George Selgin

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George Selgin is a Professor of Economics at the University of Georgia's Terry College of Business. He is a senior fellow at the Cato Institute. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking (Rowman & Littlefield, 1988), Bank Deregulation and Monetary Order (Routledge, 1996), Less Than Zero: The Case for a Falling Price Level in a Growing Economy (The Institute of Economic Affairs, 1997), and, most recently, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage (University of Michigan Press, 2008). He has written as well for numerous scholarly journals, including the British Numismatic Journal, The Economic Journal, the Economic History Review, the Journal of Economic Literature, and the Journal of Money, Credit, and Banking, and for popular outlets such as The Christian Science Monitor, The Financial Times, The Wall Street Journal, and other popular outlets. Professor Selgin is also, a co-editor of Econ Journal Watch, an electronic journal devoted to exposing “inappropriate assumptions, weak chains of argument, phony claims of relevance, and omissions of pertinent truths” in the writings of professional economists. He holds a B.A. in economics and zoology from Drew University, and a Ph.D. in economics from New York University.

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Good and Bad News from the UK

by George Selgin November 21st, 2014 7:47 pm

The good news is Wycomb member Steve Baker's excellent speech in Parliament on "Money Creation and Society," the transcript of which I copy below in full.

The bad news is this silly response in FT Alphaville, to which your correspondent has appended a comment.

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Money Creation and Society

Steve Baker (Wycombe) (Con): I beg to move,

That this House has considered money creation and society.

The methods of money production in society today are profoundly corrupting in ways that would matter to everyone if they were clearly understood. The essence of this debate is: who should be allowed to create money, how and at whose risk? It is no wonder that it has attracted support from across the political spectrum, although, looking around the Chamber, I think that the Rochester and Strood by-election has perhaps taken its toll. None the less, I am grateful to right hon. and hon. Friends from all political parties, including the hon. Members for Clacton (Douglas Carswell) and for Brighton, Pavilion (Caroline Lucas) and the right hon. Member for Oldham West and Royton (Mr Meacher), for their support in securing this debate.

One of the most memorable quotes about money and banking is usually attributed to Henry Ford:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.”

Let us hope we do not have a revolution, as I feel sure we are all conservatives on that issue.

How is it done? The process is so simple that the mind is repelled. It is this:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

I have been told many times that this is ridiculous, even by one employee who had previously worked for the Federal Deposit Insurance Corporation of the United States. The explanation is taken from the Bank of England article, “Money creation in the modern economy”, and it seems to me it is rather hard to dismiss.

Today, while the state maintains a monopoly on the creation of notes and coins in central bank reserves, that monopoly has been diluted to give us a hybrid system because private banks can create claims on money, and those claims are precisely equivalent to notes and coins in their economic function. It is a criminal offence to counterfeit bank notes or coins, but a banking licence is formal permission from the Government to create equivalent money at interest.

There is a wide range of perspectives on whether that is legitimate. The Spanish economist, Jesús Huerta de Soto explains in his book “Money, Bank Credit and Economic Cycles” that it is positively a fraud—a fraud that causes the business cycle. Positive Money, a British campaign group, is campaigning for the complete nationalisation of money production. On the other hand, free banking scholars, George Selgin, Kevin Dowd and others would argue that although the state might define money in terms of a commodity such as gold, banking should be conducted under the ordinary commercial law without legal privileges of any kind. They would allow the issue of claims on money proper, backed by other assets—provided that the issuer bore

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all of the risk. Some want the complete denationalisation of money. Cryptocurrencies are now performing the task of showing us that that is possible.

The argument that banks should not be allowed to create money has an honourable history. The Bank Charter Act 1844 was enacted because banks’ issue of notes in excess of gold was causing economic chaos, particularly through reckless lending and imprudent speculation. I am once again reminded that the only thing we learn from history is that we learn nothing from history.

Thomas Docherty (Dunfermline and West Fife) (Lab): I welcome today’s debate. The hon. Gentleman makes a valid point about learning from history. Does he agree with me that we should look seriously at putting this subject on the curriculum so that young people gain a better understanding of the history of this issue?

Steve Baker: That is absolutely right. It would be wonderful if the history curriculum covered the Bank Charter Act 1844. I would be full of joy about that, but we would of course need to cover economics, too, in order for people to really understand the issue. Since the hon. Gentleman raises the subject, there were ideas at the time of that Act that would be considered idiocy today, while some ideas rejected then are now part of the economic mainstream. Sir Robert Peel spent some considerable time emphasising that the definition of a pound was a specific quantity and quality of gold. The notion that anyone could reject that was considered ridiculous. How times change.

One problem with the Bank Charter Act 1844 was that it failed to recognise that bank deposits were functioning as equivalent to notes, so it did not succeed in its aim. There was a massive controversy at the time between the so-called currency school and the banking school. It appeared that the currency school had won; in fact, in practice, the banks went on to create deposits drawn by cheque and the ideas of the banking school went forward. The idea that one school or the other won should be rejected; the truth is that we have ended up with something of a mess.

We are in a debt crisis of historic proportions because for far too long profit-maximising banks have been lending money into existence as debt with too few effective restraints on their conduct and all the risks of doing so forced on the taxpayer by the power of the state. A blend of legal privilege, private interest and political necessity has created, over the centuries, a system that today lawfully promotes the excesses for which capitalism is so frequently condemned. It is undermining faith in the market economy on which we rely not merely for our prosperity, but for our lives.

Thankfully, the institution of money is a human, social institution and it can be changed. It has been changed and I believe it should be changed further. The timing of today’s debate is serendipitous, with the Prime Minister explaining that the warning lights are flashing on the dashboard of the world economy, and it looks like quantitative easing is going to be stepped up in Europe and Japan, just as it is being ramped out in America—and, of course, it has stopped in the UK. If anything, we are not at the end of a great experiment

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in monetary policy; we are at some mid point of it. The experiment will not be over until all the quantitative easing has been unwound, if it ever is.

