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I don't think you are understanding what Hoppe is saying here. I read something entirely different.

I think Hoppe is saying two slightly different things in the second paragraph, although it could have been more clear.

When Hoppe says "excess demand for money", he is not saying that this means a surplus of money for holding. He said "However, the idea involved is the same: the holding of (some, "excess") money is unproductive and requires a remedy."

He never said that an excess demand for money means holding excess money. He said that the *idea* behind criticizing the existence of an "excess demand for money" *is the same idea* as criticizing people who actually hold higher cash balances.

For praxeologically speaking, one could not hold a higher cash balance *now* if one did not feel a previous "excess demand for cash" in the *past*.

In short, Hoppe is saying that the idea behind criticizing people feeling an excess demand for cash is the same as criticizing people actually having more cash.

Hoppe is criticizing the view that when increased uncertaintly leads to an increase in the demand for money and the result is a lower price level and an increase in the real supply of base money, that this is a problem. Having a larger proportion of total wealth in the form of real money balances (and presumably less in the form of claims to capital goods) is providing a higher total yield when we account for monetary service yield. Maybe future production of consumer goods will be less, but we get more monetary services.

Free bankers, supposedly, don't realize this and to avoid this situation of having more wealth in the form of real money, they advocate increasing the nominal quantity of bank money. Since it is a claim to some kind of other asset, there is no shift in total wealth to real money balances.

To say it another way, people are fearful and so they hold money rather than capital goods. Rather than letting the real supply of money rise and the real demand for capital shrink to reflect these preferences, the free banking advocates increasing the nominal quanitity of money, which funds the capital goods indirectly. (Yes, this is a specific scenario.)

Of course, my undestanding of Hutt's point is that either way, increased nominal bank money (if people trust it and will hold it in the scenario) or else increased real balances, satisfies people's demand for monetary services. People get the yield from monetary services either way.

To the free banker, we get more capital goods, more production of consumer goods, and more moentary services.

In my view, a weakness of free banking combined with a fixed monetary base is that uncertainty may well have exactly the consequence Hoppe describes and I think it _is_ a bad thing.

I find it a bit odd that Hoppe doesn't follow through with the glorious decrease in the purchasing power of money when confidence returns. And why base money with a changeable purchasing power is such a wonderful hedge against uncertainty.

While Hoppe recognized the real balance effect, he doesn't seem to follow through with the implication that once the price level falls and the real supply of money rise, real expenditures do rise and people do end up investing or consuming after all. Or, maybe he does. But it is only to the degree that the higher real money balances impacts the allocation of demand that it has some kind of real effect.

For exmaple, the classic "Pigou" effect is the deflation leads to higher real money balances and more consumption. Thinking about the last resort solution to the liquidty trap, supposedly, no one buys capital goods because of pessimism and the nominal interest rate is stuck at zero so lower interest rates don't signal increased investment. But still, the lower price level raises real wealth, which increases consumption enough to employ all the labor and existing capital people want to supply. (Or so I undestood the story.)

I actually do think that this is a "bad" thing. A different set of monetary insitutions will provide monetary services (maybe even better) while avoiding this change in the allocation of resources.

I will grant that Hoppe uses the term "excess demand" for money in an idiosyncratic way. Like, "holding more money that the observing economist things people really need to hold." The term "shortage" hardly creates the same impression. But somehow, I doubt that adding "shortage" the free banking lingo would do much to preempt Hoppe.

An increase in the demand for money is the same thing as a decrease in the demand for goods at the ruling prices...

I do not see why should we issue more money because of that... Printing FRB money would just hamper the price adjustments necessary to meet the demands of those who are hoarding...

Private Freedom:

I don't think your reading is correct. It requires a much too tortured attempt to rescue Hoppe from what is clearly a lack of understanding. The easiest way to show that your reading is wrong is Hoppe's use of "the idea is the same." The "idea" in question is the belief that hoarding (that is increases in the demand for money that are successfully met) requires action. What's "the same" is that both defenders of central banking and free banking believe that increases in the demand for money should be accommodated.

It's clearer in the paragraph before those quoted by Larry. Here's Hoppe:

"Here it is: the holding of money, i.e., the not spending of it on either consumer or investment goods, is unproductive, indeed detrimental. According to Keynes, the government or its central bank must create and then spend the money that "savers," i.e., the holders of cash balances, are unproductively holding back, so as to stimulate both consumption and investment. (Needless to say, this is precisely what governments and central banks are presently doing to supposedly rectify the current economic crisis.)"

There's no doubt that the "idea" that is "the same" is the notion that hoarding is unproductive (held money has no yield) and therefore is a problem to be responded to.

Hoppe is clearly confused about the difference between actual and desired money balances here. The problem that free bankers identify with an "excess demand for money" is precisely that people's desire to hold more money CANNOT and IS NOT being met by the current money supply. (More on this in my next comment.) Hoppe is claiming that the problem is that they already HAVE those holdings and that the free bankers somehow think that's unproductive. Nothing could be further from the truth.

Hoppe would know this if he understood some monetary theory or if he'd read Selgin's "The Yield on Money Held Revisited" or my own "A Subjectivist Approach to the Demand for Money," both of which are ringing defenses of Hutt's views in the context of free banking. But Hoppe apparently can't be bothered to read the actual scholarship of the defenders of free banking with respect to Hutt. To claim free bankers are anti-Hutt when they have explicitly argued to the contrary in print reflects the shallowness of Hoppe's scholarship, which is in turn reflected in the confusion in his argument.

Rafael:

The question you raise is at the heart of the debate here. I suggest that you read some of the free banking literature to really see what the argument is (Selgin's book or mine are good places to start, so is this article of mine: http://myslu.stlawu.edu/~shorwitz/Papers/Monetary_JHET_1996.pdf ).

In short, what we are arguing is that prices simply can't adjust downward with the speed and accuracy required to maintain intertemporal coordination and avoid the idling of labor and capital. It's true that if everyone wants to hold more money and the money supply is fixed, they can do so IF prices and wages fall sufficiently. At the new price level, the existing nominal supply of money will be a greater real supply of money that will meet the higher demand for real balances.

However, what if prices can't fall with ease? What if market discovery processes are such that prices don't just smoothly adjust to the new lower levels of demand? This is a perfectly Austrian point: we don't think economies jump from equilibrium to equilibrium. If we did, then wouldn't we just say the same thing about inflation? If any supply of money can meet the existing demand to hold real balances if prices are free to adjust, then why worry about inflation? Prices will "just rise" until the higher nominal money supply is lowered in real value to meet the demand for real balances.

We know prices don't "just rise" - we get relative price effects and all other sorts of problems with inflation. Well the same is true with an excess demand for money - prices can't "just fall" and we get temporary surpluses of capital and labor. Free bankers (and many other economists) argue that an increase in the nominal money supply can avoid the highly disruptive effects of price level adjustments (just as we'd say that we want to avoid such effects from rising prices).

There are more complex reasons in the literature why this also wouldn't create forced savings and the business cycle, but I'll leave those for another time.

Bottom line: the economic discoordination that would come from the inability of prices to just "adjust" downward smoothly and quickly is much greater than any created by matching excess demands for money with an increased nominal supply. We want to make the nominal money supply the adjustment variable, not the price level because adjustments in the latter (both up and down) can do real damage to the economy.

On these problems see also my (2009) _Three Essays in Monetary Theory_, available from BoD Germany and BoD France. I agree that what is needed is a monetary system that would limit the scope for (both inflationary and deflationary) monetary equilibria to arise but I don´t believe that (1) fractional-reserve free banking would actually function as described by the fractional-reserve free bankers (Mises may still have been closer to the truth here), nor (2) that a system thus functioning would be optimal, or closer to optimal than the system advocated by the 100 per cent reserve free bankers. Historically monetary disequilibria have often been related to what Yeager has characterized as "the perils of base money" and this is a problem that the free bankers do not address and that their system does not solve. The 100 per cent reserve free bankers do not invoke any distinction inside-outside (or base) money, however. Even Yeager does not seem to get the latter point.
Note also that this is not a debate over free versus regulated banking, but a debate about the correct scientific definition of truly free banking.

