George Selgin


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.


A Free-Banking Fantasy

by George Selgin January 28th, 2015 2:02 pm

gold atm

Everyone fantasizes about something now and then. But even I was surprised (and not at all displeased) to discover that at least one person besides me--Warren Gibson--fantasizes banking! Better yet, he's invited anyone who wishes to stroll down fantasy lane with him to witness his vision of what a Wells Fargo branch might look like, if only governments would leave it and other banks alone.

I hope my readers will accept Warren's kind invitation. And the last thing I want to do is to spoil his personal pipe-dream. Still I can't help wanting to take advantage of the tantalizing picture Warren paints to dispel some common misconceptions about free banking, and especially about what a future free banking system is likely to look like.

"The first thing we notice," say Warren as we enter his fantasy bank, "is a display case showing a number of gold coins and a placard that says, “available here for 1,000 Wells Fargo Dollars each, now and forever.”

Hold it right there. In the past competitively-supplied banknotes, including those of free banking systems in Scotland and elsewhere, were convertible into either gold or silver, because back then "real" money consisted of gold or silver coins. But if you think that a return to free banking in the future would mean returning to a gold (or silver) standard, you'd better keep dreaming. Banks themselves, first of all, aren't in the business of establishing new monetary standards. A banker's job is to get people to trade whatever basic money they already employ, which is to say whichever basic money is in common use, for his or her bank's IOUs. Those IOUs will, in turn, be made redeemable in the same sort of money they were substituted for in the first place. That "Gold has physical properties that have endeared it to people over the ages—durability, divisibility, scarcity to name a few," though true, is irrelevant once some other stuff, whatever its physical properties, has come to be generally accepted in its place. The long and short of it is that, were I able to wave a magic wand right now, eliminating all obnoxious banking laws, disbanding the FOMC, and privatizing the Fed's remaining bits, including its clearing and settlement facilities, chances are we'd still find ourselves be on a paper dollar standard. Sheer momentum alone would tend to keep the dollar going, while the fact that the supply of basic dollars could no longer be expanded would, if anything, make the dollar appreciate. That's not saying that the new dollar standard would be perfect--far from it. But neither will it go "poof" and have gold appear, like magic, in its place.

So our future Wells Fargo may be allowed to issue all the IOUs it wants to, including circulating paper ones. But odds are that, unless other steps were taken to re-establish a gold standard, its IOUs will be promises to pay, not gold, but old-fashioned Federal Reserve dollars.

Warren manages, thank goodness, to avoid another popular misconception about free banking: the neo-Rothbardian claim that it would lead in practice to 100-percent reserves. "Wells Fargo," Warren says, "practices fractional reserve banking." But what, Warren imagines his companion asking, keeps Wells from issuing way more banknotes and other IOUs than it should? "The market will stop them, that’s who," says Warren. He's right, but "the market" can't work as he imagines it will. "In my scenario," Warren says,

Consumer Reports and a number of lesser known organizations track Wells Fargo and other banks. These organizations post daily figures online showing the number of Wells Fargo dollars (WF$) outstanding and the amount of gold holdings that the bank keeps in reserve to back these dollars. Premium subscribers, I imagine, can get an email alert any time a bank’s reserves fall below some specified levels. Large depositors will notify Wells Fargo of their intention to begin withdrawing deposits and/or demanding physical gold. Small depositors piggyback on the vigilance efforts of big depositors. They know it is not necessary for them to pester the bank when the big guys are doing it for everybody.

Terrific: Wells Fargo is free to go wild until Consumer Reports gets 'round to publishing its annual Fractional Reserve Bank special, in which Wells, assuming it is still around, earns it "unsatisfactory" rating, whereupon a run wipes it out at last. Runs, you see, are a little like pregnancy, in that there's no having part of one only. And if you think it makes sense for a worried depositor, large or small, to "notify" his bank before running, I strongly urge you to keep your money under a mattress. Finally, even if Consumer Reports or some other (presumably private) watchdog could somehow manage to supply real-time reports on Wells Fargo's reserve ratio, just how are consumers supposed to distinguish a reserve ratio that's just dandy from one that portends disaster? As we'll see, they can't do it by just guessing--and especially so if their guesses are as wildly off as Warren's are. (More on that below.)

If having people spy on its reserves won't suffice to keep a liberated Wells Fargo of the future in check, what will? The answer is still "the market," as Warren likes to say. But it's more precise than that: it's the competitive market for bank money, including paper banknotes, that matters. In that market a bank's notes, like checks drawn on it, make their way to (mostly rival) banks within a matter of days after being put into circulation. The rivals then return them to their source for payment. After offsetting payments are "netted out," banks' remaining dues to one another are settled in basic money. Consequently, any bank that's overgenerous in its lending doesn't have to wait for some watchdog agency to complain about its reserve ratio: it gets the message, and quickly, by seeing its reserves chipped away by its rivals.* In missing this, by the way, Warren paradoxically misses the key advantage of having multiple suppliers of convertible currency instead of just one. Free banking without a role for competition is like Hamlet...(blah blah blah).

As I mentioned, Warren avoids the misconception that a free Wells Fargo would resemble a Rothbardian money warehouse. Still, in imagining that Wells' fractional-reserve status would be "clearly outlined in the contract that depositors sign and...printed on their banknotes," he risks giving credence to the related misconception that the language on current bank depositor agreements and current and past redeemable banknotes is somehow misleading. In fact, no one who actually bothers to read a modern bank depositor's agreement can have any doubt that he or she isn't doing business with a mere warehouse. And though the phrase "fractional reserves" never appeared on past commercial banknotes, such notes, I've noted here previously, far from pretending to be warehouse receipts, were clear proof of debts contracted between their issuers and their holders.

Warren's free-banking fantasy is also fantastically off in its suggestion that a future free bank might hold reserves equal to a very substantial fraction--he uses 40% in his illustration--of its banknotes and deposits. Such high numbers reflect the view, traceable to Henri Cernuschi and repeated by von Mises, that open competition would force banks to hold much higher reserves than they've gotten away with historically. But consider: even the goldsmith bankers of the mid-17th century, when there was no question of banks being propped-up by government guarantees, implicit or otherwise (there was as yet no Bank of England to serve them as a last-resort lender), typically kept reserves equal to less than 30% of their liabilities--and this despite having relatively few, larger clients and very few ways to diversify.

The goldsmiths were also, one must admit, not the safest bankers ever. But consider the Scottish free banking system. Once the dust settled from the Ayr Bank's fantastic collapse, that system remained almost perfectly safe for the better part of a century, and yet managed to do so on specie reserves that frequently fell below two percent of their liabilities. Here again, the banks had no lender of last resort to turn to, Rothbard's suggestion to the contrary notwithstanding: although Scottish banks naturally placed funds in, and occasionally borrowed from, the London money market, they could never expect help from that quarter when they most needed it, which was during emergencies that tended to be felt most acutely there.

When one considers all the technological progress in interbank settlement technology, together with a still-more impressive increase in both opportunities for banks to engage in liability management and to employ highly-liquid securities as secondary reserves, its hard to imagine why the reserve ratios of any future free bank would be higher than that of Scottish banks two centuries ago. It's therefore unnecessary as well to worry that, were a future free banking system somehow to revert to a gold standard after all, its doing so would involve substantial real resource costs.

Warren's vision of his imaginary Wells Fargo's way of dealing with runs is, I think, generally spot-on, though I'm not sure that clearinghouses would get involved in extending emergency credit as he imagines might happen. (They did so in the U.S.; but that was a peculiar response to artificial restrictions placed upon their members' ability to issue their own banknotes.) He's also correct in arguing that having competing banks of issue doesn't mean having multiple monetary standards, though he makes free banks' inclination to adhere to a single standard appear to be merely a matter of doing what's most convenient for their customers, rather than what they cannot avoid doing in a business dedicated in the first place to receiving, and making promises to repay, some preexisting standard money. To repeat: banks aren't in the business of choosing monetary standards. Unlike a light bulb, a bank IOU isn't something its issuer can toy around with. That's why you will never see such a note with "New and Improved!" written across it, except perhaps in reference to changes in its physical design. (And even that would be tacky.)

Finally, to end on another positive note, Warren is to be commended for arguing that, were a future free banking system to witness occasional bank runs and failures, and even were it to inflict occasional losses on bank depositors and note holders, this would be no proof of its inadequacy. "Under my free banking scenario," he says, "depositors must take some responsibility for their actions." Show me a banking system where they don't have to do so, and I'll show you one that ends up being, not a dream, but a nightmare.
*Note, please, that this "adverse clearings" mechanism for constraining rival banks of issue has nothing to do with the fallacious "real bills doctrine" or with John Fullarton's related notion that bankers would be constrained to do no more than accommodate the "needs of trade" by means of the "reflux" of excess notes via loan repayments. Call it the "bad penny" theory of credit control.


Something Nice about Austrian Economics

by George Selgin January 11th, 2015 10:05 am

Austrian Economists

I know, I know: I haven't been terribly kind to Austrian economics on this blog, or rather, I have been positively unkind to certain sorts of Austrian economists, and especially to Late Pleistocene types who insist, on a-priori grounds (and against all sorts of evidence to the contrary) that fractional reserve banking can't work well, or wouldn't survive in a free market, or is inherently fraudulent. But before you scold me again about my bad attitude, try trying to talk some sense into this bunch over a span of several decades, and then see if you're still so inclined.

