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.


A lot of data, and good-bye

by Kurt Schuler December 31st, 2014 9:43 pm

Readers interested in monetary data should see a book-length working paper, just issued, called Currency Board Financial Statements, that I prepared with Nicholas Krus. It is the further fruit of the Digital Archive on Currency Boards, which Nick played the largest part in gathering. Spreadsheets that accompany the paper give annual balance sheet data and sometimes more frequent statistics of currency in circulation. As I said in a previous post, free banking needs something like it (and I am working on the archive part, although others will have to photograph the source documents and digitize the data). The data on currency boards will be useful to anyone interested in the economic history of the many countries concerned before they established central banks, which in many cases has only been during my lifetime. Be warned that working paper is a kind of catalog of cases and is not intended to be read from front to back. It is a first version; we expect to obtain and post more data over the next year or so.

The working paper is a preliminary project for the last book I ever intend to write on currency boards, with Steve Hanke and Nick Krus as my coauthors. We are trying to make our work definitive since we don't think anybody after will be quite as concerned to get the data as we are. Because of the work involved with the book, which will not be finished until at least 2016, and forthcoming changes to the Free Banking blog, this will be my last post. I approve of the forthcoming changes, but some of them will make this blog a less suitable place for me to express opinions. I will continue to post items on monetary history or data occasionally at the blog of the Center for Financial Stability, where I edit the Historical Financial Statistics data set. In 2015 Historical Financial Statistics will expand to  incorporate the data from my working paper and much else, and I welcome potential contributions of monetary data of free banking systems, or other economic statistics, from readers of the Free Banking blog.



No, Virginia, there is no risk-free banking

by Kurt Schuler December 21st, 2014 11:18 pm

(With apologies to the New York Sun of September 21, 1897.)

Dear Free Banking—

I am 18 years old. Some of my professors say there is a Santa Claus called "risk-free banking." Papa says, "If you see it in the Free Banking blog, it's so." Please tell me the truth, is there such a thing as risk-free banking?

Virginia O'Hanlon
115 West Ninety-Fifth Street

Virginia, your professors are wrong.

They have been affected by the credulity of a credulous age. They do not believe except they theorize. They think that something can be if only it is comprehensible by their little minds. All minds, Virginia, whether they be men's or children's, are little. In this great universe of ours, man is a mere insect, an ant, in his intellect as compared with the boundless world about him, as measured by the intelligence capable of grasping the whole of truth and knowledge.

No, Virginia, there is no risk-free banking.

Schemes to make banking risk-proof, or at least run-proof, fall under two general headings. The first restricts the kinds of assets banks can hold. The best-known scheme of this type is the "Chicago plan" of the 1930s, which would have required banks to hold 100% reserves against demand deposits in lawful money or deposits with Federal Reserve Banks. Proposals to institute something like the Chicago plan crop up periodically. The second type of scheme alters banks themselves, converting them into, for instance, a kind of mutual fund. There are also proposals to combine the two types of schemes.

Briefly, here are the problems with these schemes. My underlying assumption is that government regulation does not change. Even if mutual-fund banking, say, is coupled with the elimination of deposit insurance, most or all of the underlying problem still apply.

(1) Government or central bank liabilities are not risk-free. In a fiat currency system, purely nominal liabilities are generally free of the risk of nominal default, but not of the risk that the real value will be eaten away through inflation. Securities indexed to inflation, to foreign currency, or told remove the risk that inflation will erode their real value but bring back the risk of default, because under some readily conceivable scenarios, the ability or the willingness to repay can become questionable.

(2) Supposedly run-proof banking already exists or has existed in many countries, in the form of postal savings banks. (The United States had such an institution, the Postal Savings System, from 1911 to 1967.)  In some countries postal savings banks have had substantial market shares, but nowhere have they driven regular commercial banks out of business. Depositors apparently value the services of regular commercial  banks. Nor do financial systems with postal savings banks seem any less run-prone than those without them.

(3) There is no such thing as a run-proof financial institution. It is true that an institution whose liabilities contain no debt and consist entirely of equity cannot have its liabilities exceed its assets. Something very like a run against such an institution can happen, though, if many equity holders try to liquidate at once. The value of the equity will fall substantially, reducing the wealth of shareholders much as if they were depositors in a bank that had suspended payments.

(4) Banks provide a combination of services because depositors and other consumers want those services. (I am abstracting here from  the important possibility that banks provide some services because they have a legally privileged position that prevents potentially lower-cost competitors from providing the services and stripping them from banks.) Forcing depositors and banks into forms they do not want will result in a kind of regulatory arbitrage where other institutions arise to perform the same functions, albeit often with some attendant disadvantages. The so-called shadow banking system is in part a result of regulatory arbitrage.

In a word, Virginia, risk-free banking is humbug.