Of course I meant: monetary _disequilibria_. Sorry for the lapsus.
At bottom the position of the fractional-reserve free bankers hinges upon a certain notion of "neutral money" and "monetary equilibrium". From a history of economic thought perspective, it may be useful to re-read Koopmans´ "Zum Problem des 'Neutralen' Geldes", to which both Hayek and Selgin refer. As far as I can see, however, Koopmans does not plead in favour of the practical implementation of a so-called "productivity norm". Attention: this is not Tjalling C. Koopmans but Johan G. Koopmans.

Steve

First, thanks for explaining your point, I'll read your paper to try to understand better the free banking points...

But I'd like to ask the free bankers, what about the relative prices? The hoardings can come through a decrease in the consumption of lower order goods and/or higher order goods... If we print more money we are simply messing around with some individuals demand schedules and allowing them to hoard and mantain his consumption pattern (which was his desire to change in case there were no more money printed)... This would distort interest rates in the various stages of production and create intertemporal discoordination... I guess this is the Rothbardian and De Soto's story in brief...

Another thing is that, as you said, the world is not in equillibrium and even close to one... But there are profit opportunities for an alert (creative, insightful, whathever...) entrepreneur in shifting the resources from lower order goods/higher order goods at different points in time... Printing FRB money would distort all this profit opportunities and create some others we could not even imagine... The disequilibrium would be changed only qualitatively...

An important point to highlight is that even if we would agree - if only for the sake of the argument - that under free banking changes in the demand to hold balances of inside money must be accommodated through quantity adjustments rather than through relative price adjustments, it is _technically impossible_ for a free banking system to accomplish this. Compare with the market for cars. If the demand for cars increases, the adjustment will occur through one of a series of possible combinations of relative price and quantity adjustments (depending upon the slopes of the respective supply and demand curves). But in any case, if and to the extent that a quantity adjustment occurs the newly produced cars will arrive into the hands of those market participants whose increased demand disturbed the original equilibrium. Not so with respect to money. If market participants, say x, y and z, increase their demand to hold inside money, they have already themselves satisfied their increased demand, just by abstaining from spending. If the bank subsequently increases its circulation, say, by extending loans to A, B, and C, it just takes a discretionary, autonomous decision to increase its circulation. It is only through a highly tendentious (in fact incorrect) use of language one could say that the bank has thus accommodated the increased demand of x, y and z.

Rafael,
Of course it is (trivially) correct that the world is never in equilibrium, but following the advice of Mises we use equilibrium as an imaginary construction in our thought experiments in order to examine cause-effect relationships...

I had a very interesting discussion about free banking with Selgin, White and some other folks on the Mises site recently.

See:
http://blog.mises.org/archives/009873.asp

Isn't the problem here how people view supply and demand?

Suppose I'm uncertain about the future and would like to hold more cash. So, I go to my boss for more work. I ask him "Can I work another 8 hours per week at my current salary". He says "No, your contract of employment doesn't allow us to do that". I have an intent to supply at the market price, but I have been frustrated by a sticky price. I have an excess demand for cash.

Alternatively, suppose I'm uncertain about the future. So, I spend less at the supermarket. In this case I am not frustrated by the situation. I exchange goods at freely set and not very sticky prices without excess demands or supplies. I then accumulate some extra cash.

Steve Horowitz's point is related the example where I ask for extra work. He is noting that the problem could be helped by more flexible money.

Hoppe is thinking about the second paragraph where I cut down my shopping bill. In the situation of very flexible prices and fixed money supply the only thing that stops one person obtaining money is that someone else already has it. That other party has obtained it to hedge against uncertainty. So, in Hoppe's Walrasian view it's much the same to blame those who are hoarding as it is to blame those who want to.

The problem for Hoppe is what happens in my first paragraph. I expect Hoppe would respond by saying that this is a separate problem. A problem caused by the contracts I agreed on earlier. My employer and I deserve to get toasted for not being Walrasian enough.

I think that Horowitz is right though that this problem is part of the discussion.

But, I don't think that it is possible to unintentionally hoard. Money can always be got rid of into savings accounts when the hedge against uncertainty is no longer needed. There is no problem getting rid of the "most marketable good" the problem is obtaining it with less marketable goods.

Ah, the ad hominem comes out from Beefcake. Whatever my views are or are not about individuals or institutions, you really should try to keep up with the actual discussion here and offer something resembling an argument to the points at issue. But thanks for playing, really. If you think *I'm* making an ad hominem in my original post, please present an argument or evidence that demonstrates why my characterization of Hoppe's knowledge of monetary theory or the FRB position is wrong, rather than initiating an ad hominem of your own.

And for Current: I just skimmed that long exchange with Selgin. Not surprisingly, I think he's right and you guys are wrong.

But what should be really embarrassing for the defenders of 100% reserves in that whole thread is how many of them gladly and freely admit to *never having read anything from Selgin or White* (or Horwitz or whomever) on the FRB side. How the hell can you guys seriously get into a debate on this issue with one of its major thinkers (and think you'll not get him "bitchy") without ever having read his book, or Larry's, or their various articles and responses to the 100% reserve advocates? I'd be totally ashamed to say that after having 20 posts telling Selgin why he's wrong.

You don't know the history he offers and you don't know the theory because you haven't read the books, and you gladly admit your ignorance as you insist that the FRB advocates are deeply and profoundly wrong.

Folks, Austrian economics is not a liturgy to be learned so that you have the arguments you need to punish the heretics.

You all need to reread Mill's *On Liberty*: "He who knows only his own side of the case knows little of that."

Current's two scenarios do make an important point, although it's a tad confused.

If people wish to hold more cash, they have three basic options:

1. Earn more income and keep a greater proportion of it as cash. (Current comes very close to confusing "income" and "money.")

2. Sell off an asset.

3. Reduce their expenditures at their current income.

The problem, according to the monetary equilibrium perspective (read Yeager on this), is that the first two require the cooperation of others and thus is not within the individual's control. Only via the third option can the individual actually be assured of increasing her cash holdings.

So when there is an excess demand for money, it is mostly likely to resolve itself by people reducing their expenditures. As demand falls in individual markets, sellers have to decide how to react and this is where the sticky prices argument comes in. The theoretical and empirical evidence is such that prices will not smoothly and instantaneously adjust downward (even in the absence of gov't action to prop them up as Hoover tried in the GD), with the result being that we get excess supplies of goods and labor, i.e., falling GDP and rising unemployment and a recession.

In this sense Current is quite right that the problem is not getting rid of extra money (we know what happens during inflation) but acquiring more money when what you have something less marketable. The result is that the only way to get more money is to spend less at your current income. And *that* is what causes the Wicksellian cumulative rot, or deflationary recession.

The problem is, as LVDH points out, that under free banking increased demands to hold inside money manifest themselves, from the standpoint of the banks, only "indirectly", that is, through the appearance of positive clearings. Somewhere in the economy, some market participants spend less, therefore less money enters the clearing process, the bank experiences positive clearings and an increase of reserves, and subsequently increases its issues of bank liabilities, say, by granting loans to _other_ market participants. The free bankers suggest that the banks thus change the supply of money in response to changes in demand, analogously to firms supplying commodities, but it is clear that the analogy is tenuous to say the least.

Jonathan's point has merit. It's true that the signals about an increased demand for money are indirect. However, the bank can be sure that if IT is seeing positive clearings, the increased demand for money is of ITS inside money. So under FB, the scope of matching supply and demand is narrower.

But I think that overlooks the key point: if the demand for Chase dollars rises and Chase customers cut back on their expenditures, they are *successful* at enlarging their holdings of Chase dollars. In so doing, they provide savings to Chase (the positive clearings), which can now serve as the basis for lending to borrowers who will take the savings and turn it into investment. (Note how the free bank also maintains the natural rate/market rate equality in the process.)

Those who get the new loan will presumably spend it, offsetting the decline in spending from the hypothesized increase in the demand for Chase dollars. Thus the monetary effect on the price level is zero, as the increase in demand for Chase dollars and the implied fall in demand for goods is offset by the increased supply of Chase dollars and the implied increase in demand for goods. (Notice too the shift from consumption to investment, which is consistent with the implied change in time preferences of those wishing to hold more Chase dollars.)

These new Chase dollars will be willingly held as the price level comes back up from the downward pressure of the increased money holdings.

So the net result here is that the people who originally demanded more Chase dollars *actually get them by reducing their expenditures*. The additional dollars that enter the spending stream via loans are held by others.

