Free Banking                         .recentcomments a{display:inline !important;padding:0 !important;margin:0 !important;}      Free Banking  HomeLog InAboutContributorsTerms of UsePrivacyDMCADonate          Same and different  by Kurt Schuler August 24th, 2012 9:38 pm        The Great Depression in Britain versus the current slump

     Great Depression (1929-31) Current (since 2008)   Length of contraction 6 quarters (1930Q2-1931Q3) 6 quarters (2008Q2-2009Q3)   Time to surpass previous peak output 4 years (1930Q1-1934Q1) 4 years plus (since 2008Q1)   Monetary policy Gold standard (to September 1931 trough), then floating Floating, with inflation target   Monetary authority Central bank (privately owned) Central bank (state-owned)    Sources: James Mitchell and Solomos Solomou, “Monthly GDP Estimates for Inter-War Britain” (working paper, 2011); U.K. Office for National Statistics.

 Discuss among yourselves.

 And now for something completely different. Having mentioned Ayn Rand in my previous post in connection to Paul Ryan, I direct your attention to a New York Times Magazine article last weekend about the influence of Friedrich Hayek on Ryan. The article describes Hayek as “largely ignored,” which is comical given that the staff writer on economics at The New Yorker -- yes, The New Yorker -- has described the 20th century as "the Hayek century."

 Finally, for readers who may  be wondering what is the opposite of this blog, I give you a site I just came across today, the American Monetary Institute. Here is a description of some themes of its upcoming conference:

 "What are these broad national parameters supported by over 3000 years of history? That the control of the money system must shift away from private control toward governmental control. Away from commodity money notions; away from fractional reserve banking – using debt for money. Towards money issued interest free by government and spent into circulation for the common good. All serious reformers understand that we must replace our private credit system with a government money system, ending what is known as fractional reserve banking."

    Leave aComment        Tweet              The Economist On Money and the State  by George Selgin August 21st, 2012 11:44 pm    I couldn't help being glad to see The Economist refer to Carl Menger's theory of the origins of money just as I was about to explain that theory to my undergraduate classes. Nor did I at all mind having Menger's ideas contrasted with those of another of my favorite economists, Charles Goodhart. I was, however, sorry to see that venerable publication, whose first two editors, James Wilson and Walter Bagehot, were among the more important 19th-century proponents of free banking, embrace Professor Goodhart's "Cartalist" theory of money, and do so on grounds that won't stand up to critical scrutiny. 

 Menger, of course, famously argued that commodity money, far from having to be deliberately designed, can evolve spontaneously or, as The Economist puts it, "is a market-led response to barter costs." 

 But while The Economist allows that Menger's account offers "a good description of how informal monies, such as those used by prisoners, originate," it claims that the theory comes up short when it comes to explaining the origins of the most convenient of all commodity monies: those consisting of precious metals. Why? Because metals only make for convenient money once they have been packaged into coins, and "history shows that minting developed not as a private-sector attempt to minimize the costs of trading, but as a government operation." Consequently, the article continues, "another theory is needed, in which the state plays a bigger role." Cartalism is one such theory, according to which money, and efficient money especially, is a creature of the state, which invented coins with the ulterior motive of enhancing its revenues by making taxes payable in them and by occasionally resorting to debasement. 

 But is it true that minting developed, and could only develop, as a government operation? Goodhart's article is supposed to offer proof that this was so, by pointing to two instances in which the collapse or withdrawal of government coinage gave way, not to private coinage but to barter (in the former Roman empire) or to the use of a non-metallic money (rice in 10th-century Japan). 

 One needn't be a logician to recognize the inherent shortcomings of such a "proof by example." That the withdrawal of state-run mints has sometimes failed to prompt the establishment of private ones hardly establishes that private mints have never existed, much less that they never could exist. One may, on the other hand, disprove the claim that private mints have never existed by means of a single, contradictory example. 

 As a matter of fact, there have been numerous episodes of private coinage, including some very successful ones. What's more, it is far from clear that the very first coins ever made--the famous electrum lumps of Lydia, in Asia Minor--were government products. On the contrary: according to Thomas Figueira, one of the leading experts on the subject today, “It is uncertain whether it was someone endowed with political authority acting on behalf of his community or an individual acting on his own behalf who conceived of the idea of coinage.” Indeed, no one is even sure what those early coins were for, or even whether they ought to be called "coins" at all, since they were uniform in weight alone, but varied considerably in their gold and silver blend. 