We cannot really understand the effect of money production on society without remembering that our society is founded on the division of labour. We have to share the burden of providing for one another, and we must therefore have money as a means of exchange and final payment of debts, and also as a store of value and unit of account. It is through the price system that money allows us to reckon profit and loss, guiding entrepreneurs and investors to allocate resources in the way that best meets the needs of society. That is why every party in the House now accepts the market economy. The question is whether our society is vulnerable to false signals through that price system, and I believe that it is. That is why any flaws in our monetary arrangements feed into the price system and permeate the whole of society. In their own ways, Keynes and Mises—two economists who never particularly agreed with one another—were both able to say that currency debasement was the best way in which to overturn the existing basis of society.

Even before quantitative easing began, we lived in an era of chronic monetary inflation, unprecedented in the industrial age. Between 1991 and 2009, the money supply increased fourfold. It tripled between 1997 and 2010, from £700 billion to £2.2 trillion, and that accelerated into the crisis. It is simply not possible to increase the money supply at such a rate without profound consequences, and they are the consequences that are with us today, but it goes back further. The House of Commons Library and the Office for National Statistics produced a paper tracing consumer price inflation back to 1750. It shows that there was a flat line until about the 20th century, when there was some inflation over the wars, but from 1971 onwards, the value of money collapsed. What had happened? The Bretton Woods agreement had come to an end. The last link to gold had been severed, and that removed one of the most effective restraints on credit expansion. Perhaps in another debate we might consider why.

Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP): Does the hon. Gentleman agree that the end of the gold standard and the increased supply of money enabled business, enterprise and the economy to grow? Once we were no longer tied to the supply of gold, other avenues could be used for the growth of the economy.

Steve Baker: The hon. Gentleman has made an important point, which has pre-empted some of the questions that I intended to raise later in my speech. There is no doubt that the period of our lives has been a time of enormous economic, social and political transformation, but so was the 19th century, and during that century there was a secular decline in prices overall.

The truth is that any reasonable amount of money is adequate if prices are allowed to adjust. We are all aware of the phenomenon whereby the prices of computers, cars, and more or less anything else whose production is not determined by the state become gently lower as productivity increases. That is a rise in real living standards. We want prices to become lower in real terms compared to wages, which is why we argue about living standards.

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Sir William Cash (Stone) (Con): My hon. Friend is making an incredibly important speech. I only wish that more people were here to listen to it. I wonder whether he has read Nicholas Wapshott’s book about Hayek and Keynes, which deals very carefully with the question that he has raised. Does he agree that the unpleasantness of the Weimar republic and the inflationary increase at that time led to the troubles with Germany later on, but that we are now in a new cycle which also needs to be addressed along the lines that he has just been describing?

Steve Baker: I am grateful to my hon. Friend. What he has said emphasises that the subject that is at issue today goes to the heart of the survival of a free civilisation. That is something that Hayek wrote about, and I think it is absolutely true.

If I were allowed props in the Chamber, Mr Speaker, I might wave this 100 trillion Zimbabwe dollar note. You can hold bad politics in your hand: that is the truth of the matter. People try to explain that hyperinflation has never happened just through technocratic error, and that it happens in the context of, for example, extremely high debt levels and the inability of politicians to constrain them. In what circumstances do we find ourselves today, when we are still borrowing broadly triple what Labour was borrowing?

Ann McKechin (Glasgow North) (Lab): I am interested to hear what the hon. Gentleman is saying. He will be aware that the balance between wages and capital has shifted significantly in favour of capital over the past 30 years. Does he agree that the way in which we tax and provide reliefs to capital is key to controlling that balance? Does he also agree that we need to do more to increase wage levels, which have historically been going down in relation to capital over a long period of time?

Steve Baker: I think I hear the echoes of a particularly fashionable economist there. If the hon. Lady is saying that she would like rising real wage levels, of course I agree with her. Who wouldn’t? I want rising real wage levels, but something about which I get incredibly frustrated is the use of that word “capital”. I have heard economists talk about capital when what they really mean is money, and typically what they mean by money is new bank credit, because 97% of the money supply is bank credit. That is not capital; capital is the means of production. There is a lengthy conversation to be had on this subject, but if the hon. Lady will forgive me, I do not want to go into that today. I fear that we have started to label as capital money that has been loaned into existence without any real backing. That might explain why our capital stock has been undermined as we have de-industrialised, and why real wages have dropped. In the end, real wages can rise only if productivity increases, and that means an increase in the real stock of capital.

To return to where I wanted to go: where did all the money that was created as debt go? The sectoral lending figures show that while some of it went into commercial property, and some into personal loans, credit cards and so on, the rise of lending into real productive businesses excluding the financial sector was relatively moderate. Overwhelmingly, the new debt went into mortgages and the financial sector. Exchange and the distribution of wealth are part of the same social process. If I buy an apple, the distribution of apples and money will change. Money is used to buy houses, and we

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should not be at all surprised that an increased supply of money into house-buying will boost the price of those homes.

Mr Ronnie Campbell (Blyth Valley) (Lab): This is a great debate, but let us talk about ordinary people and their labour, because that involves money as well. To those people, talking about how capitalism works is like talking about something at the end of the universe. They simply need money to survive, and anything else might as well be at the end of the universe.

Steve Baker: The hon. Gentleman is quite right, and I welcome the spirit in which he asks that question. The vast majority of us, on both sides of the House, live on our labour. We work in order to obtain money so that we can obtain the things we need to survive.