So yes, the analogy to non-moneys is not perfect. But that's because money is different from other commodities in that it is the medium, not the object, of exchange. Again, read Yeager on this.

Beefcake writes:

"Steve doesn't like the fact that Hoppe pointed out that Stalin killed more people than Hitler. But never mind that."

Do you do stand up, cuz that's pretty funny. I'll happily make you a copy of my Comparative Economic Systems notes every time I've taught it over the last 20 where you can see extensive discussion of this fact. (And you can ask my AEH students about the tangent we got on about it last fall.)

Why I wouldn't "like" what is true is an interesting question... would you care to speculate why you think I would deny or object to someone pointing out an accepted historical truth?

Okay, more yuks below.

"It's rich of him to criticize the opponents of FRB for allegedly not reading Selgin and White's skimpy historical work (as if that would settle the issue anyway), when he himself has NEVER bothered to address Hulsmann's criticisms of the knowledge paradigm in Austrian economics."

Oh, lovely bait-and-switch there. I criticize people for *admitting* (there's no "allegedly" - go read the thread, they ADMIT it) they don't read the people they criticize, but then get criticized myself for doing what, exactly? Not "not reading the people I criticize" but actually having the modesty to not criticize what I haven't read. Of course, my SDAE presidential address does take on the dehomogenizers and their views on Hayek and knowledge: http://www.gmu.edu/rae/archives/VOL17_4_2004/1-Horowitz.pdf But wait, let me guess... YOU haven't read that, have you Beefcake? You know what that means, right?

Not reading Selgin and White isn't a sin. Criticizing them without reading them IS.

What did some guy named Rothbard say about economics? Oh yeah:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

I follow Murray's advice with respect to work I have not read (yet). Several of the 100% reservists don't.

How would you like to embarrass yourself next Beefcake?

Steve,

This seems to be a rather angry thread. Perhaps I'll talk about this another day.

You're point at 6.09pm is correct. And I do mix income and money recklessly.

However, just to clarify my view in the thread at mises.org.

I think that Selgin and White are right to say that Scotland had free banking. Or banking as free as it is reasonable to expect.

I have read many articles by both Selgin and White on this, though I have not read "Free Banking in Britain" or "Theory of Free Banking".

Here is my view.... Notes in Scotland were not redeemable on demand for gold. In most cases and for most customers they were. But it was not a truly general rule. The notes were not really similar to warehouse bills. Rather they were debt, they were Credit money. The banks backed them with loans not gold. The banks held gold as a convience to satisfy most of their customers who only occasionally asked for gold and then only for small amounts.

My view is actually not that far from Selgin's.

I'm not a professional economist, nor have I read many of the books cited above. When I am not sure about an economic issue, I fall back to first principles. One of those is "no initiation of force". 100% reserves requires the initiation of force to prevent banks from issuing unbacked notes.

Fractional reserve banking is not fraudulent in the least, so long as its depositors are aware of its nature. Only the naive expect banks to store their deposits in numbered bags down in the vault.

As to which is more economically efficient and stable, 100% reserves of fractional banking, I have no educated opinion. But I prefer the freedom, and so have to come down on the side of fractional reserve free banking. I don't want governments telling private businesses what they can or cannot peacefully do.

But I am a very great fan of Yeager, particularly on money and banking!!! However, I cannot find in his writings the beginning of an argument in favour of fractional-reserve free banking.
You write:
"It's true that the signals about an increased demand for money are indirect. However, the bank can be sure that if IT is seeing positive clearings, the increased demand for money is of ITS inside money."
But positive clearings signal an increased AND SATISFIED demand for money; they do not signal that some unsatisfied demand for money is existing out there in the market. It is a fundamental proposition of monetary theory that any market participant can immediately satisfy his or her own demand to hold simply by refraining from spending. (Note also that the situation envisaged by the hypothesis considered here is NOT identical nor even fundamentally similar to the one envisaged by Yeager when he refers to "the perils of base money".)
The whole theory of the fractional-reserve free bankers is a misleading semantic construction intended to justify certain practices of the fractional-reserve banks.
The banks that experience positive clearings and a higher reserves position can now of course engage in additional lending but they do this as they always do, and as Mises pointed out, by bidding down interest rates, thus inducing a willingness on the part of market participants to accept additional credit.
To Beefcake I would like to say that the dividing line between good and bad economics certainly does not coincide with the dividing line between pro and contra the MI. It´s a bit more complicated than that. The point is probably that, if you want to attack the establishment, there are more and less subtle ways to do it... Most of the work on money and banking coming out of the MI is excellent, however.

Brandybuck: "Fractional reserve banking is not fraudulent in the least, so long as its depositors are aware of its nature. Only the naive expect banks to store their deposits in numbered bags down in the vault."

Suppose four farmers meet in a pub. They drink many pints of stout. While doing so they create a land deal.

Seamus owns two acres of land. John own another two acres of land. Out of that land Seamus and John agree to give Paddy three acres and Mike two acres.

We agree that these four can make private contracts. However, this particular contract is contradictory. There are only four acres of land. So five acres cannot be distributed. In this case a court must judge the situation.

The same that is true of acres of land is true of gold coins.

However, when credit and debt are involved things are different. Seamus and John can promise to *owe* Mike and Paddy their land and to make good that debt sometime in the future by buying another acre.

Beefcake,
Please stop personalizing the debate, and stop launching personal attacks. Or at least reveal your identity. I tried, and others here tried too, to explain on logical grounds why we believe the contruction of the FRFBers is misguided. We are not interested in Steve´s personal motives. Respond to LvdH´s last post for instance. When an individual defends a misguided position, there are always those two possible interpretations: either the guy doesn´t get it, or bad faith is involved. I have since long abandoned the belief that academics are smarter than average citizens so I cannot exclude the first possibility. Therefore I go on arguing on logical grounds.

Just to address a bit of Beefcake's content (as opposed to his bile)

Beefcake: "Perhaps it really shows that the Austrian work coming out of GMU is more compatible with mainstream neoclassicism than they'd care to admit."

The funny thing is that in this case Hoppe is the one taking the neo-classical position.
Hoppe writes about a general wish to increase holdings of money "In generally striving to increase the size of their cash holdings, however, the money prices of nonmoney goods will be bid down, and the purchasing power per unit money will correspondingly rise."

This is *not necessarily true* in the short term. Price signaling is not instantaneous. Prices are sticky. As Horowitz says thinking about the market discovery process in this way is "perfectly austrian".

Note that some neo-classicals go as far as to claim that even in the case of a significant monetary contraction such as happened during the Great Depression, real-balance effects would be at work so as to ultimately restore equilibrium. See e.g. Patinkin´s article in the New Palgrave. I don´t know whether Hoppe would make that point, but if he would, I don´t think it is the right point to make for an Austrian. The right argument to make is that such a contraction would not happen under a 100 per cent reserve gold standard. But besides that it is a correct point that it is a simple implication of Walras´ Law that in a world with only money and commodities, an excess demand for money will be reflected in an excess supply of commodities, the latter putting downward pressure upon prices. So we have: Dm-Sm=Sc-Dc.
The point about sticky prices would be a good argument against 100 per cent reserve advocates if one could plausibly demonstrate that some historical depressions occurred because of increases in the demand to hold money (decreases in V) that took place _independently_ of any simultaneous contraction of the quantity of money. However, this point is mostly illustrated with reference to the Great Depression and in that case the quantity of money contracted significantly. In particular monetarists have considered this contraction a major cause of trouble.

It is indeed difficult to escape the impression that the way in which the free bankers downplay the role and importance of real-balance effects is somewhat reminiscent of Keynesian modes of thought. My own position with respect to equilibrating real-balance effects is an intermediate one: while it is a credible proposition in "normal" circumstances, it probably breaks down in exceptional circumstances as occurred during the Great Depression. So I am afraid Patinkin went too far in his faith in the real-balance effect. Hülsmann seems to commit a similar error in his monograph on deflation. Our perception that sticky prices are a siginificant problem is to some degree a product of the optical illusion created by such exceptional circumstances. If the downward flexibility of the quantity of money is greater than the downward flexibility of prices then it will always seem as if prices are "too sticky". Still under the circumstances at hand it may constitute a real problem. The optical illusion would probably disappear under a more appropriate institutional context.