Yours truly,

Ebenezer Scrooge

Chief Accountant, Free Banking blog


Edmund Burke a free banker? (highly speculative)

by Kurt Schuler December 19th, 2014 7:45 am

The journalist and historian Rick Perlstein has a recent book called The Invisible Bridge: The Fall of Nixon and the Rise of Reagan. A reviewer criticized the book, and Perlstein responded here. What piqued my interest was Perlstein's claim that "I first learned to distrust conservatives’ own protestations that theirs is a 'movement of ideas' when I read a speech transcript from a right-wing congressman in 1962 backing his defense of laissez-faire economics by dropping the name of Edmund Burke, who had less than nothing to do with laissez-faire economics.”

If you have read a biography of Burke, or of Adam Smith, or James Boswell's Life of Samuel Johnson, LL.D.,  you will know that Burke and Smith were friends (and members of an illustrious dining club started by Johnson). In fact, Burke's first biographer recounted a conversation in which Burke claimed that “Mr. Smith, he said, told him, after they had conversed on subjects of political economy, that he was the only man who, without communication, thought on those topics exactly as he [Smith] did" (Robert Bisset, The Life of Edmund Burke, 1800, v. 2, p. 429). And as a study of  Burke's economic thought (which I have only skimmed) observes, "Burke often sounded like Smith in his advocacy of economic freedom and the free market economy" (Francis Canavan, The Political Economy of Edmund Burke, 1995, p. 117).

It turns out, then, that Burke had a lot to do with laissez-faire economics, and that the right-wing congressman in 1962 was correct. (Will Perlstein now stop distrusting conservatives?) To my knowledge, as one who has read little of Burke beyond Reflections on the Revolution in France, he did not comment except in passing on monetary matters. But Smith was perhaps the first prominent free banker, in The Wealth of Nations, and Burke was an enthusiastic student  of the book. So perhaps Burke supported free banking but, because of his focus on other matters, never had occasion to express his opinion in his writings?


Post Keynesian free banking

by Kurt Schuler December 14th, 2014 6:27 pm

According to a recent blog post on 538, “post Keynesian” is the phrase in economic research most indicative of “left-leaning” political views and “free banking” is the phrase most indicative of “right-leaning” views. (See also the paper on which the blog post is built.) The authors apparently don’t know how to distinguish between conservatives and libertarians, because to my knowledge, most researchers on free banking are libertarians. Be that as it may, I do not view the correlation between research topics and ideology as inherently dangerous. Researchers in many disciplines have personal motivations for their research related to ideology, personal circumstances, etc. Over time, a wider body of scholars acts as judges of whether the facts and ideas advanced by the small group seem to be correct. The danger lies in the wider body being close-minded, accepting or rejecting without judging carefully. 


Bernard von NotHaus case

by Kurt Schuler December 11th, 2014 10:34 pm

Forbes article here, worth reading. Larry White offered testimony in NotHaus's favor, if I recall correctly, and perhaps he will have some comment.


Two belated anniversaries

by Kurt Schuler December 11th, 2014 10:25 pm

The centenary of the opening of the Federal Reserve System was November 16, 1914. The Federal Reserve Act was passed in December 1913 but the organization took nearly a year to open. Here is the Federal Reserve page on the event. Since it was not previously mentioned on this blog, I am bringing it up now.

As you can tell from the date, the Fed did not open until after World War I began. The financial troubles in the United States connected with the outbreak of the war were handled by the private sector and the Treasury Department. William Silber, a professor at New York University, wrote a book several years ago on the episode, When Washington Shut Down Wall Street. Among the subjects he discusses is the closure of the New York Stock Exchange for several months. With the NYSE closed, an unofficial market sprang up in New Street, which ran along the back side of the NYSE building. The establishment press refused to publish stock price data from New Street trading, but Silber found one paper that did so, perhaps because its usual focus was on horse racing and entertainment, hence it was not beholden to Wall Street for stories or advertising revenue. The paper stopped publishing data some weeks before the shutdown period ended, though. Recently two students at Johns Hopkins University filled in the remaining data using a previously untapped source and wrote a paper about it. More generally, I think much work remains to be done about what steps governments and the private sector might take under a free banking system when some catastrophic event occurs. The absence of a central bank does not remove the need to take some steps similar to what a central bank might do, but one hopes such steps could be undertaken with more reliance on voluntary consent.

This year is also the 30th anniversary of the publication of Larry White’s Free Banking in Britain (link is to the second edition, 1995). I have a slight personal connection to the book, having prepared the index to the first edition along with George Selgin. Vera Smith’s Rationale of Central Banking and Hayek’s Choice in Currency (later expanded and retitled Denationalisation of Money) were earlier, but to my mind Larry’s book marks the real start of contemporary free banking theory because it combined theory, economic history, and history of thought in an appealing way. Larry showed that the Scottish free banking system had worked well, and that its workings were both contrary to what was usually taught about laissez faire in money and banking textbooks and consonant with what is taught about markets in microeconomics textbooks. Vera Smith’s fine book was unfortunately neglected when it first appeared (1936, the same year as Keynes’s General Theory of Interest, Employment and Money). What could have been an intellectual movement was stillborn. Larry’s book has borne ample fruit intellectually, if not all that he has wished for in terms of policy.