 Of course it's hardly likely than any Tom, Dick, or Harry would have been able to have his markings treated as credible certifications of weight or purity or anything else. Whoever made the first coins had to be some sort of big shot, or its corporate equivalent. Being a tyrant might suffice; but that hardly means that it was essential. Nor does the fact that almost every coin produced since the obscure beginnings of coinage has come from a government mint mean that only governments were fit to coin money. It could instead mean that governments found the fiscal gains to be had by monopolizing coinage too good to pass up. That governments frequently took advantage of their coinage monopolies, not to mint good coins, but to mint lousy ones that they then compelled their citizens to accept, would seem to favor the latter hypothesis. 

 It ought to go without saying that there is no technological reason why coins couldn't have been a private invention, or couldn't have been privately manufactured at any time to the same standards, if not better ones, than their government-made counterparts . "A mint, Sir" Edmund Burke once reminded Parliament, "is a manufacture, and it is nothing else." A factory, we would now say. And since when are governments very good at, let alone uniquely capable of, running factories? As for state-sponsored enterprises generally doing a better job of quality control than their private-sector counterparts, if you believe it I must see about coming up with a few tons of ca. 1958 Chinese steel to sell to you. 

 In fact, all of the most significant coinage-related inventions--the manual screw press and its steam-powered counterpart are only the most famous examples--came from the private sector, and most were taken up by governments only reluctantly and after (sometimes deadly) resistance from government mint authorities. How often, on the other hand, have government authorities themselves been responsible for technological breakthroughs? (No, Tang wasn't invented by NASA.) Were it to come to a wager, I for one would much sooner keep a grip on my money than stake it on Croesus or Pheidon or any other ancient king.

 But why speculate? In fact, Goodhart's contrary suggestion notwithstanding, there have, as I've already noted, been occasions on which coinage was handled by the private sector, and in the best documented ones the coins that resulted were not only as good as but superior to those from the government's own mints. That was certainly the case in the U.S. after the Appalachian and Californian gold discoveries, when private mints sprung up to supply convenient coining services to miners who would otherwise have had to send their gold to Philadelphia or (after 1835) to either Philadelphia or Charlotte for coining. The high quality of the private gold coins produced during these episodes is attested to, both by the extant coins themselves, and by the fact that the U.S. Mint, having failed to put the West Coast mints out of business merely by finally opening a San Fransisco branch, relied instead on coercion to do the trick.

 Another instance of successful private coinage is one with which Professor Goodhart is now familiar, though he didn't know of it in 1998, when he published the article to which The Economist refers. It is the episode of private token coinage in Great Britain that is the topic of my book, Good Money. Professor Goodhart did me the honor of writing that book's introduction. And although he makes clear there that the story I tell did not at all cause him to abandon Cartalism, I am sure that he would agree that it proves that, in at least one instance, the state's withdrawal from coining did in fact lead to private entrepreneurs rushing in to fill the void.

 That private coiners didn't always or even often rush in whenever governments failed to supply coins is itself hardly surprising in light of the fact that unauthorized coining, even of coins not meant to imitate official ones, has almost always been illegal, and has more often than not been a capital crime. So the absence of acknowledged private mints following both the fall of Rome in the 5th century and the Japanese government's abandonment of copper coinage in the 10th might prove nothing more than that no one wanted, literally, to stick his neck out. 

 Might. Except for the fact that the claim that no private coinage took place in either of these instances doesn't seem to be true. I do not merely mean that there was surreptitious private coining, that is, counterfeiting: despite the death penalty Japanese copper coins were aggressively counterfeited. I mean that after the Japanese government got out of the business of making coins--after having, that is, debased its coins until they were more-or-less worthless--legitimate privately minted substitutes, manufactured by local clans and wealthy merchants, did in fact take their place, along with Chinese coins and (yes) rice. That, at least, is what it says on the website of the Bank of Japan's Currency Museum. Nor is it true that coinage simply gave way entirely to barter after Rome fell. No doubt it did so to some degree everywhere, and perhaps to a large degree in some places; but private coinage also took place, and did so notoriously in Merovingian Gaul, where thousands of local mints supplied coins modeled (sometimes crudely) on their Roman predecessors, and bearing the names of coiners very few of whom were known rulers. In short, it seems that, even as proofs by example go, those offered by The Economist are rather paltry.

 Yet I suppose that we will never see the end of the myth that only governments are fit to coin money. Were bread a government monopoly long enough, Herbert Spencer once remarked, people would react with horror to the suggestion that it might instead be supplied, and supplied with better results, by the private sector. Spencer was probably right. I'm just glad I'll never live to see The Economist prove it.

