Jonathan,
Again, where in HA does Mises even hint that some circulation of fiduciary media is necessary ? (That’s your use of the term. Not mine)
Edit: (BTW, you have “Mystery of Banking” on your bookshelf. Read the chapter on free banking and see how strikingly similar to Mises Rothbard’s view really is on the issue.)
Again, where in HA does Mises even hint that some circulation of fiduciary media is necessary ? (That’s your use of the term. Not mine)
If banks are circulating money-certificates they will have to issue fiduciary media to prevent a loss in profit. If banks are not issuing inside money then, of course, the issuance of fiduciary media is no longer necessary. But, I think that is a strong assumption to make, and even Mises doesn’t seem willing to accept that there would be no issuance of bank notes. He simply argues that issuance of bank notes would be more limited.
EDIT: If money-certificates aren’t issued then Selgin’s theory isn’t invalidated because of its belief in a positive effect of fiduciary circulation, rather it’s invalidated because the necessary preconditions for its establishment never arise. These are two very different arguments to make.
“While this doesn’t have any implications on the above discussion, it wouldn’t be the first time Rothbard was loose with the facts. Rothbard’s history of Adam Smith is wanting, and there have been discussions elsewhere on this forum regarding Rothbard’s treatment of other historical figures. For example, Danny Sanchez has pointed out that Rothbard’s history of Francis Bacon is highly erroneous.” (quoted from Jonathan’s previous post)
More along these lines:
Jonathan,
You raise some good points. Allow me to reply.
The third sentence goes on to show that they cannot cheat the public ad libitum, because “freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it.”
Now my take on that first sentence is that he is saying , no you cannot cheat them ad libitum. The implication is that you can cheat them a little bit. Meaning that it is an act of cheating.
Think about it. The first sentence contains two ideas: 1] It’s cheating. 2] This cheating can go on to whatever extent they please.
He brings a quote to support 1] from Tooke, and an argument to refute 2].
Do the math. He is clearly saying, that yes it is cheating, but they can only do so much of it.
How do you reconcile your position that Mises thought it was neccessary with the statement of his that "“Banknotes are not indispensable. All the economic achievements of capitalism would have been accomplished if they had never existed”?
Your quote that a bank that just issues notes for the convenience of its customers will not make much money doesn’t seem to say to me that therefore it is neccessary to let them issue notes and use FRB.
I still don’t see where he disagrees with Tooke in the quotes Adam provided.
The quote you provide about free banking being the only thing that can save the world is out of context. Here is the full paragraph:
Free banking is the only method available 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 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.
In other words, yes free banking [as opposed to govt meddling in banking] is the only only thing that will preven the dangers inherent in credit expansion. But what he means by that, as I will show very soon, is analogous to the following:
Say you have two breakfast cereals. Cereal A that has a high sugar content that will make ones teeth fall out. Cereal B is identical to Cereal A in all ways but this, that it also is laced with arsenic. So that eating Cereal B will make all ones teeth fall out, and then die a gruesome death by poisoning.
Mises is saying that 1] eating Cereal A will save you from the dangers of Cereal B, mainly death. 2] It will still make all your teeth fall out. It is not exactly a health food. 3] You could have gotten all the nutrients you need skipping both cereals altogether.
Here are quotes for each of the above:
1] Free banking is the only method available for the prevention of the
dangers inherent in credit expansion…Only free banking would have rendered the market economy secure against
crises and depressions
2] 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 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
When you talk about something having “inevitable consequences”, that sounds pretty ominous, no?
And when in the midst of a peaen of praise to free banking you write that " It would, it is true, not hinder a slow
credit expansion…" that means you are saying it has a bad feature, that it won’t stop credit expansion completely. No death, but the teeth do fall out.
3] "Banknotes are not indispensable. All the economic achievements of
capitalism would have been accomplished if they had never existed."
That’s a very nice ad hoc explanation by you but that doesn’t address my question of where in Human Action does Mises even hint that Fiduciary media is necessary.
On another note: What happend to your Blog?
Dave,
Neither Mises nor modern free bankers1 support free banking on the grounds of unrestricted fiduciary expansion. They support it explicitely because it would limit the degree of fiduciary expansion. Like I’ve mentioned before, it’s also true that Mises and modern free bankers disagree on the extent of limited fiduciary expansion. Mises would believe that the circulation of fiduciary media would tend towards zero, while free bankers believe that circulation of fiduciary media would be much greater (due to two separate forces; but this isn’t a discussion on modern free banking theory).
Mises believes that any limited fiduciary circulation would not cause changes in prices, because superfluous notes will simply be returned to issuing banks through a redemption process. So, any fiduciary media that replaces destroyed money-substitute (and in effect is no longer fiduciary) would simply maintain the supply of money. Fiduciary media issued above this would be returned and cleared; banks are limited in the ability to issue fiduciary media on account of having to cope with redemption of superfluous notes.
- How do you reconcile your position that Mises thought it was neccessary with the statement of his that "“Banknotes are not indispensable. All the economic achievements of capitalism would have been accomplished if they had never existed”?