It's also true that I no longer consider myself an "Austrian" economist, and that I haven't done so for decades. I could list a dozen reasons why, starting with the shivers I get whenever I imagine being mistaken for a Homo-Austriapatheticus*, or some other sort of paleo-Austrian, and my aversion to even the slightest whiff of "enthusiasm," to use that term as Hume did. I'm convinced, furthermore, that the world would be better off if half of everything written containing the phrase "Austrian economics," excepting works pertaining to the history of economic thought, had never been written, and if the rest had omitted the phrase. This last observation isn't really as damning as it seems since, would that I could, I'd consign about two-thirds of all other academic writings on economics to oblivion. Still, I can't blame my Austrian friends for wondering whether I have anything nice to say about their school of thought.

Which brings me to my purpose, which is to put my criticisms of Austrian economics into their proper perspective and, in doing so, to blow a raspberry or two at those other economists who pride themselves in their smug contempt for "Austrian economics," and who, in displaying that contempt, can't be troubled to distinguish the blatherings of the pre-Neolithic crowd from the enduring contributions of the School's leading lights.

I can think of no better way to proceed than to harken back to the time of my own first exposure to those leading lights. It was back in 1980, when I was supposed to be earning a Master's degree in Resource Economics at the University of Rhode Island. I say "supposed to" because, after a few months in that program, I was pretty much fed-up with it. I'd imagined that resource economics, and marine resource economics in particular (which is what URI specialized in) would be a great way to combine my two interests, which were economics and marine biology. Think "Adam Smith with an aqua-lung" and you get the idea. But nothing doing: the economics of the program, far from resembling anything Smith had to say, consisted mainly of one Hamiltonian after another. Nor did I go scuba diving, or head off to sea, as I'd done often enough as an undergrad. Hell, I didn't even get to wade around a friggin' fishpond, as I'd done the summer before in Auburn, Alabama.  Instead I diverted myself by swimming a mile or more every morning at Charlestown Beach, and by working my way through the economics section of URI's library.

Actually it wasn't the whole economics section so much as the HG part that held my interest. During 1980, as you may know, the CPI inflation rate reached its highest post-WWII level, just shy of 15 percent, and was seldom below 13 percent. The big economics question was why; and that question concerning what real prices were up to interested me a heckuva lot more than any professorial prattle about "shadow" prices could.

What many of you won't know, unless you were there, is just how bad standard explanations for the inflation were. Keep in mind that for the most part the economics profession back then was still high on Keynesian economics--not the namby-pamby "New" sort taught in many of today's grad programs, but the 200-proof Hansen-Samuelson IS-LM elixir to which Paul Krugman and a few other nostalgics have lately become addicted. And if there's one thing an economist trained in what Axel Leijonhufvud calls the ISLaMic Arts doesn't want to have to deal with, it's pesky questions about movements in the CPI, or any other measure of the price level. You see, the whole wiz-bang apparatus of old-fashioned Keynesian economics is held-together by one carefully-concealed premise: to wit, the premise that the general price level may be regarded, not as a variable, but as a parameter--that is, something given. What's more, that "given" price level is assumed (though no old-fashioned Keynesian would ever admit it, much less express the fact in plain English) to be well above the value that might otherwise clear the market for money balances. Let this little engine of an assumption have its way, and it will handily pull the whole Keynesian freight-train, cute little IS-LM caboose included, along with it. But search every boxcar of that train all you like, the one cargo you will never find is a decent account of how the price level itself is determined, or why it should ever change.

No wonder, then, that the best explanation all those inebriated economists could come up with for the fact that prices were rising faster than ever was that unions or OPEC or both were getting more powerful, and were therefore able to "push" costs up. There was a grain of truth to such theories, of course: costs were going up, along with prices generally; and OPEC had certainly been flexing its muscles. But all the monopoly power in the world couldn't squeeze blood from a stone, or squeeze more and more and yet still more income from a public that had only so much to spend. Something else was enabling the unions and enabling OPEC. Everyone now knows what that was--assuming that Paul Krugman does. But back then very few did.

So there I was, in the stacks at URI, reading book after book in my quest to get to the bottom of the inflation, and finding every last one of them perfectly useless. Then I read Henry Hazlitt's The Inflation Crisis and How to Resolve It, and felt the way Colonel Nicholson must have felt when Colonel Saito finally let him out of his punishment hole--I mean that Hazlitt's bright light almost hurt after so many weeks confined in the dark dungeon of textbook Keynesianism. True, if you read Hazlitt's book today you might find fault with parts of it, as I undoubtedly would as well. But just try reading any of those other books I went through, and you'll agree that they were infinitely worse.

So much for my first, favorable impression of Austrian economics, for although Hazlitt himself was a journalist, he pointed to the Austrian economists as his own guides. I didn't stop with him of course, but kept reading, moving on to more general works on monetary theory, while making a point of including more Austrian works on my reading list. At last I felt ready to tackle von Mises' Theory of Money and Credit, and once again I was struck by how superior it seemed to non-Austrian works covering similar ground. The more I read, the more often I got that same feeling. I don't mean that there were no non-Austrian books that I also liked. I simply mean that the Austrian books I read, mainly by Mises, Böhm-Bawerk, Hayek, and Menger--were always among my favorites. They still are.**

My classroom experience, in the meantime, only served to reinforce my impression that, compared to the Austrian economics I was reading, mainstream economics ca. 1980 was lousy. In one class I remember being confronted by a large IS-LM diagram, made to seem even larger by my habit of sitting in the front row, just opposite the black- (actually green) board. The professor, sticking to the Keynesian script, showed us how, by increasing M, the government could lower i while raising y. (Note that little "y." Without it, IS-LM looses a lot of its mystique.) Up goes my hand--another bad habit. Prof.: "What is it now, Selgin?" Me: "Well, according to this diagram, if we just boost M enough we can borrow for practically nothing, and have all the output we like. So why don't we do that?" Prof. (impatiently): "Well, at some point you get full employment and then things are different." Me: How do we know we aren't at that point already?" Prof. (annoyed): "Well, there are still some unemployed people, aren't there?" Me: "But... " Prof.: "We need to move on."

And on he went. As for me, I was ready to move on as well, though not at URI, and I said as much to another professor with whom I'd originally planned to study. Fortunately for me, not long afterwards he happened to come across a copy of the latest Austrian Economics Newsletter, which he passed on to me. It was the one with Israel Kirzner's photo on the front page. That was the first I'd heard about a surviving remnant of the Austrian school, run by a student of Mises himself.  The knowledge would eventually come in handy, for not long afterwards, after finally quitting the URI program, I  found myself working as a "combustion engineer," climbing the insides of power-plant smokestacks when I wasn't sitting on my hands in a laboratory in Stamford, Connecticut.  In other words, I was  finally at sea, in a manner of speaking, without the foggiest idea of what to do next.

Luckily for me, one of the Austrian works I'd read while at URI was Hayek's Denationalisation of Money. Hazlitt introduced me to the school, and Mises and Böhm-Bawerk showed me the prodigies of scholarship of which its representatives were capable. But it was Hayek who opened my eyes to a vast, unexplored realm for new research. So when, while I was loitering inside that lab, I came across a tiny notice in Reason magazine, offering small grants for summer research, a ready-made proposal was also loitering inside my brain. I duly wrote the thing down and mailed it off to IHS, which was still in good-old Menlo Park back then, receiving from them 1500 smackers in return. Best of all, I got to know Walter Grinder, who was to become a great mentor to me, as he has been to so many others.

That was how I came to write my first paper on free banking. It was called "Free Banking and the Monopoly in Money," and it wasn't all that bad, considering.  Still it never saw, and never will see, the light of day. But it did something better than that, by introducing me, with Walter Grinder's help, to Larry White, who was finishing his own dissertation at the time, and was about to enter the job market. After reading a few chapters of his work, I wrote Larry asking him to let me know when he got a job, because I planned to be his first student. For safety's sake, and remembering that copy of the AEN, I also applied to the NYU Austrian program. As luck would have it, Larry got his first job there, and I got a midnight call from Israel Kirzner himself telling me I'd been granted a fellowship. I remember Kirzner saying, "I...h..h...ope I h..h..aven't...w..w...aken you," and replying, "Professor Kirzner, with this news you could call any time!"

So off to NYU I went, and let me tell you, you couldn't have asked for a better education than I got from the Austrian program there. And I don't mean the education I got from the ordinary NYU PhD program, which the Austrian fellows had to endure along with everyone else.  The regular NYU program was run-of-the mill, or somewhat worse than run-of-the-mill, thanks to the fact that NYU back then suffered from a severe inferiority complex, which it tried to assuage mainly by making its grad students suffer through more, and tougher, mathematics than the Ivy league rivals of which it was jealous. I know this because I compared notes with students attending those schools. Among other things, none of them ever had to sit through a lecture like the one I and all my classmates got upon first entering the NYU program, in which we were told to have a good look at the students sitting at our sides, because only one of each set of three would be around a year later. "What corny B movies did this jerk get that from?" I asked myself. But a year later it wasn't just two out of three who had dropped out: it was two and counting. I ought to know, because more than once I came within a hair's breadth of becoming dropout number three.