    25Comments        Tweet              Ryan, Rand, and gold  by Kurt Schuler August 16th, 2012 8:55 pm    David Glasner has fallen into Krugman’s Bog, a poorly mapped but vast region of the Internet where the choler is so thick one cannot slog through it. David’s post is called “Where Does Paul Ryan Go When He Thinks About Monetary Policy?” The answer, he thinks, is Ayn Rand, and in particular a passage from The Fountainhead [correction: Atlas Shrugged, as a commenter pointed out; my mistake] where the character Francisco d’Anconia makes a speech about the merits of gold as a monetary standard. As Ryan has said, he read Rand when he was young and, like many of her readers of that age, was heavily influenced by parts of her message. (He explicitly rejects other parts.) However, David cites no direct evidence that Ryan shares d’Anconia’s views (which are pretty clearly Rand’s) on gold. Instead, David cites another blogger whose views are pure speculation.

 Here is a rope that travelers who have fallen into Krugman’s Bog can use to pull themselves back onto the High Road of Informed Commentary. Thomas, the legislative tracking service of the Library of Congress, shows what bills a member of Congress has sponsored. In my search, I found that Ryan sponsored two bills on monetary policy: the Price Stability Act of 2008, which would have required the Federal Reserve to establish an explicit numerical definition of “price stability” and to maintain a monetary policy that effectively promote it; and the International Monetary Stability Act of 2000 (also 2001), which would under certain conditions have allowed the sharing of seigniorage with countries that used the U.S. dollar as their official currency. Neither bill passed--the fate of most proposed legislation. My reading of the Price Stability Act is that it would in principle permit nominal GDP targeting (David’s favored approach) if the Federal Reserve defined “price stability” in a way compatible with that approach. I did not find that Ryan sponsored bills to re-establish any type of gold standard, though if others do, let me know in the comment section.

 I have had some small acquaintance with Ryan. More than a decade ago, I was a staff economist on the Joint Economic Committee of the U.S. Congress, of which Ryan was one of the members. I worked with his staff on the International Monetary Stability Act, which was sponsored in the Senate by my boss at the time, Connie Mack III (father of the current Republican candidate for Senate from Florida). The few times that I briefly met Ryan, he impressed me as having a combination of intellect and energy that is rare in Congress. Though I have not met him since, I have followed his career and have been confirmed in my impression of long ago. On financial issues, broadly construed, Barney Frank has been over the last decade the only other member of the House of Representatives in the same league in terms of providing intellectual and legislative leadership, though of course Ryan and Frank are poles apart on most policies. I could offer you criticisms of both — after all, nobody except me does exactly what I would do as a member of Congress — but I would start from their legislative records, not from what some other blogger thinks about them.

 [ADDENDUM: See David Glasner's reply in the comments. I was mistaken to say that there's no direct evidence that Ryan shares d'Anconia's views. In the post David cites, Ryan does say that he goes back to d'Anconia's speech when he thinks about monetary policy. I should have been more accurate and written that there is no readily apparent connection between the speech, with its emphasis on gold, and the legislation on monetary topics that Ryan has sponsored. Thank you for the correction, David.]

    7Comments        Tweet              Let’s not get rid of our wallets just yet  by Kurt Schuler August 13th, 2012 9:56 pm    The idea of purely electronic money, without notes and coins as hand-to-hand currency, has received attention not just for its potential convenience, but also for its potential to extend the range of central bank control in monetary policy, which some people consider a good idea.

 I see three drawbacks. First, are we so confident in our computer systems, including the electric power that they run on, that we don’t want any backup? Imagine the recent north Indian power blackout, or the U.S. mid-Atlantic blackout, lasting for a month. Unlikely, but not so unlikely that it needs no emergency plan.

 Second, a forced switch to an all-electronic currency means a forced reduction in financial privacy. Maybe, as Oracle Computer founder Larry Ellison has said in a broader context, “The privacy you’re concerned about it largely an illusion.” If so, it is an illusion I wish to try to preserve a while longer.

 Finally, it ignores consumers. If people want purely electronic money, the costs of provision are low, and there are no legal obstacles to purely electronic money, that’s what they will get. If people continue to hold notes and coins, it means that hand-to-hand currency provides services for which purely electronic money is not a perfect subsitute.

 (Hand-to-hand currency is disproportionately used in illegal activities. It is an argument for another time to what extent switching to purely electronic money would reduce illegal activities. Payment for illegal activities can still occur outside the formal financial system without cash.)