I don't disagree with the fractional reserve free banking advocates about this issue.

I disagree with them about categories of money.

As Menger described money evolves from commonly accepted exchanges. I'm going to use a splat "#" here to mean "acts like money". What concerned Mises and Rothbard was the following situation:

1. Coin money #
2. Notes convertible to commodity #
3. Deposit accounts also convertible #
4. Debt certificates

They pointed out (accurately in my opinion) that this sort of system could not be maintained with fractional reserves.

But, another configuration can make a practical free banking system. That is:
1. Coin money #
2. Debt certificates #

Perhaps this occurred in Scotland.

I don't think though that free banks consitute a solution to the first situation. This is where I disagree with the fractional reserve free banking advocates.

I'll try to illustrate the problem.

George Selgin said to me (On the Mises site discussion I linked to earlier on April 30th at 10:59am) :
"Almost always before 1765, and always afterwards, Scottish bank notes were redeemable on demand."

Yet at other times in the discussion he mentions how the bank customers knew about the risks. For example, on May 13th 9:11am:
"How could anyone aware of them believe that banks were holding 100-percent reserves? If so, how did they understand those laws? Or consider those occasional runs that anti-fr types like to point to as proof of its fraudulent nature."
And April 30th 10:46am
"It would have us believe that, for centuries all over the globe banks have systematically swindled millions of depositors, keeping them in the dark about the true disposition of their "deposits"--and have done so while suffering occasional runs and failures and also while paying interest on accounts (or at least not charging warehousing fees)--all facts that should have signalled to even the most moronic depositors the reality of fractional reserves"

I can see that customers may have understood the process. But, I don't see how all this can possibly add up. The risk a commodity banknote can come with is that bank don't convert it. So I can't see how customers can know that fractional reserves come with risk, but at that on the other hand notes are always convertible.

How can a customer know the facts without knowing they hold what is effectively a debt contract?

I'll admit that perhaps I'm wrong though and I just don't understand the argument.

Well there's a lot that's gone on while I was sleeping and at commencement, and I don't have the time to reply to all of it (Priorities, after all: Red Wings game in 30 mins!)

First, though, I'm done with our troll Beefcake, except for one question: Are you by chance related to this guy? http://tinyurl.com/r7tap6

The 100% vs. FRB debate will indeed never die. And although I don't think the FRB position has no weaknesses whatsoever, I think the 100% reserve one has far more. I'd also stand by a point Selgin made several times in that thread at the Mises blog: we can argue theory all day long, but the historical evidence points to two things - the stability of genuinely (or very close to it) free banking systems with fractional reserves and the near, if not total, absence of 100% reserve systems when they are ALWAYS legal in a world of FRB.

The critics of FR-FB throw all kinds of accusations out about how such a system will be prone to all sorts of problems, despite the fact that the historical record shows otherwise. Folks like our friend Beefcake can call their history shoddy all he wants, but it has passed muster in the peer review process, both in and out of Austrian circles. So has that of others writing on this topic. That history isn't perfect, but history never is. I do think, though, it's more than good enough and should lead the critics to be more careful in the claims they raise about how FR-FB would actually function.

That's it for now. It's hockey time.

But that´s just not true. FRFB systems have disappeared from this world, and have everywhere made room for central banking systems. And the pointing out of conceptual confusions is not the same thing as throwing accusations. But you are right, one shouldn´t expect more from a blog like this, it´s only Austrian economics after all...

This is one of the more interesting discussions of FRB in recent weeks (some unfortunate sniping aside).

Current writes (May 16, 11:02 pm): "Here is my view.... Notes in Scotland were not redeemable on demand for gold. In most cases and for most customers they were. But it was not a truly general rule. The notes were not really similar to warehouse bills. Rather they were debt, they were Credit money. The banks backed them with loans not gold. The banks held gold as a convience to satisfy most of their customers who only occasionally asked for gold and then only for small amounts."

I reply: Scottish banknotes were indeed demandable debt claims and not warehouse receipts. They were ordinarily redeemable on demand for gold, in the standard sense of "redeemable" (payable) for debts. (I refer to the period after the option clause was outlawed in 1765, and exempt the Suspension Period of 1797-19 during which the notes were redeemable on demand for Bank of England notes.) By "ordinarily" I mean except in those cases, rare in Scotland, when the issuer failed.

Technical footnote: in Mises' terminology banknotes are fiduciary media. They are not "credit money" in Mises' terms unless their redemption is post-dated.

Current appears to grant that the Scottish notes were ordinarily paid. So when he says "not redeemable" he apparently means "not always without exception redeemed". Okay, odd use of "not," but indeed there were some bank failures and there was the Suspension Period. But note that even warehouse receipts can fail in practice to be redeemed when the warehouse owner absconds with the gold. So the de facto difference is a matter of empirical degree. I'm willing to grant that banknotes are riskier than warehouse receipts, but the evidence tells me that for typical bank customers the returns (no storage fees, interest on deposits, anonymous bearer notes) outweighed the risks.

Scottish banknotes were not warehouse receipts -- as far as I know no banknotes ever have been -- because warehouse receipts are inherently unsuited for anonymous bearer circulation. A warehouse has to assess storage fees to cover its costs, so it needs to know against whom to assess them. For more on this point see my reply to Hulsmann at http://www.independent.org/publications/tir/article.asp?a=91. Of course, there may be some method for covering warehousing costs on anonymous bearer notes that I haven't thought of. If someone can point me to a single historical case of circulating bearer warehouse receipts, I'll be interested to see how they did it.

It is the FDIC that is fraudulent. The FDIC promises that money that isn't there will be there. And it funds the promise with the depositor's [taxpayers] money.
The FDIC allows the banks to invest with only one concern, maximum profit, rather than how the depositor would act with his own money [which it is].
Holding money is only ill advised because of its "lack of value". If our money held real value, it would be no different that holding capital. Any "holding" is simply a reserve set aside for future use, there is no reason to hold for non use.

professor horwitz:
your fellow free-banker, professor selgin, believes that an increase in gold supply under a fully specie monetary order (no frb) would give rise to the abc. i disagree, and believe that only inflation would result, but no systemic crisis. do you agree?

Lawrence White. That was very interesting. It sounds fairly sensible to me. I don't think there is really much difference between my view and yours.

I'm going to go and read your book. Thanks for the input.

again, to professor horwitz:
i agree that price rigidity on the downside is likely to create problems in a deflation. your solution is to mitigate this through monetary measures, but that only shifts attention from the rigidities. why not direct energies to getting rid of the legislative and union-inspired causes of price stickiness? i cannot see why stickiness would exist in the absence of these barriers. i mean the harding depression wasn't disastrous, prices readjusted quickly on the downside.


selgin's tongue-in-cheek depiction of the frb conspiracy is all very amusing, but then there remains the question as to why current-account holders persist in being called "depositors", when they are treated as "creditors" in the banks balance sheets. a little too cute for me.

to current:
why are prices sticky? this keynesian supposition never convinces me. i'm assuming you can only be referring to labour prices, as the current climate reveals how incredibly rapid adjustments are made to the downside by other prices (think crude oil in the last 18 months). prices rise via the escalator and fall via the elevator, as the trading wisdom goes.

nobody wants to take a pay cut, but again the current environment is an object lesson in how that can be embraced in preference to job losses. (bonus' cuts don't seem to have been sticky!)

newson,

Well, I think that you could argue that sticky prices only mean that the market cannot reach equilibrium (market clearing) instantly after any shock. Of course, if everybody expects a shock, then prices would have adjusted already before the event. The fact is that the process of price adjustment is a process of discovery, to assume perfectly flexible prices is to assume that the market process works with instantly.

Of course, this does not mean that state interference in the price system does not increase price stickiness.

finally, to all free-bankers - what about the tendency to cartelize? in all other indusries cartel collapse only results in oligopoly profits being lost, not generally in business collapse. a bank-run has knock-on effects that beg for state intervention, which seems to me why free-banking only stays free for a limited time.

to rr guthman:
well the market sure seemed able to adjust pretty quickly in the current market-meltdown. as they also did after 9/11. (the discovery process after 9/11 lasted minutes after everybody turned on the tv).

of course exogenous shocks take the market unprepared! but i warrant if the saudi royal family flew to exile in geneva tomorrow morning following the islamic revolutionary guard's coup, prices of oil would be less than sticky!

i just can't reconcile sticky with my experience in markets (not to be confused with illiquid markets).

professor selgin's feigned consternation about why the public tolerates frb could equally be applied to social security. many people who know the ponzi-like structure are quite comfortable with the odds that someone else will take the body-blow when the system breaks down. like frb, systemic breakdown is impossible to time accurately, and early-comers do quite well at the expense of late-comers.

