Booms and busts before the Fed era?

Miscellaneous History
41

Selgin,

I don’t see how the controversy over “legitimate meaning in banking law” has anything to do with what seems to be a devastating critique of your position, namely, that your economic theory (not legal theory) rests on Macroeconomics analysis and ignores the microeconomics effects that are at the heart of the business cycle theory.

I appreciate your response, but I have not been able to get any adequate response for this critic from you or any of your fellow colleagues who share your views. This issue is always ignored or evaded. This is quite frustrating and I was hoping that perhaps you can alleviate this frustration today. The analysis of how Equilibrium theory ignores the microeconomics effects refutes your entire economic theory unless you can convincingly show where the error is in the economic analyses of your critics. If such a response exists, I would love to see it.

42

The usual groundless assertions; DD5; the usual spitting and spluttering. I’m happy to let those who are actually willing to read my work, and to read it with an open mind, decide whether my arguments are based on microeconomics or not; and am happy to answer any doubts they may have concerning how any particular argument I’ve made squares with individuals pursuit of their self interest and with firms quest for profit.

43

I did not assert but rather conveyed to you what my impression is regarding what both sides have to say on economic theory. It seems that one side has presented a detailed argument for why “Monetary Equilibrium theory” rests on false economic premises. Now, perhaps this argument is itself fallacious, so I ask you to suggest a counter argument that responds to this particular criticism. What is wrong with the analysis of “Monetary Equilibrium Theory” as presented by de Soto on pp 688?

44

I have no idea what argument you have in mind DD5. If you want to indicate a particular error in my work, just do it, instead of referring cryptically to some “argument” without saying which or where. If you want to refer me to some article, fine. But I’m not inclined to address an entire article’s content on a chat page, even if I thought the thing worth addressing. That is what the journals are for. The web is a place for addressing particular issues at most: my employers don’t pay me to spend oodles of time on web forums, after all!

Questions regarding 100 percent reserve banking
45

Selgin: " If you want to indicate a particular error in my work, just do it, instead of referring cryptically to some “argument” without saying which or where. If you want to refer me to some article, fine. "

That’s what I did and I thought it was clear. However, I apologize if there was a misunderstanding. I’ll post it gain, and this time with a link. It starts on page 688 - The Theory of “Monetary Equilibrium” in Free Banking rests on an exclusively macroeconomic analysis. at http://mises.org/books/desoto.pdf

THE THEORY OF “MONETARY EQUILIBRIUM” IN FREE BANKING

RESTS ON AN EXCLUSIVELY MACROECONOMIC ANALYSIS

Other Austrians have made similar claims but I believe de Soto summarizes this position quite well in his book.

I didn’t necessarily expect you to address this issue on this forum, but a source for rebuttal would be nice, if one exists. Thank you.

46

Concerning De Soto’s argument on p. 688ff: like much of his book, it is really beneath contempt, starting with the device of exaggerating or misrepresenting the positions he wishes to attack. Thus he attributes to the “monetary equilibrium” theorists the claim that “the origin of all evil lies…in unexpected changes in economic agents’ demand for fiduiciary media.” Well, I dare say, that is a ridiculous claim, and it is therefore very generous to grant it “for the sake of argument.” But who made it? Not me! Not Steve Horwitz! Not Leland Yeager! Of course, no one ever claimed anything of the sort. Equally absurd is DeSoto’s claim that “modern free-banking theorists overlook the Austrian theory of the business cycle.” It’s an easy matter to show that the statement isn’t true of either myself or White or Horwitz; indeed, all of us have on various occasions discussed and even defended the theory (though not to be sure without reservations). As for the theory notr fitting into the FB theory of money supply, it never occurred to me that there was any such inconsistency, though I do argue at some length in TFB bank certain statements of the ATBC mistate the criteria for excessive credit expansion (that is, for credit expansion that depresses interest rates below their “natural” values.)

Evidently it won’t do for DeSoto to state the views he wishes to attack fairly. That would make refuting them hard work. So much easier to just engage in a little libel!

Reading on, things just get worse. DeSoto says that my arguments resemble Keynes’s–which is something worth doing if one is attempting to appeal to readers’ emotions, rather than simply addressing matters of logic. He implies that I’m unaware that people can increase their money holdings by reducing their holdings of other real or financial assets–a point I never actually deny–justifying this misrepresentation of my views by in effect construing my statement that “to hold inside money is to engage in voluntary saving” as being equivalent to claiming that any net increase in holdings of such money must be a net increase in total saving. (Suppse I said that “to own a bond is to engage in saving.” Who would deny it? Yet it is also true that one might acquire one bond by exchanging another for it–in which case there’s no increase in total saving. The fact that the latter statement is true doesn’t in any way refute the former, see?) .DeSoto could of course construe my statement in a charitable way that would prevent him from detecting error where none is present. But that’s not consistent with his goal, which is to concoct as long a list of my “errors” as possible, even if it means misrepresenting me left and right.