The hon. Gentleman pre-empts another remark that I was going to make, which is that there is a categorical difference between earning money through the sweat of one’s brow and making money by lending it to someone in exchange for a claim on the deeds to their house. Those two concepts are fundamentally, categorically different, and this goes to the heart of how capitalism works. I appreciate that very little of this would find its way on to an election leaflet, but it matters a great deal nevertheless. Perhaps I shall need to ask my opponent if he has followed this debate.

My point is that if a great fountain of new money gushes up into the financial sector, we should not be surprised to find that the banking system is far wealthier than anyone else. We should not be surprised if financing and housing in London and the south-east are far wealthier than anywhere else. Indeed, I remember that when quantitative easing began, house prices started rising in Chiswick and Islington. Money is not neutral. It redistributes real income from later to earlier owners—that is, from the poor to the rich, on the whole. That distribution effect is key to understanding the effect of new money on society. It is the primary cause of almost all conflicts revolving around the production of money and around the relations between creditors and debtors.

Sir William Cash: My hon. Friend might be aware that, before the last general election, my right hon. Friend the Member for Wokingham (Mr Redwood) and I and one or two others attacked the Labour party for the lack of growth and expressed our concern about the level of debt. If we add in all the debts from Network Rail, nuclear decommissioning, unfunded pension liabilities and so on, the actual debt is reaching extremely high levels. According to the Government’s own statements, it could now be between £3.5 trillion and £4 trillion. Does my hon. Friend agree that that is extremely dangerous?

Steve Baker: It is extremely dangerous and it has been repeated around the world. An extremely good book by economist and writer Philip Coggan, of The Economist, sets out just how dangerous it is. In “Paper Promises: Money, Debt and the New World Order”; a journalist from The Economist seriously suggests that this huge pile of debt created as money will lead to a wholly new monetary system.


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Hayekian Musings of a Gold-Standard Pessimist

by George Selgin November 17th, 2014 10:44 am

I reckon myself a fan of the classical (pre-WWI) gold standard, considering it to have been the best monetary arrangement ever, and a far better one than the various supposedly scientific alternatives seen since. I also bristle at misinformed criticisms of that standard, including the very popular claim that it, rather than the machinations of central bankers bent on severing the normal connection between gold flows and money supply adjustments, was responsible for the Great Depression.

I'm convinced, furthermore, that there is a strong positive relation between the smugness with which an economists dismisses the gold standard (and all having anything nice to say about such) and the likelihood that that economist knows nothing at all about the subject. Evidence of this happened to come across my desk just yesterday, when I found myself obliged to real a stack of papers about Bitcoin. Although they were all perfectly lousy, the one that earned pride of place for dishing-out the single most idiotic bit of disinformation did so by declaring, in the course of a brief (and entirely erroneous) review of the gold standard's shortcomings, that the former connection between the U.S. dollar and gold rested upon gold reserves held at Fort Knox! (The writer, by the way, is a chaired professor at a leading U.S. business school, who holds a Harvard Ph.D. in "business economics.")

But while I'm for barring no holds when it comes to defending the old gold standard against unthinking critics, and even some thinking ones, I've never been one to rest my hopes for monetary reform upon the prospect of its revival. I have a number of reasons for not doing so, including my fear that such a revival, if it could be accomplished at all, could prove extremely disruptive, as well as my belief that to be worth having a revived gold standard would have to be no less international in scope as the original, making gold a poor basis for any unilateral reform. But my main reason consists of my belief that the legal foundations of the historical gold standard may themselves prove impossible to recover. The paper I wrote for this year's Cato Monetary Conference on "Law, Legislation, and the Gold Standard," spells out this last source of my doubts in some detail.

If anyone, having read the paper, thinks he or she can restore my hopes for gold, I am all ears.

Postscript: For some reason SSRN is being stubborn about letting people download my paper using the link supplied. If you find that that's so in your case, just google the paper title and my name, and the appropriate SSRN page with top the results list. You should be able to download the paper without trouble by clicking on that result.


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Mammom Dearest

by George Selgin November 12th, 2014 12:45 pm

(This past weekend I took part in a Liberty Fund conference having as its main topic David Graeber's Debt: the First 5000 Years (Melville House, 2011), but also addressing parts of Felix Martin's Money: The Unauthorized Biography (Knopf, 2014). Although Martin is an economist and Graeber an anthropologist, the two works have much in common, including their authors' general contempt for what Martin refers to as "Adam Smith and his school," meaning just about every economist who has ever had anything nice to say about either money or free markets.

It so happens that a review I'd written of Martin's work appeared, in somewhat abbreviated form and minus the title I'd given it, in Barron's (together with Larry White's review of Jim Grant's The Forgotten Depression and a review of a book about football that almost certainly got the the most attention) a week prior to the Liberty Fund event. Here, by kind permission of Barron's Gene Epstein, is the original version. By way of further comment I will say only that, as bad as I think Martin's book is, Graeber's is even worse--so much so that I am seriously contemplating having an intern here at Cato compile a list of scholars--and economists especially--who have praised it, so that I might make a mental note to never again take any of their recommendations or criticisms seriously.)

*****

The aftermath of the worst financial crisis since the Great Depression is a good time for taking a hard look at money, that most basic of all financial institutions atop which all the rest teeter. As his book’s subtitle suggests, Felix Martin, having taken such a look, reports, not with a flattering portrait, but with a warts-and-all unmasking.

Mr. Martin’s good prose and eye for money’s naughtier antics help to equip him for his task. Nor is he short of tales to tell, about money’s little prank of masquerading as stone wheels in the western Pacific, its domestication by Greek kings, its adolescent kidnapping by crafty private bankers, its disastrous fling with John Law, and, finally, its post-2001 binge. Mr. Martin relates them all, and many others, with élan.