Newson: "i just can't reconcile sticky with my experience in markets (not to be confused with illiquid markets)."

Well, illiquid markets are as much of an issue as liquid markets are.

I agree that things like the price of oil and of shares change very quickly. That doesn't mean that all prices do and that is the issue.

For example, I work for a huge electronics company, one I'm sure you'll have heard of. All of the parts inside our products are bought from suppliers. We negotiate contracts with these suppliers. We cannot renegotiate these whenever we want, we can do it only at specific times. Normally, when a new component is designed the price is decided. The price has "volume breakpoints" meaning it gets cheaper the more we buy.

The effects of this can be quite irritating. For example, we want to use a high-spec component on a line of high-end products. On a particular lower-end product we want to use a lower-spec component. Unfortunately we negotiated for the lower-spec component quite a long time ago. It's price is higher than that for the higher-spec component.

The suppliers suffer from similar problems. I know because I used to work for them.

Whenever a price needs changing it costs money. Normally, people must meet to decide on it, contracts must be exchanged. There is generally an entrepreneurial and forward-looking element to it too.

The result of this is that when there is a crisis the very liquid markets can adjust quickly. The stock market prices may have adjusted quickly to the results of the 9/11 attack. However, many other price could not adjust. Many labour markets fall into that category, and so do a great deal of other markets for producer goods.

I think the real debate about this is over what effect it has.

To Newson and other folks....

It's worth mentioning that the points about demand for money that have been made here are quite separate from points about macroeconomics.

A person can agree with Steve Horowitz and I about excess demand for money. But that doesn't mean they must logically hold the opinion that recessions are exacerbated by insufficient effective demand. A person may hold the position that empirically there is not much stickiness and it does not exacerbate recessions. I don't hold that view. But I don't think it's a particularly stupid or inconsistent view either.

Also, certainly price rigidities produced by the state should be tackled. However, even if they are price stickiness will remain.

Laurence White: "Technical footnote: in Mises' terminology banknotes are fiduciary media. They are not "credit money" in Mises' terms unless their redemption is post-dated."

This is something I find interesting. In "Human Action" Mises writes on p.433:
"If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media. As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium. A part of the total amount of money-substitutes issued is usually covered by a money reserve held. Thus a part of the total amount of money-substitutes issued is money certificates, the rest fiduciary media. But this fact can only be recognized by those familiar with the bank's balance sheets. The individual banknote, deposit, or token coin does not indicate its catallactic character."

However, in "Theory of Money and Credit" on p.61 he writes:
"A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them. In some way or other the maturity of these claims must be postponed to some future time."

This may be a translation difference I suppose. I understand that the title of that book was "The Theory of Money and Fiduciary Media" when published in German.

Juggernaut,

You are talking about the situation in financial markets. I am sure you are correct.

However, there are two different issues here. One is the situation of liquidity in the world of high finance. The other is the situation for other parts of the economy.

When I said earlier:
'Suppose I'm uncertain about the future and would like to hold more cash. So, I go to my boss for more work. I ask him "Can I work another 8 hours per week at my current salary". He says "No, your contract of employment doesn't allow us to do that". I have an intent to supply at the market price, but I have been frustrated by a sticky price. I have an excess demand for cash.'

That is exactly what I meant. I wasn't using an example of an ordinary person as an analogy for high finance.

A couple of thoughts (other than noting that Beefcake should make up his mind if he's a Beefcake or a Juggernaut), all in response to Newson:

1. Can you offer more details on why you think a gold discovery under 100% reserves would just cause "inflation, but not a systemic crisis?" I'm curious as to where you see that difference happening.

2. On sticky prices: one need not assume that prices don't move smoothly and accurately because of government barriers. Markets are imperfect discovery processes. Prices don't instantaneously adjust. Again, I ask this question:

If you think prices adjust "just fine," then why is INFLATION a problem? Why don't prices "just adjust" upward when the money supply is in excess? If they did with the same effectiveness you assume about downward movements, we wouldn't get relative price effects and the rest of the problems of inflation. Why the asymmetry? It seems that those who think prices can "just adjust" downward are falling into the near-GE type world that Salerno (wrongly) accuses Hayekians of assuming.

Markets have all kinds of imperfections in them. Part of the FRFB argument is that expanding the nominal money supply causes many fewer problems faced with an EDM than does waiting out the painful fall in prices.

This article is hard to find, but is an excellent treatment of the "price stickiness" issue: Shah, Parth. 1997. “The Theory of Business Fluctuations: New Keynesians, Old Monetarists, and Austrians,” Advances in Austrian Economics 4, Greenwich, CT: JAI Press: 33-62.

3. On the cartel point, I'm not sure quite what the question is. Is it "why won't free bankers form a cartel and thereby frustrate the adverse clearning process?" If so, Selgin has addressed that problem here: Selgin, George. 1987b. “The Stability and Efficiency of Money Supply Under Free Banking,” Journal of Institutional and Theoretical Economics, 143 (3), September. If that IS the question, I'll give you the short version of his argument in a later comment.

For those critics of FRFB who have not read this piece, I recommend it:

Selgin, G. A. and Lawrence H. White. 1996. “In Defense of Fiduciary Media -- or, We are Not Devo(lutionists), We are Misesians!” Review of Austrian Economics 9: 83-107, available here: http://mises.org/journals/rae/pdf/RAE9_2_5.pdf

Current, Horwitz and others,
As you may know, Steve and others who adopt a productivity norm believe that changes in the demand for money or in velocity are at least as important as changes in the quantity of money in explaining and understanding recessions/depressions. When one refers to the quantity of money, they always immediately come up with this.
However, can anyone say a few things about the relevance of velocity changes in historical depressions/recessions? In particular, are there any examples of historical depressions where the quantity of money did _not_ change and where the causal factor was uniquely a change in V?
And in cases where both M and V changed, how did they interact? Which of the two was leading/lagging? etc.
Thank you very much in advance.

Juggernaut: "In your example, wouldn't you just adjust your cash purchases of other goods, leading to the desired effect (through the price system, which admittedly might not be an unhampered system)? I'm not sure I see the significance of not being able to adjust your cash holdings via your relationship with your employer."

The point I'm trying to make is that it's necessary to talk carefully about money demand.

As I point out a person may not be able to get extra money from working. Similarly they may not be able to get it from selling assets, as Steve Horowitz points out.

That leaves restricting expenditure. That would be possible for an individual unless they have signed contracts to agree to buy at certain times. We can agree though empirically that in general this is possible.

Now, recall the normal way to talk about supply and demand. A "demand" is a desire to purchase from a particular market at the prevailing price. If this is frustrated by an agreed upon contract then it is an "excess demand", as I understand it.

Certainly a person can obtain the money by cutting back on their expense. That though doesn't mean that the excess demand doesn't exist.

However, I think I see your point. You perhaps see one market for money whereas I see many. I must say though I look at it that way because I'm used to looking at things that way.

Juggernaut: "I don't make the distinction you make between the financial ("high" or otherwise) and non-financial sectors of the economy, so I guess we're going to have to disagree on some of these points."
That's fair enough. I pointed out that I was not talking about finance to deliberately show that I'm not giving the Keynesian investor liquidity preference.

The problem is that some markets face a situation very similar to a walrasian auctioneer. Other markets don't, they face completely different situations.

Juggernaut: "Yes, I would view the market for money in terms of supply _and_ demand ("one market"), so again, the fact that someone is frustrated in their attempts to raise cash through sellling some good (eg, their labor) is not particularly significant. (At any rate, contracts can always be modified at some price, can't they?) Let's forget about contractual restrictions; can't a seller be frustrated by the simple fact that prospective buyers don't want his additional wares (ie, they're happy with their current cash balances and don't want them reduced)?"

I see your point more clearly now.

