generated 300,000 comments against the proposal (with only 105 in favor). Let's organize those groups and experts interested in these issues to figure out how to fix this proposal now: contact me at bjansen @ financialprivacy.org and stay tuned here if interested in joining this fight!

Kudos for the NYDFS for being pro-active to secure a legal path to digital currency use, but the proposal as written would do much more harm than good. Let's hope they are open to making sure they get this right and don't end up shifting digital currencies and other financial innovations away from New York. Even more thanks go out to Perianne Boring for her efforts!

Now is the time to stand up and make the world (well, at least New York) safe for digital currencies and alternatives to the Fed!


EDIT: the new proposed rules are now online here (scroll to page 14):


The National Law Review has a post here.


John Blundell, R.I.P.

by Kurt Schuler July 22nd, 2014 11:04 pm

John Blundell has died at age 61 of cancer. As an earlier post mentioned, he was one of the attendees of the 1974 South Royalton, Vermont conference that marked the revival of the Austrian School of economics, and he recently wrote a reminiscence of the conference. Here is the Wikipedia article on him. In his roles as President of the Institute for Humane Studies, President of the Atlas Economic Research Foundation, and General Director of the Institute of Economic Affairs (London), he supported funding and publication of free banking ideas. Others who knew him better will have more to say in due course. Here is a tribute from the Atlas Economic Research Foundation.


When the Best Plan is No Plan at All

by George Selgin July 21st, 2014 4:53 pm

I was recently asked to submit a "solution proposal" concerning a panel, on "The New Global Financial Architecture," in which I'm to take part at this September's Global Economic Symposium in Kuala Lumpur.  The proposal is supposed to summarize my own scheme for reforming the global financial system, showing, in 700-1000 words, that my plan is "feasible," "innovative," and (naturally) of "positive social impact."

A you might well expect, the request posed something of a challenge to this unreconstructed Hayekian.  Here, for whatever it may be worth, is what he came up with.

Truth be told, I'm not quite sure that my proposal is consistent with the organizers' assumption, as given in their "challenge" to the panel, that "Different regulators - including the monetary authorities - must cooperate in order to achieve better but not necessarily more regulation." I hope, in any event, that it will help fuel a spirited discussion.


Yglesias on the Gold Standard

by Steve Horwitz July 17th, 2014 5:50 pm

In a column at Vox yesterday morning, Matt Yglesias gave us 7 reasons to think a gold standard is a terrible idea.  They are not all completely wrong (a low bar, I suppose), but it’s worth exploring exactly what the problems are.

1) A gold standard wouldn’t stabilize inflation

His evidence for this is the gold-price of oil since the mid-80s.  Aside from the fact that looking at one price alone doesn’t tell us much about inflation (especially with a commodity like oil that has its own constant changes in supply and demand, which are part and parcel of a market economy), using fluctuations in the price of gold or the gold-price of other commodities under a fiat money standard as evidence of gold’s volatility misses the whole point. Gold is an inflation hedge, and to the degree that inflation is more likely under fiat money regimes, of course gold will vary in value a great deal (and therefore so will the gold prices of other commodities).  But that’s not a problem with gold, that’s a problem with central bank fiat money.  Under a proper gold standard, the inflation threat would be much lower, making fluctuations in the price of gold much less than they are right now.  The gold standard might have problems, but this is not a good argument against it.

2) A gold standard wouldn’t stabilize exchange rates

Yglesias points out that unless every country goes to a gold standard, you won’t get the benefits of stable exchange rates. And he does have a point here, but that’s all the more reason to convince those other countries to move to some sort of commodity standard as well!  Notice too that this is not a way in which gold makes things worse – it just doesn’t make something better.  So if gold has other advantages, this point is a wash with the status quo.

3) There’s no inflation problem to cure

Partial credit here. He’s correct that changes in the price level have been minimal in the last few years, but if we look instead at growth rates in the monetary base, there’s much to still be concerned about. Banks are still flush with reserves and how those are going to be removed or neutralized remains unclear. The Fed still does not appear to have credible exit strategy and, without one, inflation remains, if not a current problem, a serious threat.

But the bigger point is that if we think about the gold standard as an economic constraint on a central bank, it can help prevent the sort of  expansionary policy and artificially low interest rates that were major contributors to the housing boom , financial crisis, Great Recession, and Abysmal Recovery.  There may or may not be an inflation problem now, but expansionary monetary policy is a big part of what got us into this mess (and several others in the post-gold standard era) and one good argument for the gold standard is that it can reduce the likelihood of that happening again.

4) There’s nothing stopping you from writing gold contracts

This is true  - it’s no longer illegal. But again, the variation in the price of gold that results from the uncertainty around the value of the fiat dollar reduces the marginal benefit of a contract stipulated in gold.  And, again, that is not evidence against the gold standard, but evidence about the problems of fiat money for which investment in gold is a hedge.

5) Gold recessions could last for years

Yglesias points to the length of recessions before the Fed and then, of all things, the length of the Great Depression as evidence against the gold standard and that “the Federal Reserve is a far-from-perfect manager of the economy, but it does a lot better than that.”

Well, where to begin?  First, while we did have a gold standard before the Fed, we certainly did not have the kind of gold standard that most folks are arguing for today, particularly not those of us who are arguing for a free banking system based on gold.  The various regulations that prevented banks from adjusting their currency supplies to the demand to hold it were the primary reason (along with the lack of interstate banking) for the long and painful recessions before the Fed. Yglesias has to explain why these were absent in Canada which also had a gold standard, and a more “pure” one than the US.  Absent such an answer, this is not evidence against the gold standard.