But in his eagerness to reveal truths to which others have been blind, Mr. Martin ends up exposing, not so much money’s mysteries as his own incomprehension of it. He goes astray, first of all, in assuming that, because credit rather than barter came before money, money consists, not of any physical stuff, but solely of a more-or-less elaborate system of IOUs. But while simple societies may track and settle debts in many different ways, among relative strangers and throughout most of history monetary promises have been promises to pay some particular stuff, whether tobacco, metal discs, or engraved paper strips.

The distinction between monetary promises and the stuff promised is, admittedly, often muddied, as it was when Great Britain’s pound sterling ceased to refer to any actual coin (gold guineas having been worth a bit more than £1), and when modern central banks turned their paper promises to pay gold into what one former New York Fed President dubbed “IOU nothings.” But the fact that a Federal Reserve note is no longer a promise to pay anything doesn’t make the dollar an “arbitrary increment on an abstract value scale” or “a unit of abstract, universally applicable economic value.” When a diner sells me bacon and eggs for $4.99, that doesn’t mean that bacon and eggs are worth $4.99, “universally” or otherwise. It means that to the diner they are worth less, and to me, more.

Mr. Martin’s understanding of what economists have had to say about money is still more inadequate. With the phrase “Adam Smith and his school,” he lumps together every thinker from John Locke and Bernard Mandeville to Friedrich Hayek, throwing some later mathematical economists in for good measure, and excepting only John Law, Walter Bagehot, and John Maynard Keynes. He then attributes to this homogenized mass “a vision of society in which economic value had become the measure of all things” together with a blindness to the “debt and financial instability” to which this crass vision leads. Horse feathers. The monetary theories of John Locke (Martin’s unlikely heavy) didn’t particularly impress Smith, though Locke’s mercantilism did—unfavorably; and far from sharing Mandeville’s identification of narrow self-interest (“private vices”) with public virtue, Smith condemned it as “pernicious.” No one aware of the English currency controversies that raged for decades after the Panic of 1825 could possibly hold English economists oblivious to financial turmoil. Finally (to cut a long list short), in saying that the Bank of England should serve as a lender of last resort, Bagehot was taking issue, not with his fellow economists, but with the Bank’s short-sighted Directors.

If Mr. Martin’s knowledge of the history of economics is less than reassuring, his choice of economic good guys, Bagehot apart, is downright scary. He has soft spots for the ancient Spartans, who (according to him) wisely chose to dispense with money and all the “impersonal and inhumane relations its use entailed,” and for Lenin and his crew, who tried unsuccessfully to do the same. Another of Martin’s heroes is John Law, the Scottish “projector” whose “System,” implemented in France in 1720, was, according to Martin, “ingenious, innovative, and centuries ahead of its time.” Just shy of three centuries, one is tempted to elaborate. (Law’s “system” collapsed, catastrophically, in 1721.)

That a jaundiced view of both money and most expert thinking about it shouldn’t lead to any novel proposal for its reform isn’t surprising. Stopping shy of suggesting another stab at Sparta’s convivial solution, Mr. Martin instead endorses the old-hat idea of making commercial banks keep reserves (of “abstract units,” presumably) equal to their readily transferable liabilities. To be free of the bathwater of financial crises we must, in other words, give old-fashioned banking the old heave-ho.

A proper respect for the crucial role bank loans play in promoting economic growth—in industrialized countries still, but especially in developing ones—combined with a glance beyond the limited experience of a few countries ought to suffice to make anyone think twice about such a Procrustean (if lately de rigueur) remedy: Canada, for instance, which has a very highly developed banking system (and one that has, since 1987, been utterly-free of Glass-Steagall-like regulations separating commercial from investment banking) experienced neither bank failures nor insolvent-bank bailouts during the recent crisis; indeed it has had an almost uninterrupted record of financial stability since the mid-19th century. Scotland long boasted a similar record, with no central bank to look to for bailouts, and very little bank regulation of any kind, until English currency laws were thoughtlessly imposed upon it in 1845.

It happens that Adam Smith supplied an especially eloquent account of the workings and advantages of Scotland’s once brilliant fractional-reserve banking system as he witnessed it in its formative years. That account can be found in Book II, chapter 2 of The Wealth of Nations. Alas, so far as Mr. Martin is concerned, Smith’s real thoughts about money might as well be among the very deepest of its secrets.


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Keynes to FDR: Forget Quantitative Easing

by George Selgin November 4th, 2014 10:08 am

From Keynes' "Open Letter to President Roosevelt," published December 16, 1933:

"Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."

This near the very bottom of the Great Depression. Perhaps Keynes was wrong then. But is there not a strong case to be made, nevertheless, that the recent rounds of QE were, what with all that heaping-up of excess reserves, just so much unhelpful belt-loosening?

What say ye, my Market Monetarist friends?


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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.


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Leaving Athens

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

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

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

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

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

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

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

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

__________________________

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


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What We're Up Against

by George Selgin May 20th, 2014 6:36 pm

A couple weeks ago I experienced an embarrassing bout of "premature e-publication," having unknowingly made public a mere fragment of a post-in-progress, consisting of a quotation that I thought I had merely saved for future editing. That involuntary emission elicited some puzzled inquiries and speculation concerning just who the quote was from, and what its point was, for which, my humble apologies.

Here is the passage again:

Unlike the income tax, prominent lawmakers from both parties recognized the need to overhaul the laissez-faire, crazy-quilt way that money was created and interest rates determined. Private "national" banks were still in charge of issuing currency and loaning it out, in blithe disregard of the panics that resulted every few years--the latest in 1907--from such unpredictability. Everyone familiar with the problem favored some kind of regulated coordination among banks.

The words are, in fact, not Paul Krugman's (as one reader speculated). Nor are they from any economist. They are from Michael Kazin's book, A Godly Hero: The Life of William Jennings Bryan, which I'd decided to read in order to gain a better understanding of the man who played an important (if overlooked) part in shaping the modern U.S. currency system.

