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.


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.


Mises, Rothbard, and others in French

by Kurt Schuler April 17th, 2014 10:06 am

Nearly two years ago I mentioned the French economist Philippe Nataf and his small but active publishing house, Editions Charles Coquelin. Its namesake Charles Coquelin was a 19th-century French classical liberal who wrote on banking and business cycles, among other topics. The publishing house issues works by French and other thinkers in the classical liberal tradition to the present. I recently saw Philippe again, and he informed me that Editions Charles Coquelin has now published translations of Ludwig von Mises's Theory of Money and Credit and part of Murray Rothbard's Man, Economy and State, with more to come. Among the older works of the publishing house is a 2005 biography of Jean-Baptiste Say. Readers interested in ordering these works can do so through the site of Editions Charles Coquelin or, for at least some books, Amazon France.

While I am on the subject of books translated into French, it is worth mentioning that George Selgin's Theory of Free Banking was translated and published by Les Belles Lettres in 1991. It is now out of print, but used copies are available, though at high prices. Perhaps the publisher can at least bring it back as an e-book? Those who cannot read French but are interested in the French classical liberals should be aware of the 2012 book French Liberalism in the 19th Century: An Anthology, edited by Robert Leroux and David M. Hart. Here is Hart's Web page on the book.  As usual, if you want the book, do not order it directly from the publisher; you will find lower though still quite elevated prices here and here.


Free banking conference announcement

by Kurt Schuler April 16th, 2014 7:49 pm

Call for papers:
Conference: Free Banking systems: diversity in financial and economic growth
Lund University School of Economics and Management, September 4 – 5, 2014

Department of Economic History, Lund University, Sweden
For more info on the venue please see: http://www.ekh.lu.se/en

Travelling: Most conveniently to Copenhagen Airport (Kastrup)
There are frequent trains from Copenhagen Airport (Kastrup) to the city of Lund. Travelling time is approximately 35 minutes and the cost for a single journey is around 12 Euros. For more info on travelling please see: http://www.lunduniversity.lu.se/o.o.i.s/24936

Paper proposal deadline: April 30, 2014
We invite all scholars interested in participating to submit an abstract of approximately 400 words and a short bio to the main organizer Anders Ögren on e-mail: anders.ogren@ekh.lu.se

Notification of acceptance: May 30, 2014

Paper deadline: August 15, 2014
Note that as this is a pre-conference to the session S10133 at the WEHC in Kyoto August 3 – 7, 2015 papers can be preliminary at this point in time.

Conference rationale

In 1992 Kevin Dowd edited the important book “The Experience of Free Banking” gathering several historical episodes of Free Banking in a “historical laboratory”. This collective volume aimed at evaluating Free Banking as a way of achieving both banking stability as well as monetary stability. It was found that the problems usually attached to Free Banking, such as rapid inflation and banking instability, in fact were not at all the consequence of Free Banking, underlining instead that these results questioned the idea that the Central Bank’s monopoly on currency issuance is a natural monopoly. In a way this book was a continuation of the theoretical development on Free Banking made in influential works such as Smith’s “The Rationale of Central Banking” (1936), Hayek’s “Denationalization of Money” (1978), White’s “Free banking in Britain” (1984) and Selgin’s “The Theory of Free Banking” (1988) (to name a few).

As a result of the recent crisis Free banking as a way of achieving both banking stability as well as monetary stability is back on the agenda for scholarly debates. Again there are those who argue that Free Banking systems are more prone to banking instability and banking failures with less positive impact on growth than banking systems operating under a state sponsored Central Bank. But to the contrary there are those that argue that banking and monetary instability and slumps in growth due to crises are results of the increased importance of central banks.

Supporters and skeptics of Free Banking alike are using historical episodes as laboratories for empirical testing of their ideas. But to what extent are the features of the alleged Free Banking episodes comparable, not only between different historical episodes but also in relation to theory or in relation to Central Bank based banking systems. Historically many varieties of banking exists between what would be the theoretically pure Free banking system and a Central bank based system. All these varieties provides essential information about how a banking system works and why it obtains certain results in terms of banking and monetary stability and in extension in growth. Thus comparing the diversity of the development of Free Banking systems allows us to understand their different impact on economic growth.

Thus the idea with this conference is to continue the work to make historical cross country comparisons on Free Banking episodes and theories – aiming at understanding what features that are required for different stages of free or central banking and to disentangle the impact of these different variables on banking and monetary stability. We welcome scholars working on empirical cases of what is suggested to be Free Banking – whether their results seem to support Free Banking or Central Banking or a hybrid between the two.

This conference is an open pre-conference to the session S10133 at the WEHC in Kyoto August 3 – 7, 2015. Due to time constraints participation in this conference does not necessarily imply participation at this session at the WEHC conference.


Anders Ögren
Lund University
E-mail: anders.ogren@ekh.lu.se

Andres Alvarez
Universidad de los Andes

Masato Shizume

[Thanks to Lars Jonung for notification about the conference]


Why don't we have that for free banking?

by Kurt Schuler April 12th, 2014 5:49 am

In the 1990s I wrote extensively on currency boards with Steve H. Hanke of Johns Hopkins University. The subject had a vogue among economists for several years, but faded after the crash of Argentina's "convertibility" system in late 2001 and early 2002 (which I analyzed here).  Steve and I remain interested in currency boards. With Nicholas Krus, at the time an undergraduate at Johns Hopkins, we conceived the idea of a Digital Archive on Currency Boards. Nick did the most work to make it a reality, spending many hours photographing source material in libraries in Washington DC, London, and even in Canberra during a semester as an exchange student there. A number of Steve's other students also worked on the archive, for which I thank them.