For your reading

by Kurt Schuler November 12th, 2014 10:54 pm

The Federal Reserve Bank of Richmond's Econ Focus interviewed Richard Timberlake earlier this year and somehow I missed it, (Here is George Selgin's post on Dick's book Constitutional Money and here is my appreciation of Dick on his 90th birthday, two years ago.) The first question and part of Dick's answer to it follow.

EF: Let’s start with a unifying theme of your work: Your support of a gold standard. Several great neoclassical monetary theorists — Marshall, Walras, Wicksell, Fisher, and Keynes — argued that a rules-based fiat money could outperform a gold standard. Why do you disagree?

Timberlake: Let me say first of all that I am not a “gold bug.” Nonetheless, the fact is that an operational gold standard works to promote a free society, and no other monetary policy seems able to do so.

The key word in your question is “could.” But the policymakers won’t allow it to. The reason they won’t is found in public choice economics, which argues that the policymakers, like all other human beings, have a stronger motive to further their own self-interest than to promote sound public policy — not only at the Fed, but everywhere.

And now for something much different. If, like me, you are interested in free banking as a subset of the wider phenomenon of voluntary exchange, you may derive some instruction from these anthropological works:

Keith Hart (London School of Economics and University of Pretoria) and Horacio Ortiz (Centre de sociologie de l’innovation, Paris), The anthropology of money and finance: from ethnography to world history (essay).

Charles J. Opitz, An Ethnographic Study of Traditional Money (a book that catalogs hundreds of different forms that money has taken; the result of the author's years of work collecting many of them).


Creativity and crackpots

by Kurt Schuler October 26th, 2014 11:18 pm

Isaac Asimov wrote an essay on creativity in 1959 that was only published recently.  His view is that “the person who is most likely to get new ideas is a person of good background in the field of interest and one who is unconventional in his habits. (To be a crackpot is not, however, enough in itself.)”

Monetary theory and policy have been fertile ground for crackpots (more commonly referred to as “monetary cranks”) from the beginning. Part of the attraction is that the field has some abstruse aspects. Another is that there is the appeal of seemingly getting something for nothing with the right policy, or, contrarily, the suspicion of being swindled by the powers that be.

Far be it from me to issue a blanket condemnation of monetary cranks, though. Some deserve the appellation “interesting fringe thinkers.” Though almost always wrong on the theory, sometimes they have been right on the policy when conventional opinion has been dead wrong! During deflations, schemes such as Silvio Gesell’s proposal for a currency that depreciates if not spent (which interested Keynes and Irving Fisher) offer workarounds for overly tight monetary policy and the consequent fall in velocity. During high inflations, pure gold or barter schemes offer workarounds for overly loose monetary policy.

(Scott Sumner has a recent post somewhat related to these ideas. On a point of personal privilege, though, he should know enough not to refer to Argentina’s monetary system of the 1990s as a currency board. Argentines called it the “convertibility” system. It was a quasi-currency board, with some but not all features of an orthodox currency board, and the distinction is important both in theory and in practice. Few people have looked at the evidence, but Scott should be one of them.)


Barron's on Tirole and Selgin

by Kurt Schuler October 18th, 2014 10:49 pm

Gene Epstein of Barron's is critical of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel awarded to Jean Tirole. His article "This Nobel is No Prize" quotes George Selgin. Here are a couple of paragraphs summarizing Epstein's view:

Say Adam Smith and others had never shed light on the gains that result when one nation freely exchanges goods and services with another. Without a compelling theory of the benefits of free trade, we would no doubt assume that tariffs, duties, and subsidies to domestic exporters were just a case of government doing its job. [...]

Happily, we do have a theory of free trade that mainstream economists honor, even if the theory is often honored in the breach. Unhappily, since the mainstream lacks a theory of free banking, Jean Tirole can be given a Nobel for useful formulations that include the optimal regulation of finance.


Leonard Liggio, R.I.P.

by Kurt Schuler October 14th, 2014 9:46 pm

Leonard Liggio died earlier today in Washington, D.C. He was 81 years old. His kidneys had failed recently, which I infer put a strain on his body more generally.

I wrote a short appreciation of Leonard just after his 80th birthday. For an obituary from the Atlas Economic Research Foundation, where he worked for many years, see this.

When Leonard became interested in classical liberalism, there were so few other people interested in it in that he got to know them all. His far-flung web of friendships, boundless memory, and wide reading, especially in history and political philosophy, made him a key figure in establishing a community of like-minded thinkers that is now many thousands strong and spans the world. It has today no Mises, Hayek, Friedman, Rothbard, Rand, or Nozick. To some it will seem as though we have passed from an age of giants to an age of pygmies. My view is different. As a current of thought become broader, it is harder for any single thinker to have the influence that was possible when it was smaller. The work becomes more specialized. (This blog is an example.) For the current to remain a unified current, though, it needs people who can make connections from one part to another, and Leonard was supremely talented at doing so.



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