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Yes, Professor Huerta de Soto is a great scholar of the sophisticated sort. He reminds me of Guido Hulsmann (whom I have met). They both seem to have that erudite and urbane scholarly tone about them. I met Professor Hulsmann at the Austrian Scholar's Conference at the Mises Institute one year, and my father, who accompanied me with camera in hand, fell in love with him! Hulsmann was a man apart from others like David Gordon and Roderick Long.

I have read Professor De Soto's giant book twice; once when I was a young Rothbardian and again when I graduated to the more Boettke/Horwitz Austrian stuff. I think it is a great book. The early chapters on the differences between loans and deposits are really fucking good. No matter how much I tried to get into White and Selgin, I keep coming back to De Soto's book. So Pete is correct in pointing out that there are differences between White/Selgin and De Soto on matters relating to "legal and banking history."

But there are also important differences that De Soto addresses in this book relating to "economic theory." In my Mises Institute edition, De Soto explicitly attacks Selgin, White, and Horwitz in pages 675 and 705. These arguments relate directly to "economic theory." Now I will not summarize De Soto's arguments (in large part because I have forgotten them!), but a brief look at the subject headings will give you some indication of their disagreement:

1.) The demand for fidicuiary media regarded as an exogenous variable;

2.) The Possibility that a fractional-reserve free-banking system may unilaterally initiate credit expansion;

3.) The Theory of 'Monetary Equilibrium' in free banking rests on an exclusively macroeconomic analysis;

4.) The Confusion between the concept of saving and that of the demand for money;

etc. etc. etc.

So Pete should re-read these pages if he wants to understand what the disagreement is about.

Monetary theory has for me always been a tricky subject for young Austrian students. My impression has been that Selgin and White have failed to produce REAL pupils, while the Mises Institute has been much more successful in getting young students to accept their monetary theories (viz. De Soto's theory). And most Austrian students go to places like George Mason University after having been to the Mises Institute and absorbing anarcho-capitalist Rothbardian/Hoppean dogma. So they graduate with B.A.'s as Rothbardians, and then go to George Mason to work on stuff related to Institutional analysis and Public Choice. But hopefully White's presence their now will change that. I had the good fortune of taking White's courses at UMSL as transfer credits, and really enjoyed them. He is very articulate, but my impression was that he is not one to suffer fools gladly!

But I think everyone interested in Austrian economics should give De Soto's book a close read (and this includes you Pete!). (:

The healthy policies recommended by Prof Huerta de Soto are particularly the ones our governments are not implementing, quite the contrary.
In Spain (everywhere?) we are suffering from a very interventionist government which wants to delay as far as possible the necessary adjustments. Labor market reform isn't in the political agenda, and even some "libertarian" economists (not Austrians) think liberalising the labor market (e.g. reducing layoff costs) isn't the right thing to do.

Prof. Huerta de Soto did foresee the current mess, but politicians don't listen to the very few "smart guys"

An interesting point here is the interaction between the absence of 'healthy deflation' in the 90s and the socialist calculation debate: To what extent did targets for inflation for central bankers mean they ran inappropriate policies.

As the UK economist John Kay says: 'If targets worked then the Soviet Union would have worked.'

Achieving the target overrides what was supposed to be the rule.

I will agree with MGM on one thing: Dr. White is going to be a fantastic addition to the faculty.

I'm afraid I must insist that the differences between my views and Professor de Soto's are far from trivial. True, he and I both claim that no harm is done by allowing prices to decline at rates consistent with underlying productivity gains. But that's as far as the resemblance goes. For de Soto is generally opposed to monetary expansion, including expansion to offset a decline in the velocity of money, and so thinks deflation OK even if it isn't driven by productivity gains. (In reading his book, you perhaps noticed an entire chapter devoted to criticizing my opposite views on this matter.) Moreover, De Soto believes that fractional reserve banking should be outlawed, and that it is inherently destabilizing, whereas I deny both claims.

Unlike some commentators on this blog, I confess that I find little merit in De Soto's legal arguments against fractional reserve banking. However much he may insist otherwise, the term "deposit" on Anglo-American banking doesn't connote the same thing as the latin "depositum." What's more the distinction has been clearly set-forth in common law since the early 17th century, if not before. Remarkably, de Soto at one point admits this--and then insists that the common law is itself at fault (while broadly hinting, without evidence, that judges were swayed by the government). Those wanting the straight dope are advised to consult Henry Dunning Macleod's Theory of Credit, in which they will find a detailed exposure of de Soto's legal fallacies, albeit one written more than a century before de Soto's own treatise.

I see Pete is following his own advice.

Prof. Selgin, correct me if I'm wrong but isn't deflation, in the sense of a fall in the general level of prices, a consequence of (a) productivity gains, and (b) contraction in the volume of spending (quantity of money).

The former is clearly a long-run phenomenon and results mainly from continuous capital accumulation while the latter is a short-run phenomenon -- a reaction to problems on the side of money and banking.

