George Selgin on Central Banking

by Don Boudreaux on July 27, 2009

in History, Monetary Policy

Recently, George Selgin — author of, most recently, Good Money — was a featured speaker at a debate sponsored by the Don & Paula Smith Family Foundation.  George's initial appearance begins around the ten-minute mark.  His talk and comments are not to be missed.

George is a scholar's scholar.

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{ 31 comments }

JPIrving July 27, 2009 at 9:55 pm

Selgin and Schiff in the same debate. I love the internet. Thanks for the link professor.

Greg Ransom July 27, 2009 at 10:17 pm

Selgin is about as classy as they come.

Kevin July 27, 2009 at 11:25 pm

Selgin was very kind to Schiff after Schiff's pathetic tirade about fiat money. Schiff displays here a very incomplete understanding of money and banking.

Jeremy P July 27, 2009 at 11:39 pm

I would vote for Schiff, but he is no way an intellectual heavyweight.

S Andrews July 28, 2009 at 2:30 am

I can't vote for Schiff, so I am sending him money. Who cares if he is an intellectual. He is not a parasite.

J Cortez July 28, 2009 at 10:23 am

Selgin is awesome. I am a big fan. His research into private coinage and free banking is excellent.

I am a fan of Schiff also. Although Schiff hates fiat money, his position in previous interviews is pretty much a free banking position. He has some stupid ideas about international trade, but he is by far the most insightful guy on TV regarding economic issues. Look up "Peter Schiff was right" and you'll find several videos from 2005-2008 interviews on CNBC, Fox Business Channel, etc, where he lays out almost everything that has happened to the economy in the past 3 years.

Jeremy P said: "I would vote for Schiff, but he is no way an intellectual heavyweight."

As far as voting goes, Schiff is in the process of deciding to run for the senate. Since he's based out of Connecticut, if he does run, he'd be up against Chris Dodd. Dodd is a political hack, through and through. Compared to Dodd, Schiff is a intellectual heavyweight. And S Andrews is correct, unlike Dodd, Schiff is no parasite.

Crusader July 28, 2009 at 1:09 pm

This is a debate that goes back to our founding fathers. Hamilton won, libertarians lost.

Sam Grove July 28, 2009 at 1:50 pm

Hamilton won, the people lost.

dg lesvic July 28, 2009 at 1:56 pm

Have you noticed how ambiguous the Austrian School is now on saving vs spending, with many erstwhile Austrians sharing the Keynesian bias for spending over saving, and, I might add, the Keynesian propensity for barring dissent.

Crusader July 28, 2009 at 6:42 pm

dg – that's the rub isn't it? It's good for an individual to save money, but bad for the economy as a whole if there is too much saving. It's a fault in our current consumerist economy. If our culture were more geared like the Japanese toward taking the longer-view, we could still have the goods we want and innovation. I don't buy the notion that only the American crazy-consumerist style is the only way to breed innovation. Nor do I think the Japanese model is the way to go either with their "lost decade". There has to be a middle ground between the two is all I'm saying.

dg lesvic July 28, 2009 at 7:22 pm

Crusader,

Let's rub out your rub.

From my essay, Macro Schmacro

Economics implies scarcity and the need to economize.

Or, does it?

To the third most famous economist of all time, Lord Keynes, the need was not to economize but consume.

The Great Depression of the 1930s confronted us with the Paradox of Unemployment, the fact that so many men and machines were left idle while there was a desperate need for what they could have produced.

Keynes tried to explain the Paradox of Unemployment by a Paradox of Thrift. Spending is what keeps the economy going and people employed. So, by saving rather than spending, we throw some of them into unemployment. And, without their spending, there will be even more unemployment, in an ever downward spiral, all started by saving. And since the problem was “underconsumption,” it was better to spend and even squander than to save.

That was economics on its head, economics against economization.

You know that, in your own affairs, you cannot spend your way to prosperity. But, according to Keynes, the economy of a nation was different from that of an individual, and thrift, a private virtue, was a public vice.