To be honest, even a few initial dips into Kazin's book where enough to persuade me that his was not a work that I was likely to gallop my way through with bells on. For one thing, in discussing the Scopes trial Kazin dismisses Mencken as an anti-semite, which is, to employ a Menckenesque term (and no matter what Charles Fecher says), a calumny, and a threadbare one at that. For another, he considers the fact that Bryan anticipated much of FDR's New Deal a reason for us to revise our opinion of the man upward.

So Kazin is no economist--or at least isn't enough of one to seriously reckon with the predictable consequences, for an economy faced with mass unemployment, of policies aimed at boosting prices by curtailing output. But he is a professional historian, with a teaching post a Georgetown U., who as such might be expected to do a little homework before committing to print a statement as misleading as the one I've quoted above--not to mention one brandishing such a doozy of a misplaced modifier.

Kazin, it seems, believes that panics were somehow caused by private bankers issuing currency, as if the problem had been a surfeit of that nasty private paper. In contrast every economist or economic historian worth his weight in leftover Chautauqua tickets, whether he be current or of the late 19th century, knows or knew that the problem back then was one of currency shortages, where the shortages, far from having been the bankers' fault, were a result of government regulations dating from the Civil War. Those regulations tied the stock of national bank notes to that of outstanding U.S. government bonds, the supply of which steadily declined as the century wore on, while making it it unprofitable for state banks to issue any notes at all. In Canada currency also consisted of the notes of private banks. But because the Canadian government imposed no comparable limits on its banks' ability to issue notes, Canada was spared both currency shortages and associated panics.

U.S. reformers naturally tried at first to get rid of the regulations that were the true cause (or at least one of them) of U.S. financial crises. So it's something of a kicker to realize that no man did more to oppose such reforms, "in blithe disregard of the panics that resulted every few years," than Mr. Kazin's godly hero.


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William Jennings Bryan and the Founding of the Fed

by George Selgin April 20th, 2014 8:33 am

BryanandWilson

If William Jennings Bryan is remembered at all these days, other than as the real-life model for "Matthew Harrison Brady"--the buffoonish Bible-quoting opponent of Darwinism portrayed by Fredric March in the movie version of "Inherit the Wind"-- it is as the three-time populist presidential candidate whose campaign for a revival of bimetallism,  at the long-defunct ratio of 16:1, split the Democratic party in two, and whose "Cross of Gold" speech at the 1896 Democratic Convention gave goose-bumps both to his audience and to Wall Street's plutocrats, albeit for very different reasons.

Bryan's plea for renewed coining of silver ultimately served only to assure William McKinley's victory, and to thereby pave the way for silver's official demonetization with the passage, in 1900, of the Gold Standard Act.  But though the fact is often overlooked, Bryan's influence upon the development of the United State's currency system went far beyond his failed effort to revive bimetallism.  For Bryan also played a crucial part in the paper currency reform movement that was to lead, thanks in no small way to his influence, to the passage of the Federal Reserve Act.

To appreciate Bryan's role, one must recall the circumstances that lead, during the last decades of the 19th century, to widespread pleas for the reform of the existing U.S. currency arrangement.   During the Civil War the Union, seeking to replenish its depleted coffers, passed the National Banking Acts.  Those acts provided for the establishment of federally (as opposed to state) chartered banks, subject to the requirement that any notes issued by the new banks be fully, or (at $110 nominal backing for every $100 of notes outstanding) more than fully, secured by U.S. government bonds.  

When the number of applications for national bank charters (and associated bond sales) proved disappointing, chiefly because state banks were not tempted to convert to them, the authorities responded by subjecting outstanding state bank notes to a 10% tax.  The prohibitive tax forced most state banks to either secure federal charters or go out of business altogether, with only a relatively small number managing to survive despite no longer being able to issue their own currency.  Thus by the war's end, or not long thereafter (for the implementation of the 10% tax was eventually delayed until August 1866), national banks had become the country's only suppliers of banknotes, which, together with U.S. Treasury notes ("greenbacks") also authorized during the war, made up the total stock of United States paper currency.

Because the stock of greenbacks was itself legislatively fixed, with the intention of eventually withdrawing them altogether, national banknotes were the only component of the paper currency stock that might conceivably expand, once a ceiling on their quantity was lifted in 1875, to accommodate either temporary or permanent growth in the demand for currency.  However, that capacity was undermined by the bond-security provision, which linked the total potential stock of national banknotes to the extent of the federal governments' indebtedness, and, particularly, to the outstanding quantity of those particular government bonds that had been deemed eligible for securing such notes.   Because the Treasury enjoyed surpluses for most of the years between 1879 (when gold payments were resumed) and 1893, and took advantage of them to reduce the federal debt, national banks, rather than finding it profitable to supply more currency as the nation grew, supplied less.   Total national banknote circulation, which stood at over $300 million around 1880, had fallen to less than half that amount a decade later. 

What's more, because acquiring and holding the necessary securities, with their increasingly high market prices and correspondingly low yields, was so costly, national banks were not at all inclined to acquire them just for the sake of providing for temporary spikes in the demand for currency, such as occurred every "crop moving" season.  Consequently every autumn witnessed some tightening in the money market, as farmers came to withdraw currency from rural banks, and those banks were compelled, by the high cost of bond collateral, to draw instead on their cash reserves.   Because national banking laws allowed country banks to reckon as part of their legal reserves deposits lodged with "reserve city" correspondents, while those bankers were  in turn allowed to treat their own correspondent balances in New York (the "central reserve city") as cash, Wall Street tended to bear the brunt of this tightening, which on several occasions, and most notoriously in 1893 and 1907, manifested itself in full-fledged financial panics.