From the standpoint of economic mechanics, the opponents of FRB identify in the credit expansion carried out by FRB, with or without the assistance by central banks, the ultimate destabilizing force which at first contributes to an increased economic activity and profitability (by expanding fiduciary media) in order then to cause the collapse of profitability (destruction of fiduciary media). This account is consistent with a monetary theory of the business cycle that identifies the root of the problem in the monetary/financial sectors.

What problems do you find in this account?

Thank you!

Wladimir Kraus

Correction in the previous post: deflation, in the sense described, is a consequence of (a) OR (b), NOT (a) AND (b).


Vladimir, I've written entire books, and numerous articles, elaborating my views on the questions you raise. You may start with my theory of free banking and my pamphlet less than zero. To offer a brief reply, free banks tend to increase M mainly in response to declining V (your second cause of deflation). Otherwise their powers of expansion are extremely limited. Thus they do not tend to trugger cycles, but can avoid a risk of the bad sort of deflation.


You can also find a version of the argument in this paper of mine: http://myslu.stlawu.edu/~shorwitz/Papers/Monetary_JHET_1996.pdf . George's work is much more thorough, but the basic idea is articulated in the paper linked above.

Yes, thank you!

In the last thread where this issue was discussed, I tried to argue that monetary expansion during a secondary recession--in contrast with ordinary times--can actually preserve the real value of savings. Has anyone else made this argument?

It seems to me that many Austrians object to any monetary expansion, because it is always seen as robbing the real value of savings. Underlying their objection is a deep conviction that monetary expansion is morally wrong. If I am right, then I think it is a point which should be made more forcefully.

That last sentence is ambiguous; I should have wrote:

"But, if I am right, then the moral objection is mistaken under particular circumstances, and perhaps this point needs to be made more forcefully."

The argument of "robbing real value of things" is, at least for me, not too convincing.

Individuals own goods, not their value. I can be the owner of a car, but not of its market value. If car production increases I cannot claim a robbery because its market value has decrease (or prevented from raising). I can own my money, but I do not own its purchasing power.

I do not think this is new (the idea that you own things, not their value), but you can find it mentioned on this topic in "In Defence of Fiduciary Media..." (Selgin & White; 1996; RAE) pp. 92-93 (point 1).

Hope it helps!



that's exactly the point that de Soto and other supporter of 100% standard have in mind. Money is a physical good that must be owned, for example certain quantity of gold. Menger and Mises's definition of money demands that it must be scarce physical commodity.

When free bankers say that increase in demand for money must be offset by increased supply of credit, what they actually say is that sellers of goods own the value of their goods. Which is to say that equilibrium should not be reestablished by increase in purchasing power of money (decrease in value of goods), but by keeping goods at current prices while increasing quantity of money (whatever theoretical justifications they offer for that, such as Keynesian arguments of "sticky wages" or "idle resources").


you should read de Soto's chapter confined to critique of free banking (pp. 675-712), and you shall see good explanation why credit expansion is harmful even during deflation, and not from ethical, but from economic point of view - credit inflation always causes misdirection of production and malinvestment. Large portion of additional supply of fiduciary media during deflation will simply end up in new unsustainable long-term investment that is inconsistent with the underlying time preference of the public, and will have to be liquidated in the future. The same forces that transform credit inflation into malinvestment during the boom, operate in the same way during credit expansion at the time of the bust. Far from "equilibrating" temporary monetary disturbance during deflation, credit expansion only brings about further "disequilibration", sowing the seeds of next crisis and delaying present recovery. So, the idea that credit inflation now can cure the effects of credit inflation in the past, without further significant misdirection of capital, is an illusion, based on wrong emphasis on macroeconomic aggregates and neglecting underlying changes in relative prices.

In his book review on “Money, bank credit and economic cycles” (1998) by Jesús Huerta de Soto, Jörg Guido Hülsmann has said that it is the first treatise on money and banking to appear since publication of Mises´s original work eighty-six years ago.
We all know the differences between White-Selgin and Huerta de Soto, but I think Boettke is right to talked about “his deep and uncompromising commitment to the Austrian school of economics, and the tremendous job he has done in teaching and in publishing Austrian works in Spain.“
I also undertand Selgin´s comment, if we consider that he was particularly criticized by this book by Huerta de Soto.
I think, also, that Boettke do not ignore those differences.
So, here is my doubt: Which should be our attitude? To show the diferences (as Selgin did), or trying to reconcile positions (as Boettke did)?


it is obvious what our attitude should be -- truth tracking, in Pete's words. If there are substantive differences between the two views, then only one of them can be true. On this point Milton Friedman got it right: there is either good or bad economics.



I understand and you are right. But, does Selgin thinks that Huerta de Soto´s theory on money and banking is 100 % wrong?

Does he thinks that Huerta de Soto´s chapter V, on the capital theory and economic cycles is wrong?

There is no doubt in my mind that these economists: Selgin, de Soto, White, Hulsmann, etc. are not only good economists, but damn good economists. This does not make them robots where everything is agreed upon. In their quests for economic truths, they are espousing theories which they utterly believe and will hold on to until persuaded otherwise. One thing in which we all could agree: a world of free banking(with fractional reserves) or 100% reserve banking would be a vast improvement on what we have now.
One thing I have noticed is that the exchanges between the two camps have been rather spirited. I hope there is no animosity between the two. That would be a shame.