As for the Great Depression…. Really?  The Great Depression is evidence of how much better the Fed is than a gold standard?  Even if you don’t accept the Austrian argument that Fed expansion during the 20s (made possible by its monopoly status even under a gold standard), certainly the Friedman-Schwartz argument about its role in the early 30s in deflating the money supply demonstrates that the Fed was a huge problem and that “far from perfect” is the understatement of the monetary century.

And if one wants to count “gold recessions,” one should also count the numerous recession generated by post-1933 and post-1971 inflations here, as well as the inflations themselves.  Inflation was nearly absent in the 19th century (whatever that system’s flaws) but has become a huge problem only after the gold standard was totally abandoned in 1971.

The history of the last 100 years of central banking is the best argument there is for getting away from central banking.  And the Canadian case shows that the gold standard isn’t the cause of the long US recessions before the Fed.

6) The gold standard wouldn’t eliminate political money

Here Yglesias has a point in two possible ways.  First, if by the gold standard one means central banking with a gold standard, then yes, by definition we still have political money.  If he means a gold standard without central banking, then he still has a point in claiming that Congress could always change its mind and end the gold standard again.  No argument here, but there are steps we could take to make that harder by constitutionalizing the gold standard or limits on government involvement in money.  It’s no guarantee, but it helps.

7) Gold-backed money reduces the supply of gold

Yglesias writes “That means forcing banks to hold their reserves in terms of giant piles of physical gold would impose a cost on the real economy. Gold held in bank vaults is gold that is not available for industrial or decorative uses.”  Several problems here.  First, the gold in bank vaults is not, therefore, useless.  To the degree that it serves as a check on central bank expansion, it plays a very useful economic role that is no less important than its other uses. Second, historical gold standards under free banking had very low reserve ratios, on the order of less than 3%, and not all of that was gold. In a modern economy, the amount of gold banks would have to have on hand in their vaults in a fractional reserve free banking system would be minimal. So Yglesias underestimates the benefits and overestimates the costs.

And to the degree that gold would gain a monetary use, the incentive for people to dig it up out of the ground would be greater not less and this would increase the supply of gold.  It’s not clear that Yglesias understands what economists mean by “supply.”

One final comment:  critics of the gold standard need to specify what they mean by “the gold standard.”  Do they mean a central bank whose liabilities are redeemable in gold?  Do they mean a 100% reserve private system?  Do they mean fractional reserve free banking on a gold standard?  These differences matter as these systems perform differently and if you want to criticize the gold standard, you need to be clear on what it is you think that means. That aside, Yglesias fails on most of his 7 objections here and the gold standard, at least in the form I’d like to see it as part of a free banking system, remains a very good idea.

Cross posted at Coordination Problem and Bleeding Heart Libertarians


Panic scrip

by Kurt Schuler July 14th, 2014 9:54 pm

I have only just become aware of the 2013 book Panic Scrip of 1893, 1907 and 1914: An Illustrated Catalog of Emergency Monetary Issues. The title refers to the U.S. financial panics of those years. The book is available in paper from the usual sources, and Google has a considerably cheaper e-book edition. Here is a review of the book.

Scrip is a circulating IOU issued by a person or corporation, often redeemable in kind, typically accepted widely within a limited area, and, in the context of panic issues, tolerated by the authorities although perhaps of dubious legality. During the U.S. panics listed in the title of the book, large local employers such as steel mills, companies that offered widely used goods or services such as tram lines, and in smaller towns well known local merchants such as those who owned general stores issued scrip as a substitute for banknotes that became quite scarce. The issuance of scrip can be seen as a kind of free banking: with the most trusted issuers restricted from further issuance of notes by certain provisions of federal law, other issuers stepped into the gap. The service that issuers of scrip performed was large, the losses from failures by issuers were small, and the episodes illustrated that there was no necessity to limit note issue to banks.

Among the economists to have written about the place of scrip in the U.S monetary system are Richard Timberlake, "The Significance of Unaccounted Currencies" (JSTOR, gated); William Roberds, "Lenders of the Next-to-Last Resort: Scrip Issue in Georgia during the Great Depression" (free, article starts on page 16); and Price Fishback, "Did Coal Miners 'Owe Their Soul to the Company Store'?" (JSTOR, gated; an article about the routine use of scrip in company towns; the title is a reference to this hit song of the 1950s).


Dear Charles G. Koch Foundation: I have some ideas for that $10 million

by Kurt Schuler July 3rd, 2014 4:30 am

Brooklyn College of the City University of New York recently refused a $10 million grant offer from the Charles G. Koch Foundation. The grant would have strengthened the college's business program sufficiently to allow it to obtain accreditation from the Association to Advance Collegiate Schools of Business. The dean of the School of Business apparently did not want to accept the money for fear of being contaminated with free-market ideas and inviting the unhinged leftist criticism that Charles and David Koch often attract.

I hereby invite the foundation to contact me for ideas about projects costing considerably less than $10 million that would achieve measurable, worthwhile scholarly results in economics and finance, and whose proposed recipients will assuredly not refuse the money. I won't take a penny for my advice. As you might expect, some of the ideas are related to topics that have been discussed on this site. Readers, as a service to philanthropy, I invite you to propose in the comments how you might spend the money in a vein somewhat related to that proposed for Brooklyn College.