George Selgin

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

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William Jennings Bryan and the Founding of the Fed

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

BryanandWilson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2) Ibid., p. 35.

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

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

(5) Ibid.

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

(7) Colette, p. 41

(8) Ibid., p. 42.

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

(10) Dunne, p. 11.

(11) Ibid., p. 13.

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

(13) Dunne, p. 19.


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Wrong Way Corrigan Strikes Again

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

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

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

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

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

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

 

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

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

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

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

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

NotesPartII_Page_010


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

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

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

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

and this:

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

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

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

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

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

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

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

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


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Central Banking: the Real "Dangerous Mistake"

by George Selgin February 12th, 2014 4:49 pm

Kurt Schuler just alerted me to this recent FT article attacking Bitcoin, by a former Federal Reserve employee named Mark Williams. The article is noteworthy for its pie-in-the-sky view of central bankers--a view that seems to be informed by sheer wishful thinking, rather than by even the most meager recognition of how actual central banks, including the Fed, routinely botch up their economies.

Here is a sampling of the sort of pablum Mr. Williams dishes out, seemingly cooked up by his former employer's PR staff:

Keeping money stable and trustworthy has traditionally been a function of national governments. By controlling the money supply and targeting interest rates, the authorities try to promote job creation and economic growth, while preventing runaway inflation that would cause the system of market exchange to break down. Calibrating monetary policy to the needs of the economy is an enormous undertaking. Central banks such as the US Federal Reserve employ hundreds of people to analyse economic data, chart the best path for monetary policy and explain their decisions to the public.

Bitcoin, in contrast, Williams observes, appears to have been motivated by "the libertarian ideal of putting money creation beyond the reach of meddling central bankers." "Meddling?" (I imagine Mr. Williams thinking); "Where do those libertarians get such silly ideas? Don't they realize that central bankers are just technicians seeing to it that money is scientifically managed so as to maximize social welfare? Why, to listen to them you'd think that there was something in central banks' records to complain about--you know, inflation and cycles and bailouts and moral hazard and that kinda stuff. Geez, what a paranoid bunch! Why don't they read economics principles textbooks like I did so that they can understand what central banks are really like?"

For Mr. Williams it is not central banks, with their almost unchallenged currency monopolies, but Bitcoin, with its miniscule share of total payments, that we should all be worried about. For the Bitcoin set-up, with its predetermined supply schedule, "ignores the ebbs and flow of economic cycles" altogether, thus constituting a "reckless" alternative to conventional monies that "is the equivalent of a doctor giving penicillin to every patient without first checking whether they are suffering from infection, depression or mania."

Letting the clunky analogy pass, Mr. Williams has a point: the Bitcoin monetary "rule," to call it that for argument's sake, is unlikely to prove ideal, should Bitcoin ever manage somehow to become a true rival to established monies. But that hardly justifies Mr. Williams' suggestion that Bitcoin is "dangerous," or that it ought to be either stamped out altogether or (what amounts to the same thing) subjected to central bankers' control. Mr. Williams here seems to forget that, whatever its other qualities, Bitcoin, unlike, say, Federal Reserve dollars, is a voluntary exchange medium; no one is obliged to either receive or to pay it, whether by legal tender laws or by banking and other regulations. Because Bitcoin is voluntary, it doesn't carry the risk of holding an entire economy at its mercy. Only official paper monies can do that. Only such monies have done it, time and time again.

What's more, as Mr. Williams recognizes, rival cryptocurrency entrepreneurs have been busy (with the help of some prodding by yours truly) developing more macroeconomically smart alternatives to Bitcoin. But Mr. Williams, like any good technocrat (or, for that matter, any ca. 1948 socialist) is cocksure that no amount of old-fashioned entrepreneurial ingenuity can ever be a match for "central bankers who can adjust monetary policy to promote prosperity when people behave in unexpected ways," that is, for white lab-coat donning scientists who fine-tune the money stock against a backdrop of spinning gauges, bubbling Erlenmeyer flasks and steaming retorts, all according to Mr. Williams' black-and-white B-movie version of how central banks function.* No sir: we can't expect any private money to cope with "patterns of human behaviour that are too complex to capture in a simple rule." After all, real human beings, unlike Mr. Williams' sci-fi central bankers, are made of flesh and blood.

