I actually said just the opposite, I’m not too sure about Hayek, but Mises only became a staunch support of 100% reserves by the time he wrote Nationaloekonomie, the German language predecessor of Human Action. In fact, there’s a paper on this site called “Dehomogenizing Mises’ Monetary Views” or something along those lines. If you read Selgin’s and White’s work you’ll see a great deal of quotations from Mises in support of their argument. And the quotations are legitimate (as noted by Joe Salerno), but you’ll also see quotations by Mises that oppose FRB in the works of Rothbard et al. This is one issue of the debate that is rather problematic. As for Hayek, I’m not so sure, but I do know that whilst he realised FRB may lead to industrial fluctuations he also noted that there are benefits from fractional reserves, such as increase investment in long term projects.
But those long term investments would not be warranted by the actual economic condition. The completion of such investments would require a great deal of central planning and monetary intervention, all of which, according to Hayek, would be extremely problematic if not impossible. Hayek does say that increasing the money supply during the transition of a capital combination to another may indeed be useful, but such policies would have to be very carefully implemented, and the newly created money should only satisfy the demand for money as money, and not as capital. And again, he goes on to say that such a policy would be nearly impossible, and thus should not even be considered. As far as today’s so-called Austrian economists, I would have to reserve judgment until I have read all of the classics. I have noticed that sciences tend to lose their way over time.
Yes, thank you for the lecture on Hayek. On the other hand, I already knew this, so perhaps it’s not necessary to be so condescendingh (or is it?). As for science losing there way, I’m not even sure what this is supposed to mean. Economic science has gone a long way since the days of Mises (in the right direction, I might add), so if you want to make sense of any of it, reading the “classics” won’t get you very far. In any case, I’d argue some of the more modern Austrian works are classics in their own right.
I don’t agree at all. Economics is not like physics, you can’t just begin where someone else left off. Doing so may lead to confusion, as seen by Keynes and his contemporaries. There’s a reason why Hayek and Keynes basically started with the Wicksellian framework and yet came to very different conclusions. I plan on reading Tooke and other members of the currency school before I venture into the new stuff.
Giles.
I agree with you that Austrianism came to be anti-FRB primarily due to the Rothbard school. But I thought it was the reverse of what you wrote: that Mises made anti-FRB remarks ealier in his career, but later in his career came to distinguish between FRB in an atmosphere of free banking vs. FRB in an atmosphere of central banking. Reference: Human Action, Scholar’s edition, pages 436 to 445.
A great, but hard to find article is: “Mises on Free Banking and Fractional Reserves” by White, in the book: A Man of Principle, Essays in Honor of Hans F. Sennholz.
I certainly grant that Hashem is guilty of this. But who else here is? Quoting Rothbard regarding points on which you happen to agree with him is not the same as agreeing with him on all points.
Perhaps “Rothbardolatry” also includes instant and/or constant appeals to him as an authority?
With hashem, I remember vividly that he would quote something from Rothbard due to the ideas, and yes it was mixed with Rothbards authority on the ideas, but hashem clearly stated debate those ideas. Don’t dismiss Rothbard without dismissing Rothbards ideas. Hashem didn’t implicitly state this. He explicitly stated this.
I think Physiocrat is right about Giles; He has read more than most here. Also, he is usually polite to others who are polite to him.
And Hashem did a terrible job. He clearly hasn’t read anything by any other natural rights theorist, and doesn’t understand that Natural Law is usually used to refer to a tradition of legal normative thought, and is only rarely used to refer to the laws of physical reality.
the natural law of gravity…what? It depends on who you are around. I was used to natural law referring to physical reality before I figured out less than a year ago that natural law also has to do with human nature. I really don’t like being in this discussion though, so, I’m trying to focus on something a bit substantial from your comment.
I remember reading at least half of hasheem’s arguments (& the responses); I wasn’t referring to him though. I was speaking in general terms & supposing another adjective of “Rothbardolatary”.
I didn’t read "Theory of Money and Credit " BUT I’ve noticed that some passages that Esuric quoted from that book can be found verbatim in Human Action. And those passages are critical of fiduciary media. If anything Mises grew even more critical later.
The whole book pretty much demolishes FRB, from start to finish.
You really can’t even do that in physics.
Human Action, Scholar’s. Ed. Pages 436 to 445.
If one reads these nine pages closely, one will see that Mises’s argument is that under conditions of free banking, the issuance of fiduciary media would be limited by the bank’s ability to enlarge its clientele. Then no special laws would be needed besides general commercial laws requiring all banks to fulfil their contracts.