No, sir: what made NYU great back then was the Austrian program. Thanks to it, not only did I get to learn the history of economic thought from Israel Kirzner and economic methodology from Fritz Machlup. I got to attend one of the best economic workshops anywhere: the famous Austrian seminar that's still going strong. I learned more economics by sitting in that seminar than I did from all my required classes combined, which were mostly devoted to applied mathematics and statistics. Better still, I got to spend time with a bunch of grad students who were passionate about economics. Passionate. Just attend a few student sessions--or sessions of any sort for that matter--at the AEA or SEA or Econometric Society meetings, and see how much passion you come across. Then tell me there wasn't anything special about those NYU students.

And they were no less passionate about economics outside of class. All of them read, and some read voraciously, papers and books on economics that weren't on any course syllabus. That was a rare thing among economics grad students even in those days; today econ grad students who make time for extracurricular reading--or who merely believe that such reading might possibly be worthwhile--are rare as hens' teeth. I know that because I served on plenty of faculty recruitment committees while working at UGA, and so got to see the sort of material other schools, including some top ones, churned out. For example, I remember mentioning William Stanley Jevons to a candidate whose dissertation was on monetary search models, and getting a blank stare for an answer. ('Twas Jevons who came up with the phrase, "double coincidence of wants.") That, by the way, was one of the better candidates. On another occasion my fellow recruiters and I thought we might succeed in getting candidates to stop droning on about their boring macro dissertations by asking them to name for us their favorite dead macroeconomists. After half a dozen couldn't think of anyone--not even Keynes, for crying out loud!--and another named Milton Friedman, who was then very-much alive, we gave up.

Nor were my fellow grad students at NYU merely interested in Austrian economics. The whole history of economic thought, and much else besides, interested them. More than a few were hard-core bibliophiles, three of whom lived on different floors of the same rickety lower East Side tenement. Their apartments were furnished with nothing save a mattress and stacks of books, with a narrow chasm, reminiscent of the one at Petra, running through the stacks from the bathroom to the mattress, and another one like it running from the mattress to the kitchen. After seeing them I expected the tenement to come crashing down any day, inspiring a headline in the Daily News, or perhaps the Post, screaming, "Bookworms Buried Alive in Alphabet City Avalanche!" Despite that, I got hooked on books myself, and so ended up standing outside of the Strand first thing every Saturday morning, with several other Austrian nuts, waiting for the opening bell to ring so that we could all pounce on the New Arrivals table that had been freshly stocked the night before. I emerged from those raids with my knuckles bloodied, but also, occasionally, with some damned hard-to-find books. What's more, by gosh, I read them. And I learned a lot of economics that way, and a fair bit about other subjects. Other subjects! In grad school!

But just how valuable, some of you may wonder, could the economics in all those old books have been? I will tell you: far more valuable than the vast majority of things I learned in my regular grad school classes, including what I learned from articles on the reading list. You see, the stuff that was considered leading-edge back then, which is what most of the classes were about, is now for the most part as dead and forgotten as the Kings of Nineveh. And that same fate awaits most of what's being taught in today's econ programs. Yet Smith, Bagehot, and Wicksell, and many others beside, are as alive as ever, if not more alive than ever. That, of course, is what it means for a work to count as a classic. But where I went to school, at least, it seemed that the Austrians were the only ones who appreciated the fact, for never once did any of my non-Austrian professors ever venture to suggest that I might make good use of my time reading something that was as much as a decade old, let alone older than that.***

Worse than that was the obvious disdain shown by many (though by no means all) of NYU's non-Austrian economics faculty toward their Austrian colleagues. I well remember the day when the usually courtly Fritz Machlup came to class visibly upset. He'd just been informed, he told us, that the international finance class he'd taught for decades had been taken from him and assigned to some young Turk. Imagine: Fritz Machlup, himself then already a classic, but not quite tooled-up enough to be worthy of teaching "real" economics (as oppose to soft stuff like methodology) to NYU students! Then there was the time when my first-semester micro teacher asked me to join him after class for a drink. Somehow I'd managed to impress him, and though I was too much of a tyro to realize it at the time, he meant to get me to write under him. Of course he couldn't have succeeded, as I was determined to work on free banking with Larry. But even if I hadn't been it wouldn't have happened, for the first thing he said once we were sitting at the bar was, "You seem pretty smart. So why are you wasting time with those Austrians?", to which I replied, thoughtlessly but without guile, "Because I think they're the best economists here." I suppose that the rest of that drinking session wasn't much fun for either of us. Fortunately I can't remember, and anyway the fellow was a good sport, for I still got an A in his class.

So the truth is that I owe a great deal to Austrian economics, and particularly to the Austrian economists, both actual and in the making, with whom I interacted at NYU. Had it not been for the Austrians, I might still be toying with Lagrangian multipliers, or struggling to figure out why interest rates don't behave as if they served to clear the market for money balances. Worse, I might never have been exposed to the works of so many great economists, the great Austrians among them, from which I continue to draw knowledge to this day. Finally, I would never had learned about free banking, or met Larry White, or gotten to write for, assuming that it would still have existed. For that and a lot more, I say to my Austrian friends: thanks for everything, and keep on inspiring others.

*Please note that the term refers to a tiny subspecies of the Austrian economics genus. I contemplated having a link to the Wikipedia page of an actual Homo-Austriapatheticus specimen, but decided not to because I might get sued, or stoned.

**Nota Bene:  The phrase "Austrian economics" does not occur anywhere in these works, unless in introductions added long after their original appearance.

***Nor did the fact that some of the new stuff we were learning also had lasting value make reading older things any less valuable. For example, although the then counter-revolutionary New Classical economics I was taught was indeed valuable, I found it far easier to grasp than I might have thanks to having read the essays by Albert Hahn gathered together in The Economics of Illusion, which contained the gist of it, though written decades before, and in plain English.


Why Discuss It?

by George Selgin January 3rd, 2015 3:47 pm

I've been busy lately preparing a long-delayed review essay on Charles Calomiris' and Stephen Haber's Fragile by Design. Although, having argued the same point for many years now, I was bound to approve of that book's thesis to the effect that banking systems, rather than being inherently unstable, are made so by bad government policies, the fact that I did only made it all the more disappointing to encounter in the same work the opinion that talk about free banking (referred to obliquely and inaccurately as "libertarian utopianism") is a waste of time because governments aren't about to embrace the idea.*

That encounter goaded me to reach for my copy of John Morley's superb 1898 essay, On Compromise, in which he asks,

How far, and in what way, ought respect either for immediate practical convenience, or for the current prejudices, to weigh against respect for truth? For how much is it well that the individual should allow the feelings and convictions of the many to count, when he comes to shape, to express, and to act upon his own feelings and convictions? Are we only to be permitted to defend general principles, on condition that we draw no practical inferences from them? Is every other idea to yield precedence and empire to existing circumstances, and is the immediate and universal workableness of a policy to be the main test of its intrinsic fitness?

In a nutshell, Morley's answer to all of these questions is, "Not a bit"--not, at least, so long as one wishes to avoid the "disingenuousness of self-illusion" and consequent "depressing deference to the existing state of things, or to what is immediately practical," that are the inevitable "result of compromising truth in the matter of forming and holding opinions":

An excessive devotion to what is 'practical' tends to make people habitually deny that it can be worth while to form an opinion, when it happens at the moment to be incapable of realization, for the reason that there is no direct prospect of inducing a sufficient number of persons to share it. 'We are quite willing to think that your view is the right one, and would produce all the improvements for which you hope; but then there is not the smallest chance of persuading the only persons able to carry out such a view; why therefore discuss it?' No talk is more familiar than this. As if the mere possibility of the view being a right one did not obviously entitle it to discussion; discussion being the only process by which people are likely to be induced to accept it, or else to find good grounds for finally dismissing it.

"Seen from the ordinary standards of intellectual integrity," Morley says, it is contemptible enough that many politicians should be unwilling to entertain an idea until they're convinced that it is "capable of being at once embodied in a bill." Still "there are excellent reasons why a statesman immersed in the actual conduct of affairs, should confine his attention to the work which he finds to do." But the fact that politicians are so preoccupied

furnishes all the better reason why as many other people as possible should busy themselves in helping to prepare opinion for the practical application of unfamiliar but weighty and promising suggestions, by constant and ready discussion of them upon their merits... As it is, everybody knows that questions are inadequately discussed, or often not discussed at all, on the ground that the time is not yet come for their solution. Then when some unforeseen perturbation, or the natural course of things, forces on the time for their solution, they are settled in a slovenly, imperfect, and often downright vicious manner, from the fact that opinion has not been prepared for solving them in an efficient and perfect manner.

If, while reading that last sentence, the words "Dodd-Frank" bounced around your cerebrum, you get the point.

Calomiris' and Haber's uncharitable treatment of the free banking literature--and, within the academy at least, nothing can be more uncharitable than to dismiss ideas while also taking care to avoid referring to, let alone actually addressing, the works professing those ideas--compels me to quote one more passage from On Compromise. This time the words, instead of being Morley's own, are ones he himself quotes from Isaac Taylor's Natural History of Enthusiasm:

An opinion gravely professed by a man of sense and education demands always respectful consideration--demands and actually receives it from those whose own sense and education give them a correlative right; and whoever offends against this sort of courtesy may fairly be deemed to have forfeited the privileges it secures.

