Free Banking and the Free Bankers

Review of Austrian Economics

Volumn 9, Issue 1, 1996, Pages 3-53

  Hülsmann, Jörg Guido ^a  

^a Technische Akademie Wuppertal   (Germany)

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EID: 0008346398     PISSN: 08893047     EISSN: None     Source Type: Journal    
DOI: 10.1007/bf01101880     Document Type: Article

References (110)

1. Kevin Dowd, David Glasner, Steven Horwitz, A. J. Rolnick, Larry Sechrest, George Selgin, Lawrence White, and Richard Timberlake. I shall concentrate my discussion on the works of Dowd, Selgin, and White. It is here that the doctrine is elaborated. By contrast, the contribution of Sechrest consists of a formal, i.e., mathematical, expression of their tenets; Glasner and Horwitz base their works heavily on Selgin's Theory of Free Banking; and Rolniek and Timberlake have contributed applications of free banking theory to historical episodes.
2. See Fischer BlackBanking and Interest Bates in a World Without Money Journal of Banking Research 1 (1970);
3. Eugene F. FamaBanking in a Theory of Finance Journal of Monetary Economics 15 (1980);
4. Robert E. Hall, Inflation, Causes and Effects (Chicago: University of Chicago Press, 1982);
5. Robert L. Greenfield and Leland B. YeagerLaissez-faire Approach to Monetary Stability Journal of Money, Credit, and Banking 15 (1983).
6. See Neil WallaceA Legal Restrictions Theory of the Demand for 'Money' and the Role of Monetary Policy Federal Reserve Bank of Minneapolis Quarterly Review (1983);
7. Thomas Sargent and Neil WallaceThe Real-Bills Doctrine versus the Quantity Theory: A Reconsideration Journal of Political Economy 90 (1982).
8. With the exception of Kevin Dowd, see, The State and the Monetary System (London: Phillip Allan, 1989), p. 188;
9. idem., Laissez-faire Banking New York: Routledge, 1993), pp. 66f;
10. David Glasner, Free Banking and Monetary Reform (New York: Cambridge University Press, 1989), p. 240f;
11. and Richard Timberlake, Gold, Greenbacks, and the Constitution (Berryville, Va.: George Edward DurellFoundation, 1991), pp. 60ff.
12. For a critique of the latter see RothbardAurophobia: or, Free Banking on What Standard? Review of Austrian Economics 6, no. 1 (1992): 97-108.
13. George Selgin and Lawrence WhiteHow Would the Invisible Hand Handle Money? Journal of Economic Literature 32 (1994): 1737.
14. See also Lawrence WhiteIdentifying Money in his Competition and Currency (New York: New York University Press, 1989), pp. 206ff.
15. See the contrary opinion of White, ibid., pp. 134f.
16. See, for example, V. C. Smith, The Rationale of Central Banking (1936; Indianapolis, Ind.: Liberty Classics, 1990); Kevin Dowd, Laissez-faire Banking, esp. chap. 10.
17. It is noteworthy that what is said about banks applies to virtually all financial intermediaries dealing with money substitutes. Money substitutes are not only banknotes and demand deposits but principally all claims that have to be redeemed at par into money whenever the holder of the claim likes to have money substitutes. See in particular Murray N. Rothbard's excellent analysis of money substitutes in the 1920s in America's Great Depression, 4th ed. (New York: Richardson and Snyder, 1983), p. 83.
18. See Condy Raguet's discussion "Of Banks of Deposits, Banks of Discount, and Banks of Circulation" in his Treatise on Currency and Banking (New York, 1840), pp. 67ff.
19. See, Hans-Hermann HoppeHow is Fiat Money Possible Review of Austrian Economics 7, no. 2 (1995): 57.
20. This argument was used by Condillac in order to claim that not only the quantity of money is rather irrelevant but that, on the contrary, it would be advantageous if it were smaller ("On voit donc qu'il est assez indifférent qu'il y ait beaucomp d'argent, et qu'il serait même avantageux qu'il y en eut moins. En effet, le commerce se ferait plus commodément. Quel embarras ne serait-ce pas si l'argent était aussi commun que le fer?" Le Commerce et le gouvernement (Paris, 1795), p. 87).
21. Lawrence White, Competition and Currency, p. 200.
22. George Selgin, The Theory of Free Banking (Washington, D.O.: Cato Institute, 1988), p. 53.
23. Larry Sechrest, Free Banking: Theory, History, and a Laissez-faire Model (Westport, Conn.: Quorum Books, 1993), p, 66.
24. Dowd, The State and the Monetary System, p. 25.
25. Steven Horwitz, Monetary Evolution, Free Banking, and Economic Order (Boulder, Colo.: Westview Press, 1992), p, 115.
26. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1726.
27. See Selgin, The Theory of Free Banking, pp. 60ff. Transfer credit is "credit granted by banks in recognition of people's desire to abstain from spending by holding balances of inside money" (p. 60). This of course, is no definition. Every use of money implies the holding of it.
28. Ibid, p. 55.
29. See the following, for example, W. H. Hutt, The Keynesian Episode (Indianapolis: Liberty Press, 1979), pp. 51ff.
30. See the analoguous remarks of Mises concerning the possibility of stabilizing the value of money in his Theory of Money and Credit (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1971), pp. 123-31.