The troubles stemming from our "inelastic" currency arrangements had a straightforward solution.  That solution was not, as so many monetary economists today assume (knowing as they do the solution that was actually settled upon, but lacking understanding of the  roots of the problem), a central bank.  It was simply to free national banks, and perhaps state banks as well, from the Civil-War era shackles that, owing to long-obsolete fiscal considerations, were preventing them from supplying notes on the same terms as those governing their ability to create demand deposits.   Once allowed to back their notes with their general assets, national banks could swap notes for deposits, either permanently or temporarily, without limit, thereby conserving both their own cash reserves and those of their city correspondents.   State banks, once freed from the obnoxious 10% tax, might do likewise.   Reform, in other words, was a simple matter of leaving bankers equally free to supply customers with either paper or ledger-entry promises, according to the customers' needs.

That that is precisely what the banks would have done, had they been permitted, and that it could have worked, were far from being untested conjectures.  For proof one had only to look north.  For Canada's currency exhibited precisely the sort of elasticity that it's U.S. counterpart lacked, growing steadily while the stock of national bank notes shrank, and rising and falling with the coming and going of the harvest season.   How come?  Central banking had nothing to do with it.    Instead, Canada's paper currency stock, like the U.S. stock, consisted mainly of commercial banknotes.  The key difference was that Canadian banks, unlike the national banks, could issue notes based on  assets of their own choosing.

Canada's system differed as well in other crucial respects, though ones that did not bear so directly upon it's currency's elasticity.  Chief among these was the fact that Canadian banks were able to establish nationwide branch networks, and the fact that entry into the industry was very strictly limited.  Canadian banks therefore tended to be much larger, much more diversified, and much less prone to fail than their U.S. counterparts.  An important, though often overlooked, connection exists between banks' freedom  to issue notes and their ability to establish branch networks, in that the cost of keeping additional cash reserves is among the more important costs connected to the establishment of branches.  To the extent that banks are free to issue their own notes, the need for cash reserves, whether at branches or at the home office, is greatly reduced.  Consequently, the fact that Canada's banks enjoyed a relatively high degree of freedom of note issue meant that they were also better able to exploit gains from branching.  Well developed branch networks, in turn, indirectly contributed to the elasticity of Canada's currency stock, by allowing for local clearings that substantially reduced the cost of mopping-up surplus notes.

That numerous attempts should have been made to reshape the U.S. system along Canadian lines, especially by allowing national (and perhaps also state) banks to issue "asset currency," but also by allowing for unlimited branching, shouldn't be surprising.  What is (or ought to be) surprising is the fact that none of these eminently sensible plans succeeded.  Instead, every one--including the Baltimore, Indianapolis Monetary Commission, Gage, Carlisle, and Fowler plans--was either voted down by Congress, or scuttled in committee.

I had long supposed that opposition to unit banking, from "Main Street" unit banks naturally, but also from "Wall Street" banks that profited from the correspondent business that unit banking brought, was responsible for the failure of these attempts.  But that explanation isn't entirely satisfactory, because at least some asset currency plans didn't call for branch banking.  Something else was to blame for the utter failure of the asset currency movement.  And that something else turns out to have been...William Jennings Bryan.  For if Bryan was a tireless champion of silver, he was no less unremitting in his violent opposition to any sort of bank-issued currency, and to asset currency especially.

As a Democratic congressman (1891-95), Bryan fought not only against opposition measures calling either for asset currency or for a repeal of the 10% tax on state bank notes, but also against those sponsored by the Cleveland administration itself. So far as he was concerned, state banking was just another name for "wildcat" banking; and the Constitution's clause declaring that "No state shall...emit bills of credit" meant that allowing banks of any sort to issue notes was tantamount to surrendering a sovereign power of Congress to private corporations.(1) When, in the wake of Panic of 1893, Cleveland again called for a repeal of 10% tax, Bryan

delivered an impassioned speech in which he blamed the "crime of demonetization" [of silver] for the deflation of agricultural prices following 1873 and asserted that the federal government alone should issue paper money.  He would make all government money legal tender and prohibit, as the New Deal did, the writing of contracts calling for payment in any particular kind of money.  Furthermore, he would retire national bank notes in favor of government money.(2)

Though beaten in the 1896 presidential election, and again in his 1900 bid, Bryan retained control of the progressive minority within the Democratic party, which he employed skillfully and effectively in "waging incessant war against asset currency"(3), especially by putting paid to attempts to include any sort of currency reform allowing for such currency in the Democratic platform. "If you said anything against Bryan," a representative of long standing recalled many years later, "you got knocked over, that is all."(3)

The Panic of 1907, far from causing Bryan to modify his blanket opposition to any relaxation of existing currency laws, only made his opposition to asset currency more resolute than ever, by convincing him that bankers would stoop to anything to retain control over the nation's money. Replying, in the midst of the panic, to "editorials in the city dailies, demanding an asset currency," Bryan claimed that "The big financiers have either brought on the present stringency to compel the government to authorize an asset currency or they have promptly taken advantage of the panic to urge the scheme which they have had in mind for years."(4) Democrats, Bryan continued, "are duty bound to...oppose asset currency in whatever form it may appear" as "a part of the plutocracy's plan to increase its hold upon the government":

The democrats should be on their guard and resist this concerted demand for an asset currency.  It would simply increase Wall Street's control over the nation's finances, and that control is tyrannical enough now.  Such elasticity as is necessary should be controlled by the government and not by the banks.(5)

As if not content to assail a good idea using bad arguments, Bryan went on to endorse a genuinely rotten alternative: nationwide deposit insurance:

What we need just now is not an emergency currency but greater security for depositors. ...All bank depositors should be made to feel secure, and they could be made to feel secure by a guarantee fund raised by a small tax on deposits. What depositors feel sure of their money they will not care to withdraw it.(6)

During the 1908 presidential campaign, his third and last bid for the presidency, Bryan, in deference to the party's divided opinion on the subject, downplayed the currency question, but lost to Taft anyway. Four years later, however, he was instrumental in securing Wilson's nomination, which he favored in part because Wilson seemed to echo his own beliefs in declaring, in a 1911 speech, that "The greatest monopoly is the money monopoly." When further examined by Bryan, Wilson passed with flying colors by again stating that he would oppose any currency plan "which concentrates control in the hands of the banks"(7). Wilson was thus able to secure the democratic nomination, for which he thanked Bryan by making him his Secretary of State.