Addendum (2/12/2014, 5:50PM): Jerry Dwyer (another former Fed employee, but one who actually knows a lot about monetary policy and history, not to mention alternative currencies) responds to the same FT piece.

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*As Mr. Williams served the Fed as a bank examiner, he presumably never witnessed an actual FOMC meeting, let alone the behind-the-scenes dealings of that committee's chief with senior government officials. Whether he can possibly entertain a similarly starry-eyed view of Fed bank examiners, even in the wake of the last decade's events, is a good question.


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Economic Schools of Thought

by George Selgin February 10th, 2014 11:23 pm

At the close of my last post here, I referred to myself as a "non-Austrian," causing one of our regular commentators to wonder why. "Because," I answered, "belonging means conforming."

That admittedly cryptic reply (I was anxious to get back to the book I was reading) led to speculation to the effect that I was inclined to identify "Austrian" economics with the economics of Murray Rothbard, and particularly with his and his devotees' opposition to fractional reserve banking.

But although it's true that I have a low opinion of the ideas and arguments put forward by the 100-percent crowd, and that I'd rather swallow a dozen toads than have anyone confuse my thinking with theirs, I don't believe they've yet succeeded, despite trying their damnedest, in hijacking the "Austrian" brand name. There are, thank goodness, still plenty of non-Rothbardian "Austrians," including my fellow blogger and former colleague and mentor Larry White. But though there is no such radical difference--and in some cases hardly any difference at all--between my views and those of such non-Rothbardian Austrians, I wouldn't consider myself an Austrian even if they were the only self-styled Austrians around. My reason has nothing to do with any particular "Austrian" belief to which I object. I don't consider myself an Austrian economist for the same reason that I don't consider myself a Chicago economist, or a Keynesian economist, or a New Classical economist, or a--well, you get the point. I don't want to belong to any economic school of thought, or to "do" any sort of economics. I just want to "do" my own sort of economics.

And what sort of economics is that? I can't tell you--I've never thought much about it. But perhaps that's just it: I don't "think" about writing any "sort" of economics. I don't want to have to think about whether what I'm up to qualifies as "praxeology" or not, or whether Mises would mind my using terms like "money" and "inflation" the way most contemporary economists use them, instead of the way Mises himself used them a century ago. Nor am I any more inclined to trouble myself over whether my work fits neatly into any other economic school's pigeonhole. I don't worry about not having a "model," meaning a bunch of equations, when I'm perfectly confident that I can say what I need to say in plain English. (I rather wish that other economists both appreciated the power of plain English, and knew how to make proper use of it.) But if there's one thing I truly believe concerning the "methodology" of economics, it's that thinking about it is as helpful to actually doing economics as contemplating one's steps is to dancing the rumba. In short, having to look over my shoulder while I think or write, at any methodological strictures at all, cramps my style.

I can't imagine, on the other hand, what it could possibly mean for me to declare myself an Austrian (or a Chicagoan, or a Keynesian...) unless it means precisely that when I think or write about economics I seek while doing so to abide as much as possible by what I consider to be the distinguishing maxims of the Austrian (or Chicagoan or Keynesian...) approach. That is what I meant when I said that "belonging is conforming." And though I suppose some will take issue with this--that they will insist that being "Austrian" is not so strict a matter as all that--I can only observe in return that they might wish to consider what it would mean--no, what it has already meant--to have that label bandied about by every other anti-government nitwit. No sir: a school of thought had better insist upon its defining tenets, or risk becoming a laughing stock.