31. For example David Ricardo, The High Price of Bullion, Works 3 (London: John Murray, 1811), p. 73
32. G. Selgin and L. H, WhiteThe Evolution of a Free Banking System in Selgin, The Theory of Free Banking, chap. 2, and in White, Competition and Currency, chap. 12; also Dowd, Laissez-faire Banking, pp. 26-33, 59-68.
33. See Ludwig von Mises, Human Action (Chicago: Henry Regnery, 1949), pp. 571ff; and Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962), pp. 850ff.
34. By the way, it is not true that a reduction of the inflated money stock is the cause of crises. It is already the widespread injection of additional money via the credit system which implies that money calculation has to fail on a wide scale. Once the failure becomes obvious in the form of a crisis, a reduction of the money stock has the effect of accelerating recovery. Hence, one cannot claim that "Austrian economists such as Rothbard add that it was the Ped's expansionary policies during the 1920s that precipitated the crisis, which was exacerbated by the Ped's later inaction" Steven Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 182 [emph. added]. This claim presupposes that monetary expansion is but a detail in the picture of business cycles and that Rothbard shared the view that it is the drop of the money stock which creates crisis. Neither is true.
35. For a vain attempt to prove the contrary, see, Dowd, The State and the Monetary System, p. 60ff.
36. In a brilliant analysis Fritz Machlup demonstrated that the time horizon for which a credit is given has nothing to do with the time horizon of its employment. It is thus illusory to believe that fiduciary issues would only finance transfers (Börsenkredit, Industriekredit und Kapitalbildung [Vienna, 1931], pp. 139,179ff).
37. Selgin, The Theory of Free Banking, p. 54.
38. Ibid., p. 55.
39. White, Competition and Currency, p. 158.
40. See also Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 120f; Dowd, Laissez-faire Banking, p. 65f.
41. White, Competition and Currency, p. 158.
42. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1724-5. 34 Glasner, Free Banking and Monetary Reform, p. 174f.
43. This means the quantity of money (money in the narrower sense) plus the quantity of fiduciary money substitutes. The latter always equals zero in a 100 percent reserve system. The money supply in the larger sense, then, always equals the money supply in the narrower sense. Only in a system of fractional reserves can these two aggregates deviate from one another.
44. Consequently, it is not surprising that some advocate the absurd idea that the crisis of the thirties had been the outcome of heavy variations of the value of gold (Glasner, Free Banking and Money Reform, p. 222ff). For a critique see the articles by Wiegand, Kemmerer, and North in Gold Is Money, Hans Sennholz, ed. (Westport, Conn.: Greenwood Press, 1975). Cause and effect are confused. The value of gold changed heavily because of big variations of the quantity of its substitutes. The same confusion prevails about the variations of the gold price of the 1980s. Gold went up because many market participants expected it to soon become money again. It went down when it became obvious that these expectations were premature. This was partly due to the views of experts who considered it as "a commodity whose purchasing power is subject to violent and erratic fluctation" (White, Competition and Currency, p. 131).
45. "[I]t takes time for changes in spending to influence prices in a general way" Selgin, The Theory of Free Banking, pp. 53f.
46. Convertibility taken fallaciously in its larger, meaningless sense. See the section entitled "Money and Substitutes for Money" in a previous section in this article.
47. Selgin, The Theory of Free Banking, p. 54.
48. Ibid.
49. Vorwitz, Monetary Evolution, Free Banking, and Economic Order, p. 134.
50. Unfortunately, such conceptual confusion prevails also in one of the most brilliant expositions of the problems of fractional reserve banking, see, F. A. Hayek, Monetary Nationalism and International Stability (London: Longmans, Green, 1937).
51. Vorwitz, Monetary Evolution, Free Banking, and Economic Order, p. 135.
52. Selgin, The Theory of Free Banking, p. 55.
53. Note that its application in the context of savings-investment is incompatible with its application to justify the "anchor theory." However, as both are fallacious we do not have to dwell on inconsistencies between the tenets of the free bankers.
54. Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 135.
55. Selgin, The Theory of Free Banking, p. 62.
56. Murray RothbardThe Case for a 100 Percent Gold Dollar in In Search of A Monetary Constitution, Leland B. Yeager, ed. (Cambridge: Harvard University Press, 1962), pp. 115-6. Reprinted in book form by the Ludwig von Mises Institute, Auburn, Alabama in 1991.
57. Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 115.
58. Ibid., p. 131.
59. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1725 n.
60. Dowd, Laissez-faire Banking, p. 48. This is precisely the argument of the central bankers. Goodhart, for example, claims that central banks are necessary "to support the residual, risky, 'true', banking institutions, which were undertaking the necessary function of making loans to borrowers who could not otherwise sell their own equity and debt in extant financial markets" ("Are Central Banks Necessary? Unregulated Banking: Chaos or Order?, Forrest Capie and Geoffrey Wood, eds. (London and New York: St. Martins Press, 1989), p. 18.
61. Murray N. Rothbard, Power and Market, 2nd ed. (Kansas City: Sheed Andrews and McMeel, 1977), p. 186.
62. RothbardThe Case for a 100 Percent Gold Dollar pp. 114f. 55
63. White, Competition and Currency, p. 156. 56Ibid., p. 157. 57Ibid., p. 156.
64. Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 97.
65. Ibid., p. 100.
66. It seems to be the intention of discussing Simmel's work at length to prepare the ground for a communication theory of money (ibid., pp. 9 Iff). The same reproach must be made for citing Mises's ideas on the importance of language from his Nation, State, and Economy (New York: New York University Press, 1983). Indeed, these belong to the few ideas Mises considerably revised later on (Omnipotent Government [New Haven, Conn.: Yale University Press, 1944]). It is impossible to claim his authority in support of the tenet that "ideas do not exist extralinguistically" (Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 186).
67. See Maehlup, Börsenkredit, Industriekredit und Kapitalbildung, pp. 143ff. Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 146 n. 46. TVHlton FriedmanThe Resource Cost of Irredeemable Paper Money Journal of Political Economy (1986).
68. Here my opinion deviates from that of Rothbard. He says: "A man may allocate his money to consumption, investment, or addition to his cash balance." (Man, Economy, and State, p. 678, see also pp. 179f), thus suggesting that holding a cash balance is something different from savings-investment. Hans-Hermann Hoppe has given another expression to this view in claiming that time-preference and the utility of money are "two distinct and praxeologically unrelated factors" (The Economics and Ethics of Private Property [Boston: Kluwer, 1993], p. 119). To be sure, there is no causal connection between the demand for money and the interest rate. Increasing the quantity of money cannot reduce the interest rate because money's real value, its purchasing power, would be reduced accordingly. Yet this is no reason to overlook the unity in all acts, viz., in all valuation. Value is the preference accorded to an effect, and at least in the realm of action this can mean nothing but that the preferred effect should be achieved before alternative but less urgent effects. As action-and all other means-are always employed in the pursuit of some ends or effects acting man necessarily has to value (i.e., select) his means according to the urgency of the ends they are supposed to achieve. Thus, time-valuation is present in all actions. Actions with money can be no exception. However, it should be noted that it is the holding of money which constitutes savings-investment. The holding of money substitutes, on the other hand, does not constitute savings-investment but claims on savings-investment in the form of money. It cannot give disposition of more than the existing stock of money-even if the owners of fiduciary money substitutes believe the contrary to be the case. See Böhm-BawerkRechte und Verhaeltnisse vom gueterwirtschaftlichen Standpunkt in Gesammelte Schriften (Frankfurt/M.: Sauer & Auvermann, 1968).
69. Rothbard, America's Great Depression, p. 16.
70. Selgin and WhiteHow, Would the Invisible Hand Handle Money?": 1725.
71. Ibid.
72. Hasan Ifedhar and Gerald P. Dwyer Jr.Bank Runs in the Free Banking Period Journal of Money, Credit, and Banking 26 (1994): 284. Or, in the terms of A. J. Rolnick and W. E. Weber: "free bank failures were not caused by individuals establishing free banks with the same intention of having them fail. Rather, free banks failed when economic times turned bad and the value of their portfolio declined. Thus, the problems of banks during this period do not appear to have been different from those encountered by banks in other periods or by other types of industries" ("The Causes of Free Bank Failures,*Journal of Monetary Economics 14 (1984): p. 290. See also Glasner, Free Banking and Monetary Reform, p. 203; Dowd, Laissez-faire Banking, pp. 218f; Horwitz, Monetary Evolution, Free Banking, and Economic Order, p. 152ff).
73. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1726.
74. Dowd, The State and the Monetary System, p. 62. See also the references given above in the section entitled "Does Fractional Reserve Banking Lead to Monetary Equilibrium."
75. Rothbard, Man, Economy, and State, p. 677.
76. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1725.