Hence, two different kinds of economics, Micro and Macro, the economics of the individual, and of the nation.

The macro economists assume that saving withdraws money and therefore purchasing power from circulation. But, even saving money in a mattress would merely force prices downward, and the purchasing power of the money remaining in circulation upward. So, though less money in circulation, there’d be no less purchasing power, for all of it saved would, in effect, be lent to the spenders.

They suggest that, with a lesser amount of money in circulation, suppliers may cut back on production instead of cutting prices. But that is to suggest that they care more for money than the things it buys.

Savings are never a drain upon aggregate purchasing power but an essential factor of its creation. For there is no purchasing power without production, little or no production without investment, and no investment without savings. We lose purchasing power not to savings but mistakes. And while the market would liquidate them and accumulate the means of recovering from them, the Keynesians would accumulate them and liquidate the means of recovering from them, and spend us into the poor house, just like a micro-economic individual.

The Cause and Cure of the Depression

The Great Depression of the 1930s was not caused by the Crash of ’29. There had been crashes before without depressions. The difference this time was the bizarro-eco-nomics of squandering our way to prosperity, propping up a falling house of cards, and driving productive enterprises to insolvency in order to save the unproductive from it.

Empowering the public sector to bail out the private is just giving the bull in the China shop more China to break. Since it had nothing it had not taken from the private, it could not support but only undermine it. Throwing good money after bad, and keeping prices from falling to market clearing levels, our macro-masters could only spend and meddle our way, not to prosperity, but into the poor house and World War II. That is the real legacy of the Compassionate Conservatism of Hoover and New Deal of Roosevelt, and prospect of the Back Door Socialism of the shake-down artists who got us into the current mess and will get us out of it for a small price, unlimited money and power.

Economic stimulus? How could a socialist revolution be anything but a depressant?

The “stimulus” is supposed to stem the tide of “systemic failure.” But, if there could really be such a thing in the market itself, it would occur every time a donut shop went out of business, setting off an endless cascade of falling businesses. In fact, the market has withstood the failure of a great many donut shops and banks, for, no matter how many fail, there are still eager buyers and sellers.

If something is keeping them apart, it isn’t the market. For, it is nothing but buyers and sellers. The only thing that could come between them was the so-called government. Get it out of their way, and they will surely come together again.

Since they need capital to do so, they need saving. Yet, remarkably, even many Austrian School economists share the Keynesian bias for spending over saving, with but one minor difference between them. Whereas the pure Keynesians favor a direct, “fiscal” approach, with the “government” doing the spending, the Keynesian Austrians favor an indirect, “monetary” approach, with the “government” merely pumping up the money supply, in order to stimulate private spending. But spending, public or private, is not what is needed. Capital has been squandered on unproductive enterprises, and trying to keep them afloat is wasteful and futile. What is needed is not more “spending” on them but more saving and investment in new and more productive enterprises.

What is needed is to halt all intervention and let the market find its own way back.

Since a recession is a curative process, purging the system of bad investments, keeping it from hitting bottom keeps it from starting back up again, prolonging and deepening the agony, and turning a recession into a depression. Now we’re rushing to another, and finding out what “spreading the wealth around” really meant: welfare for billionaires, and the biggest money and power grab since the Nazis looted Europe.

If Roosevelt got us out of the Depression, it was only by getting us into World War II.

There was a better way. Another predecessor of Roosevelt’s, Harding, elected in 1920, “inherited…one of the sharpest recessions in American history. By July 1921 it was all over and the economy was booming again. Harding had done nothing except cut government expenditure.”

Modern Times by Paul Johnson, P 216

With a policy of saving rather spending our way to prosperity, he got us out of a downturn without a depression and a world war; and, for that, is the most belittled president of the last century, while Roosevelt is the most admired.

Martin Brock July 28, 2009 at 8:11 pm

I also hoped for more Selgin and less Schiff. Selgin promised more discussion of decentralized alternatives to central banking, and he's better qualified than Schiff to explain them. Selgin understands how money operated under gold standards, as a record of expected value relative to the value of gold, not simply as warehouse receipts for gold.