Does this mean that I think schools of economic thought entirely useless, except perhaps as convenient labels to be used by historians of the discipline after the fact? Not quite. For while I hold self-conscious devotion to any school of thought to amount to putting blinkers on one's brain, I can't deny that such devotion brings offsetting, psychological advantages. The academy is no bed of roses, especially for young faculty; and having the moral support of an organized body of like-minded peers can help a lot. What's more, it can be lots of fun. The alternative is...well, it can get pretty darn lonely.

And that, I suppose, is why, despite everything, I don't really mind being called an Austrian. That at least makes one school whose parties I don't have to crash.


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Feet of Clay

by George Selgin January 28th, 2014 6:40 pm

I never thought it would happen--perhaps I'm slipping.  But as I was preparing to bang-out this post, my first in over a month here, I discovered that, a couple hours ago while I was toiling away in class, Paul Krugman stole my thunder.

Despite that bad omen, I'm plunging in with my two-cents, which, like Krugman's, has been provoked by an article in today's New York Times.  The article, which is mainly about Minneapolis Fed President Narayana Kocherlakota, who just recently rotated onto the FOMC, includes a quote from Ed Prescott, who is himself (among other things) a member of the Minneapolis Fed's research staff.  What Prescott said--and what put Krugman in high dudgeon--is: "It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed."

That's right: no effect--none, nada, zero, zilch--on output, or on employment, ever.  Not even in the 30s.  Or in the 70s.  Or recently.  Why, the Fed might as well set its policy targets by throwing darts at a board, for all the difference it would make to real activity.  Money's just a veil, after all.  We know that--what's more we know it "scientifically."

Krugman rightfully pours scorn on Prescott's assertion, which states a "scientific fact" only in the peculiar sense that distinguishes such facts from ordinary, unqualified, plain-old facts, that is, the sort of facts one might glean from experience.   A "scientific fact," apparently, is not such a grubby affair.  It is, rather, something much more pure, even virginal; it is a fact implied by a theory.  The theory in this case is of course the "real business cycle" theory for which Prescott (and coauthor Finn Kydland) are famous.  The theory starts with the New Classical premise that prices always adjust instantly to their general equilibrium levels, thereby all but eliminating any scope for real consequences of monetary disturbances.  It then proceeds--hey presto!--to the conclusion that, if real variables bounce around, they must do so in response not to monetary but to real shocks.   It follows, as a matter of logic, that the world economy must have met with a whale of an adverse supply shock in the 1930s.  What shock, you wonder?  What difference do such details make?  There had to be a big bad shock, dontchyasee: the theory proves it.   If the historians and econometricians can't find it, well, so much the worse for history and econometrics.

Some Austrian economists like to insist on the a-priori nature of their discipline, while many non-Austrians, myself among them, fault this sort of Austrian economics for its failure to to be swayed by experience.   But when it comes to dogmatic a-priorism,  even the most doctrinaire praxeologist can't hold a candle to some of the economics profession's perfectly mainstream superstars.


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New-Keynesian Thermodynamics

by George Selgin November 30th, 2013 10:11 am

Once, while a good friend was visiting me on a particularly cold winter's night, the temperature in the poorly uninsulated living room of my old Victorian house dropped to a distinctly chilly 62 degrees.   "Can't you make it any warmer?" she asked?  "I'm afraid I can't," I said;  "the thermostat's already on 68."  "Try setting it at 80," she replied.

I didn't indulge her (well, not that way).  But I wonder whether those economists who have been calling for a higher inflation target would have.


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Parliament to Scottish Nationalists: "Get Your Own B__y Money!"

by George Selgin November 27th, 2013 5:50 pm

There are, I'm sure, some parts of the Scottish National party's recent blueprint for an independent Scotland to which the British government might reasonably take umbrage.   But the plan's call for Scotland's continued use of the pound sterling, which has drawn the most criticism, isn't one of them.