I have a lot more to say about Fragile by Design, and especially about how its authors' commitment to a reductive sort of Public Choice theory causes them to adulterate a generally sound understanding of the legislative causes of financial crises with an excessively pessimistic, if not a fatalistic, view of the possibility of reform. But if I ever wish to get around to saying it, I had better stop blogging.
*See pp. 491-2. Although Calomiris and Haber never refer to "free banking" as such, except in its degenerate antebellum U.S. variant, that it is free bankers of the sort they have in mind is evident enough from the views they attribute to "libertarian utopians," such as their treatment of the Scottish system as most closely approximating their ideal.


More on Counterfeit Currency

by George Selgin December 30th, 2014 5:58 pm


As devoted followers of this blog already know, one of my (many) free-banking hobbyhorses concerns counterfeiting. Assuming similar penalties for convicted counterfeiters, is a system of competing suppliers of redeemable paper currency more or less likely to encourage counterfeiting than a currency monopoly? Having sketched-out some basic ideas on the topic, I'd like to see more economists address it systematically, instead of just deferring to conventional wisdom. That wisdom has long had it that a system of competing banks of issue encourages counterfeiting, because, as the variety of legitimate banknotes increases, so does the cost of information required to distinguish legitimate notes from fake ones. So (the argument goes), whatever its other merits or shortcomings, central banking at least has the virtue of reducing the volume of spurious paper money.

Back in 2007 this prevailing view got a major boost when Harvard University Press published A Nation of Counterfeiters, by Stephen Mihm, a professor of history at UGA, where I was also employed at the time. Mihm views the extensive counterfeiting of U.S. banknotes prior to the Civil War as an inevitable consequence of the failure of the Federal government to assume responsibility for supplying the nation with paper currency. According to HUP's blurb for his book,

Few of us question the slips of green paper that come and go in our purses, pockets, and wallets. Yet confidence in the money supply is a recent phenomenon: prior to the Civil War, the United States did not have a single, national currency. Instead, countless banks issued paper money in a bewildering variety of denominations and designs—more than ten thousand different kinds by 1860. Counterfeiters flourished amid this anarchy, putting vast quantities of bogus bills into circulation.

In a brief essay published elsewhere, Mihm observes that

The antebellum era’s counterfeiting problem was a consequence of the nature of the money supply at this time. There is a tendency to assume that the greenback is a timeless creation, that the nation-state has always taken the lead in issuing and safeguarding the currency. Nothing could be further from the truth. Prior to the Civil War, the United States exercised little control over the money that circulated within its borders, having abdicated that responsibility decades earlier.

In fact, the roots of the problem date back at least to the previous century, when the colonists began issuing paper money contrary to the wishes of the imperial authorities.

In fact, as I tried to convince Stephen back when, and as a glance at several other nations' experience might have suggested to him, the "roots" of the U.S. counterfeiting problem did not go nearly so deep as he supposed. The problem was not that the Federal government refused to enforce a monopoly of currency. It was that, by refusing to regard banking as a form of "commerce," it tolerated state and territorial governments' interference with the development of nationwide branch banking, not to mention their occasional inclination to outlaw banking altogether. Hence the proliferation of so many thousands of tiny banks, and the corresponding lack of facilities for the prompt clearing and redemption of rival banks' notes. Rampant counterfeiting of banknotes wasn't a problem in Canada before the Bank of Canada's establishment in 1935, or in Scotland before Peel's Act was applied there. By treating the antebellum situation as a result of the absence of a Federal monopoly rather than as that of an excess of state-government interference with free trade in banking, Mihm reinforces the quite misleading notion--the source of so much mischief--that with respect to currency, as opposed to most other necessities, competition is a bad thing.

As for the simple transactions-cost argument favoring a single currency supplier over multiple ones, the trouble with it, as I tried to explain in my "Notes" linked above, is that it's far too simple. Sure, more notes mean higher information costs, and therefore more counterfeiting other things equal. But the case here is one in which other things are manifestly unequal. Most importantly, in a system of competing currency suppliers, and especially one involving a well-developed system of bank branches and clearinghouses, issuers will routinely return their rival's notes for payment, just as banks "return" checks drawn upon their rivals for payment, virtually if not actually, today. Non-note-issuing banks do not, on the other hand, routinely return a central bank's notes for payment, even if those notes are mere claims to precious metal, preferring instead either to retain them as vault cash or to exchange them for central bank deposit balances.

Though this might seem a small difference, it has very large implications, because it means that, although a competitive system does involve more distinct varieties of legitimate banknotes, if nothing like the huge numbers of banks seen in the antebellum U.S., it also involves much shorter average circulation periods (the length of time between initial issuance and return to their source) for those notes. This short circulation period in turn means more frequent occasions for expert scrutiny and detection of counterfeits, and a correspondingly greater chance of would-be counterfeiters getting nabbed.

A competitive bank of issue also has a greater incentive, ceteris paribus, than a monopoly issuer does to protect itself against counterfeiters, by catching them and by making its notes hard to replicate, because, having but a relatively small share of the total currency market to itself, it incurs greater harm from any absolute nominal sum of counterfeits of its notes. A monopoly issuer of fiat money, at the opposite extreme, offers an especially tempting target to counterfeiters, both because it's notes are only returned for "payment" (in fresh currency) once they have been badly worn, and because it needn't fear being ruined even by large quantities of undetected replicas of its notes, and so is less inclined to embellish those notes with cutting-edge anti-counterfeiting devices.

In short, the answer to the question whether competition encourages or discourage counterfeiting isn't a matter of mere logic, simple or otherwise, but one that must be resolved by referring to experience.

Alas, the nature of the subject is such as makes quantitative evidence scarce even today--a situation not helped by the tendency of enforcement agencies to treat their counterfeiting data as classified information--and almost completely unavailable for centuries past. "Anecdotal" evidence from plural note issue systems not hampered by the same infirmities as antebellum U.S. arrangements must therefore carry the day. But even that sort of evidence is hard to come by. Consequently I was very pleased to discover, in reading some old British banking-controversy documents recently, some relevant testimony. The source is Charles Lyne's generally excellent pamphlet, published anonymously in 1821, entitled "A Review of the Banking System of Britain: With Observations on the Injurious Effects of the Bank of England Charter" etc. The "lower orders," Lyne notes (pp. 78-82),

are very unfond of Bank of England notes, from the numerous forgeries committed upon them; and unless, during the existence of a "run" on their provincial Banks, generally prefer their paper, however doubtful they may suspect them to be, ultimately, in the point of security. The prohibition of provincial issues under £5, would have greatly increased the forgeries of Bank of England notes, which were to supersede them, and these forgeries are already sufficiently numerous...; on the other hand, the circulation of each provincial Bank being confined, in a great measure, to a comparatively small section or division of the country, any attempt to circulate forgeries upon it, are almost immediately detected. Besides, there Bankers are so sensibly alive to the injurious effects of a successful forgery on their notes, that they ferret out the forgers with the eagerness of men whose interests are deeply at stake; and with so many local checks of this description, provincial forgeries are rarely attempted. When they do take place, the public is seldom allowed to lose much by them; for the Banks find it more for their own interest, to receive, as genuine, two or three hundred pounds of forgeries, than to excite public alarm by refusing to do so, which might injure their circulation very materially... Every pound so paid for forgeries, communicates, if possible, additional energy to to their exertions for detection of the criminals, and usually produces improvements in the paper, water marks, engraving, signatures, &c. of the notes of such Bankers, which render their imitation more difficult afterwards. From every inquiry, the loss sustained by the Banks, and the public, from forgeries of Scots notes, betwixt 1815 and 1820, did not exceed £500 in all, or £100 annually.

So supine were the directors of the Bank of England on this point, that they not only disregarded all remonstrances respecting the execution of their notes until very lately, but also retained the forged notes presented to them, granting the holder merely what was termed an investigator's ticket, specifying the date, sum, and marks on the forgery; so ineffectual a method of enabling the holder to trace back through whose hands it had passed, that it looked rather like a bounty or protection to forgers... . But the interest which an individual feels in the case of a £1 or £2 forgery, is seldom sufficiently powerful in itself, to lead to the detection of the makers; and even when aided by the exertions of the Bank's law agents or officers, there must be fewer chances of detection, than if the Bank's circulation was more local or of smaller in amount, another reason why rival issuing Banks should be established in London.

Although one pamphleteer's observations can't be expected to settle the larger debate, I note that Lyne's claims concerning the relative abundance of fake Bank of England notes compared to that of Scottish bank notes agrees with testimony to the same effect from a number of other sources. What he adds that's new is the claim that the notes of English provincial banks--then limited by law to six or fewer partners--were also less frequently imitated than their Bank of England counterparts. Such testimony should at very least suffice to warn students of banking history to resist drawing conclusions about the pros and cons of currency competition based solely on U.S. experience.


A Free Banker's Christmas Wish List

by George Selgin December 21st, 2014 9:40 pm


As is usual this time of year, my mom and brother, and a close friend or two, asked me to share with them some of the items I'd included in the list they assumed I'd already mailed to the North Pole, as I have done diligently every year since I first learned to spell "toy." In the past I've always been happy to indulge them, for my petitions to ol' St. Nick were, truth be told, long enough to raise the eyebrows of more than a few elves. "The man who has everything" described, not the man that I've been, but the one I've always aspired to be.

But this year that's all changed, thanks to my having traded my 2800 square-foot place in Athens for a DC condominium less than a quarter as big. Speaking of her similarly small apartment in Manhattan, Dorothy Parker once said that she just had room enough to lay her hat and...a few other things. My social life is a lot duller than Parker's was, so as far as my place is concerned "my hat" pretty much says it all.