    6Comments        Tweet              Walter Bagehot's driver's license  by Kurt Schuler August 13th, 2012 9:50 pm    Even though Walter Bagehot died in 1877, before the age of the automobile, for $200 he (or you) can still buy a fake driver's license. While he's at it, maybe he can go vote. I look forward to seeing driver's licenses for other long-dead proponents of free banking. Adam Smith, however, might have a harder time picking up a six-pack of beer or talking his way out of a speeding ticket because his 18th-century wig looks a tad more out of place today than Bagehot's impressive 19th-century beard does. (Thanks to Bill Stepp for the tip.)

 For a more serious take on modern technology, see my next post.

    1Comment        Tweet              In Which I Reveal What is Wrong with Most Books by Academics Today  by George Selgin August 11th, 2012 2:29 pm    For an upcoming conference I've been writing a brief history of the gold standard in the United States. So naturally I've been reading or re-reading books on the subject, both new and old, and discovering or rediscovering their merits. My overarching discovery is, not to put too fine a point on it, that almost all of the newer books are a great bore, and none too informative at that. 

 Why is that so? A clue is that these books are all written by academics, and mainly by academic economists and historians, whereas at least some older ones were written by amateurs, which is to say, by people who considered writing itself their craft, and who had no reason to expect their books to be purchased and read if the books weren't reasonably entertaining as well as informative. But even the older books by academics aren't so bad. It's only relatively recent academic books (which for me means ones written during the last twenty years or so) that are almost uniformly godawful. And the reason for this, I suddenly realized, is that the real subject of recent academic books is, not the subject their titles advertize, but the books themselves. 

 To be clear: if the title of a modern academic book is "The History [or theory or whatever] of X," the real subject is "My book on the History [or whatever] of X." Such books are, in other words, not so much contributions to history or economics or whatever as they are exercises in literary criticism where the critic just happens, conveniently, to be the author of the book under appraisal, or (more accurately) the would-be author of the "urbook" that the actual book appraises, which urbook has not actually been written, and generally never can be, because if it were it would be an article rather than a book, and most likely a trite or banal article at that.

 Once you realize what most academic books today are about, recognizing one of this sort is a piece of cake. You might, of course, infer that you're reading one from the fact that, as you slog through it, you don't seem to learn much at all about X, and so are tempted to skip, first paragraphs, then pages, and finally entire chapters in the hope or finding the place where the author gets to the point. What's more you may never find that place, or it may prove so fleeting that you skip past it. That of course shouldn't happen if the book you are reading really is about X; but if the book is really a critique of a book about X, what you are looking for, without realizing it, is what critics sometimes disparagingly call a "plot summary"--disparagingly because it's the sort of thing one finds in mere book "reviews" rather than in works of "higher" criticism; and academics' criticism of their own urbooks strives to be nothing if not "high." 

 But as the test above, besides being painful to administer, doesn't distinguish the true academic book-about-itself from a merely thoroughly bad book about X, there are other, surer clues to look for. These include endless throat-clearing introductory materials, announcing over and over again the book's "purpose" and telling how the author intends to go about achieving it ("though maybe not just yet," an honest author might add), followed by a no less endless disquisition on how the book's arguments differ importantly--really!--from those to be found in other (also academic) books, followed at last by concluding chapters saying more or less the same thing as the introductory ones, only tossing in a little sprig of "told you so!" triumphalism. 

 Imagine, for a still clearer picture, a great, classic work that really is about X. Once upon a time, though far less often today, a genuine critical undertaking might have consisted of the preparation of a new edition of the work, undertaken not by the (usually deceased) author but by an editor well-versed in the whole literature on the subject. That editor might author a lengthy introduction to the new edition, and numerous footnoted commentaries on the text, some perhaps rather arcane, and an explanatory appendix or two. 

 Well, your modern academic book writer erects the same sort of critical scaffolding, but does it, not for someone else's book, but for a 'classic' that exists only in his own head. He then serves up the scaffolding alone, packaged to look just like the imagined classic, much as the scaffolds one occasionally sees around Baroque buildings in Europe are disguised by tromp l'oeil curtains meant to fool people into mistaking them for the buildings themselves. The difference is that those tromp l'oeil-curtained scaffoldings disguise a real work in progress, whereas the academic equivalent surrounds so much hot air.

    13Comments        Tweet              Friedman on flexible exchange rates  by Kurt Schuler August 5th, 2012 10:06 pm    Lars Christensen’s blog The Market Monetarist, which I make sure to read regularly, used the recent centenary of Milton Friedman’s birth to discuss Friedman’s views on exchange rates. The standard view of Friedman was that he was an advocate of flexible exchange rates, pure and simple. I think this view is based on an incomplete reading of Friedman, as Steve Hanke argued several years ago. (Anna Schwartz told Hanke she disagreed strongly with his interpretation of Friedman, but I think it's the only way to view Friedman's pronouncements on exchange rates as consistent over the years.)