Among other things, Mises writes:
“Unfortunately, the Currency School erred in two respects. It never realized that the remedy it suggested, namely strict limitation on the amount of banknotes issued beyond the specie reserve, was not the only one. It never gave a thought to the idea of free banking.” (p.437)
This has parallels to the Rothbardian position regarding banking. What Mises is arguing is that as opposed to considering only legal restrictions on banking, the idea of free banking should be considered. Mises believed that completely free banking would limit the issuance of fiduciary media by natural market processes:
“It must be emphasized that the problem of legal restrictions upon the issuance of fiduciary media could emerge only because governments had granted special privileges to one or several banks and has thus prevented the free evolution of banking. If the governments had never interfered for the benefit of special banks, if they had never released some banks from the obligation, incumbent upon all individuals and firms in the market economy, to settle their liabilities in full compliance with the terms of the contract, no bank problem would have come into being. The limits which are drawn to credit expansion would have worked effectively. Considerations of its own solvency would have forced every bank to cautious restraint in issuing fiduciary media. Those banks which would not have observed these indispensable rules would have gone bankrupt, and the public, warned through damage, would have become doubly suspicious and reserved.”(p.438)
Above, Mises is making the point that it is not fiduciary media per se that is the problem, it is government intervention and interference, allowing some banks special privileges.
A little further down, Mises makes this plea for free banking:
“Today even the most bigoted etatists cannot deny that the alleged evils of free banking count little when compared with the disastrous effects of the tremendous inflations which the privileged and government-controlled banks have brought about.”
The privileged and government-controlled banks bring about system-wide inflation, not free banks in an atmosphere of free banking.
“The establishment of free banking was never seriously considered precisely because it would have been too efficient in restricting credit expansion.”(p.438)
About as clear as it can be stated: Free banking would limit credit expansion.
Mises is clearly aware of two competing approaches to the problem of credit expansion: Through legal restrictions, or through the program of free banking. Here is what he says:
“In carrying the idea implied in the Currency Theory to its full logical conclusion, one could suggest that all banks be forced by law to keep against the total amount of money-substitutes (banknotes plus demand deposits) a 100 percent reserve. … But even if the 100 percent reserve plan were to be adopted on the basis of the unadulterated gold standard, it would not entirely remove the drawbacks inherent in every kind of government interference with banking. What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the contract.”(p.440)
“If banks are preserved as privileged establishments subject to speical legislative provisions, the tool remains that government can use for fiscal purposes. Then every restriction imposed upon the issuance of fiduciary media depends upon the government’s and the parilament’s good intentions.”
So what Mises is arguing is, that rather than government intervention into banking (special legislative provisions, e.g., outlawing fractional reserve banking), banking should be totally severed from the goverment. That is, no special legal provisions for banking. Mises is arguing for free banking, where banks are subject to general commercial and civil laws only.
“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.”(p.440)
Mises reiterates that under free banking, natural market processes limit credit expansion:
“The concatenation which sets a limit to credit expansion under a system of free banking works in a different way… It is brought about by the fact that the credit expansion itself does not expand a bank’s clientele, viz., the number of people who assign to the demand claims against this bank the character of money-substitutes. Since the over-issuance of fiduciary media on the part of one bank, as has been shown above, increases the amount to be paid by the expanding bank’s clients to other people, it increases concomitantly the demand for redemption of its money-substitutes. It thus forces the expanding bank back to a restraint.”(p.441)
Regarding the notion that fractional reserve banking is fraud, Mises writes:
"It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tooke: “Free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take banknotes any longer.”(p.443)
Mises thus believed, at least at the time he wrote Human Action, that the best means to suppress harmful credit expansion was through the program of free banking. However, as he writes:
“It is extremely difficult for our contemporaries to conceive of the conditions of free banking because they take government interference with banking for granted and as necessary. However, one must remember that this government interference was based on the erroneous assumption that credit expansion is a proper means of lowering the rate of interest permanently and without harm to anybody but the callous capitalists. The governments interfered precisely because they knew that free banking keeps credit expansion within narrow limits.”(p.444)
Thus, when Mises wrote Human Action, he was convinced that the solution to banking problems was the program of free banking, and he believed that natural market processes keep within narrow limits the credit expansion that can occur in an atmosphere of totally free banking.
There was a huge divide between Mises and Rothbard on the subject of free banking, and whether banks should be free to issue their own banknotes under general commercial laws, or be restricted by law from doing so. Rothbard may have importantly misunderstood Mises’s position. In 1992 Rothbard writes the following:
“That was the proposal stemming from Mises’s insight into the inevitably destructive effects of paper money and fractional reserve banking. Instead, what our pseudo-Austrian economists propose to do is not abolish counterfeiting, but to privatize it–to open up the counterfeiting process to “free” private competition.”
“One of Mises’s favorite quotes on money and banking was from Thomas Tooke: “Free trade in banking is tantamount to free trade in swindling.” Tooke and Mises, of course, where referring to fractional-reserve banking.”
“If counterfeiting per se is deplorable and to be outlawed, then the same standards must be applied to its surrogate, fractional reserve banking, which is currently legal and which would run rampant in the “free banking” system heavan of our non-Misesian pseudo Austrians.”
(source: The Present State of Austrian Economics, 1992, pages 35, 36)
But Mises did not believe that fractional reserve banking was inevitably destructive. He believed it was inevitably destructive when practiced by government controlled or government privileged banks. He believed that fractional reserve banking would not be destructive in an atmosphere of free banking.