So I faced the question: what should a man who has no room for anything ask for for Christmas? And that's when my bright idea came. Books, paintings, neckties, pottery--love them though I do, they all take up space. So, what do I love that doesn't? You guessed it: free banking! Instead of having Santa or my family and friends deliver stuff to me for which I haven't any room, why not have them deliver me, and everyone else for that matter (for here is a genuine public good if there ever was one), from something, to wit: our crummy, centralized monetary system!

Much as I'd like to take my leave from monetary tyranny lock, stock, and barrel, I don't want to burden my loved ones, or some elves, unnecessarily. So, at the risk of setting off another round of wailing by those hard-core libertarians who prefer uncompromising sloganeering to actual (but namby-pamby) change, I offer here a list of relatively modest requests, with the assurance that fulfillment of any one of them would make me as happy as any other present might--perhaps even happier than I was that first time I wrote to Santa, when he, generous fellow, interpreted "toy" to mean a Tiger Joe tank!


Dear Santa,

I've been a good boy this year, as usual. But this time, For Christmas, instead of more toys or other stuff, I'd like you to see about doing any or all of the following:

1. Make the Fed follow a monetary rule. Any rule beats almost unlimited discretion, which is what we've got now, though a nominal spending growth rule would be best.

2. Send the FOMC packing. It's simple: if you have a rule, you don't need them. All they can do is muck it up. Replace the FOMC with a computer that determines the open-market operations needed to implement the rule. Better still, develop a tamper-proof Bitcoin-style ("Bitdollar") protocol that implements the rule automatically.

3. Abolish the Primary Dealer system: we don't need it any more than any other country does. Getting rid of primary dealers will also make it easier to

4. End Too Big To Fail, which will in turn make it easier to

5. End Fed discount-window lending, or at least "expansive" discount window lending.

6. Consider making sure, while you're at it--and lest the Fed try more funny business--to close the "emergency lending" loophole.

7. Since the Fed has no no reason to keep an eye on banks that can't count on bailouts from it (and can't be counted on to keep an eye on them even when it does have a reason to do so), how's about getting it out of the bank supervision business altogether?

8. Since these are all pretty tall orders, even for a fat fellow who manages somehow to clamber through who knows how many billions of chimneys in a single night, while you work on them perhaps you could get Congress to pass the Centennial Monetary Commission Act, so we can at least get them to start talking about these and other ideas for fixing the Fed.

9. And finally, a real easy one for you: how's about sticking it to those zinc lobby liars by finally getting rid of all those stupid pennies?

10. Oh wait, I almost forgot my most important wish of all, which is that you please see to it that all my pals, and all readers of this blog (including those who don't care a whit for me or my ideas) have a very



Free Banking and the Dollar

by George Selgin December 12th, 2014 5:51 pm

I've been getting some flak lately from hard-core free market types for occasionally saying some nice things about NGDP targeting, and especially for suggesting, in the course of a recent Cato forum contribution, that we might improve upon the present U.S. arrangement by replacing the FOMC with a tamper-proof Bitcoin-type protocol that automatically adjusts the output of base dollars so as to maintain a steady NGDP (or, better, Domestic Final Demand) growth rate. Call the dollar thus reformed the "Bitdollar."

My Bitdollar proposal, my hard-core critics maintain, places me firmly in the ranks of apologists for state "manipulation" of the money supply. Consequently I am, by their reckoning, a turncoat in the fight for monetary freedom, and (since I still have the brass gall to post on a site called "") a hypocrite to boot.

What have I to say in response to such charges? Considering their sources, I'm tempted to settle for a Bronx cheer. But as some others may wonder if there isn't some merit in their accusations, I think I'd better indulge my critics by entering a plea of "Not Guilty."

My defense? It is simply this: that while I'm all for monetary freedom and competition, I'm also for reforming the U.S. dollar, which for me means freeing it from control by discretionary central bankers. Like it or not, the dollar is presently the standard money, not just of several hundred million U.S. inhabitants, but of many millions of inhabitants of other countries. What's more, these millions, unlike holders of U.S. securities, hold fiat dollars under some degree of duress, because a combination of network externalities and legal restrictions makes it almost impossible for them--my hard-core critics included--to survive without equipping themselves with dollar-denominated exchange media, or because they live in places where the dollar seems rock-solid compared to anything local authorities have to offer.

Consider, then, some other purportedly free-market strategies for monetary reform, and the alternative fates to which each would consign the world's hapless dollar holders. There is, first, the inevitable catastrophe strategy, according to which, in the wake of a long-forestalled but nonetheless inevitable hyperinflation, a state of monetary freedom (gold version, usually) emerges Phoenix-like from the dollar's ashes. Then there's the level playing field strategy, which supposes that mere elimination of legal tender laws and other government-erected impediments to free choice in currency would provoke a spontaneous switch from dollars to other currencies, leaving to the Fed the choice of either shedding assets to preserve the dollar's value, or letting it become worthless. Next there's the back to gold strategy, in which the Fed (or some replacement agency) is compelled to turn present "IOU nothings" back into redeemable claims to gold. Finally, there's the frozen Fed strategy, which equates any change in the stock of base dollars with monetary interventionism, and therefore treats a frozen base as the closest fiat-money equivalent to monetary laissez-faire.

Unless you happen to live in a bomb-proof shelter equipped with a lifetime supply of canned goods, the catastrophe strategy will, I trust, strike you as undesirable both because you might be among the people wiped-out by the anticipated hyperinflation, and also because that hyperinflation could be a long-time coming. A long delay is also likely to be in store for those banking on the level-playing field strategy, which downplays, I think severely, the likelihood that the dollar will stay in the saddle so long as catastrophe doesn't strike. As for a return to gold payments, I've explained elsewhere why I doubt such a return could be sustained, assuming it might be achieved at all.

That leaves the frozen Fed strategy. For this alternative I admit to having considerable sympathy: I can hardly do otherwise, having proposed the idea myself in my first book (see chapter 11). Besides, unlike the other plans this one could preserve the dollar network whilst safeguarding dollar holders from the Fed's machinations. But in what sense is this strategy any less of a cop-out than my now favorite plan for replacing the present Federal Reserve dollar with an NGDP- (or Domestic Final Demand) stabilizing Bitdollar? If a tamper-proof Bitdollar is a form of monetary central planning, then so is a frozen Fed dollar. The difference between the schemes is, not that one involves a planned base money stock and the other doesn't, but that one involves a fixed base money stock and the other doesn't.

But, you may ask, isn't a fixed stock of base money more consistent with laissez-faire than a stock that grows at some constant rate while also adjusting, albeit automatically, in response to changes in the real demand for base money? No, it isn't. Consider the classical gold standard, or any commodity-money regime for that matter. Such a regime involves, not a constant monetary base, but one that tends to expand along with growth in the real demand for base dollars. Thus the long-run price-level stability that was one of the gold standard's most noteworthy achievements. Whatever else it might be doing, a discretionary Fed that insisted upon keeping the monetary base constant would not be emulating a gold standard. Instead, it would be pursuing a policy that might well lead to disturbances as serious, if not considerably more serious, than those that could be justly attributed to the historical gold standard or (for that matter) than those that might arise today under a discretion-based regime that yielded low and steady inflation. In any event the belief that a central bank is "doing nothing" when it chooses to maintain a constant monetary base (or constant stock of any monetary aggregate) is my personal choice for top honors (and, take my word for it, the competition is stiff) in the "crudest free market monetary fallacy" contest.

Free banking would, to be sure, go a long way toward reducing the risk of money shortages, and consequent downturns, in a frozen-base regime, both because it would allow changes in the relative demand for currency to be accommodated through greater emissions of private banknotes (or their digital counterparts) without need for more base money, and because changes in the free-banking base-money multiplier would tend (for reasons also given in The Theory of Free Banking) to automatically compensate for changes in the velocity of money. But these tendencies would still not suffice to avoid some risk of unwanted deflation--which is to say, deflation that's not just a reflection of productivity gains.* In particular, they would not allow for monetary expansion to accommodate growth in the supply of factors of production, and of labor especially. An automatic and tamper-proof regime providing for a constant spending growth rate would come closer to avoiding both monetary excess and monetary shortages. And that's why I favor such a regime, now that Bitcoin has suggested a means for implementing it.

It would be unnecessary for me to say, where it not for certain contrary animadversions, that, far from being a monetary freedom apostate, I remain as committed to free banking, and to monetary freedom in the more general sense, as ever. I still pine for truly unregulated banking, minus all the regulatory red-tape but also minus government safety nets and the prospect of Fed (or Treasury) bailouts. I still oppose all artificial restraints upon free trade in currency. I still would rather have private mints coining and private firms issuing our small change, for goodness sake! But I also want to see the dollar made safe and sound, and the sooner the better; and I can think of no better way of making it so than by replacing the present discretion-based version with one that provides for an automatically-determined supply of dollars--an automatic mechanism not unlike the one that characterized the gold standard, though one both more conducive to short-run stability and less dependent upon untrustworthy promises.

*I can hear certain self-styled Austrian economists grumbling to themselves, "but there's nothing wrong with any sort of deflation!" Here is another good candidate for the previously-mentioned contest. Like it or not, in today's world, many prices, and wage rates especially, are notoriously "sticky" downwards, which means that a plunge in general spending is bound to result in otherwise avoidable unemployment. True, Murray Rothbard says otherwise in the theoretical part of America's Great Depression. But then he spends the rest of the book explaining how Hoover changed everything with his silly high-wages doctrine. Whether or not price stickiness originated with Hoover, it certainly didn't end with him!