I could reply in turn with an equally long list of DeSoto’s misrepresentaations–and I could do so, moreover, without having myself to engage in the same game of “paint it black.” But I haven’t the time or the inclination. Instead, I will simply state, for the record, that I find the whole of DeSoto’s book one lengthy lawyer’s brief, written not in the interest of discovering the truth, but in the that of defending the Rothbardian orthodoxy against all critics, and especially those perceived as fomenting apostasy among the rank and file.

47

I have to carefully digest that response, but thank you.

48

I have to carefully digest that response, but thank you.

I have always liked Jesús Huerta de Soto, and still enjoy Money, Bank Credit and Economic Cycles. I think the book is extremely valuable in its exposition of Austrian capital theory, credit expansion and business cycle theory. But, I have to agree with Professor Selgin that it does not do a very good job at explaining the free banking argument. As Professor Selgin knows, I do not necessarily agree with the free banker’s position, but reading more and more free banking literature it becomes evident that Professor Huerta de Soto greatly exaggerates some of his complaints against the school.

49

Dear Jonathan,

By all accounts Professor de Soto is a very nice gentleman, and his book displays both wide reading and considerable intelligence, as well as a great deal of hard work. Consequently iI take no pleasure in being so critical of it. Nevertheless, because so much of it is devoted to criticizing my own work, and (in my opinion) to crtiticizing it so unfairly, and because so many people appear to have taken those criticisms at face value instead of assessing them in light of direct acquaintaince with the arguments they purport to refute, I have felt compelled to be blunt in stating my own reactions to it.

50

I’ll have to consider more in depth if the accusation of exaggeration is justified, however, given what you understand today about the free banking position, are you able to show how Monetary equilibrium theory avoids the distortion of the structure of production as portrayed in the specific example used by de Soto on pp 690? In what way does de Soto misrepresent the free banking school, such that the distortion that he shows to take place under a free banking system is actually avoided? I’m sincere about my inquiry. I want to hear a good counter argument. Perhaps, I have overlooked something.

51

This has been an interesting thread.

On a side note, I want you to know that I’ve been in the same circumstances too Selgin. Nice to see this being addressed here. Also, I know DD5 has been involved in trying to mull this over as I follow his posts in this forum.

  • Well, I simply just wanted to post in gratitude towards this thread. Thanks everybody for this good discussion. Truly enjoyable.
52

What are some introductory books to free banking and/or full reserve banking? I’ve always been in the 100% reserve camp, but I haven’t read much of anything on free banking.

53

deSoto’s treatment suffers in conflating developments in the market for bank money from those in the loan market generally. Contrary to what he claims, his case in which money holding increases at the expense of proportional reductions in demand for both consumption and investment goods (that is, real or financial assets) is not consistent with n unchanging (marginal) rate of time preference, because it involves an increase in demand for real and financial assets, inclusive of money balances, both absolutely and relative to the demand for consumption goods. True, the demand for non-money assets declines, and in consequence the relative prices of those assets must also decline somewhat, along with the prices of consumption goods. But in the bank-intermediated portion of the loan market the supply of funds shifts out, and the natural rate of interest declines; and the outward shift here is larger than the inward shift in demand for “other” (consolidated) investment goods, because to some extent the increased holding of money is “financed” by a reduction in consumption.

That banks respond to increased demand for their IOUs by making more such claims available to borrowers, who are not themselves necessarily seeking to accumulate money ba;lances, is not at all problematic, despite de Sotos suggestions to the contrary. It is, instead, perfectly consistendt with the notion of “intermediation,” in which the deferral of spending by one set of bank clients (deposit or note holders) allows a like increase in spending by others (borrowers). The whole point, indeed, is to have banks accurately translate any increased willingness of clients to direct savings their way into a correspondingly increased willingness to lend.

54

I still feel obliged to encourage you to look at my Theory of Free Banking, if you can find a copy. Dowd’s books are also good; as are Steve Horwitz’; but neither goes into the details of the free banking money supply process, and that processes’ general consistency with general economic stability, as mine does (not surprising, as my book’s particular theme, as indicated in it’s subtitle, is “Money Supply under Competitive Note Issue”). The late and lamented Larry Sechrest’s Free Banking covers the same ground, and purports to be a more rigorous statement of my own theory. Alas, I don’t see it so: in several places he gets the theory quite wrong, and the mathematical formulas that crowd his book’s paages seem to me more decorative than helpful.

55

If you look at a chart of economic activity (GDP for instance), you will see that booms and busts were far more common before 1913 than after. However, I think what we’ve seen since `13 is the gradual building up of bubbles since busts are not allowed to naturally occur. The Great Depression was the result. Great Depression II will possibly destroy the Fed.

56

N.B.: I don’t know how to work html code on these forums, and so I’m not sure how to quote different members. I’m going to do this the old fashion way.

DD5,

You ask,

…given what you understand today about the free banking position, are you able to show how Monetary equilibrium theory avoids the distortion of the structure of production as portrayed in the specific example used by de Soto on pp 690?

