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Source link: http://archive.mises.org/16328/conversations-on-free-banking/

Conversations on Free Banking

April 2, 2011 by

Georg Selgin responds with Oh Dear: Bagus and Howden’s Critique of The Theory of Free Banking to the article that is found in the Winter 2010 Quarterly Journal of Austrian Economics entitled Fractional Reserve Free Banking: Some Quibbles by Philipp Bagus and David Howden.

Money quote: “Facts serve its authors no more than sex served the first Queen Elizabeth, Isaac Newton, or the Virgin Mary.”

{ 23 comments }

newson April 2, 2011 at 1:34 am
Beefcake the Mighty April 2, 2011 at 5:49 pm

Nair’s paper is outstanding. Although, I’m sure Selgin’s response will be that Nair didn’t read his work, and that Nair is an economic ignoramus. This seems to be the Selginista’s MO in these debates.

The current response seems hastily thrown together. Selgin’s curt dismissal of the charge that the free bankers are resurrecting the Real Bills doctrine is interesting, as it illustrates a point you’ve raised here, newson. He clearly presupposes an equilibrium state where there is an existing demand for fiduciary media, as opposed to asking how such a demand could ever come about in the first place.

I do hope senior Austrians like Salerno call out Selgin (and Horwitz) for their totally unprofessional and unbecoming conduct here. I will give Selgin credit for one thing, however: he hasn’t (yet) whined that such rebuttals take away his valuable time from crusading against the Fed. (The Beard is no doubt quaking in his boots at the prospect of Selgin now returning to battle.)

George Selgin April 2, 2011 at 10:14 pm

Well, Beefcake, why don’t you write to Nair, who can tell you exactly how I responded to her paper, in several e-mails, including one congratulating her for the prize she won for it. No, I don’t think her arguments were sound, and I told her so; but I didn’t call her an ignoramus because I know she isn’t.

Do I think some people are ignoramuses? Yes. But your theory about why I do so has just been neatly falsified. Try hard, and you will perhaps think of another.

Dan April 3, 2011 at 8:13 am

Keep fighting the good fight!

J Cortez April 2, 2011 at 12:27 pm

I haven’t read either yet, but with a money quote like that, one has to presume that Selgin’s response is a scholarly beatdown of sorts.

Dave April 2, 2011 at 1:32 pm

Very relative quote. I haven’t had a chance to read either of these yet but I understand that Fractional Reserve Free Banking leaves out some modern thinking but I’ll reserve judgment until I have read it myself.

Beefcake the Mighty April 2, 2011 at 2:51 pm

Selgin is truly the Red Queen of Austrian econ. Totally unprofessional character.

Inquisitor April 3, 2011 at 7:20 am

It’s funny, because the “money quote” would almost incline me -not- to read the paper. Almost.

Rafael Hotz April 2, 2011 at 6:40 pm

Selgin did not address what I believe to be the most relevant criticism – distortions on relative prices between inputs and outputs (that is, the rate of interest) caused by trying to stabilize nominal income. The conflation between higher demand for money and higher savings flows continues. Selgin also do not address the time structure of savings, equaling economically savings via hoarding and via lending.

The main discussion is about FRFB mechanisms, not about the flawed economic reasoning that justifies FRFB. And as stated above, FRFB pressupose some equilibruim state with some hoarding as given, without explaining it.

Jonathan M. F. Catalán April 2, 2011 at 11:31 pm

How does the abstention from present spending not represent savings?

Beefcake the Mighty April 3, 2011 at 7:20 am

Not spending can mean either not spending on consumer goods *or* producer goods. It thus can affect the structure of production in different ways than saving, which is usually understood to mean spending on producer goods.

Rafael Hotz April 3, 2011 at 11:17 am

Exactly. If I, for example, sell a bond against present money, consumption has not risen, obviously. But the time structure of the current savings stock has inclined towards the present. Interest rates are supposed to rise. Input prices are supposed to fall against output prices, and production should be less roundabout. Nominal income stabilization hampers this process of relative price changes. A 3×3 matrix of demand for money/time preference cases could be set up – this example would be one of them.

Besides, monetary disequilibrium is based on the equation of exchange, which Mises and Rothbard showed to be lame.