We Are All Free Banking Theorists Now*

by George Selgin December 7th, 2014 12:33 am

(*And we always have been.)


Yesterday, while giving Cato's interns an impromptu talk about my work, I found myself saying something that seems worth putting in writing. This was that the difference between me and Larry White and Kevin Dowd, among others, and most other monetary economists, isn't that we theorize about free banking, and they don't. It's that we're mindful of our free-banking theories, whereas they're mostly heedless of their own.

Consider: an economist says that central banks prevent or limit the severity of financial crises, or that without mandatory deposit insurance even sound banks are likely to face runs, or that banks can never be expected to hold enough capital unless we force them to, or that commercially-supplied banknotes will tend to be discounted. All such claims--which is to say any claims about the need for or consequences of government intervention in banking--depend, if not on an explicit understanding of the nature and workings of a laissez-faire banking system, then on some implicit understanding. And this understanding in turn implies a theory of some sort, for reference to experience alone won't suffice for drawing the sort of sweeping conclusions I'm talking about. It follows that all economists who have anything to say about the effects of government intervention in the banking system are either self-proclaimed free banking theorists or are free banking theorists who don't admit (and perhaps don't realize) it.

The rub is that tacit or subconscious theories of free banking--the sort people rely upon when they are "doing" free banking theory without being conscious of it--are likely to be bad theories because, being unstated, they can't be challenged, and, being unchallenged, they don't tend to be systematically corrected. A self-conscious free banking theorist confronted with some claim of banking-market failure might point to his own theory suggesting that no such failure exists, and might also point to contrary evidence. But he can't generally infer, and therefore can't directly contradict, the theory behind the claim.

If even economists who've never heard of free banking, or who dismiss both it and the people who take it seriously, nevertheless subscribe to some free banking theories of their own, where do their theories come from? As I can't read other economists' minds, I can't pretend to know the answer. However, I can, and I will, hazard a guess or two.

Consider, if you will, your typical fresh PhD, having monetary or (more commonly) macroeconomics as a specialty, as might have been disgorged by any save a handful of the doctoral programs in the U.S. sometime during, say, the last 30 years. In all likelihood that graduate never took a class on economic history, let alone one on monetary history or (least likely of all) the history of economic thought. Nor is he or she likely to have become familiar with even present day monetary institutions through any other coursework, most of which is devoted to mastering either statistical methods or highly abstract models. As for the monetary sequence itself, it is likely to have involved toying with Overlapping Generations models, which don't even get the definition of money right, or Woodford-style neo-Wicksellian economics, which (unlike the Swedish real McCoy) strives to avoid using the "m" word altogether. Some better students, to be sure, will make up for the lack of institutional meat in their bland graduate-school porridge by grabbing the occasional vitamin from the library. But even when I went to school (NYU, class of '86), that sort of thing was relatively rare. Today, to judge from the many grad students I talk to, a student who dare's to do it, besides risking failure by having less time left to study for prelims, is sure to be regarded as a weirdo.

After graduation, perhaps? So far as most economists employed in research universities are concerned, Fuggedaboudit. Publish or perish means, for the vast majority, polishing up the three-articles that comprise their dissertation, and then milking the same highly-specialized human capital that sufficed for producing those "chapters" for all it's worth, which, with luck, will be additional articles enough to get one over the tenure threshold. With the tenure clock ticking inexorably, and journals taking their sweet time to return reports, who can afford to be intellectually curious? After tenure? Not likely, since most tenured faculty, having developed a shtick which, with the help of some elegant variations, may serve as well in getting them promoted again as it did in getting them tenured, still won't get around to learning stuff that they now regard, with perfect justice, as perfectly irrelevant to mastering their profession. Better to angle for department head, or (for those with higher aspirations) to take up golf.

The upshot of all this is that most of what our monetary economist knows or believes about monetary institutions he or she learned as an undergraduate. And what was that? To infer from the contents of most principles and money and banking textbooks, very little, and much of it misleading. Of monetary history, in particular, such books (1) say very little, if anything at all; (2) refer (if written for the U.S. market or by U.S.-trained economists) only to U.S. experience; and (3) get that wrong. Reading such books, you are quite likely to learn (for examples) that banking started out as a big swindle, that before the Civil War U.S. banks were hardly regulated at all and that, for that reason, American's were saddled with all sorts of banknotes, most of which were worth far less than their face values; that the Federal Government nationalized the currency supply, forcing state banks out of the business, during the Civil War because it was suddenly inspired to establish a uniform currency; that post-Civil War panics were inevitable given that we still lacked a central bank; that during the Great Depression people staged runs willy-nilly on good and bad banks alike until, in early 1933, they lost confidence in every last one of 'em, thus proving beyond doubt the necessity of nationwide deposit insurance; and that the Fed is an independent central bank, having become so in 1951. My conjecture, in short, is that tacit theories of free banking are most likely cobbled together, unconsciously and therefore haphazardly, from such substandard undergraduate building material.

So much for academic economists, or at least for the vast majority of them under the age of 60. If you want an academic economist who really knows his monetary institutions, a good rule of thumb is, the older the better. Try Dick Timberlake (92), or Leland Yeager (90), or Alan Meltzer (86), or Axel Leijonhufvud (81), or Charles Goodhart (78), or David Laidler (76). But beware that, even among Laidler's cohort, there are plenty who don't seem to be know a bank from a hole in the ground, or a redeemable banknote from (say) a durable good.

True, economists who work for the Fed, or at least for research departments of the various reserve banks, are another matter. Their jobs tend to encourage them to be familiar with at least some real-world monetary institutions; and I know quite a few, not all of them yet 60, who know their monetary history pretty well, including a fair bit about free banking. Having actually heard of it and thought about it, their theories of free banking, if still implicit, are at least reasonably well informed. They also tend to be rather more interested in, and favorably disposed to, what we avowed free-banking theorists have been saying, than their academic counterparts.

Would that this were also true of the Fed's higher ups, including its highest-ups of all. Alas, officially at least, their understanding of free banking is not much better than that of our lowly tenure-grubbing assistant professor. Consider even Ben Bernanke, a Fed chair regarded as an expert monetary history. To judge from his GWU lectures, at least, his general take on U.S. monetary experience doesn't seem all that different from the conventional textbook wisdom I mentioned a few paragraphs ago. The Fed's other "educational" productions, aimed at general readers (as opposed to its research intended for other experts) are for the most part even worse.

Some persons hearing me claim that many economists, including those who want nothing to do with free banking theory, are free banking theorists themselves, albeit ones who don't know it (and whose theory is likely to be the poorer for it) will, I imagine, think to themselves, "What in the blazes is Selgin thinking? Of course free banking's critics have a theory, and not just a tacit one. They've got a theory and they know it. They've got...Diamond and Dybvig! What's more, it's a real theory, a rigorous theory, with equations and optimization and all, not like the loosey-goosey stuff free-bankers churn out. What more can Selgin possibly want?"

A lot more, actually. Because, notwithstanding all its bells and whistles and tweakability (the quality of lending itself to publishable variations), the Diamond-Dybvig model isn't a formal representation of free banking at all. It's a formal representation of the same cartoon version of free banking that, if I guess correctly, informs most tacit free banking theories. More precisely, it's a formal model that takes as its starting point the assumption than an unregulated banking system is one that might at any moment fall victim to random yet system-wide runs.

I'm not saying that the D-D model is anything less than ingenious. In fact, it isn't easy at all to come up with a model that obeys the rule of not having agents do anything that doesn't increase their expected utility, and yet have it imply occasional if not frequent disasters. In this case, it took some doing. Diamond and Dybvig had to assume away, among other things, (1) the difference between a bunch of idiosyncratic banks and a single representative bank; (2) bank equity, which would otherwise drive a wedge between adverse shocks and bank insolvency; (3) any distinction between banks' reserves and an economy's consumption goods (which makes consumption equivalent to disintermediation); (4)...well, read Kevin Dowd's excellent survey if you want the whole rather long list. The gist of it all, anyway, is that in Diamond and Dybvig we have, not a formal model explaining the workings of some actual banking system, laissez-faire or otherwise, but a formal and in that sense only "rigorous" re-telling of a hackneyed textbook banking myth.

Does any of this prove that the self-aware free banking theorizing of myself, Kevin Dowd, Larry White, and others is any good? Of course it doesn't. Our theories might be perfectly lousy, and I suppose some of them are so. But at least we've arrived at these theories deliberately, after consulting evidence from actual free (or at least relatively free) banking systems, and with due attention to criticisms that our attempts have elicited. Of course it's possible nonetheless that some of the tacit theories informing the case for intervention are, for all their slap-dashed-ness, closer to the mark. But what are the odds? Better, I'm sure, than those of a chimp typing War and Peace. But not nearly enough to bet on.

But the point of my remarks isn't to pass judgement on the views of critics of free banking. It is merely to encourage more of them to join in a more explicit debate concerning what a free banking system would look like, and how well it might perform.