The pound sterling has been Scotland's monetary unit since 1707, when the Act of Union led to its adoption in place of the Pound Scots.  Scotland's actual paper currency, on the other hand, has mainly consisted of sterling-denominated notes supplied by several of its own commercial banks.    The nationalists' proposal is therefore  largely (though not entirely) a call for adhering to the status quo, and a rejection of the alternatives of either adopting the Euro or having Scotland once again establish an independent monetary standard.

How has such a seemingly reasonable and innocuous plan managed to ruffle Parliament's feathers? According to The New York Times, the British government

says it is unlikely to agree to share the pound with an independent Scotland, citing the problems experienced by the 17-nation euro zone to illustrate the dangers of a common currency without political union. London says it would be difficult to have the Bank of England act as guarantor of the pound if Scotland had a different fiscal policy from Britain, for example. Nationalists hint that if Scotland cannot keep the pound, it will not accept its share of Britain’s debt.

Now I've no dog in the fight over Scottish independence, but it seems to me that the folks who are saying this hae git thair bums oot the windae. For starters, an independent Scotland would hardly need the British government's permission to go on using the pound sterling: it's hard to imagine how the U.K.-sans-Scotland could prevent Scottish citizens and banks from continuing to use the pound without resort to such Draconian legislation as would make U.S. money-laundering laws seem toothless in comparison. In both England and Scotland today, for example, it's perfectly legal for banks to offer foreign currency demand deposit accounts, not to mention other sorts of foreign currency services. Just how would a truncated British government contrive to prevent, and to justify preventing, an independent Scotland from continuing to enjoy the right to offer such services, while adding the pound sterling to the list of "foreign" currencies to which the right pertains?

If the Brits were really willing to play hardball, I suppose they could try placing an embargo on shipments of Bank of England currency to Scotland, like the one the U.S. imposed, as part of its effort to topple Manuel Noriega's government, on shipments of fresh Federal Reserve notes to Panama. But whereas Federal Reserve notes had long been the only form of paper currency known in Panama's dollarized economy, the Scots, as I've already observed, have long managed without Bank of England notes, and could easily continue doing so, especially once freed from British-imposed banking regulations. Settlements and redemptions of Scottish bank balances would presumably have to be done using London funds. But unless the Brits wanted to impose severe exchange controls, which besides being embarrassing would harm English citizens no less than Scottish ones, that option would pose no great difficulty.

And the Eurozone comparison? A load of mince! The reason the Eurozone is a mess is because the Euro isn't the German mark--that is, because it's a multinational currency supplied through a multinational central bank, rather than a national currency that happens to be employed by several nations. Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid, and especially so since the Growth and Stability Pact became a dead letter in 2003. Creditors to dollarized countries, on the other hand, have no reason to count on Fed bailouts. Were either Ecuador or El Salvador unable to service its debt, or were a Panamanian bank teetering at the brink of insolvency, it would be of no concern to the Fed, or the FDIC, or any other U.S. government agency. Dollarized or not, Ecuador, El Salvador and Panama have to manage on their own.

And how have those countries been doing despite having no lender of last resort to turn to in a crisis? Just dandy, as a matter of fact. Indeed, it seems that not having a lender of last resort has proved to be something of a boon to dollarized economies, because, by doing away with, or at least greatly limiting, any prospect of a bailout, it has caused creditors and banks to behave more prudently.

If the experience of dollarized countries can be relied upon, Scotland, besides not needing England's permission to go on using the British pound, would be better off not having such permission. It stands to benefit, in other words, by steering clear of any formal arrangements that might appear to make the Bank of England, or any other non-Scottish authority, responsible in any way for the safety and soundness of Scottish bank liabilities or government securities. Let the Scots follow the example of Ecuador and El Salvador, and "poundize" unilaterally. If the British Parliament refuses to cooperate, so much the better. Who knows: Scotland could even end up with a banking system as good as the one it had before 1845, when Parliament, which knew almost as little about currency then as it does now, began to bugger it up.


