Rothbard's Interpretation of Mises on the Question of Free Banking

Economics Political Theory
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Rothbard’s Interpretation of Mises on the Question of Free Banking

Writing in his 1992 essay “The Present State of Austrian Economics,” Rothbard argues against free 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” heaven of our non-Misesian pseudo-Austrians.”

Rothbard is arguing for legal restrictions on banking, and claiming that those who argue for free banking are pseudo-Austrians. In support of his position, Rothbard cites a phrase that he says was one of Mises’ favorites:

“One of Mises’ 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, were referring to fractional-reserve banking, in which banks pledge to redeem on demand receipts to non-existent money in their vaults. These bank notes or deposits are just as much counterfeit as warehouse receipts to grain, which were loaned out by grain elevators until recent decades—until, that is, the practice of fractional-reserve issues of receipts in grain, was outlawed and cracked down on.”

Thus, Rothbard implies Mises is in agreement with both himself (Rothbard) and Tooke, in holding that “free trade in banking is tantamount to free trade in swindling.” What Rothbard is saying is that one of Mises’ favorite quotes was “free trade in banking is tantamount to free trade in swindling,” and that Mises would often use this phrase to express his opposition to free banking.

The following are two instances where Mises uses this phrase in his lectures and written works:

“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.” (The Free Market and its Enemies, p.63)

and

“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 any banknotes any longer.” (Human Action, 3rd Rev. ed. p. 446)

In both instances in which Mises refers to the quote attributed to Tooke, Mises clearly takes issue with the quote, and immediately counters this quote by saying that economists consider free banking as the best means to limit the issuance of banknotes generally, and the best means to protect people against the government’s bad banknotes.

The dictum “free trade in banking is free trade in swindling” is meant to convey that free trade in banking is the cause of harm and therefore should be prevented. In both cases where Mises addresses this quote directly, his answer is to argue the opposite: that free trade in banking is the best means to prevent harm and therefore should be promoted. Mises is arguing that free trade in banking is the best means to diminish both private and public issuance of value-losing currency notes.

Rothbard is implying that Mises believed free banking is a bad idea, and that Mises agreed that “free trade in banking is free trade in swindling.” Contrary to this though, Mises himself took issue with this very quote, and argues that free banking is the best means to protect people from value-losing notes.

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I’m not exactly sure what this thread supposed to imply, but it seems you may be misinterpreting Mises (or Rothbard) on what they said.

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Rothbard writes ‘free-banking’ in quotes for a reason

Also note:

However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it.

The ‘freedom’ to X leads to the trivial status of X.

Do proponents of X want to be free to do it, and think its a great thing for X to become a trivial phenomena in the economy?, or do they want to be free to do it and for it to be done hard and good?

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Adam: "Thus, Rothbard implies Mises is in agreement with both himself (Rothbard) and Tooke, in holding that “free trade in banking is tantamount to free trade in swindling.” What Rothbard is saying is that one of Mises’ favorite quotes was “free trade in "

You are conflating two completely separate arguments: One based on legality, and one based on economics.

Rothbard in that essay in the context of that quote is talking about the legality of the issue.

Mises in those quotes is talking about the economics. Rothbard is in complete agreement with Mises that free banking would amount to a hard money and sound system. In fact Rothbard would reject the free banking position that banks would operate with fractional reserves in a free market on the basis that the market would simply not allow it.

He has dedicated an entire chapter on this in The Mystery of Banking (Ch 8) so I suggest you read it before you continue to misrepresent his views.

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DD5:

I disagree with your interpretation. As I see it Mises is arguing for free banking (no special legal provisions for banks) as the best way to limit what he and many would consider harmful effects. By contrast, Rothbard is arguing for special legislative provisions prohibiting specific banking practices toward the same end.

Here is Rothbard:

“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” heaven of our non-Misesean pseudo-Austrians.” (essay cited above)

Here is Mises:

“If banks are preserved as privileged establishments subject to special legislative provisions, the tool remains that governments can use for fiscal purposes. Then every restriction imposed upon the issuance of fiduciary media depends upon the government’s and the parliament’s good intentions. They may limit the issuance for periods which are called normal. The restriction will be withdrawn whenever a government deems that an emergency justifies resorting to extraordinary measures. If an administration and the party backing it want to increase expenditure without jeopardizing their popularity though the imposition of higher taxes, they will always be ready to call their impasse an emergency. Recourse to the printing press and to the obsequiousness of bank managers willing to oblige the authorities regulating their conduct of affairs is the foremost means of governments eager to spend money for purposes for which the taxpayers are not ready to pay higher taxes.” (HA, 3rd. rev. p.443)

As I understand Mises here, he is not making a praxeological argument and trying to establish a praxeological law between the adjustment of the legal system and some necessary consequence. His argument as I understand it is that based on our knowledge of how government works, once government is entrusted with regulating a particular business or industry, this is the foothold by which further controls will inevitably follow (not as an apodictic praxeological matter, but as a general rule).

“In fact Rothbard would reject the free banking position that banks would operate with fractional reserves in a free market on the basis that the market would simply not allow it.”

As I understand the Rothbardian position, it is not that the discipline of the market would curtail or disallow certain banking practices, but that such practices should be prohibited by legislative mandate.