Selgin could make the case for a monetary policy based on some commodity exchange standard, but he never really had a chance in this forum. It's just not the stuff of popular debates and sound bites for cheering crowds.

Schiff is more in the "notes are not money" and "gold is real money" school. This school has an enthusiastic following, but its theory of money is oxymoronic, has no historical foundation and doesn't provide an effective alternative to central banking.

… the Keynesian bias for spending over saving, and, I might add, the Keynesian propensity for barring dissent.

I don't see anyone barring your dissent.

If people understood that credit is not simply the expenditure of "savings" on productive means (a backward looking perspective) but is the forward looking valuation of expected future production, they'd better understand why economics is not a zero sum game and why the disintegration of unprofitable economic organization requires new extensions of credit (and thus "spending" without "saving") as well as the writing off of bad debts, the creation as well as the destruction of money.

Money obeys no "conservation law", like the conservation of mass in Physics. Writing off bad debts only acknowledges that prior valuation of productive resources, as previously organized, was mistaken. Further extension of credit (which is never ending) accounts for new expectations of the productivity of reorganized resources and has nothing essentially to do with any past saving.

One can argue that persons who deferred consumption in the past should govern extensions of credit, but that's a separate issue, and it's not how credit operated under historical gold standards. Gold bankers could and did leverage their gold deposits, not holding gold reserves equal to 20-40% of their notes as Schiff suggested but often holding no more than five percent, as Selgin stated on EconTalk.

In principle, a free creditor operating under a gold standard could leverage gold in his vault a thousand fold, because his notes record the value of capital securing his loans, not the value of gold in his vault. The constraint on this leverage involves the liquidity of the capital, how easily the banker can convert his claim on the capital into gold to meet demands of his note holders.

Crusader July 28, 2009 at 8:14 pm

Martin – it's true dg's dissent has not been barred… yet. However I often hear leftist commenters tell me to STFU in no uncertain terms. They also talk about how "the righties need to be dealt with". I can only imagine what it means. I just think vigilance is the price we pay to keep our freedom.

Crusader July 28, 2009 at 8:17 pm

dg – I fully understand the difference between micro and macro. However, you can't say that America can sustain over-spending.

dg lesvic July 28, 2009 at 8:20 pm

Crusader,

Yes it has been, by the Keynesian Austrians at ThinkMarkets.

Martin Brock July 28, 2009 at 8:22 pm

Although Schiff hates fiat money, his position in previous interviews is pretty much a free banking position.

In this debate, he sounded more like a Rothbardian, with all the talk of "real money". Of course, banknotes under free banking, even under a gold standard, do represent real capital, as valued by creditors, but they don't simply represent the value of gold or any similar "real money".

Money fundamentally is not a real, tangible commodity like gold. Money is an abstract record of value and can record the value of anything. Money is an accounting device. Money is information, not matter.

dg lesvic July 28, 2009 at 8:28 pm

Crusader,

You wrote,

"you can't say that America can sustain over-spending."

I wouldn't try.

Martin Brock July 28, 2009 at 8:42 pm

Schiff's presentation was informative though. I didn't know for example that the original Federal Reserve Act forbade the central bank to purchase Treasury securities. There's a reform I can get behind. Hardly a generation later (and until very recently), the Fed is buying only Treasury securities and buying an ever increasing volume of them.

At one time, I thought understood the logic of this policy, and I'm still very uncomfortable with a central bank (with a monopoly of money creation) buying privately issued securities, but the Treasury seems clearly to be out of control.

On the other hand (and there is always another hand), Bernanke's recent Congressional testimony, over Fed credit to banks in New Zealand, illuminated some things for me. the Fed's seemingly incredibly expansion of the money supply has less to do with local (i.e. U.S.) politics than with globalization. A global market will eventually embrace a global currency, and a race is on to establish it.