A 1920-21 Recovery Myth

by George Selgin December 4th, 2014 3:00 pm

The Forgotten Depression, Jim Grant's excellent book about the 1920-21 downturn and the recovery that followed, has generated a burst of critical commentary from persons anxious to reject the principal conclusion Grant draws from that episode. That conclusion, in brief, is that the U.S. was able to recover relatively quickly from at least one deep slump (and the '21 slump was deep, to judge not only from price statistics but also from available if sketchy unemployment statistics) despite authorities' refusal to resort to either fiscal or monetary stimulus. On the contrary, Grant observes, both fiscal and monetary policy were, according to today's Keynesian-influenced understanding, more contractionary than expansionary.

I've no desire to plunge into the general controversy concerning what other lessons one might safely draw from the 1920-21 episode, except to point out (as many of Grant's critics fail to do) that Grant himself resists drawing many other conclusions. He never claims, first of all, that Harding-administration-type policies might have been a dandy solution in 2008. Nor does he insist that post-2008-style expansionary fiscal and monetary policies would have made for a less satisfactory recovery had they been employed in '21. "We can't know what might have been," Grant writes (p. 2) "if Wilson and Harding had intervened as presidents in of the late 20th and early 21st centuries are wont to do." Grant merely settles for observing that "When, as 31st president, Hoover did intervene--notably, in an attempt to prevent a drop in wages--the results were unsatisfactory" (ibid.) The results of FDR's more aggressive interference with price and wage cuts, through the NRA and AAA, were, I would add, still more so.

If there's a foolish generalization lurking about here, or anywhere else in Grant's book (say, for instance, a "citation of the 1921 economic recovery as somehow refuting everything we’ve learned about macroeconomics since then," or an assertion to the effect that "If only we had let wages and prices crash in 2009, we would be in la la land right now,") I hope someone (Paul? Barkley?) will be so kind as to point it out to me. I also hope Barkley will explain to me why, in purporting to refute Grant's thesis, he compares what happened in 1920-21, not with what transpired in 1929-33 (which is the one episode concerning which Grant himself draws comparisons) but with what happened in various post-WWII recessions to which Grant himself never even refers.

My concern here, in any event, isn't with the general lessons that either should or shouldn't be drawn from the post-21 recovery, but with a particular myth concerning that recovery, namely, the myth that, contrary to what Grant and others have suggested, the Fed did in fact help out, and help out in a big way, by loosening of monetary policy.

Barkley Rosser has been particularly anxious to make hay with this claim, especially in the post (linked above) written in response to the recent Cato Book Forum over which I presided, featuring Grant's book. (For his part Krugman settles for a mere link to Barkley's post--this in a post implicitly accusing Grant, whose book Krugman almost certainly didn't bother to read, of laziness!) "In 1921," Barkley writes, "the Fed reversed course and lowered the discount rate back down to 4%. The economy then went into its rapid rebound. I note that in his remarks at Cato, at least Larry White did note this point as a caveat on all the proceedings. Bordo et al also note that both Irving Fisher and also Friedman and Schwartz pinpointed the role of the Fed in all this and declared it to have behaved very irresponsibly in the entire episode. But for Grant and Samuelson, the Fed barely even existed then."

The claim about Fed easing having ended the 21 slump has been repeated by many others, including The Economist, which in its review of Grant's book observes that "The Fed brought on the 1920-21 depression with high interest rates. Those rates drew in gold anew, which, along with deflation and political pressure, eventually caused the Fed to relent and lower rates. The slump and recovery were thus not the spontaneous product of the free market but of deliberate policy, much as in later recessions." Another proponent of this view is Daniel Kuehn, who has written two articles and several blog posts countering Austrian claims about the implications of the 1920-21 episode. In a comment responding to a laudatory David Glasner post concerning his work on the subject, for example, Kuehn claims that Fed "loosening...definitely played a prominent role in the recovery" from the 1921 slump.

What, then, are the facts of the matter? One fact, or set of them, to which Barkley and Co. refer, is that the Fed banks did indeed lower their discount rates, from 7%, where they'd stood since June of 1920, to 6.5% in May 1921, and then all the way to 4.5% in November 1921. (The further reduction to 4% to which Barkley refers did not occur until June 1922.) But, as Scott Sumner has been tirelessly observing for some years now, even under an interest-rate targeting regime, a low policy rate doesn't necessarily mean easy money. Instead, low rates can reflect slack demand for funds, and indeed tend to do just that in any slump. A Wicksellian would say that what matters isn't where rates stand absolutely, but where they are relative to their "natural" counterparts.

But treating the discount rate as an indicator of the stance of monetary policy with reference to the 1920-21 episode is even worse than treating it so in reference to more recent experience. In recent times, you see, the relevant policy rate has been, not the Fed's discount rate--the rate at which it extends discount-window loans--but the federal funds rate, to which, in the good old day's before the recent recession, it assigned a target value, to be achieved using open-market operations, by means of which the supply of federal funds (that is, overnight loans of bank reserves) would be either increased or reduced sufficiently to bring the funds rate to its target level. A decision to "lower interest rates" by the Fed thus tended to imply a decision to expand the monetary base by adding to the Fed's security holdings. Thus, although low rates didn't necessarily mean "easy" money, a decision to target lower rates did at least tend to mean more money.

Back in the 20s, on the other hand, a lowering of the Fed's policy rate--here, not the federal funds rate but the discount rate--might not even imply an increase in Fed lending or security purchases. In reducing its discount rate from 6.5% to 4.5%, for example, the Fed merely allowed banks possessing the requisite commercial paper to discount that paper with it at the newly reduced rates. Whether they would do so, however, depended on whether the rates in question were low, not merely compared to previous rates, but relative to market rates generally or, again, to "natural" rates. If not, the volume of discounting might not budge, and the lower rates would not imply any actual monetary expansion, except perhaps relative to the contraction that might have ensued had rates remained high.

So, did the Fed, by lowering its discount rate, actually give the U.S. economy a dose of monetary stimulus? It did not, as can be readily seen by referring to the chart below, reproduced from Nathan Lewis's New World Economics blog:


As you can see from the chart, although there was some increase in "bills discounted" in response to the Fed's lowering of its discount rate, the increase was slight compared to the massive decline in total Fed non-gold assets since 1920. What's more, it was more-or-less perfectly--and by implication quite intentionally--offset or "sterilized" by means of Fed sales of government securities. The Fed's contribution to recovery, in short, consisted, not of any actual monetary stimulus, but of a mere cessation of what had been a precipitous decline in its interest-earning asset holdings.

This isn't to say that monetary expansion played no part in the post-1921 recovery. In fact, it played a significant part. But the expansion that took place was due solely to gold inflows, which were themselves encouraged by relatively high interest rates as well as by falling prices--that is, by the normal working of the price mechanism rather than by activist Fed policy. (In the 30s as well, by the way, such recovery as took place was entirely the result not of Fed easing--or of fiscal stimulus--but of the dollar's devaluation and subsequent gold inflows from Europe.) That gold flows (as opposed to Fed easing) contributed to the post-1921 recovery is itself a fact that Jim Grant readily acknowledges; his book's 17th chapter is called "Gold Pours into America."

In fine, far from having overlooked the real cause of the recovery, as his critics claim, Grant seems to have gotten it just right, whereas they all seem to have been led astray by an interest-rate red-herring.

While preparing this post I was unaware of Bob Murphy's reply to Krugman's remarks, which is very much worth reading.


Money, Economic Growth, and the Fed

by George Selgin December 3rd, 2014 1:49 pm

That's the title of my contribution to Cato's online forum on "Reviving Economic Growth." The forum anticipates a conference on "The Future of U.S. Economic Growth" being held at Cato all day tomorrow.

My forum piece is an edited version of a somewhat longer paper I plan to publish separately.


Dizzy Miss Izzy

by George Selgin November 24th, 2014 9:21 pm

I'm so dizzy my head is spinning
Like a whirlpool it never ends
And its you, girl, making it spin
You're making me dizzy*

Tell me I'm not with it, if you must, but the fact is that until a couple of days ago I'd never heard of Izabella Kaminska, who bills herself as a "finance blogger" and believer in something called the "collaborative economy," in which sharing things takes the place of buying and selling them, the result being, she claims, a reduced carbon footprint.

Although I rather doubt that we're likely to witness an end to our "propensity to truck and barter" anytime soon, I don't doubt that such an event would in fact reduce carbon emissions: there would, for one thing, be a lot less less breathing going on. But what concerns me isn't Ms. Kaminska's general economic philosophy, to call it that. It's her vertiginous spin on free banking, which she saw fit to air this past week, first on FT Alphaville, and then on a blog of her own called, appropriately enough, Dizzynomics.

All this might have gone happily unremarked had the Econ Blogosphere's Grand Pooh Bah not seen fit to deem the last of these disorienting missives worthy of his readers' attention. And so it happens that, Despicable Free Banking Nobody though I am, I find myself submitting, for The Rt. Hon. GPB's consideration, my own humble post, the gist of which is that Ms. Kaminska hasn't the foggiest idea what she's talking about.

Because I addressed some errors in Ms. Kaminska's FT post in comments to that post itself, I'll embellish a bit here rather than repeat myself.