 Friedman wrote his most frequently cited essay on exchange rates, “The Case for Flexible Exchange Rates,” as a proposal for a quick way for Western European countries to eliminate the exchange controls that they had established before World War II and that persisted in the early 1950s. Exchange controls hindered trade. Flexible exchange rates could allow countries to remove their exchange controls quickly, Friedman thought, thereby improving opportunities for international trade and the wealth created by the international division of labor.

 In the same essay, though, Friedman also discussed the sterling area, a zone of rigid exchange rates with the pound sterling. He wrote, “In principle there is no objection to a mixed system of fixed exchange rates within the sterling area and freely flexible rates between sterling and other countries, provided that the fixed rates within the sterling area can be maintained without trade restrictions.” At the time, the sterling area included most of Britain's colonies and protectorates as well as India, Pakistan, Australia, and New Zealand. It therefore extended over a considerable portion of the globe. Friedman likewise showed no objection to, or even praised, fixed exchange rates on a number of other occasions, cited in Hanke’s article.

 The key to reconciling Friedman’s apparently contradictory positions is to understand that clean fixed and clean floating exchange rates, though differing in their degree of nominal rigidity, are similar in that both give market forces free rein. Under a clean fixed exchange rate, the nominal exchange rate is fixed and market forces determine the nominal monetary base. Under a clean floating exchange rate, the nominal monetary base is in the short term fixed (or perhaps a better word would be "set") and market forces determine the nominal exchange rate. Under intermediate arrangements where the monetary authority intervenes in the foreign exchange market to influence the nominal exchange rate and the nominal monetary base simultaneously, market forces do not have free rein and market adjustment is to some extent frustrated.

 The overall impression Friedman's statements on exchange rates leave is that he considered flexible exchange rates to be the system most desirable and most politically sustainable for large and medium-size economies that were politically independent and able to keep inflation relatively low. In his policy advice, which took account of the particular circumstances of various countries, he did not, however, advocate flexible exchange rates across the board, nor were the cases where he thought fixed exchange rates would work acceptably mere unimportant exceptions.

    2Comments        Tweet              The Cobden Survey  by George Selgin August 4th, 2012 2:19 pm    In June, 2010 the Cobden Centre in London released a report on "Public Attitudes on Banking," based on a questionnaire to which 2000 Britons responded. The findings of that report have since been offered, both by the Cobden Centre itself and by others, as proof that many people today believe that banks store rather than lend money surrendered to them in exchange for deposits payable on demand. 

 This week, for instance, a blogger named James Miller (whose article appears as well at Mises.ca and ZeroHedge, among other sites) wrote:

 [U]sually depositors don’t fully realize that their funds are not really there in whole. In a 2010 study commissioned by The Cobden Center, it was found that 74% of U.K. residents polled believed they were the legal owners of their banking deposits. And while 61% answered that they wouldn’t mind if their money was used for additional lending, 67% responded that they wanted convenient access to what they saw as their money. Whether or not one regards fractional reserve banking as a clear case of fraud, it seems that a good portion of the public is wrongly informed on the mechanics of modern day banking. 

 But as even a careful reading of Miller's own summary of it should make clear, whatever else the Cobden survey may demonstrate, it most certainly does not demonstrate that most depositors think that the money they hand over to banks sits in the banks' vaults (or perhaps in those of a central bank) until some or all of it is either withdrawn or transferred to specific others by order of the original depositors.

 Unless the questions they pose are chosen very carefully, survey results can easily mislead, and are indeed sometimes designed precisely with that end in mind. That isn't to say that the Cobden survey was intended to mislead--I am in fact inclined to believe that it wasn't. But it misleads nonetheless, thanks to the utter ambiguity of several of the questions it poses. 

 Consider the first survey question: "Why do you keep some of your money in a current account?" 15% of respondents answered "For safekeeping" and 67% answered "For convenient access," while only 10% answered "Because it earns interest." The predominance of the first two replies over the third might appear to suggest that most people suppose that their money is being stored. But the responses may be just as readily interpreted to mean that they consider fractionally-backed deposits to be both more convenient and safer than cash kept on one's person, at home, or in a cash register. Indeed, in these days of deposit insurance, it is hard to see why anyone concerned with safety, even exclusive of other considerations, would hesitate to prefer a fully-insured demand deposit balance to cash, while being perfectly indifferent to the dangers stemming from the lending of "their" deposits.