Crusader July 28, 2009 at 11:20 pm

Martin – I would maintain that gold is not a real currency either. There's hardly enough of it to sustain the modern economy. It is useful as a raw material for industrial purposes, and let's leave it at that.

Joe July 29, 2009 at 12:20 am

Even in Japan and Germany and china where the savings rate is high get hit when people decide they have enough goods and services and no longer want to consume them.

MJ July 29, 2009 at 12:20 am

"There's hardly enough of it to sustain the modern economy"

Does that not just make it more valuable, and the weight you pay smaller?

In the Rothbardian sense anything can be a currency so long as it is easily valued and exchanged. Shells were used as currency in this sense, how could gold not?

Schiff makes the point that something has to have an tangible and intrinsic value, not just faith, for to be real money. He doesn't go as far as to say that warehouses (banks) writing notes on assets (gold) it doesn't have is fraud, as Rothbard does (but it wouldn't surprise me to hear it from him).

Martin Brock July 29, 2009 at 4:30 am

In the Rothbardian sense anything can be a currency so long as it is easily valued and exchanged.

Any intrinsically valuable thing can be exchanged for another, but this exchange is called "barter", and this barter involves no "money" by definition. Even if one intrinsically valuable thing, like gold, is commonly bartered, held and marketed primarily as a medium of exchange, still it is an item of barter, and an item of barter is "not money" by definition.

If I exchange an intrinsically valuable thing, like gold or corn or oil or water or anything else, for a record of its value entitling me to corresponding value in the market at a later time, then I've accepted "money" in exchange, by definition. This record needn't have any other use or intrinsic value.

That a medium of exchange has no other use or intrinsic value is a necessary characteristic of "money"; otherwise, the distinction monetized exchange and barter is meaningless.

Rothbard excludes this characteristic from his peculiar definition of "money", and his usage is both unconventional and confusing for this reason, because money more commonly (and in a technical, economic sense) is precisely the item of exchange distinguishing barter from other trade. A "barter" transaction does not use money by definition.

Martin Brock July 29, 2009 at 4:49 am

Schiff makes the point that something has to have an tangible and intrinsic value, not just faith, for to be real money.

But this point is clearly false as a matter of historical fact. I deal in FRNs every day, and FRNs have no tangible, intrinsic value as a matter of fact, any more than my credit in a grocer's ledger has intrinsic value. This accounting entry only records the grocer's willingness to provide me intrinsically valuable goods from his store. It is not an intrinsically valuable good itself. Surely, we don't want to blur the distinction between this record of credit and goods I later consume from the store.

Walmart gift cards of standard denomination could act as money, and we could use them as money without any FRNs. We imagine obtaining a Walmart gift card by exchange FRNs for it, but this exchange is not necessary. Walmart could simply pay me for other things in this medium of exchange. It could pay its own employees and suppliers with the cards, and they could in turn exchange the cards for other goods and so on.

Of course, Walmart could also raise prices on goods in its stores, to absorb more gift cards, and these price increases would be "inflation". If consumers objected to this inflation, Walmart might charge different customers different prices depending on some expiry date on their gift cards, so you'd always pay the price on the date a card was issued rather than some later price. Various U.S. currencies actually operated this way historically.

Martin Brock July 29, 2009 at 4:57 am

Walmart cannot create a new currency this way, largely because it must pay taxes in FRNs.

Chuck July 29, 2009 at 5:27 am

Money is simply the most marketable good in an economy. Which means that you can "barter" it for almost any other good.

Credit is a promise; usually to provide money at a certain date or request.

Savings must necessarily entail forgoing present consumption. Regardless of the monetary system you are utilizing, you cannot have your cake and eat it too.

Martin Brock July 29, 2009 at 7:44 am

Money is simply the most marketable good in an economy. Which means that you can "barter" it for almost any other good.

Obviously, you may use the word "money" however you please, but in common parlance, and in more specialized economic usage as well, "money" excludes "barter" definitively.

http://dictionary.reference.com/browse/barter

Money, distinct from a barter good, even the most common barter good, is a record of credit, principally short-term credit since money typically records only current value while values typically rise.