The archive collects the annual reports of currency boards, financial statements in government gazettes, and other important historical sources of material. There is also a companion working paper series, not limited to currency boards, from the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at Johns Hopkins. (The institute's mouthful of a name reflects that it ranges over the interests of its founders Hanke and Louis Galambos, a professor of history at Johns Hopkins who has written on everything from the Eisenhower presidency to the drug company Merck.) One of the working papers is a guide to the archive that catalogs its contents and documents the applicable copyright law in the countries of publication. Another is a study I did with a former Johns Hopkins undergraduate, Charles Weinberg, on the Paper Currency Department of the Indian government, which existed from 1862-1935 and operated as a quasi currency board for part of that period. Charlie digitized the data from source material that Nick Krus had collected and wrote an analysis. I contributed a history of legislative developments. A forthcoming issue of the Indian Journal of Economics and Business will carry an article that is a shorter version of the working paper. Other working papers have likewise made some digitized data available, and later this year far more digitized data will be released.

It would be desirable to have an analogous  archive on free banking. The task of gathering the source material would be different, because there was no single issuer of currency as there was in most currency board systems. (In a few currency board systems, currency boards issued notes alongside banks. Bank notes were sometimes restricted to larger denominations, giving the currency boards a monopoly of small denominations. The Digital Archive on Currency Boards does not cover the banks in such cases.) Annual reports of banks, financial statements published in government gazettes or commercial newspapers, reports of government bank inspectors, and other sources exist in great quantity, waiting to be collected and organized. As with the material on currency boards, most of it is out of copyright and therefore could be posted on the Internet. Material remaining under copyright could still be collected for individual use, then posted as copyright expires. This site would be one possibility for the location of the archive. I lack the time to  undertake such a task, which I think would need to be a cooperative undertaking among widely scattered scholars rather than a project that owes most of its content to just one person. A spontaneous order awaits a catalyst. Is somebody out there equal to the challenge?


Free banking in New Zealand

by Kurt Schuler April 3rd, 2014 9:30 pm

Since the revival of interest in the history of free banking begun by Hugh Rockoff's work in the 1970s on American "free banking" of the early 19th century and Larry White's 1984 book on the far freer Scottish system of the same period, economists have studied a number of other free banking episodes in some depth. New Zealand has not been among them, though it has received passing attention. We are fortunate, then, that Harry D. Bedford's 1916 dissertation "The History and Practice of Banking in New Zealand" is now available online. Until this year only paper copies were available at the University of Otago, where it was submitted for the doctorate, and a few other libraries in New Zealand. The university has digitized the dissertation and readers around the world can now find it here.

Harry Bedford was a lawyer, social scientist, and sometime member of the New Zealand Parliament whose life was cut short when he drowned in 1918 at age 40. This brief biographical sketch makes it apparent that he had abundant physical and intellectual energy that would have led to even more notable things had he lived.

(Thanks to Michael Reddell for the pointer.)


It was 20 years ago today...

by Kurt Schuler April 2nd, 2014 9:57 pm

...not that Sgt. Pepper taught the band to play, but that Lithuania adopted a quasi currency board. Actually, it was 20 years ago yesterday, when I meant to put up this post. The Lithuanians first heard about the currency board idea from George Selgin, Larry White, and me when a delegation of officials made a trip to the United States in 1990. Lithuania was still part of the Soviet Union but like many of the other Soviet republics was chafing at the bit, and Lithuanian officials were thinking about what policies to enact if and when Lithuania regained independence. Two of the places the delegation visited were Hillsdale College in Michigan, where George and Larry were attending a seminar, and George Mason University, where I was a graduate student. It was pure happenstance that George, Larry, and I were among the then very small number of people who knew anything about currency boards. In the fall of that year, George persuaded the George Edward Durrell Foundation to pay for us to visit Lithuania. We talked to the president, prime minister, and other officials, and wrote what I believe was the first detailed proposal about how to establish a currency board in the circumstances of an economy in transition from socialism. (Unknown to us until later, there had been one or two other recent proposals for a currency board in the Soviet Union, but with fewer specifics than we provided.) We visited again in 1991 with George's colleague at the University of Georgia, Joe Sinkey, an expert on banking,  just before the coup that ousted Mikhail Gorbachev and resulted in the collapse of the Soviet Union.

Lithuania did not immediately establish a currency board, opting instead for a conventional central bank. When it did not work as well as hoped, the government took a second look at the currency board idea. Within Lithuania, the Lithuanian Free Market Institute and especially its president Elena Leontjeva had kept the idea in the debate. Outside, Steve Hanke of Johns Hopkins University had become the best known advocate of currency boards and I had written a number of works with him on applying the currency board idea to other countries. Steve was named a state counselor (a position equal to cabinet rank, though unpaid) to the prime minister. Lithuania adopted not the strict currency board George, Steve, and I advocated, but a quasi currency board retaining some discretionary features the central bank already had. The system was much less discretionary than what it replaced, however.

Twenty years later Lithuania has been through more than one storm, but the currency has remained solid. As was the case with the similar system of Estonia, Lithuania's goal is to adopt the euro, which it expects to do in 2015.

George and I considered advocating free banking for Lithuania and made a case that bank regulation should be light. We lacked confidence in the capacity of Lithuanian bankers to achieve rapidly the stability that had made the best free banking systems elsewhere highly reliable, and it turned out that we were correct. It took a number of years for the banks to become stable, during which time most of the local banks failed or were absorbed by foreign banks. In the meantime, the currency gave one element of stability to the financial system. We had hoped that having taken one step away from central banking, the success of the system would lead people to consider that taking another step, to free banking, would likewise be advantageous, but it didn' t happen.

A reminiscence I wrote for the tenth anniversary of the system is here. An interview with Steve Hanke on the 15th anniversary is here.

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