77. It is unlimited without regard to the prevailing money prices on the market. The latter, however, rise every time the quantity of fiduciary money substitutes is enhanced. They must necessarily be higher than they otherwise would have been. The circumstance, too, leads to higher demands for holding money.
78. White, Competition and Currency, p. 25, Cf. also Selgin, The Theory of Free Banking, p. 46.
79. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1726.
80. Ibid., p. 1726. They note that only three out of six major panics in the National Banking era involved suspensions of payments.
81. See Murray N. RothbardThe Myth of Free Banking in Scotland Review of Austrian Economics 2 (1987): 229-45,
82. See also Charles Goodhart, The Evolution of Central Books (Cambridge, Mass.: MIT Press, 1988), p. 51f.
83. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1732.
84. See also Lawrence White, Free Banking in Britain: Theory, Experience, and Debate, 1800-1845 (Cambridge: Cambridge University Press, 1984); Dowd, Laissez-faire Banking.
85. Cf., e.g., Selgin, The Theory of Free Banking, p. 137;
86. Glasner, Free Banking and Monetary Reform, pp. 199ff.
87. Cf. Dowd, Laissez-faire Banking, p. 48.
88. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1727.
89. For a refutation of this claim of the free bankers see Hans-Hermann HoppeHow is Fiat Money Possible?": 70f.
90. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1729.
91. On this point see Hoppe, The Economics and Ethics of Private Property, p. 14.
92. Cf. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1732f.
93. For the following see the third part of my Logik der Währungskonkurrenz, forthcoming from Frankfurt/M: R. G. Fischer, 1996.
94. See Ludwig von Mises, Theorie des Geldes und der Urnlaufsrnittel, 2nd ed. (Munich and Leipzig: Duncker & Humblot, 1924), pp. 85ff,
95. also published in English as The Theory of Money and Credit, H. E. Batson, trans. (London: Jonathan Cape, 1934); idem, Human Action, pp. 408ff.
96. In his Denationalization of Money, 2nd ed.CLondon: Institute for Economic Affairs, 1978) Hayek simply skips the problem that the Ducates, which he wantsto introduce by a redemption promise, can only become money if this promise is broken. In fact Hayek's Ducates are money substitutes and not money. Otherwise they could never be issued. White holds the same misconception. See also White, Competition and Currency, p. 132. For a critique of Hayek's ideas on the introduction of moneys, see Martin HellwigWhat Do We Know About Currency Competition? in Zeitschrift fur Wirtschafts Sozialwissenschaften, 105, pp. 565ff.
97. The selection of media of exchange of our hitherto non-monetary commodities. See for this mechanism Carl Menger, Money, in Collected Works, Vol. 4, P. A. Hayek, ed. (1933-36; London: London School of Economics, 1970), esp. chap. 8, sec, 1.
98. Hans F. Sennholz, Money and Freedom (Spring Mills, Penn.: Libertarian Press, 1985), p. 67.
99. It is futile to cite the German hyperinflation of 1923 as indicating "that inflation can reach mindboggling proportions before alternative currencies can gain a foothold (White, Competition and Currency, p. 132). For anyone acquainted with theGerman mentality of this time it is rather "mindboggling" that even blind trust in authority and heavy penalties could not prevent the use of all sorts of other moneys.
100. White, Competition and Currency, p. 131.
101. Cf. Dowd, The State and the Monetary System, p. 185ff; White, Competition and Currency, p. 91ff.
102. For the distinction between economical and political means see Franz Oppenheimer, The State (New York: B. W. Heubsch, 1914), pp. 24ff.
103. For the same reason there can be made no vital distinction between rules and discretion as principles of the conduct of monetary affairs. Every rule prescribing ex ante how much money has to be issued at what times and in what places and circumstance is discretionary by the very fact that it has to be set up by someone. A rule specifying, e.g., different behaviors of central bank officials according to different circumstances cannot even be said to be more "stabilizing" than any pure discretion on their side. It is therefore that rules vs. discretion is a false dichotomy, not because fractional reserve banking has been overlooked as a third alternative (as suggested by Horwitz, cf. Monetary Evolution, Free Banking, and Economic Order, p. 125f.
104. "[T]he choice ought not to be foreclosed by anticompetitive policies" (White, Competition and Currency, p. 162). Unfortunately this attitude is not limited to the ranks of the free bankers. See also Sennholz who seeks "merely freedom" (Money and Freedom, p. 77).
105. White, Competition and Currency, p. 130.
106. Ibid., p. 135.
107. Selgin and WhiteHow Would the Invisible Hand Handle Money?": 1730.
108. Ibid., p. 1719.
109. For plans to attain free banking on a 100 percent gold standard see Mises, The Theory of Money and Credit, pp. 485ff
110. and RothbardAurophobia: or, Free Banking on What Standard?": 107f.