I was going to post something this afternoon about this Hans-Hermann Hoppe piece over on the Mises Institute site, but Larry White at Division of Labour has beat me to it and said more or less what I would have said. One excerpt from Larry's post with a comment from me below (I also have some other comments on the thread at DoL):
The second example [of supposed anti-Hutt thinking] is from closer at home, i.e., from the proponents of "free banking" such as Lawrence White, George Selgin, and Roger Garrison. According to them, an (unanticipated) increase in the demand for money "pushes the economy below its potential," (Garrison) and requires a compensating money-spending injection from the banking system.
Here it is again: an "excess demand for money" (Selgin & White) has no positive yield or is even detrimental; hence, help is needed. For the free bankers help is not supposed to come from the government and its central bank, but from a system of freely competing fractional-reserve banks. However, the idea involved is the same: the holding of (some, "excess") money is unproductive and requires a remedy.
The second sentence of Hoppe's first paragraph quoted above is correct. The second paragraph contradicts the first, and makes no sense.
Let's be clear about terms. An "excess demand" generally means an excess of quantity demanded over quantity supplied, i.e. a shortage at the current price. An "excess demand for money" -- certainly not a phrase original with Selgin and me -- accordingly means a deficiency of money held. It exists when the current quantity of money units falls short of the quantity demanded at the current purchasing power per unit. It can indeed be alleviated by an injection of additional units (or, alternatively, by an increase in the purchasing power per unit of money).
In the second paragraph Hoppe takes "excess demand for money" to mean "the holding of (some, 'excess') money", or in other words a surplus of money units held. This is the reverse of its meaning.
I will only add to Larry's point that it is really interesting to see that Hoppe does not understand a concept that is central to monetary theory and even more central to the debate between free bankers and 100 percent gold advocates. The entire monetary equilibrium framework depends on the idea of an excess demand for money meaning that people's actual money balances are less than they desire, which is, of course, merely an extension of the more general concept of an excess demand for anything.
My questions now are: do the other Rothbardian critics of free banking really understand the concept? And why should anyone now take seriously any criticisms Hoppe makes of free banking?