 In reply to the survey's second question, "Who do you think owns the money in your current account(s)?", 74% answered "The account holder," while only 8% said "The bank." Another 20% answered, "Both the bank and the account holder." Proof that many British bank depositors don't know what their banks are about? Hardly. The responses instead prove nothing more than that the question posed can be interpreted in two different ways, depending on the meaning given to the word "money." Cobden Centre types, steeped in Austrian monetary economics, may insist that "money" ought to mean what others call "base" or "high-powered" money; but the fact remains that for most people, including most economists, a fractionally-backed bank deposit or note is itself "money." The latter, more common usage is implicit in standard working measures of national money stocks such as M1, M2, and so forth.

 So, who owns the "money" in someone's current account? Well, it is in fact owned by the account holder, or by the bankers, or by both depending on how money is defined. If "money" is taken to mean "base money," than when someone accepts a demand-deposit credit from a banker in exchange for "money," that person surrenders ownership of the "money" to the banker, while becoming the owner of a deposit credit--a claim against the bank--of the same nominal value as the surrendered sum. But now suppose that by "money" we mean money in the broader sense, including demandable bankers' IOUs. By this definition, of course, the depositor continues to "own" the deposited sum, because instead of merely surrendering ownership to "money" he must now be understood to have merely exchanged one kind of money for another. The banker now owns the surrendered base money, while the depositor owns broad money consisting of a redeemable deposit balance. It thus follows that all of the respondents to the survey question, including the 2% who said "I don't know," may have been perfectly well informed of what their banks were up to, differing only in their interpretation of the question, or in the extent to which they were (understandably) baffled by it.

 The survey's third question is equally ill-posed. It asks respondents to say what percentage of their current accounts is (1) held as reserves; (2) lent; (3) used to speculate on financial derivatives. That 66% answered "I don't know" is surprising only because one would expect the percentage replying so to such a question, calling as it does for a specific magnitude of which even many expert economists must have been unaware, while posing as alternatives two possibilities that are not in fact mutually exclusive (money might be simultaneously "lent" and "used to speculate on financial derivatives"), to have been closer to 100! The response proves, in any event, that at least two-thirds of those surveyed were not convinced that their "deposits" were fully backed by reserves. 

 Oddly, we are not given (as we are with regard to the other questions) a breakdown of the other responses to question 3, and so cannot say more than this. But it is at least possible that none of the 2000 respondents actually believed that his or her current account was backed 100% by reserves. If anything, the fact that we are not told what percentage of those surveyed answered this key question in accordance with the presuppositions of the anti-FR crowd ought to lead one to suspect that the percentage was in fact very low. Survey question 4, however, asks respondents to indicate "how they feel" about their banks making loans using current account deposits, and finds that 33% think the practice wrong because "they have not given [their bankers] permission to do so." Thus support appears to be given to the upper-bound ignorance quotient of 2/3. 

 But here once again the question is ill-conceived, not to be sure because it is ambiguous, but because it is what survey designers call a "suggestive" question, and as such one that nudges respondents in a particular direction. The question, in full as it appears in the report, reads as follows:

 You may or may not have been previously aware that banks lend out some of the money deposited within current accounts by their customers to fund loans [sic]. Which of the following best describes how do [sic] you feel about the fact that your bank lends out some of the money in your account as loans [sic]? 

 The subtle, implicit suggestion here, perhaps unintended, is that banks are not systematically informing their customers about what they do (so that customers "may or may not" be aware of it), and that their conduct is such as might be expected to arouse some definite "feelings" among those customers. 

 If you doubt that the manner in which the question is posed favors the most-frequently offered response--that is, if you doubt that the question is such as tends to favor expressions of dismay regarding what bankers' regard as business as usual--imagine getting the following message in your voicemail, where the words indicated by **** are inaudible: "Hello. You may not be aware of it, but **** has been **** your ****. How do you feel about that?" Forced to say either "fine" or otherwise, I venture to guess that you'd admit that such a message leaves you "feeling" like someone who has been decidedly, albeit mysteriously, snookered.

 Addendum (August 4 at 5:05PM): I had not bothered to comment on the Cobden survey's fifth and final question, because I found it so loopy that I hardly knew where to begin. I ought to have observed, nonetheless, that 26% of those surveyed responded to it by choosing, of several alternatives, the one that said "We should ensure that banks keep reserves equal to 100% of deposits." Would the respondents have made the same choice had the response in question been lengthened by adding the words "while allowing them to collect from us annual fees of somewhere between 5% and 10% of our average balances"? Unless Cobden redoes the survey, I suppose we'll never know.