Yes, an economy can do without money substitute. Money substitute is not needed to induce growth. But, if money substitute is preferred to commodity money (or inside money to outside money) then the conditions Mises describes will be relevant. So, the fact that the “achievements of capitalism would have been accomplished” regardless really has no bearing. Nobody is claiming that money substitute provide a service greater than actual money.
- Your quote that a bank that just issues notes for the convenience of its customers will not make much money doesn’t seem to say to me that therefore it is neccessary to let them issue notes and use FRB.
Like I’ve repeated before, it’s a method of dealing with a loss in profits. It’s not even necessarily fractional reserve banking, it’s just free banking (there are important differences between Mises’ theory of free banking and Selgin’s theory, and I’ve said this countless times before).
- I still don’t see where he disagrees with Tooke in the quotes Adam provided.
Tooke said that free banking is swindling. Mises said that Tooke is wrong, because only free banking can really limit the degree of “swindling” in the economy (the issuance of fiduciary media).
- The quote you provide about free banking being the only thing that can save the world is out of context. Here is the full paragraph:
The entire paragraph supports what I’ve said lol!
Mises is saying that 1] eating Cereal A will save you from the dangers of Cereal B, mainly death. 2] It will still make all your teeth fall out. It is not exactly a health food. 3] You could have gotten all the nutrients you need skipping both cereals altogether.
No, you are completely misinterpreting Mises! Mises saying the system isn’t perfect, but it’s the only way of avoiding credit induced business cycles. I think the paragraph is very clear. You seem to be adding things between the lines, where they originally don’t exist. Nowhere in that paragraph is Mises saying that there is something more preferable to free banking. Throughout that chapter in Human Action Mises is defending free banking.
In fact, your bolding, ironically, is what takes the passage out of context. You bold what seems to defend your position, but neglect everything in between. It is rather disingenious.
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.
Re-read the quote above. He’s saying with free banking it’s impossible for that credit expansion and its inevitable consequences to take place.
DD5,
It does. Mises is saying that if a bank is issuing money-certificates then issuing a limited amount of fiduciary media is necessary to cover costs. He explcitely claims that banks that don’t do this tend to suffer. It’s all in the passage I quoted earlier. Like I said, if a bank is not issuing money-certificates then it’s not a necessity, but we’re talking about causality not generality. I didn’t mean to imply that fiduciary media is necessary as a precondition for economic growth; I only wished to imply that banning the issuance of fiduciary media could have negative consequences.
Here are some other quotes someone sent me in response to this thread,
[A]t any rate, catallactics is not interested in the purely technical problems of banks not issuing fiduciary media. The only interest that catallactics takes in money-certificates is the connection between issuing them and the issuing of fiduciary media." (HA 1949 [1996], p. 435)
“To start from the Banking Principle, which denies the possibility of an over-issue of bank-notes and regards ‘elasticity’ as their essential characteristic, is necessarily to arrive at the conclusion that any limitation of the circulation of notes, whether they are backed by money or not, must prove injurious, since it prevents the exercise of the chief function of the note-issue, the contrivance of an adjustment between the stock of money and the demand for money without changing the objective exchange-value of money.” (TOMC 1912 [1981], pp.406-407)
“As far as Peel’s Act was concerned, however, this very shortcoming of the theory that had created it turned out to be an advantage; it caused the incorporation in it of the safety valve without which it would not have been able to cope with the subsequent increase in the requirements of business. The fundamental mistake of Peel’s system, which it shares with all other systems which proceed by restricting the note circulation, lies in its failure to foresee the extension of the quota of notes not backed by metal that went with the increase on the demand for money in the broader sense. As far as the past was concerned, the act sanctioned the creation of a certain amount of fiduciary media and the influence that this had on the determination of the objective exchange value of money; it did not do anything to counteract the effects of this issue of fiduciary media. But at the same time, in order to guard the capital market from shocks, it removed all future possibility of partly or wholly satisfying the increasing demand for money by the issuing of fiduciary media and so of mitigating or entirely preventing a rise in the objective exchange value of money. This amounts to the same thing as suppressing the creation of fiduciary media altogether and so renouncing all the attendant advantages for the stabilization of the objective exchange value of money. It is an heroic remedy with a vengeance, in essence hardly differing at all from the proposals of the downright opponents of all fiduciary media.” (TOMC 1912 [1981], p.408)
Although the differences between HA and TOMC have been discussed before and elsewhere.
My blog was hacked and I decided to discontinue it.
Obviously they suffer because banks that did not expand could not compete with other baks that expanded. But this is a total non-sequitur. Necessary for the survival of a fractional reserve bank doesn’t mean necessary for everyone else, or that they are productive or even not harmful. Mises doesn’t say that the expanding bank itself is necessary. That was what you were implying. Mises argues against the expanding bank almost every step of the way. I don’t know how you can possibly miss this point. Selgin doesn’t.
Don’t quote from TOMC. We know that Young Mises not much older then you in 1912 is still learning maturing, which is why TOMC, brilliant as it is, has some incoherency to it. TOMC is not HA.
Sorry to hear.
I dunno, Jon, I stand by my interpretation of his words, and think my proofs decisive.
Since I cannot convince you, nor vice versa, we’ll have to leave it.