Kurt Schuler


Kurt Schuler is an economist in the Office of International Affairs at the U.S. Treasury Department. In his spare time he edits Historical Financial Statistics (a free, noncommercial online data set) for the Center for Financial Stability. He has written a number of publications about the history of free banking and about other monetary systems. Because the Treasury Department discourages employees from commenting publicly on current policy issues within its purview, he refrains from discussing such issues here. His views represent no official Treasury Department position. As befits a bureaucrat, he has chosen to remain faceless, hence we have posted no photo of him.


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.


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.


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.



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.


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.


A neglected anniversary

by Kurt Schuler May 10th, 2014 9:30 pm

Max Weber was born 150 years ago on April 21. I saw no note of it on any of the blogs I follow written by economists of the Austrian School. Besides being the author of the most important book in sociology of the 20th century, Weber has some indirect relevance to free banking because he recognized that the key question for the practicability of a socialist economy is whether it can calculate efficiently (Economy and Society, part I, chapter 2, section 12, "Calculations in Kind"). The key theoretical addition to arguments for free banking over the last generation is a form of Ludwig von Mises's socialist calculation argument, which Weber slightly preceded and which he acknowledged in a note added while "Calculations in Kind" was in press.

In the same book and chapter, section 6, "Media of Exchange, Means of Payment, Money," Weber remarks, "The formulation of monetary theory, which has been most acceptable to the author, is that of von Mises." Finally, he observes in passing near the start of section 32, "The Monetary System of the Modern State and the Different Kinds of Money: Currency Money," and near the start of section 34, "Note Money," that issuing coins or notes need not be a monopoly.


Is it a currency board or a central bank? (guest post by Mike Sproul)

by Kurt Schuler April 21st, 2014 9:21 pm

(Mike Sproul responds to this post, part of a back and forth we have been having. Readers will pardon my inexpert formatting.)

A currency board gives a convenient way to explain the backing theory of money. In line (1) of Table 1, a currency board receives $100 of Federal Reserve Notes (FRN’s) on deposit, and it issues 100 of its own newly-printed paper pesos in exchange. By its nature, a currency board stands ready to redeem the pesos it has issued for the dollars it has on deposit, just as it stands ready to create and issue more paper pesos (line (2)) to anyone who deposits more dollars. It is clear from the table that whether there are 100 pesos backed by $100, or 300 pesos backed by $300, 1 peso will always be worth $1. This is an essential point of the backing theory: As we triple the quantity of pesos, we also triple the assets backing those pesos, so the peso holds its value as the quantity of pesos rises and falls. The quantity theory of money would imply that an increase in the quantity of pesos would reduce the value of the peso, because there are more pesos chasing the same amount of goods. But the quantity theory does not apply to this case, since the currency board is always able to maintain convertibility at the rate of 1 peso=$1. This idealized currency board thus gives the backing theory a foot in the door. Even someone who thinks that the quantity theory is correct for modern government-issued paper money must admit that the backing theory is correct in the case of a currency board.

Table 1


1)   $100 FRN’s………………………………..100 paper pesos

2) +$200 FRN’s……………………………...+200 paper pesos

The obvious problem of the currency board in Table 1 is that it earns no interest, and thus cannot pay its operating costs. This problem is solved in line (3) of Table 2, where the currency board prints 300 new pesos and uses them to buy a $300, 1-year US government bond. (Table 2 duplicates Table 1, except for line (3).)

Table 2


1)   $100 FRN’s………………………………..100 paper pesos

2) +$200 FRN’s……………………………...+200 paper pesos

3) +$300 bond……………………………….+300 paper pesos

With the purchase of such a bond, many of us would no longer call this institution a currency board. Currency boards are not supposed to make loans, but the purchase of a US government bond is a loan to the US government. Also, currency boards are supposed to offer immediate convertibility of pesos into US dollars. But if customers wanted to redeem all 600 of the pesos held by the public, they would have to wait for the bond either to mature, or to be sold for paper dollars. But perhaps this definition of a currency board is too literal. Currency boards often hold bonds, and they suspend convertibility every night and every weekend, and we still call them currency boards. So someone might still call our institution a currency board, even though it now looks more like a bank.