    58Comments        Tweet              Friedman and free banking  by Kurt Schuler July 31st, 2012 10:34 pm    Today is the centenary of Milton Friedman’s birth. (He died on November 16, 2006.) To honor it, Julio Cole, a professor at Francisco Marroquín University in Guatemala, compiled a bibliography of Friedman’s scholarly writings earlier this year. An earlier bibliography, which adds many of his newspaper articles and other more ephemeral writings, exists in The Essence of Friedman, an excellent collection edited by Kurt Leube.

 Friedman’s ideas on monetary policy changed over time. He began as a convinced Keynesian. Then, of course, he became the leader of the monetarist school, and wrote with Anna Schwartz the groundbreaking Monetary History of the United States, 1867-1960. The most influential aspect of the book was how it changed the views of economists about what caused the Great Depression—and, by implication, many other economic disasters. Friedman and Schwartz blamed the Federal Reserve System, and to consider how completely their argument has been accepted it suffices to recall that Ben Bernanke, who at the time was a Federal Reserve governor though not yet the chairman, remarked at a 90th birthday celebration for Friedman, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”

 Late in his career, Friedman switched from advocating a constant growth rate for M2 to a quite different approach: freeze the monetary base and deregulate financial institutions, including letting them issue currency (“Monetary Policy for the 1980s,” originally in John Moore [editor], To Promote Prosperity: U.S. Domestic Policy in the Mid-1980s, 1984, reprinted in the Leube volume.)

 A bit later, in 1986, he discussed free banking in an article with Anna Schwartz, “Has Government Any Role in Money?” (Journal of Money, Credit and Banking, also reprinted in the Leube volume). Friedman and Schwartz cited Larry White’s work on free banking in Scotland, but claimed that the experience of the United States before the Civil War is much less favorable to the case for free banking. I think they understated the influence of the different legal frameworks in various states on the shape the U.S. banking system took, and therefore understated the extent to which the U.S. banking system was far less free than the Scottish system.

 Friedman ended up being close to the free banking position as far as his ideas for contemporary policy were concerned, though not in terms of his interpretation of the history of the system. Friedman's later views remain obscure, even among monetary economists, compared to his middle-period advocacy of targeting M2, the view he held at the time he was awarded the Nobel Memorial Prize in economics.

    6Comments        Tweet              Notes for an Essay on Currency Competition and Counterfeiting  by George Selgin July 19th, 2012 5:18 pm     I’ve long been meaning to write something about the bearing of free banking on the problem of counterfeiting—a topic I addressed only very briefly in Theory of Free Banking. Since that time, although quite a lot has been written about the general subject of counterfeiting, hardly anything has been said about whether or not having competing banks of issue would make matters worse.

 Conventional wisdom has it that having many banks of issue instead of just one makes life easier for counterfeiters. This wisdom draws heavily on the United States’ antebellum experience, while overlooking the experiences of arrangements more representative of genuine free banking, including those of Scotland between 1770 or so and 1845 and of Canada during the late 19th and early 20th century. Evidence from these other episodes points to a rather different conclusion, while suggesting that extant theoretical models of counterfeiting overlook ways in which competitive note issue can actually make counterfeiting less rather than more lucrative than it is when currency is supplied monopolistically.

 I hope readers of this forum will forgive my setting forth, as a framework by which to gain a better understanding of the ways in which plural note issue bears upon the problem of counterfeiting, a very simple formal representation of a prospective counterfeiter’s anticipated profit, π. Let

 π = ND – CcN – FP,

 where P = g(Cc, Ca, N, D, T, B), Cc = c(Ca), F = f(N,B), Ca = d(B), and T = t(B). Here N stands for the number of counterfeits placed into circulation, D for their denomination, Cc for counterfeits’ average unit cost of production, F for the penalty or a counterfeiter incurs if caught (which may depend on the number of counterfeits he is found guilty of having uttered), P for the probability of detection, Ca for the unit cost of a genuine note, T for a note’s average “turnover” time, that is, time spent in circulation before returning to its (purported) source, and B, finally, for the number of legitimate banks of issue. The presumed derivatives are Cc’ > 0, f’(N) > 0, f’(B) < 0, g’(Cc) < 0, g’(Ca) > 0, g’(N) > 0, g’(T) > 0, g’(B) < 0, d’ > 0, and t’ < 0. 