If it is the Rothbardian position that free market forces would not allow fractional reserves, then Rothbardians are free to advocate complete laissez-faire in banking as Rockwell argues in this article: http://mises.org/daily/3318

I’ll paste some of the article here:

"In an essay written at the end of his career, and recently brought back to life by the Mises Institute, F.A. Hayek discusses the only serious means of reform that is open to us. We must completely abolish the central bank. Money itself must be wholly untied from the state. It must be restored as a private good, privately produced for private markets. Government must have no role at all in monetary affairs. Money should be produced by private enterprise alone. Banks must exist only as free-enterprise institutions, with no privileges from the state. This plan has also been advanced by Ron Paul.

What strikes me is how this accords precisely with what Hülsmann writes. His book on the Ethics of Money Production ends with a call for an end to all intervention in monetary affairs. Coinage must be private. Banking must receive no privileges. There should be no legal-tender laws, no guarantees, no restrictions on currency use — a fully laissez-faire system.

What is further striking about the Hayek, Hülsmann, and Paul idea here is that they offer no plan for restoring a gold dollar. It’s not that they would disagree with the idea, but they have fully confronted the reality that the idea of converting the existing currency from fiat money to sound money is essentially a 19th-century ideal that presupposes an enlightened class of political managers. This condition is not met today.

But what is the means? It is the same as we propose in every other area of national life: get the government out. Let the people be free to manage their own affairs. Stop interfering with commercial acts between consenting adults. Stop using violence to interfere with economic affairs. Let the people pursue mutually beneficial exchange based on their own self-assessment of the advantages. Let property owners accept the risk and reward for their own decisions.

It is the same with monetary policy and banking policy too. Let failing banks die. Let profitable banks live. Let the people choose to use any form of money. Let the people choose any means of payment. Let entrepreneurs create any form of financial instrument. Law applies only the way it applies to all other human affairs: punishing force and fraud. Otherwise, the law should have nothing to do with it.

What would be the results? We cannot know for sure. But history can be a guide in our speculations. Throughout all time and in all places, precious metals have emerged as the foundation of the monetary system. I think we can have every expectation that the same would be true today. Evidence comes from how people turn to gold in difficult times as a store of value, a safehouse from the machinations of government. Gold, in my view, is destined to be the foundation of a new free-market monetary system.

To this extent, and with this expectation, all believers in liberty can consider themselves advocates of the gold standard. But we must also be careful with this phrase. It is identified with a particular set of policies associated with 19th-century practice. It was a policy choice among many that some favored and some opposed.

A free-market monetary system of the future will not be a policy option in this sense. It is not something we want the government to adopt as its own. In fact, we don’t want the government to adopt any particular policy but rather abandon the policy option altogether. There should be no policy at all in the sense that this word is routinely used today.

In this way, a path forward in money and banking is no different from the path forward in agriculture, labor, health care, education, or any other sector. The right policy is no policy. The job of the government is to stop interfering altogether.

Now, I’m aware that this is a big intellectual leap these days. But you only need to consider the myriad ways in which government fails at everything it attempts, whereas the market succeeds. There is nothing about the structure of the universe that confers upon money and banking any special status that requires the government to regulate it, to serve as a lender of last resort, the marker of money, the guarantor of stability, or anything else. A free market in money would work the same as a free market in everything else."

I interpret this to be essentially the same argument Mises makes in Human Action. There is no call made here for special legal restrictions. Rockwell argues that property owners should be left free to face the risk and reward of their own decisions. Let people choose their own currency providers just as they choose providers in every other area of life. Let them offer, and let them choose, if they wish, currencies that may lose value. Rothbardians can offer and patronize any currency they choose. “Free bankers,” in the pejorative, ethical sense intended by Rothbard, may do likewise. Let the market decide.

I personally believe there is a shift occurring in the free banking debate. But it’s slow going…

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Good luck Knott.

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Adam: "As I understand the Rothbardian position, it is not that the discipline of the market would curtail or disallow certain banking practices, but that such practices should be prohibited by legislative mandate."

Look, I don’t know what it is about some people who want to argue over 2+2=4. Not everything is a matter of subjective opinion. Either the above is correct or incorrect. Fortunately for us, Rothbard has made his position known in the most unambiguous way. Follow the link I have provided you and find out what Rothbard said about free banking. What are you afraid of? That your sources will be discredited? Imagine what that will do the rest of your “understandings”. Follow the link. take a chance..

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He spent ten years in “scholarship” and then he (previously, yet here we are again?) strawmans Rothbard’s position by failing to make the most basic of distinctions and as a result conflates personal morality with political philosophy… it’s really quite sad actually.

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"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” heaven of our non-Misesian pseudo-Austrians.”

i dont know that fractional reserve banking takes place now or not.

the dollar currency system with central bank and fdic and related agencies may just generate and regualte various modes of the dollar. reserves to banks as needed and cheap paper dollars whn needed.

other posts have said that reserves exist other than paper dollars.

the paper mode has serial numbers so that isnt couterfitting and the bank dollar fidu. media which i have read exists, if i texists, is jsut one aspect of the dollar currency system…it really isnt counterfitting. again, if what i have read is true.

deplorable and unconstitutional, perhpas. and it may benefit a few much more than the many…but i havent been able to determine that.

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if free banking is non govt insured and regualted banking i would expect that the farther a note got from its source the less likely it woul be accepted in exchange and used as a broad exchange media…a more objective standard or medium would be the norm…probably some of the metals.

so i doubt that free banking , if true, would be a large swindle. plenty of ways to risk real money too.

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The extended Rockwell quote is 100% Rothbard friendly.

the ‘Get the state out of everything’ position is the Rothbardian position. it is at least as anti-government as the Misesian position with respect to money ,and certainly more-so in respect to everything else.