In discussing the founding of the Bank of England, Kaminska refers to the risk that "a private syndicate" took in "lending money to" the "UK" government. Let pass the anachronism. What matters is that the arrangement in question involved, not a loan directly made by the parties in question, but one made from the proceeds of a public stock offering, the lure for which consisted of monopoly powers the new Bank was expected to command. The stock sold in 12 days, and though the investors (again, not the scheme's principals) could hardly avoid taking some risk, their gamble had every appearance of being a darn safe one. According to Sir John Clapham (History of the Bank of England i, p. 20), among the various projects being floated in those times, "the Bank with its Parliamentary backing, its high sounding name, and its guaranteed income from the taxes was a very attractive proposition. The speed of the subscription need not surprise those more familiar than any pamphleteer of 1695 could be with how and why men invest."

I comment in the FT post itself on Kaminska's suggestion that the Bank of England was particularly effective at enhancing England's prosperity, so let me add here some brief excerpts from the source I referred to in that comment: Rondo Cameron's chapters on "England" and "Scotland" from his edited volume, Banking in the Early Stages of Industrialization (Oxford University Press, 1967). "The English banking system from 1750 to 1844, " Cameron observes, "was far from ideal in its contributions to either stability or growth of the economy as a whole." Topping Cameron's list of that system's infirmities is the Bank of England itself, whose "contributions to industrial finance were negligible, if not negative." Regarding Scotland Cameron says, in contrast, first, that despite having been "a poor country by any standard" in 1750, it "stood with England in the forefront of the world's industrial nations" a century later, and, second, that "the superiority of its banking system stands out as one of the major determining factors" of this relatively rapid growth.

Ms. Kaminska's estimate of the contribution of the Bank of England's monopoly privileges toward British economic stability is just as unfounded as her opinion regarding its contribution toward British prosperity. "Before the Bank knew it," she writes, "its notes had become the most liquid and trusted in the land." Actually, because the Bank didn't even bother to have branches beyond London before 1826, its notes were until that time seldom seen beyond the metropolis. (Nor, prior to the French wars, did the Bank issue notes for less than the princely sum of 10 quid.) If the Old Lady's notes were nonetheless judged safer than those of country banks, that was because those banks were severely under-capitalized and under-diversified. And why was that? Because they were not only denied Joint-Stock status, but subject to a rule limiting their ownership to six partners or fewer. In short the country banks--the only sort, remember, allowed to operate wherever the Bank of England chose not to--were by law prevented from achieving any reasonable degree of financial diversification and strength. Here we see how, like most apologists for central banks, Ms. Kaminska fails to appreciate how the advantages commanded by such banks have as their precise counterpart limitations imposed upon all others. Little wonder so many English country banks fell victim to the Panic of 1825! Contrast, again, the situation in Scotland at the time, with three chartered banks and twenty-nine provincial ones, all commanding nationwide branch networks, and not one bank failure since a private bank failed in 1816--and even that one paying 19s on the pound! "Certainly Scotland," Sir John observes, "appeared to have secrets of sound banking that England might inquire into."

Ms. Kaminska is sanguine enough to allow that the Bank of England's powers tempted it to engage in "imprudent money-printing." But she spoils this lapse from her otherwise unalloyed confidence in the benevolence of state-sponsored monopolies by adding, gratuitously, that the bank was "not helped by the fact that [it] still had to compete with a whole bunch of private banks who were just as keen to issue money to an equally imprudent degree." But, as I've noted, "compete" with "private" (meaning, presumably, country) banks is just what the Bank did not do, at least not until after 1826. Instead, by the terms of its charter it subjected them to inhibiting constraints, and then, having led them on by means of its own generous discounts, reversed course and...let them fend for themselves. (For evidence, see the relevant section of my article, "Bank Lending 'Manias' in Theory and History.")

Kaminska can at least take credit for originality in reporting that, during the 1840s, "a terrible inflation" took hold in England, and that it was to combat that outbreak that Peel's 1844 Act was passed. Alas, the claim owes its originality to the fact that there's not an ounce of truth to it. The same may be said for her claim that the Scottish system was stable only because Scottish bankers "were so good at forging oligopolistic cartels that happily restricted competition." As I noted in my FT comments, there's no evidence that limited entry was a source of any significant monopoly power in Scottish banking. (On the contrary: the system was notoriously efficient.) Nor is there any evidence that Scottish banks policed one another other than by engaging in regular note exchanges, as they would have been no less compelled to do had entry into the industry been open. But let us assume, for the sake of argument, that Ms. Kaminska is correct in holding that oligopoly was the cause of the Scottish system's superior stability. Then why, one wonders, does she not grant that a similar oligopoly might also have made England better off than it managed to be with its patently unstable blend of monopoly and hamstrung polypoly?

In 1833, thanks to a the efforts of the great Thomas Joplin, the terrible Six Partner Rule was partially circumvented by way of the discovery that its language encompassed note-issuing banks only, and not mere banks of deposit. The Bank of England thus faced for the first time competition from other joint-stock banks. Such are the facts. And what does Ms. Kaminska's make of this development? First, that it came, not in 1833--that is, well ahead of Peel's Act--but "in the latter half of the 19th century"; and, second, that it occurred, not because a clever banker discovered a loophole in the law aimed at severely restraining the Bank of England's rivals, but supposedly because restrictions imposed by Peel's Act on the Bank of England itself created "conditions" favoring the rise of "a new type of unregulated" bank. "Some history" indeed.

Ms. Kaminska concludes her remarks on English versus Scottish banking with a long excerpt from the Bank of England's web pages, telling of how it "established the concept of lender of last resort" in the wake of the crises of 1866 and 1890. Had the "concept" thrust down its throat, by Walter Bagehot, is closer to the truth. What that great man had to say concerning the respective merits of the English ("one reserve") and Scottish ("natural") systems is, or ought to be, too well known to warrant repeating.

In her Dizzynomics follow up Ms. Kaminska adds little to the substance of her FT argument against free banking, such as it is, preferring instead to heap anathemas upon free bankers, who according to her reckoning are thick on the ground (were it only so!), and whom she regards as "reason and logic deniers" incapable of grasping the fact "that whenever we've had free-banking systems they've resulted in chaos or alternatively co-beneficial collusion to the point were the system is not free by the standard definition of free."

No one, so far as I know, has ever claimed that the systems generally held out as examples of "free" banking--Scotland, of course, and Canada before 1914, among others--were perfectly so. Not me. Nor Kevin Dowd. Nor Larry White. Nor any other free banker I know. Of course those systems weren't perfectly free. No banking system ever was. Nor has Hong Kong ever witnessed free trade in all its unsullied glory. So what? The question is always whether the examples come close enough to serve as evidence of the likely consequences of the fully-realized alternative. Was Scottish banking, to return to that case, "close enough" to shed light on the consequences of truly free banking? The debate on that question was joined some years back, with Larry White weighing in in the affirmative against the counterarguments of Murry Rothbard, Larry Sechrest, and Tyler Cowen and Randy Kroszner, among others. Ms. Kaminska, having found the opposition's case neatly summarized in a blog post, simply overlooks White's rejoinders. She overlooks as well the not-insignificant body of theoretical work using induction aided by deduction rather than deduction alone to draw inferences about the likely consequences of unalloyed freedom in banking.

Kaminska herself needs no theory, on the other hand, to reach the conclusion that genuinely free banking, unlike the Scottish mongrel, must lead to "chaos." How can she know? As she offers neither evidence nor argument, one must hazard a guess. Mine is that she is referring to the U.S. banking system between the demise of the second Bank of the United States, in 1836, and the outbreak of the Civil War, and that she imagines, as many people do, that because a half-dozen states passed so-called "free banking" laws during that interval, it qualifies as one of perfect freedom from any sort of bank regulation. Excuse me for having had to suppress a yawn just now--it is a long post, after all, and fatigue is setting in, quite possibly for us both. Suffice to say, then, that old banking myths die hard, and that this especially hoary one about U.S. "free banking" seems harder to kill than Rasputin himself. That it is mostly hokum is nonetheless easily established: just have a look at any post-1975 work by an economic historian on the subject, including the locus classicus, Hugh Rockoff's The Free Banking Era: A Re-Examination (Arno, 1975). (A later survey piece is here.)

A misreading of the same U.S. experience seems also to inform several of the obiter dicta that follow Kaminska's opening thrust, including her claim that free bankers fail to "appreciate that it was standardizing certain subjective [?] values like weights, distances, time [sic] itself that has allowed society to cooperate, grow and thrive." (Because antebellum state banking laws generally prohibited branching, state banknotes tended to be subjected to discounts when encountered any distance from their source; in contrast, in the Scottish and Canadian systems, where banks were free to establish branch networks, banknote discounts were unknown.) Ditto her belief that free bankers "advocate a Wild West model where no one can trust anyone and everyone has to do due diligence themselves." (Though it's true that the antebellum [old] west was inundated by all sorts of phony bank paper, that result came about, not because banking was unregulated there, but because territorial authorities, by having outlawed it, made their citizens perfect targets for phony notes purporting to come from legitimate banks down east. Where banking was more, though not perfectly, free, as in 19th century Canada or Scotland, in contrast, it sufficed to trust one bank, and to accept only those notes regarded as current at that bank, to avoid trouble.)

I hope I've said enough to suggest why I find it remarkable than anyone should take Ms. Kaminska's ramblings on free banking (or, I now feel justified in saying, on any subject whatsoever) seriously. Perhaps no one does. Still I wish Tyler hadn't given those ramblings more currency by advertising them, without the benefit of critical comment, on Marginal Revolution: here, surely, is a case where sharing adds to rather than subtracts from the world's burden of hot air.
*Tommy Roe, "Dizzy."

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