 Standard treatments of the counterfeiting problem, to the extent that they allow for the possibility of plural note issue at all, have tended to treat the number of banks of issue, B, as increasing the anticipated profitability of counterfeiting by directly reducing the likelihood of prosecution, an effect allowed for here by the last element in P: this effect stems from the extra information costs that must be incurred by persons seeking to distinguish genuine from counterfeit notes as the variety of genuine notes increases. The practically exclusive emphasis upon this influence reflects the tendency of researchers to look upon antebellum U.S. experience, with its huge numbers of relatively small banks, and consequent need for “Counterfeit Detectors” to keep bankers and retailers informed of the correspondingly large numbers of known counterfeits, as representing the typical consequences of plural note issue. 

 As anyone who is familiar with the free banking literature, or simply with more informed writings on U.S. banking history, knows, the U.S. case was a by-product of legal restrictions, chief among which were laws prohibiting most banks from having branches, while prohibiting banking altogether in some states and territories. These circumstances turned under-banked regions into dumping grounds for the worst of the authentic banknotes from other parts of the country, while in turn creating easy opportunities for counterfeiters to add their products to an already disorienting melange. 

 But the U.S. experience was unique. Other plural note issue systems, like those of Scotland and Canada, involved not thousands or even hundreds but no more than a few dozen banks of issue, most of which had extensive branch networks. The number of distinct banks was small enough to allow retailers to familiarized themselves with legitimate note varieties. Yet in combination with branching it was more than large enough to provide for notes’ active redemption, that is, for their regular absorption by the clearing and settlement system, by which they were sent back to their reputed sources. In the Scottish system, for instance, it took eleven days or so for a note to return to its source after having first been paid out—a speed not so different from that for modern checks. This translated into a high annual turnover (T) of about 33. In contrast, notes of a monopoly issuer might remain in circulation for several months, if redeemable in specie. If not, they might remain afloat until too badly worn to circulate, which could mean years. 

 What difference does turnover make? That it matters a great deal becomes apparent as soon as one considers that in the vast majority of instances counterfeits are discovered, or at least discovered and then reported, not by members of the general public or by non-bank merchants, but by bankers themselves, and especially by the banks whose notes have been counterfeited. There are two simple reasons for this. First, the tellers at these banks are the persons best equipped to distinguish their banks’ authentic notes from even clever counterfeits. Second, they have the strongest incentives both to be on the lookout for fake notes and to report fakes that they discover instead of merely refusing them or attempting to fob them off on others. The last point is true in part because, if persons other than a bank's employees report a counterfeit of a bank’s notes, they may suffer a loss equal to the value of the reported notes. (Importantly, although this last deterrent has generally been in effect in monopolistic currency arrangements, it was sometimes absent in competitive ones.)

 The significance of turnover, then, is that, the higher the rate of turnover of any bank’s notes, the greater the risk a counterfeiter faces of having, first his counterfeits, and then himself, discovered. High turnover means a greater chance that counterfeits will be detected within any given span of time, and consequently a greater chance of them being detected after a small number of transfers only, which increases the odds of their original “utterers,” and therefore the counterfeiters themselves, being caught. 

 A second, indirect way in which currency competition deters counterfeiting, which also has something to do with turnover, is by inducing note issuers to devote more resources to making their notes counterfeit-resistant. This follows from the fact that especially convincing counterfeits can fool even a bank’s own expert tellers, causing it to suffer losses by redeeming counterfeits. The extent of such losses will be greater, for any given volume of counterfeiting, the greater the turnover (and hence the lower the float) associated with an issuer’s currency. In the extreme case of a monopoly issuer of fiat money, which is of course never called upon to redeem its notes, the risk in question is nonexistent, and the incentive to invest in counterfeit-resistant notes is correspondingly low.

 Finally, the presence or absence of competing issuers can influence would-be counterfeiters’ expected profits in at least one other way. This is by having some effect on the penalties or fines to which successfully prosecuted counterfeiters are subject. Here the difference is not so much economic as political, consisting of the fact that counterfeiting of the notes of a monopoly bank of issue has often been treated as a crime equivalent to the counterfeiting of official coin, and often, therefore, as a capital offense, whereas the counterfeiting of competitively-supplied banknotes has in contrast generally been a misdemeanor, if indeed it has been considered a crime at all. 

 The upshot of all this is that competition in currency can serve either as a deterrent or as a stimulus to counterfeiting. Whether it serves one way or the other depends on the importance of the “turnover” and “anti-counterfeiting investment” effects on one hand and those of “information cost” and “reduced penalty” effects on the other. Theory alone—at least the sketch of a theory considered here--therefore doesn't warrant the conventional conclusion that currency competition means more counterfeiting. The matter calls for a closer look into the historical evidence, to which I will turn in a second installment of these “notes.” 

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