Credit is a promise; usually to provide money at a certain date or request.

No, money is a credit itself. One can trade a promise of unspecified goods in the future for specified goods currently. That's money. A promise of money itself in the future is money of a second order, like the bond of a monetary authority.

Martin Brock July 29, 2009 at 7:53 am

Savings must necessarily entail forgoing present consumption.

Credit financing investment also competes with present consumption, and the word "saving" sometimes describes this credit-fueled investment in technical parlance, but people commonly imagine "savings" as preserving something produced (or earned) previously for future use rather than using its value currently. So we speak of "accumlating" savings for example.

Credit does not fundamentally require any past production. Credit can exist on a frontier before anything is produced. It can value only expected future production.

Regardless of the monetary system you are utilizing, you cannot have your cake and eat it too.

But I can pay you today for a cake I expect you to deliver tomorrow, and I can do so without first producing anything of value myself, because I can pay with the promise of what I expect to produce tomorrow after fueling myself with your cake. This is how a system of credit "bootstraps" market organization.

indiana jim July 29, 2009 at 11:12 am

I join others in expressing the sentiment that Selgin gave a great account of himself; he was far and away the best on the panel, the woman sitting at his right was THE WORST (for lots of reasons). The other thing Selgin did very well was showing that he had "class"; there were many many points at which it must have been difficult for him to wait his turn while listening to various and sundry drivel from others. Nevertheless George was gracious, much in the manner that made Milton Friedman so effective in debates and panel discussion.

Sam Grove July 29, 2009 at 12:29 pm

I wonder what the price of gold would be without the speculative factor.

Perhaps the use of gold as money may be described as indirect barter if the reason someone accepts gold in payment is to be able to exchange it for consumables.

Chuck July 29, 2009 at 12:31 pm

“No, money is a credit itself”

You are confusing money with notes. At various times and places salt, grain and livestock have been used as money. People were willing to accept these in exchange for almost any other good or service because almost everyone had a use for these commodities other than as money.

“I can do so without first producing anything of value myself”

Someone must have produced something of value in the present otherwise what are we exchanging? If I trade you a cake in exchange for your promise to provide me two cakes in the future, then I have given up my use of the cake in the present. If we both exchange promises, then nothing has been saved/invested because nothing has been produced. Such contracts can be useful, but no one is loaning/investing anything.

Anonymous July 30, 2009 at 2:18 pm

You are confusing money with notes. At various times and places salt, grain and livestock have been used as money. People were willing to accept these in exchange for almost any other good or service because almost everyone had a use for these commodities other than as money.

You are confusing barter with monetized exchange. Certainly, money evolved gradually from barter, but to call salt “money”, even if it was a common medium of exchange, is to blur the distinction between a barter good and a unit of account, accounting for goods exchanged without being a good exchanged.

Money is a unit of account. Money needn’t have any physical manifestation at all (or hardly any). It can be bits in a computer’s memory or even your memory and mine. The same money can exist in many different memories simultaneously. Money is pure information.

“I can do so without first producing anything of value myself”

Someone must have produced something of value in the present otherwise what are we exchanging?

We can exchange only the promise of future value. You promise to harvest timber and produce lumber. I promise to build houses. A farmer promises to feed us while waiting for a new house. A banker promises to account for all of this production by extending each of us credit to purchase the goods and services of the others (including his own) until houses exist, which could be months after we first transact.

If I trade you a cake in exchange for your promise to provide me two cakes in the future, then I have given up my use of the cake in the present.

You could trade this way, but you needn’t have a cake at all to trade the promise of one. Just as you can accept the promise of two cakes in the future, you can also offer the same promise, and you can even exchange a promise for a promise.

If we both exchange promises, then nothing has been saved/invested because nothing has been produced.

Our resources have been pledged. All investment begins so.

Such contracts can be useful, but no one is loaning/investing anything.

In the housing scenario, we each invest our opportunity to labor in the future, because you promise to harvest timber and produce limber while I promise to build houses and so on.

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