The purchase of the $300 bond doubled the quantity of paper pesos from 300 to 600, but it also doubled the currency board’s assets from $300 to $600, so the currency board is still able to maintain convertibility at 1 peso=$1. The backing theory still applies, and the quantity theory does not.

Table 3


1)   $100 FRN’s………………………………..100 paper pesos

2) +$200 FRN’s……………………………...+200 paper pesos

3) +$300 bond……………………………….+300 paper pesos

4) +600 peso loan……………………………+600 paper pesos

In Table 3, our bank/currency board lends 600 newly-issued paper pesos to a local miller, who intends to buy wheat that he will grind into flour and sell within 30 days, at which point he will repay his loan with interest. If he fails to repay, then 600 pesos worth of his property (plus interest) will be taken from him in court.

With the loan in line 4, nearly everyone would stop calling this institution a currency board and start calling it a bank. It is backing its pesos with a loan, and the loan itself is payable in pesos, rather than dollars. But the backing theory is still just as true of this bank, and the quantity theory just as false, as ever. Even though some of the bank’s assets are now denominated in pesos instead of dollars, and even though the bank has once again doubled the quantity of pesos, the bank still has enough assets to maintain convertibility at $1=1 peso. Even if all 1200 of the pesos issued by this bank were returned to the bank at once by customers demanding payment in dollars, the banker could satisfy his customers with the following steps:

1. Delay redemption of 600 pesos for 30 days until the 600 peso loan is repaid in pesos, then retire those pesos as they are received from the borrower. This reduces the number of returning pesos from 1200 to 600, and the interest on the loan can be used to compensate customers for the 30-day delay.

2. Sell the bond for $300, and use the $300 to buy back another 300 returning pesos.

3. Use the remaining $300 of FRN’s to buy back the last 300 returning pesos.

Let’s take stock of where we are. We all agree that the backing theory is true of a currency board. We have found that the backing theory remains true if that currency board buys bonds and makes loans, even peso-denominated loans. In short, the backing theory remains true as the currency board is transformed into a bank.

Now consider one last change to our bank/currency board: Let it suspend dollar-convertibility. With the peso now floating against the dollar, it might seem that the backing theory has finally been made irrelevant. But suspension of dollar-convertibility is nothing new to this bank. We have already seen that convertibility can be suspended for a weekend or for thirty days, and as long as the bank’s assets remain untouched inside the bank, the peso holds its value at $1=1 peso. Also, we must remember that the peso was initially redeemable at the bank for either dollars, bonds, or loan repayments. The bank has suspended only dollar convertibility, but bond convertibility and loan convertibility remain in force. If the public wanted to return 900 pesos to the bank, the bank could buy back all 900 pesos in exchange for its bond ($300) and its loan (600 pesos), without ever touching its dollar reserves. Dollar convertibility would only matter after the bank had paid out all its non-dollar assets.

With the suspension of dollar convertibility, our currency board now operates like a modern central bank. It never trades its pesos directly for dollars, but it nevertheless uses its bonds and loans to either issue new pesos when the public needs more pesos, or to soak them up when pesos are excessive. The central bank’s assets are crucial to the process, since a bank without assets would have nothing with which to buy back its pesos on the occasions when pesos return to the central bank. Moreover, the central bank’s balance sheet still looks exactly as it looked in Table 3: 1200 pesos are still fully backed by $600 worth of FRN’s and bonds, plus 600 pesos worth of loans. The backing theory is still fully applicable, and the quantity theory is not.

We all agree that when it comes to currency boards, the quantity theory is wrong and the backing theory is right. It’s too obvious to deny. A modern central bank is nothing but a currency board that holds bonds, makes loans, and suspends one kind of convertibility. None of these things affects the validity or relevance of the backing theory, so the backing theory is just as relevant to a central bank as it is to a currency board.

Next Page »