Most of my interest in the free banking school actually revolves around this exactly. While I love monetary theory (as a beginner), I am particularly interested because I am researching for an upcoming piece on the crash of 1929 and the Federal Reserve’s response between 1929 and 1933. I want to see if Rothbard’s argument in America’s Great Depression is completely accurate, and I want to weigh it against the free banker’s theory that much of the damage could have been averted had the Federal Reserve extended credit to meet an increase in demand.

With that said, I don’t think I have read enough to really comment. Like I alluded to before, I disagree with certain portions of the free banker’s position, but this is largely out of bias because I happened to read Murray Rothbard and Jesús Huerta de Soto before reading anything else (and most pieces on Mises Daily tend to be Rothbardian, e.g. Frank Shostak).

I’ve been reading parts of Professor Selgin’s Bank Deregulation and Monetary Order, but I haven’t read enough of it to give an accurate description of the free banking theory. But, from my conversations with Professor Selgin over at my blog, and from some light reading of that book, what I gather so far is that an increase in demand for money by their definition revolves mostly around an increase in demand for bank money and not base money. So, the depositor would exchange base money (gold, for the sake of simplicity) for bank notes. What I disagree with is the free banker’s belief that this constitutes savings. I don’t see any reason why that is; the fact that the depositor preferred bank notes over base money doesn’t suggest anything about time preference, just like people who deposit their checks in checking deposits don’t necessarily prefer future goods over present goods. I consume out of my checking account all the time.

In regards to Professor Huerta de Soto’s argument on p. 690, it’s been a while since I’ve read “In Defense of Fiduciary Media”. But, it seems that Huerta de Soto says something similar to what I say above; an increase in demand for money does not necessarily come about due to a decrease in time preference. In any case, I rather withold judgement until I better understand both theories (something I hope to do over this summer, although I am starting from scratch and re-reading Mises’ The Theory of Money and Credit first).

You also ask,

In what way does de Soto misrepresent the free banking school, such that the distortion that he shows to take place under a free banking system is actually avoided?

I think that Professor Huerta de Soto does make some good criticisms of the free-banking school. On the other hand, I know that what I thought of the free-banking school before reading parts of Bank Deregulation and Monetary Order was not completely accurate, and a lot of my former opinion was based on reading Money, Bank Credit and Economic Cycles.

Mtn Dew,

Like Professor Selgin, I suggest Theory of Free Banking. I have not yet personally even looked at it, but it has been suggested to me over and over again by both Professor Selgin and Professor Horwitz. I have read most of Larry Sechrest’s Free Banking, which I think comes off as a balance between Rothbardian banking theory and free banking theory, but I agree that it is math-heavy (one of the chapters is almost completely composed of mathematics, and it is one of the chapters I skipped over). I also own and have read some parts of George Selgin’s Bank Deregulation and Monetary Order. I have promised myself to read the book from cover to cover, but I haven’t read much of anything in the past two months. From what I’ve read so far, though, it should be read by anybody looking to garner a complete understanding of free banking theory. Steven Horwitz also suggested his textbook, Microfoundations and Macroeconomics.

Sechrest’s is probably the most inexpensive. I’m actually dissapointed that the Mises Institute doesn’t offer more free banking literature, like Professor Selgin’s books.

EDIT: By the way, does anybody know the link to that criticism of Rothbard’s methods of collecting data for America’s Great Depression?

57

I think this is precisely de Soto’s point. That the funds will shift out and the interest rate will decline, but contrary to your conclusion, de Soto is concluding that this does not represent the natural rate of interest, because he clearly defined the problem as one where the time preference is not changing despite an increase in demand for bank money. Now, it seems to me that your are basically saying that this is not possible, that is, the initial conditions for the problem are not valid. Is this correct?

58

Jonathan: “and I want to weigh it against the free banker’s theory that much of the damage could have been averted had the Federal Reserve extended credit to meet an increase in demand.”

I think that the argument for the Fed to extend credit to meet demand by some free bankers refers to avoiding the “secondary” deflation as Hayek called it (just to differentiate it from the Friedman/Monetarist position which is quite different). Anyway, if that were ture, it is never made clear as to how the Fed is to overcome the knowledge problem.

Jonathan: “although I am starting from scratch and re-reading Mises’The Theory of Money and Credit first).”

I would suggest the relevant chapters in Human Action if you haven’t already read them. Mises by 1949 refines his theory.

59

DD5: When free bankers make a claim concerning what the Fed should have done, that doesn’t mean that they believe the Fed generally or even usually capable of doing what it should. If we believed that, we wouldn’t be free bankers, would we?

60

Wait, you may be confusing something here.

Increasing your cash balance (or hoarding) does indeed constitute savings. There is hardly a debate over this among Austrians. Savings (forgoing consumption) is always tied to capital accumulation, whether in the form of direct investment in capital goods or in the form of hoarding. Actually, it is usually the free bankers that make the case that the two are not exactly equivalent and that the first is more efficient (due to less painful price adjustments), which is why they advocate for banks to issue fiduciary media on the account that there is a demand to hold them.