We can look at the local perspective or a wider perspective. In the wider perspective it is unlikely that a person won't be unable to sell one of his assets or services for money.

That doesn't seem to change very much though. In what way do you think it changes things?

Juggernaut: "Why is it believed that a special institution (FRB) that creates additional _claims_ to goods is needed for money, but no other good? (I'm asking this in general, not towards you in particular.)"

Well, it looks to me as though White isn't really treating banknotes very differently to debt. It's just debt that has undertaken the Mengerian process of becoming money.

So creating it isn't particularly special.

Steve, please don't weaken your thesis by pointing to "passing of peer review process" of some work as an "argument" of its validity. That's weakest and shallowest argument of all. If we start listing all the shoddy things that passed glorious "peer review" process in economics or in many other fields, result wouldn't be good, believe me.

Juggarnaut: "One last point, Current (and this may be a nit-pick), but the way you characterize demand (in terms of desire), there will _always_ be excess demand (eg, I'd like a whole lot of a good for much less than the prevailing price)."

What I said in my post at 11:32am was "A 'demand' is a desire to purchase from a particular market at the prevailing price."

Juggarnaut: "Isn't it better to think of demand in terms of the _amount_ at which exchange will take place at some price, and whether amounts of goods can clear for transaction (ie, whether the price system is properly functioning)?"

Yes. That is why I'm bringing contracts and stickiness into it. I may desire to work more hours than I do *at the prevailing price* for my work, but a contract or a cost elsewhere may stop me and my employer from making that bargain.

Ivan,

Sorry, but I really do believe that passing the peer review test is a "really good reason" to believe that an argument has merit. It's not sufficient, that's for sure, so counter-evidence doesn't necessarily undermine the argument. And it's not strictly necessary either, but boy it's close.

Yeah, bad arguments pass peer review, but, like Bastiat, we should remember the unseen and ask how many more *didn't* get into circulation because peer review filtered them out.

Having been a submitter, a referee, and an editor for long enough, I've seen the process from all sides. Ceteris paribus, an argument that's been peer review approved will always carry more weight with me than one that has not.

Juggernaut: "Also, let's ask why there are contractual barriers to supplying more of one's labor (again, not talking labor unions, minimum wage laws and such). Doesn't this just mean that demanders of that labor don't like variability in the supply (so that they're trying to "lock it in" for some period)? So why should their desire for stable supply (which is the counterpart of the frustrated seller of labor trying to raise more cash) be viewed as a problem, which is what is implicitly being claimed (by viewing such rigidities as a problem)?"

Certainly indeed I may have fixed my hours because *I* don't like variability. However predictions made in the past are not necessarily good indications of the present.

Both I and my employer may wish to do something different *now* because of new situations that have arisen.

The situation is exactly the same as that for specialist capital equipment. Resources are invested in specialist capital equipment on a production line on the assumption that there will be a large demand for the production line's products in the future.

The production line may be modified to make something different, at a high cost. Just as my employment contract may be modified at a high cost.

Just as we see capital rigidities as a potential problem, so we should see contract rigidities as a potential problem.

Juggernaut: "banknotes (as demand deposits) _are_ different from debt, and no kind of evolutionary process can turn them into debt."

Perhaps not legitimately. But, I think that it can work the other way around. Debt certificates can become acceptable media of exchange.

Consider the legitimacy of the following hypothetical....

I move to the deep west of Ireland where marijuana is acceptable currency. I setup in business and become very rich.

My friends come to me one day and say that they need some money. Some other come to me saying that they have too much. I respond by writing a set of notes.

"This note is a debt Current owes to the holder. Current promises to try to pay the holder on demand the sum of 10 grammes of hashish. In the case that Current cannot meet that demand when presented with the note he promises to pay 12 grammes of hash in three months from that time."

Now, I keep reserves of hash. I also keep assets of other sorts. Growing plants for example.

Over the years my bills are reliable and I always pay them. I never smoke the reserve. So, they come to trade on a par with actual hash. Nobody can really complain that my notes aren't backed by real dope since I haven't promised that.

Now I don't agree with some FRFB advocates when they suggest that I can promise to pay on demand without adding other clauses.

"selgin's tongue-in-cheek depiction of the frb conspiracy is all very amusing, but then there remains the question as to why current-account holders persist in being called "depositors", when they are treated as "creditors" in the banks balance sheets. a little too cute for me."

Language evolves, and words acquire new and distinct meanings, and especially so when used in particular contexts. Reading somewhere on the LvM site the opinion that fractional reserve accounts should be tolerated, but only provided that bankers be prohibited from calling them deposits, made me wonder whether people holding that view also think that "egg creams" should be illegal 'cause they don't really have any eggs in them? And just to be on the safe side, perhaps restaurants should have to cease and desist referring to sandwiches containing nothing but beef as "hamburgers"!

Perfectly silly, of course. But the point is that banning the use of the term "deposit" to refer to a credit balance at a bank would be equally silly, as the usage is no less well established as that of the other terms mentioned.

Steve,

do you really think that Hayek's "Use of Knowledge in Society", will today pass peer review process in any of the leading economics journals in USA?

If you for example seriously believe that ABCT offers plausible or even true explanation of BC, you would have any reason to prefer work that is not "per reviewed" in leading economics journals to one that is, because mainstream economic theory is extremely hostile to Austrian methodology. Peer review process in AER or QJE can probably pass only papers that severely compromise Mises-Hayek's theory, because that theory is not considered mainstream and even serious among 99% of "peers" i.e. reviewers. "Austrian" piece in QJE is for me ex definitionem reason to be sceptical, because of who "peers" are and what their criteria of quality and relevancy are. I don't want to say nothing about Selgin and White, this is just general point.

Jonathan writes, apropos my claims regarding the robustness of past free banming systems, "But that's just not true. FRFB systems have disappeared from this world, and have everywhere made room for central banking systems." Here Jonathan strips my arguments of their context: I was responding to the specific claim that, in a free market, people would insists on (near) 100-percent reserve backing. I observed that there was no evidence that fractional reserves would be out-competed under laissez faire by 100-percent reserves. The claim is consistent with the evidence, notwithstanding the tendency of governments to undermine free banking in favor of central-bank based systems.

Steve,

Thank you for your reply. I know exactly what you are saying, but I insist that you are reading Hoppe incorrectly.

I believe that your statement below is where things go wrong:

>The problem that free bankers identify with an "excess demand for money" is precisely that people's desire to hold more money CANNOT and IS NOT being met by the current money supply. (More on this in my next comment.) Hoppe is claiming that the problem is that they already HAVE those holdings and that the free bankers somehow think that's unproductive. Nothing could be further from the truth.

I think you are trying to take Hoppe's argument to be an argument against what a *free banking defender* considers to be an excess demand for money. Yes, you are correct to say that the problem for free bankers is that an excess demand for money means that people's desire to hold more money cannot and is not being met with the current money supply.

But does the fact that Hoppe understands an "excess demand for money" to mean that people are in the process of holding more money, which is counter to what Selgin and White and other free bankers consider it to mean, does this mean that Hoppe is not understanding the difference between a desire to hold more money and the actual state of holding more money?

Could it be that you are arguing over semantics? This problem you have with Hoppe's treatment of excess demand for cash reminds me of the countless arguments that arise over what the proper definition of "inflation" should be. A monetarist would observe falling consumer prices and say that we have deflation. An Austrian on the other hand will observe falling consumer prices but rising money supply, and say that we have inflation. Each side will say that the other does not know what "inflation" and "deflation" really means, and that they are confusing the two.

My question to you is this: Does the fact that Hoppe is treating an "excess demand for money" differently than free banking defenders treat it, does this mean that he does not know the difference between holding more money balances and wanting more money balances?

Don't you think that you are assuming that he does not know what most children know?

I think that maybe you are taking Hoppe's treatment of what you consider to be solely a free banking phrase, and since he does not use it in the same way, that he is wrong.

I think you can see the error of your ways by simply considering this:

How could an excess demand for money, that is, a wanting to hold more money that cannot be met under current money supply conditions, how could this not exist unless people are already hoarding cash? For if people are not hoarding cash, then whatever money supply exists must be able to clear the market, because with no shocks to cash holdings, prices have already adjusted.

There cannot be an excess demand for money unless there is a money shortage, and a money shortage is felt only when people are already hoarding money.