Also, above, Rothbard says that the idea of free banking makes those who argue for it “non-Misesian pseudo Austrians.” This is plainly wrong, and Mises presents a fairly detailed argument for free banking on pages 436 to 445 in Human Action, Scholar’s. Ed. Those who argue for free banking are making a case that Mises was making.
Rothbard writes, as above: “One of Mises’s favorite quotes on money and banking was from Thomas Tooke: “Free trade in banking is tantamount to free trade in swindling.” Tooke and Mises, of course, where referring to fractional-reserve banking.”
The context in which Rothbard writes this one in which he is saying that those who favor free banking are “non-Misesian pseudo Austrians.” He is saying that free banking is non-Misesian, and implying that Mises agrees that “free trade in banking is tantamount to free trade in swindling.”
But Mises’s actual position can be clearly seen in these two passages:
“Propagandists who wanted to make the government pre-eminent in the issuance of money substitutes have publicized many stories about private money substitutes. These tales were condensed by an anonymous American who is credited with the dictum “Free trade in banking is free trade in swindling.” Economists, however, think differently; they consider free trade in banking as the only protection against the government’s issuance of bad banknotes.” (Mises, The Free Market and Its Enemies, p.63)
Rothbard is saying that those who argue for free banking are non-Misean, while Mises is arguing for free banking.
And:
“It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tooke: “Free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it.” (Human Action, Scholar’s Edition, p.443)
Mises’s postion in Human Action is that privately issued banknotes would be limited by natural market processes. He was against special legislative provisions outlawing fractional reserve banking. Mises was a proponent of free banking.
This is all fine and well, but it doesn’t have anything to do with the fact that FRB allows for the creation of fiduciary media, thus causing disconnect between the capital markets and time preferences, i.e., artificial fall in the market rate below the natural rate. Mises may have believed that free banking may lead, eventually, to the end of FRB. I highly disagree with this assertion. One hot-shot bank would force his competitors to lower their interest rates in order to remain competitive.
You asked where Mises defends FRB.
Mises did not believe that free banking will lead to the end of FRB. He believed free banking would keep the issuance of fiduciary media within narrow limits. He viewed the issuance of fiduciary media as being regulated by natural market processes in a free economy, not as something that should be regulated by government.
AEN: What area of Austrian economics is most and least advanced?
MNR: Methodologically, we are pretty advanced, thanks to the work of Hoppe. But we can always use more since that is what sets us apart from the rest of the profession. And Salerno is doing great work on calculation.
Banking theory, however, has taken a very bad turn with free banking. We have to show that this is the currency and banking school argument rehashed. They have adopted the banking school doctrine, that the needs of business require an expansion of the money supply and credit. Moreover, the free banking people violate the basic Ricardian doctrine that every supply of money is optimal. Once a market in a money is established, there is no longer a need for more money. That is really the key point.
AEN: What about the argument that 100% reserves requires government intervention?
MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.
But how do we address the needs of trade argument, those who say that business has a demand for credit? Well, there are many things demanded on the market that are also crimes. There may be a demand for killing redheads. And there is certainly a demand for government loot. What’s so great about market demand? if it is not within a framework of non-aggression, there will always be a demand for fraud and theft.
The free bankers accept a kind of David Friedmanite anarchism, where there is no law, only people engaging in exchange and buying people out. If you have a group that wants to kill redheads, the redheads will have to buy them off if they value their hair. I think this is monstrous, the kind of anarchism would indeed be chaos. Just because there is a demand for something doesn’t mean it should be fulfilled.
AEN: One of the criticisms of this position is that it is normative and not economic.
MNR: Yes, but the response to 100% reserves is that bank entrepreneurs have the right to offer whatever fraction of deposits they want, which is also a normative position. Any discussion of policy is inherently normative. You can’t have free markets unless you have property rights,
AEN: Why isn’t private deposit insurance viable?
MNR: The same reason insuring any bankrupt industry isn’t viable. You cannot insure entrepreneurs because they engage in uninsurable risk. You can reasonably predict how many fires there will be in New York; the unlucky few who get burned can dip into the pool of resources. But entrepreneurship is not heterogeneous; it is completely unpredictable, and each attempt is non-random. The entrepreneurs assumes the risk. If an insurance company insures it, it becomes the entrepreneur. Who then insures the insurer? In the case of banks, either they don’t need insurance, since they are 100% covered, or they are uninsurable because they are taking entrepreneurial risk.
AEN: You have been critical of White’s book on free banking.
MNR: The White book says the Scottish banking system was more successful than the English system. But he doesn’t say one word about prices, inflation, or business cycles. His only statistic is that were fewer bank failures in Scotland than Britain. But what’s so great about not having failures? An industry that doesn’t have failures might be doing poorly. What if we applied this test to the Soviet Union, where no industries fail?
When you say one banking system is more successful than another, it seems the test should be less inflation and fewer business cycles. Yet this is never mentioned.