Beefcake the Mighty April 3, 2011 at 12:02 pm

Yes, if there’s any real weakness to the BH paper, it’s that they do not mount a sufficient attack on the notion of “velocity,” which Bagus had previously and correctly (in his excellent quality of money paper) dismissed as empty. I should note Selgin’s appeal to the equation of exchange to assure us that he is symmetrically concerned about inflation as well as deflation is a bit rich, given the overwhelming preponderance of deflation-phobia that one finds in the ME literature.

Beefcake the Mighty April 3, 2011 at 12:08 pm

And actually, it’s misleading to call it the “equation” of exchange; it’s an *identity*, something rather different. It’s meaningless to speak of “stabilizing” MV while professing lack of concern with PT.

newson April 3, 2011 at 6:59 pm

hazlitt’s treatment is my favourite.
http://mises.org/daily/2916

Jonathan Finegold Catalan April 4, 2011 at 10:50 am

Beefcake,

I’m sorry, what? Not spending means not bidding a certain quantity of money towards the purchase of any goods. What does it matter if this abstention is from capital goods or consumer goods? If the person is abstaining from purchasing capital goods, then what’s the problem? Someone else can use those “savings” as a means of purchasing capital goods. The structure of production remains with the same proportion of investment as it would have otherwise.

Jonathan Finegold Catalan April 4, 2011 at 10:51 am

And no, saving is not “spending on producers’ goods”. Saving means abstention from spending. Changes in relative prices between the different phases of production is what incentivizes the investment of these savings into the structure of production.

George Selgin April 3, 2011 at 2:32 pm

If Beefcake understood what an “identity” means, he’d understand that, according to his own logic, stabilization of MV is equivalent to stabilizing PT (or Py, depending on which V is involved). So to be “concerned” about the stability of one thing is of course to be concerned about that of the other. In fact, the policy in question, in its income velocity version, is sometimes referred to as “nominal GDP stabilization.”

John James April 4, 2011 at 10:40 am

Just for reference, here’s Horwitz’s quick weigh-in.

Mike Sproul April 4, 2011 at 11:03 am

“Both lengthened clearing periods and interbank agreements render credit expansion unrestrained.”

This misses the point that when a normal bank expands credit, it also expands the assets backing that credit by a commensurate amount, leaving the value of its money (credit) unaffected. In the same way, a corporation that issues new liabilities normally gets new assets of commensurate value, leaving the value of its liabilities unaffected.

George Selgin April 5, 2011 at 10:50 am

Mike Sproul: Read my comment on B&H, for goodness’ sake: you repeat here one of the elementary fallacies that I point out in their article! Briefly, banks typically hold lots of fixed nominal assets, which means that their net worth typically goes down, not up, when inflation worsens. Remember the S&L mess?

Mike Sproul April 5, 2011 at 1:24 pm

George:

If, for example, a bank has issued $300, backed by 100 oz. of silver and bonds worth $200, then that bank holds $200 of nominal assets and 100 oz of real assets. Let E=the exchange value of the dollar (oz./$). Setting assets=liabilities yields

100+200E=300E, or E=1 oz./$ (Equation 1)

But if the bank’s bonds fall in value from $200 to $190, then the above becomes

100+190E=300E, or E=.91 oz./$, or about 9% inflation.

But in the kind of credit expansion where the bank acquires equal-valued assets, for example where the bank above issues another $40 in exchange for bonds worth $40, equation (1) above becomes

100+200E+40E=340E, or E=1oz./$

In other words, an increase in money issuance, when accompanied by an equal increase in bank assets, causes no inflation, even when those assets are denominated in dollars. This occurs even if there are more dollars chasing the same amount of goods, but in fact, if the number of dollars has grown excessively, the extra dollars will simply reflux to the issuing bank.

Bookkeeping Brisbane August 24, 2011 at 3:54 am

@Rafael Hotz April 3, 2011 at 11:17 am
“Exactly. If I, for example, sell a bond against present money, consumption has not risen, obviously. But the time structure of the current savings stock has inclined towards the present. Interest rates are supposed to rise. Input prices are supposed to fall against output prices, and production should be less roundabout. Nominal income stabilization hampers this process of relative price changes. A 3×3 matrix of demand for money/time preference cases could be set up – this example would be one of them.”- You did it well mate, you explained every detail.

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