If I am wrong, by all means please pull no punches.

Ivan,
As someone who has studied the history and philosophy of science for a long time, I agree with you that the referee process in economics means little in terms of _scientificity_, but of course it means a lot in terms of who you are, and what your position is, _within the conventional establishment_. Similar situations exist in other fields but the situation in economics is in my opinion much worse because economists do not yet agree about the objective criteria of scientificity, even if they have agreed that in the meantime it probably won´t do much harm if they mimick physics as much as possible.
Now there is a little truth in this since much of mainstream economics isn´t that bad after all, but Steve was talking about _Austrian_ economics...
And then math is great fun, besides possessing an intrinsic aesthetic quality...

Juggernaut: "That's bad (for him), sure, but papering over things isn't going to change the facts of life. Likewise, employment contracts that now prove to be not to one's liking are unfortunate, but a real error nonetheless. Better to learn from one's mistake than expect they be papered over, which is how I see the free banker's solution (as a rationale for facilitating increased cash balances in the presence of such mistakes)."

Though a similar problem of rigidity occurs I think that things can be done.

Consider pawnbrokers for example. They accept goods that are not immediately marketable by their owners. They then lend a sum of money against them. If their debt is paid back they return the item, and they sell it otherwise.

I think much the same is true about some sorts of media of exchange.

Going back to my example where I set up as a hash banker. If I do what I set out above how do I do anyone any harm?

Suppose that there are uncertain times ahead, many people ask for bills. However, somebody gives me a valuable asset. One that is not immediately salable, but from which an income can be earnt. So, I issue more of the hash bills -which are credit money- that I described in my previous post.

As far as I can see there is nothing wrong with this. Certainly it allows people to evade the consequences of price stickiness. Who cares though? Pawn shops provide a similar service.

Now, it's a completely different thing if I misrepresent my business.

Mr. Horowitz, it seems to me that you made the first logical fallacy, not beefcake.

And why should anyone now take seriously any criticisms Hoppe makes of free banking?

Does one criticism you do not agree with, preclude Dr. Hoppe's capacity for future criticisms?

Professor Salerno has a response for you.

http://blog.mises.org/archives/009973.asp

George Selgin: "Reading somewhere on the LvM site the opinion that fractional reserve accounts should be tolerated, but only provided that bankers be prohibited from calling them deposits, made me wonder whether people holding that view also think that "egg creams" should be illegal 'cause they don't really have any eggs in them? And just to be on the safe side, perhaps restaurants should have to cease and desist referring to sandwiches containing nothing but beef as "hamburgers"! "

At the Mises.org site you said to me:
"As for the number of naive bank depositors who think their money is absolutely safe, I think it is you who are now relying on evidence from a post-government guarantee world. Yes: many people now think "deposits" are in some sense fully backed, but these days the belief isn't so naive, as governments have in fact given them the impression that this is so, if not thanks to bankers' own efforts, then thanks to government guarantee funds and treasuries"

The point is that the word has evolved to mean something that is not correct for the purposes of free banking.

I don't think it's at all unreasonable that if free-banking were reinstituted that the word "deposit" should have a precise legal meaning similar to its *effective* meaning today.

P-F says:

"I think you are trying to take Hoppe's argument to be an argument against what a *free banking defender* considers to be an excess demand for money...My question to you is this: Does the fact that Hoppe is treating an "excess demand for money" differently than free banking defenders treat it, does this mean that he does not know the difference between holding more money balances and wanting more money balances?"

I think you've missed the point, and it's one Larry made in his original response to Hoppe: the free bankers' use of "excess demand for money" is NOT "ours." It is the meaning of excess demand for money used by monetary economists of ANY sort. In fact, it's an application of the more general concept of "excess demand" used by economists everywhere. This is not mere semantics. It's Hoppe using a term accepted across the discipline incorrectly. If he said "demand curves slope up" and what he means by "up" is what everyone else means by "down," surely it's not "semantics," it's him misusing a commonly accepted term.

So he can, like Alice, want words to mean whatever he wants, but they are what they are.

Furthermore, the fact that he seems utterly unaware that the free bankers love that Hutt piece and have written on it, including Selgin's piece of almost the same title as Hoppe's, suggests that he really hasn't understood the argument that the FBs have made on this whole topic. That context suggests this is an intellectual error, not a semantic one.

Look, peer review ain't perfect. But my earlier point was in response to the claim that Selgin and White have done shoddy history. Their history has passed the peer review test both by Austrians and non-Austrians. When their critics can publish something that demonstrates their errors and can do it in a forum where the work is refereed by economic historians outside of the Austrian movement, then you've got something. Til then, I'll trust Selgin and white's accounts over their critics'.

Finally for Beefcake/Juggernaut:

If you keep it up you and your collection of sock puppets will get the pleasure of hanging out with DG Lesvic over in the penalty box. You can call me a Keynesian in drag all you want, as that at least is on topic. Keep it on topic and keep it civil please. We've banned before, and we'll do it again.

Dixie:

I stand by my interpretation of Hoppe's argument.

That said, yeah, I probably let my rhetoric get the best of me in suggesting it undermines every/anything Hoppe says about free banking. Part of my frustration was not just the error he made about EDM but also that he juxtaposes their view to Hutt's when Selgin and I have both, in print, argued for the importance and accuracy of Hutt's argument. It's one thing to be criticized, but it's another to be criticized for not holding a position you in fact hold and have written about in print.

The first duty of a scholar is to make sure he has the arguments of his opponents correct and one way to do that is to make sure you've done the research and know what they've said. That Hoppe could both get the position utterly wrong and do so with apparent ignorance of at least George's article with nearly the same title as his is just poor form to say the least. And that as much as anything pissed me off.

Poor Alice! It was Humpty Dumpty who thought he could chose the meanings of words, not Alice.

"I don't know what you mean by 'glory,'" Alice said.
Humpty Dumpty smiled contemptuously. "Of course you don't – till I tell you. I meant 'there's a nice knock-down argument for you!'"
"But 'glory' doesn't mean 'a nice knock-down argument,'" Alice objected.
"When I use a word," Humpty Dumpty said in a rather a scornful tone, "it means just what I choose it to mean – neither more nor less."
"The question is," said Alice, "whether you can make words mean different things."
"The question is," said Humpty Dumpty, "which is to be master – that's all."


Hoppe is as much a master of words as Humpty Dumpty, I think.

professor selgin says:
"But the point is that banning the use of the term "deposit" to refer to a credit balance at a bank would be equally silly, as the usage is no less well established as that of the other terms mentioned."

i don't think the comparison holds water. sure "hamburgers" no longer contain ham, but you'll find most food products these days have exhaustive ingredient lists, so that people who may be allergic to ham, or jewish/moslem may be quite sure that what they're consuming conforms to popular language. (and they may have grounds for legal recourse if that isn't the case).

when you open a current account, you don't get a p.d.s. on the risks of the f.r.b. system. and anyway, why do the banks use different language in their own accounts? perhaps it's all just a happy accident, but one would think that trillions of dollars would focus the mind. in my experience, banks are not very laid-back when it comes to legal drafting.

to professor selgin:
on a mises' blog you stated -
"Even a pure gold system allows some scope for ABCT, as when there's a new gold discovery, and in fact I suspect that such a system would do a worse job of keeping interest rates at their "natural" levels than a fractional-reserve free banking system would do, because of its limited ability to keep nominal money supply in line with demand."

do you still stick with the first affirmation, that under a pure gold standard, unexpectedly large gold discoveries can engender the abct? why would this create any more systemic crisis than the price of oil or wheat changing in response to supply changes?

to professor horwitz:
i'd previously read "we are not devo..", but “The Theory of Business Fluctuations: New Keynesians, Old Monetarists, and Austrians” is proving a bugger to access online.

Steve wrote:
"Their history has passed the peer review test both by Austrians and non-Austrians. When their critics can publish something that demonstrates their errors and can do it in a forum where the work is refereed by economic historians outside of the Austrian movement, then you've got something."
But this is sheer philosophical naïveté! Didn´t they oblige you to take an introductory course in the philosphy of science as an undergraduate?
As such "passing the referee process" is not a substantive epistemological criterion of scientific truth or validity. Galileo problably wouldn´t have passed the referee process of his days if something like this did exist or had existed. The referee process is part of how we now organize professional scientific activity, but it remains an institutionally and historically contingent fact. Now some individuals aren´t really that good at independent, critical thinking, and then there is always still the referee process which always creates a prima facie presumption of the sort: if it has passed, perhaps it cannot be that bad... Maybe...