By the time of Wilson's election, former advocates of asset currency had for some years given up any hope of achieving their preferred reforms, and had instead turned their attention to the alternative of establishing a "central reserve" bank, charged with supplying currency to supplement, and perhaps replace, the limited quantities forthcoming from the national banks. But here again they encountered opposition from progressives, including Bryan, who was no less opposed to reforms that smacked of European-style (or, for that matter, Bank of the United States-style) central banking than he had been to asset currency itself. The Aldrich plan, ostensibly the fruit of the National Monetary Commission's extensive deliberations, but really a scheme secretly cobbled together by Aldrich and his banker friends at Jekyll Island, was (according to Paolo Coletta) "particularly anathema to Bryan...because it called for a single, privately controlled central bank located in New York."(8) Bryan also believed--correctly--that "big financiers" were behind Aldrich's "scheme."(9)

Though he also wished to steer clear of a European-type central bank Wilson thought the Aldrich plan "about sixty or seventy per cent correct," and so had Carter Glass come up with an alternative that differed chiefly in proposing numerous regional reserve banks governed by a Federal Reserve Board. But because the proposed Board was mainly to consist of bankers, and so left them in charge of the nation's currency, Glass's plan also dissatisfied Bryan, who "was exceedingly disturbed at those provisions of the [bill] contemplating currency in the form of bank notes rather than greenbacks" (10), and who, as the most prominent member of Wilson's cabinet, was capable of killing Glass's bill, just as he'd killed previous asset currency measures. When Robert Owen, an old associate who was now chairman of Senate Banking and Currency Committee, drafted an alternative calling instead for new Treasury issues to replace existing national banknotes, Bryan naturally preferred it, placing the Glass plan, which was already encountering stiff opposition from bankers, in still greater jeopardy.

Yet Wilson managed, by means of some very clever politicking, to rescue Glass's Federal Reserve plan. To scare the bankers into supporting it he had William McAdoo, his Treasury Secretary, offer (to Glass's considerable dismay) a "compromise" that would have replaced banknotes, not with redeemable Treasury notes (as contemplated by Owen's plan), but with legal-tender notes resembling the Civil War-era greenbacks.(11) To win Bryan over, he had Glass revise his bill by making Federal Reserve Notes obligations "of the United States" as well as of the Federal Reserve banks themselves, and by excluding banker representation from the Federal Reserve Board.(12) When Glass's bill, having made it through the House Banking Committee, was attacked by Bryanite Democrats at the party caucus, Glass stunned and silenced them by brandishing Bryan's letter calling for his supporters "to stand by the president and assist him in securing the passage of this bill at the earliest possible moment" (13). Thanks to Bryan's support, the Federal Reserve Act became law just two days shy of Christmas, 1913.

And so it happened that, through his unrelenting efforts over the course of more than two decades, William Jennings Bryan, the most stalwart enemy of both private currency and currency monopoly since Andrew Jackson, helped to create a currency monopoly far more powerful than any that Jackson could ever have envisaged, and far more capable of gratifying Wall Street, at the expense of the rest of the nation, than Wall Street alone, left perfectly free from government controls, could ever have devised.
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(1) Paolo E. Coletta, "William Jennings Bryan and Currency and Banking Reform," Nebraska History 45 (1964), p. 33.

(2) Ibid., p. 35.

(3) Gerald D. Dunne, A Christmas Present for the President, Federal Reserve Bank of St. Louis, p. 9.

(4) William Jennings Bryan, "The Asset Currency Scheme," The Commoner 7 (43) (November 8, 1907).

(5) Ibid.

(6) Ibid. Besides overlooking the moral hazard problem, Bryan's argument neglects the fact, crucial to a proper appreciation of the advantage of asset currency, that bank customers often wish to convert deposits into currency for reasons, like paying itinerant workers, having nothing to do with doubts concerning the safety of bank deposits.

(7) Colette, p. 41

(8) Ibid., p. 42.

(9) James Neal Primm, A Foregone Conclusion: The Founding of the Federal Reserve Bank of St. Louis, St. Louis: Federal Reserve Bank of St. Louis, 2001.

(10) Dunne, p. 11.

(11) Ibid., p. 13.

(12) Glass went along with this plan only owing to his understanding, the correctness of which Wilson readily affirmed, that the supposed obligation "would be a mere pretense," the government's obligation being "so remote that that it could never be discerned" (Colette, pp. 48-9).

(13) Dunne, p. 19.


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Wrong Way Corrigan Strikes Again

by George Selgin March 19th, 2014 5:20 pm

Over at Zero Hedge, "Tyler Durden" reposts a piece by Sean Corrigan, the link to which appears to be non-working, in which Corrigan imagines that he is having a "Gotcha!" moment, at the expense of yours truly, because he has discovered some reputable authorities who claim that (commercial) banks are in fact capable capable of making loans above and beyond any sum of deposits they acquire.  Here are the first few paragraphs:

Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! - that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.

As an example, some few months ago, I had an exchange with the disputatious George Selgin (he of the perfervid fractional free banking bent) in which I cited – after a good twenty minutes’ research – the following authorities to that very same effect:-

Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:

The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.

 

Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]

Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81-2):

The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.