Although I'm not prepared to argue 100% reserves would be worse than the status quo, I don't think that claim should be dismissed out of hand. It's certainly not obvious. There are lots of problems with 100% reserves and it depends what one's criteria of "better" and "worse" are before I'm willing to make an argument one way or the other.

I know that I've to familiarize myself with the content of the free-banking school first but what are, in essence, in the view of the school the problems that make 100% reserves economically unworkable, besides the legal argument? Is it the deflationary potential of the secular stagnation type or something inherent in it that would create business cycle or something inherent in it that would otherwise inhibit capital accumulation? If so, by what mechanism? Is there a literature that would attack 100% reserves system on the consequentialist, economic grounds?


Wladimir Kraus


This remains one of the best "one stop shopping" articles for criticisms of the 100% reserves position. It deals with both the fraud argument and consequentialist ones: http://mises.org/journals/rae/pdf/RAE9_2_5.pdf .

To be honest, there hasn't been much energy expended by free banking folks going after 100% reserves in great detail. That article is probably the one major example. I raise issues in a couple of places in my book, but not in a sustained way.

I own both the first and second editions of Jesús Huerta de Soto's book, and it is amongst my favorite of all the books within the Austrian literary circle that I've read. Although, I do have a bias, since I am from Spain. ;)

Furthermore, I would suggest Spanish speakers to look up his lectures on YouTube. They are one of a kind.

Jonathan -- How much new or reworking is there to the 2nd edition? Pete B mentioned a new preface, but nothing else.

Several years ago when I was reading Professor de Soto's book I e-mailed him with a question about GSE's and money. I explained that I was just a laymen with no academic connection and no training in economics. He was very gracious and we exchanged several messages. A wonderful sign in a scholar.

Thank you, Prof. Horwitz. I've read the two papers that you recommended. We may disagree about some analytical specifics, which are an inevitable and healthy phenomenon in the pursuit of truth, but one thing is certainly beyond doubt: Selgin/White's (and others') work on free banking appears to be an important contribution to the theory of free banking. I still have to familiarize myself with the substance of their work but it's nevertheless great to observe another significant instance where the fundamental harmony of economic self-interest of all participants in a capitalist economic system tends to be confirmed. In this connection, I was particularly glad to see this quote by Mises in the Selgin/White article:

"Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular-one is tempted to say normal-feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions."

But one more question I do have. Is there actually a serious anti-free-banking scholarship? I would be grateful for any suggestions.


Wladimir Kraus

The defenders of 100% reserves, many of whom are associated with the Mises Institute, have written any number of critiques of the modern free banking arguments. DeSoto, Hulsmann, and Hoppe mostly, but also Salerno to some extent and others. Hang out on this blog long enough and you'll see me get called an inflationist on a regular basis. :)

No, I was actually thinking about more "mainstream" critics who criticized the free-banking as being inherently unstable, prone to "excesses", and thus in need of regulation. The 100% reserves advocates are not in that camp.


Scott Sumner argues against Free Banking on his blog http://blogsandwikis.bentley.edu/themoneyillusion/ .

His argument seems to be that the supply of gold is too volatile.

Bill Woolsey has had some very interesting discussions with him over there.

George and Steve:

If we imagine a world with 100% reserve banking, and then, fractinal reserves banking is discovered or permitted, and we move to a new equilibrium, with a lower demand for base money, then it would seem to me that the transition could involve malinvestment.

In my view, the "problem" is that the increase in the quantity of fiduciary media and the apparent capital goods that could be funded would outstrip the resources freed from gold mining as the purchasing power of gold falls. I presume that expansion in the nonmonetary uses of gold (the value of gold as a raw material in jewelry, for example) would involve less consumption of substitutes (costume jewelry?) and so more resources for producing capital goods.

It is the monetary uses of gold (but at a lower purchasing power) that free up no resources. The thought experiment of 100% reserve banking with a frozen stock of fiat currency moving to free banking with that same frozen stock shows this best.

Now, once the fractional reserve banking equilibrium is obtained, and assuming that it can survive the liquidation of any malinvestments generated during the transition, then further changes in the quantity of fiduciary media should be due to changes in the demand to hold them, and any equilibrium increases in their quantity are consistent with equilibrium.

If you remember, I have always considered malinvestment as a phenomenon of regime change, and moving from 100% reserve banking to free banking would be a regime change.

In reality, of course, free bankers are proposing a regime change from the status quo. While I have my doubts, don't most free bankers of the Austrian school believe that this change would require that malinvestments (from the status quo) be liquidated?

And so, there is no "policy relevant" concern about malinvestments that might be created by a move from 100% reserve banking to free banking. We don't have 100% reserve banking now. The policy relevant malinvestments are the ones that must be liquidated from the status quo, and then any future ones that might be generated by the operations of a free banking system.

English will give very confidence to learn anything or new language using it. .

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