Hamburger comes from "Hamburg steak". It never contained ham or pork.

Jonathan,

I explicitly said that peer review was neither necessary nor sufficient for truth (see my earlier comment). I did say that passing peer review is a really good reason ceteris paribus to take someone's views as provisionally reliable. You are quite right that it is the institutional matrix we now use to organize science. It's far from perfect but it's the best game in town. And, again, c.p., those claims that have been peer vetted have a degree of reliability that others do not.

You wrote:
"And, again, c.p., those claims that have been peer vetted have a degree of reliability that others do not."
I didn´t exactly say that. But to come back to the issue at hand, I believe you are all paying a great tribute to Hoppe, since for an intellectual like Hoppe it is much more important to get attention than to get approval...

Steve Horwitz: "And although I don't think the FRB position has no weaknesses whatsoever, I think the 100% reserve one has far more"

It would be interesting to read what you think the weaknesses of the FRB position are, what things it needs to work on, etc.

I am about to violate Rothbard's rule and step way outside my knowledge area to proffer the following:

A human individual's expectations for the future (predictions) are usually based on his own personal (rational or irrational, always imperfect) analysis of history and his experience, thus his "training" often determines how he perceives his current condition and acts on it. If an individual has learned by experience that there is "mysteriously" a more or less monotonic long-term rise in the prices (money supply), then his general expectation may be for inflation in the long run. This does not mean that in periods of market correction or shock that his demand for money does not temporarily go up, but one of the reasons he does not have the account balance that he desires to hold at the beginning of a catastrophic bust must partially be blamed on his prior fear of long-term inflation during the boom. This may also have encouraged him to enter into relatively long-term contracts with suppliers of desired goods and services so that he can insure future supply at today’s prices; a supposed hedge against the perceived threat of inflation. Contrarily, the supplier of these services may be motivated to enter into such contracts with the buyer as a hedge against short-term market corrections which can quickly force him into bankruptcy because he is not holding the cash (due to the long-term expectation of inflation) that he might otherwise have. In times of recession and bust, a significant cause of the sticky downward prices might be a bank that is always committed to the expansion of the money supply. One could certainly argue that this is not the most significant reason for sticky prices. Yes, but the discovery issues are also made worse by the delayed realization of how much and how fast new money will be added to accommodate a widespread increase in money demand, and what effect one might expect this “unseen” future action will have on prices. Without a central bank inflating, people would grow accustomed to expect that prices fall in a recession. There is no such general expectation now. So we can imagine that some of the recent history of stickiness may be exacerbated to some degree by individuals who are unknowingly “trained” by the actions of an ever-inflationary central bank.

Perhaps in a world without central banking, prices are not nearly as sticky, and consequently the increased demand for money might be mostly or fully met by more freely floating prices.

Juggernaut: "Yes, I would view the market for money in terms of supply _and_ demand ("one market"), so again, the fact that someone is frustrated in their attempts to raise cash through sellling some good (eg, their labor) is not particularly significant."

I've thought about this comment some more. I think it's something people haven't really addressed adequately.

Suppose that I have a desire. That desire clearly isn't a demand. There may be several ways to fulfill that desire. For example, if I want to eat a brassica I could be cabbage, brussel spouts or brocolli. I can make the decisions about which I look for first or afterwards. The same is true on the supply side. I may got to market with several things I wish to exchange, but use only one of them.

Suppose I have decided that I want money to hold. Ex-ante I may demand that money with several different sets of goods. To perform the transaction I can only exchange on particular good.

Suppose that I have a violin and a flute. I know the market price of each. I travel to the local music shops. I offer the market price at each of them. Most of the shopkeepers tell me "I don't need a violin or flute". One however agrees to purchase the flute. Once this has happened I have ex post transferred only the flute. That doesn't change the fact that I wanted to sell the violin but couldn't. I may have preferred to sell the violin.

You could say I had an excess demand for money I intended to fulfill using a violin. I was frustrated so I sold a flute instead.

In this situation the pawnbroker can help. If the pawnbroker knows the price of something I can hand it over to him and get money.

Just as the pawnbroker can help, so can the provider of credit money I described earlier.

to current:
thanks for that. if nothing else, i now know the etymology of "hamburger".

Well Steve, both Larry and you have been shown to be in error by Joe Salerno over at Mises. You are beating on a straw man characture of Hoppe's position, not the real thing.

Shock and horrors, my friend Joe Salerno thinks I'm wrong about monetary issues! :) I think he's wrong about a lot too, but so it goes when you have a set of ideas that is a living, breathing intellectual framework, not a liturgy to be learned.

Does anyone have a link to that Salerno piece? I have no memory of Salerno often being wrong on monetary matters.

Selgin wrote: "Jonathan writes, apropos my claims regarding the robustness of past free banming systems, "But that's just not true. FRFB systems have disappeared from this world, and have everywhere made room for central banking systems." Here Jonathan strips my arguments of their context: I was responding to the specific claim that, in a free market, people would insists on (near) 100-percent reserve backing. I observed that there was no evidence that fractional reserves would be out-competed under laissez faire by 100-percent reserves. The claim is consistent with the evidence, notwithstanding the tendency of governments to undermine free banking in favor of central-bank based systems."

I was actually responding to an argument of Steve. But the point here is that the concept of free banking has first to be defined independently of what "people insist on" in a particular historical context. Otherwise the argument quickly becomes circular. It is difficult to see how such a definition could be other than in terms of the ethical, legal etc. constraints defining free banking. What people insist on _within an actual historical context_ is from this perspective probably largely irrelevant. People who live from rent-seeking, government subsidies probably won´t insist on abolishing government subdisies either... But even from the economic point of view, I think Mises had a point that free banking would in practice remain close to 100 per cent reserve banking.

Steve wrote: "The first duty of a scholar is to make sure he has the arguments of his opponents correct and one way to do that is to make sure you've done the research and know what they've said. That Hoppe could both get the position utterly wrong and do so with apparent ignorance of at least George's article with nearly the same title as his is just poor form to say the least. And that as much as anything pissed me off."

Science is about finding out about the truth before it is about beating opponents. A scholar can choose to ignore opponents and try to get directly at the truth, if he/she believes it is a waste of time to first criticize the work of others, or if he/she believes it is simply crap. Science has the structure of "a free critical dialogue". You can never be sure your work will be quoted by others, or by particular others. If a scholar is pissed off because of not being quoted, prima facie this probably says more about the scholar´s personality than about the validity of his/her work.

My point, Jonathan, is that because Hoppe was, apparently, unaware of George's previous work, he MISSED the truth and utterly misrepresented George's position. If you want to make claims about what others believe, you best be accurate about it. Hoppe was not.

I don't care if I'm cited. I care that my views are accurately represented. Often, if not always, that requires being aware of what I have said.

But in the social sciences most controversies, disagreements etc. are precisely about the meaning of claims, propositions etc. So A puts forward a claim, then B responds by saying, "properly analyzed what you say actually means A´ rather than A" etc. Very often there is nothing more about it. I guess you just don´t like Hoppe. And then I said: TRYING to get at the truth... I must go back to work now.

DixieFlattine,
Thanks for the link to Salerno´s piece. What was again the title of that comedy by Shakespeare? Much Ado About Nothing...

Actually if someone could e-mail me (a copy of) the following paper, that would be useful:
Selgin, G.A. (1987), 'The yield on money held revisited: lessons for today', Market Process, Fairfax, VA: George Mason University, Spring, 18-24.
Ludwig van den Hauwe
lvandenhauwe@yahoo.com
ludwigvandenhauwe@yahoo.fr
ludwigvandenhauwe@clearwire.be

For what it's worth I think that the debates this disagreement has exposed are far more interesting than the original question of interpreting Hoppe.

Steve wrote: "I don't care if I'm cited."
I guess for most people the game is really about being quoted and cited, and rightly so. What interests you most: a publication in a non-refereed, obscure journal which is quoted by, say, one or more Nobel Prize winners, or a paper in a refereed, high-profile journal that has never been quoted? I guess most people would prefer the first option.

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