Actually, Sean, I can assure you that I've read them all, and carefully; what's more, I've probably taught several thousand students about the process of multiple deposit expansion, being careful in doing so to make precisely the distinction Hayek insists upon between what individual banks on one hand and the system as a whole on the other are capable of making doing with any fresh deposits.* In fact, no individual bank involved can lend more than a part--usually the greater part--(the "excess reserves") of whatever fresh funds it is able to secure. It is precisely your misunderstanding of Hayek's point that was, I am inclined to think, the nub of our original disagreement!

*Here FYI is a screenshot of the relevant page of the class notes I give to my students:

NotesPartII_Page_010


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Gene Callahan Gets it (but Bob Murphy and Joe Salerno Don't)

by George Selgin February 13th, 2014 3:29 pm

It seems that, even when I'm not trying to do so, I manage to raise the hackles of some of the 100-percent crowd. Most recently I did so by trying to explain, a couple posts ago, my preference for remaining independent of the Austrian School, or any other economic school of thought. The particular passages at which my critics took aim were this one:

And what sort of economics [do I want to do]? I can't tell you--I've never thought much about it. But perhaps that's just it: I don't "think" about writing any "sort" of economics. I don't want to have to think about whether what I'm up to qualifies as "praxeology" or not, or whether Mises would mind my using terms like "money" and "inflation" the way most contemporary economists use them, instead of the way Mises himself used them a century ago. Nor am I any more inclined to trouble myself over whether my work fits neatly into any other economic school's pigeonhole.

and this:

But if there's one thing I truly believe concerning the "methodology" of economics, it's that thinking about it is as helpful to actually doing economics as contemplating one's steps is to dancing the rumba. In short, having to look over my shoulder while I think or write, at any methodological strictures at all, cramps my style.

According to Joe Salerno, the implication of the first of these passages is "that those of us who pursue a research program within the praxeological paradigm continually sweat and fret about using terms or formulating concepts in exactly the same way as Mises did 'a century ago.'" Joe then goes on to point out, with what (I can't help observing) seems like a fair amount of fretting and sweating, that plenty of Austrian economists, including Mises himself, have in fact not hesitated to depart from Mises' 1912 definitions. To this I can only say, Bully for them! But why is Joe pointing this out to me? He should be telling the legions of self-styled Austrian economists, most of whom presumably formed their opinions by reading various Mises Institute publications, who burst a blood vessel every time someone uses the term "inflation" to mean a general rise in prices, or the term "money" to refer to a fractionally-backed bank deposit or note.

As for me, I wasn't pretending to characterize the preoccupations of each and every Austrian economist, by means of "equivocations, omissions, and errors" (as Joe reckons) or otherwise. Nor did my remarks have much to do with my desire (however fervent it may be) "to prevent 'the 100 percent crowd' from 'hijacking the ‘Austrian’ brand name'." I was just tossing out an example of the sort of ruminating I'd just assume not bother with when setting out to do some economics. (Next time I should be more careful and add a disclaimer like the ones you find in novels, you know, "This illustration is a work of fiction. Any resemblance between my economist worrying about Mises' old definitions and any particular member of the current Austrian school is entirely coincidental.")

As I might have predicted, some of my critics (who never seem to come up short when it comes to putting an uncharitable spin on things) went still further, by understanding me to say that I don't find thinking of any sort especially helpful to doing economics! Bob Murphy, for instance, has fun with what he took to be my suggestion that the best way to dance the rumba is to never have learned it in the first place. In a comment to Gene Callahan's favorable notice of my post, Bob went so far as to characterize me as someone who "rips on the philosophy of science, saying he don't need no stinkin' thinkin' about *what* he's doing."

Ah well, that's the risk one takes in employing a metaphor. The gain, of course, is that the metaphor helps readers who aren't merely interested in playing "gotchya!" Such readers won't bother to put the poor little thing on a rack to see what it will confess to when stretched to the breaking point. Gene Callahan himself, for instance, was quick to come to my defense, both in his own post and in the comments to mine, where he (quite properly) ridiculed the suggestion that, in saying (as he nicely put it) that I didn't want to look over my shoulder "at some 'methodological' scold," I meant to declare, among other things, that I "didn't care about logic or consistency."

Of course I do care about logic and consistency; indeed, I insist upon them both for myself and for others who wish to engage me in a discussion. And of course (news flash!) I believe that good economics takes some thinking! Besides requiring one to think about whether one is being logical and consistent, it takes thinking about whether one's reasoning is consistent with available evidence, and thinking about whether one is expressing his ideas clearly, and (ahem) thinking about whether one is characterizing rivals' views accurately. Indeed, the only sort of thinking that I insist is unhelpful to doing good economics is thinking about, so as to better obey, the methodological credos of some particular school of thought.

What's more, I have what I consider to be the best possible reason for having this opinion--an opinion that, remember, is intended only to justify my personal decision not to belong to any school, and not to browbeat others into joining me in my heterodoxy. The reason is simply this: that I have found that, when I set out to address some economic issue, I do not find it at all helpful to concern myself with "methodology" except of the "very small-m" sort that supplies such rules as ought to command the assent of economists of all schools. In particular, though I sympathize with the arguments that underlay what Joe calls "the praxeological paradigm," and what's more believe that I understand them, I don't give that paradigm any thought in pursuing my research; if someone claims that despite this I've been doing praxeology all along, I can only say, like Molière's* Monsieur Jourdain when informed that he's been speaking prose, that I have been quite unaware of it.

Addendum: Joe Salerno's rejoinder. I never accused Joe personally, by the way, of insisting on Mises' 1912 definitions of "money" and "inflation." Much less did I ever mean to hold him responsible for the many "Austrians" (for they present themselves as such) who insist on those old definitions. That such Austrians exist, and in large numbers, cannot reasonably be denied by anyone familiar with the economics blogosphere. As for where their understanding comes from, I should be glad to hear Joe or anyone else offer an alternative to my own conjecture.
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*I had previously (and foolishly) written "Proust's." I thank Andras Toth for correcting me.


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