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Four Old-Fashioned Monetarist Heresies

by George Selgin November 21st, 2013 10:30 am

1) For any given growth rate of aggregate spending, lower actual rates of price and wage inflation mean higher levels of output and employment;

2) For any given growth rate of aggregate spending, higher expected rates of price and wage inflation mean lower levels of output and employment;

3) An increase in the growth rate of aggregate spending is not the same as an increase in the equilibrium rate of inflation;

4) An increase in aggregate spending succeeds in raising the rate of inflation only in so far as it fails to increase output and employment.

I submit these old-fashioned monetarist heresies for the consideration of all those who think that an increased target rate of inflation will help us out of our present economic quagmire.


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Déjà-Vu All Over Again

by George Selgin November 20th, 2013 9:29 pm

I must say I'm puzzled and frustrated by the many clueless responses, like this one by Dallas Fed President Richard Fisher, to those well-placed (mostly Keynesian) economists who have been insisting for some time that, with the unemployment rate still above 7%, and the latest (annual) inflation rate at just 1%, what the U.S. economy needs right now is a higher inflation target. Instead of 2%, they say, make it 4%, or even 6%. Those higher targets, they explain, can be be counted on to raise interest rates, rescuing us from the zero lower interest rate bound we've been stuck near, and thereby getting the unemployment rate back down to the Fed's current goal of 6.5%, if not lower.

Should we take their advice? Heck, yeah! After all, this isn't the first time that we've been in a situation like the present one. There was at least one other occasion when the U.S. economy, having been humming along nicely with the inflation rate of 2% and an unemployment rate between 5% and 6%, slid into a recession. Eventually the unemployment rate was 7%, the inflation rate was only 1%, and the federal funds rate was within a percentage point of the zero lower bound. Fortunately for the American public, some well-placed (mostly Keynesian) economists came to the rescue, by arguing that the way to get unemployment back down was to aim for a higher inflation rate: a rate of about 4% a year, they figured, should suffice to get the unemployment rate down to 4%--a much lower rate than anyone dares to hope for today.

I'm puzzled and frustrated because, that time around, the Fed took the experts' advice and it worked like a charm. The federal funds rate quickly achieved lift-off (within a year it had risen almost 100 basis points, from 1.17% to 2.15%). Before you could say "investment multiplier" the inflation and unemployment numbers were improving steadily. Within a few years inflation had reached 4%, and unemployment had declined to 4%--just as those (mostly Keynesian) experts had predicted.

So why are these crazy inflation hawks trying to prevent us from resorting again to a policy that worked such wonders in the past? Do they just love seeing all those millions of workers without jobs? Or is it simply that they don't care about jobs at all, just so long as inflation is low? Whatever the reason, they certainly come across like a bunch of callous dunderheads.

Oh: I forgot to say what past recession I've been referring to. It was the recession of 1960-61. The desired numbers were achieved by 1967. I can't remember exactly what happened after that, though I'm sure it all went exactly as those clever theorists intended.

P.S.: I can already imagine Ken Rogoff's response to this post. Something to the effect, no doubt, of "This time is different."

P.P.S. (November 20): Of course it is different this time--but not, I submit, in ways that clearly favor the doves. One particular difference that comes to mind is that, whereas in the 60s policymakers (implicitly) gambled that an increase in the actual rate of inflation would not lead to a corresponding increase in the expected rate (and, hence, in the rate of upward or leftward movement of short run aggregate and labor supply schedules), those calling for a 4-6% inflation target today actually see it as a means for achieving a like increase in expected inflation, and so are (implicitly) gambling that such an increase in expected inflation will not result in any corresponding increase in the rate of upward or leftward movement of short-run aggregate and labor supply schedules.

I leave it to my readers to decide for themselves whether the new wager is more or less rash than the old one.


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