George Selgin Reviews Steil and Hinds

by Don Boudreaux on November 6, 2009

in Books, History, Inflation, Law, Monetary Policy, Trade

There are only very few scholars — and even fewer economists — whose every word is worthwhile to read.  George Selgin is in that elite group.

Here’s Selgin’s review of Benn Steil’s and Manuel Hinds’s wonderful, if flawed, book, Money, Markets & Sovereignty.  The opening paragraphs of the review set the tone well:

Economists generally take for granted, if only tacitly, a teleological view of money’s historical development, according to which it first takes the “primitive” form of mundane commodities such as cowrie shells and cacao seeds, and then advances through various stages, culminating in the national fiat monies most economies rely upon today.

Money, Markets, and Sovereignty offers a spirited rebuttal to this naively “whiggish” perspective. Instead, its authors — Benn Steil and Manuel Hinds, senior and former fellows, respectively, of the Council on Foreign Relations — argue that the principal effect of national monies consists, not in their contribution to economic prosperity, but in their capacity to assist national governments in their efforts “to extract wealth from their population and to exercise political control over them.” The combination of national fiat monies and global markets results, moreover, in “a deadly brew of currency crises and geopolitical tension” that in turn supply “ready pretexts for damaging protectionism.” Steil and Hinds thus see national fiat monies, not as an essential basis for economic progress, but as an imposing barrier to such progress — one which threatens to “throw globalization into reverse.”

And this editorial in today’s Wall Street Journal provides yet more evidence of how national governments use their control over the money supply “to extract wealth from their population and to exercise political control over them.”

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{ 31 comments }

Anonymous November 6, 2009 at 2:21 pm

Sounds very interesting. One of the most fundamental aspects of how we organize society (or don’t) is the money system. Seems like no one has a great answer to this most fundamental aspect of societies and their economies.

Selgins own idea of free banking seems pretty radicle in light of what wrath financial innovation and credit card companies have put upon us.

Sam Grove November 7, 2009 at 12:09 am

It always strikes me how so many people point at problems in a politically dominated system, citing them as failures of a free system.

Anonymous November 6, 2009 at 2:24 pm

Prof. Boudreaux,

I’m curious to know your thoughts on de Soto’s “Money, Band Credit, and Economic Cycles.” In the first half (roughly) of the book, he makes similar arguments to the ones you mention in your post. Specifically, fractional reserve banking and fiat money allow the state to use the wealth of the people to their own ends, thereby putting it at risk. Historically, if I read de Soto correctly, these ends were warlike.

Anonymous November 6, 2009 at 2:27 pm

Neoaustrian — I’ve not read that book by de Soto. But while I am confident that competitive note issue — “free banking” — would be a great boon to both prosperity and freedom, I see no problem with fractional-reserve banking.

Anonymous November 6, 2009 at 2:39 pm

Prof. Boudreaux,

De Soto’s discussion is lengthy; the book pushes 1000 pages. He bases his point in Roman jurisprudence, and I won’t discuss his reasoning here, for it too is lengthy. Essentially, he makes the point that demand deposits are not legally available as money that the bank can use to make loans, historically speaking. The only money the bank can use are time deposits, because these are effectively loans to the bank from the saver. Of course, laws have changed over time because the state likes fractional reserve banking.

De Soto’s problem with fractional reserves goes beyond the legal angle, though. It enters the realm of agency. He points out that banks who engage in lending out demand deposits can appear to increase their own prosperity, relative to banks that don’t, but they now put themselves at risk of a bank run. Runs don’t typically happen in day-to-day business though. Anyway, the state sees how well banks are doing, and proceeds to engage a “central bank” that imposes itself into the banking system. This, I think, is the real danger of fractional reserve banking: it proves too much of a lure for the state.

The Bank of Amsterdam is held up as the best example of a bank that avoided engaging in the lending of demand deposits, but it too eventually began this practice.

Anonymous November 6, 2009 at 2:41 pm

Re: the article in the WSJ regarding the return of the inflation tax, and your previous post about distorting party politics.

Shall we just ignore the distorting influence of party politics in advancing and implementation in the scheme? Shall we also ignore the part party politics played in why such an immense deficit is hanging around the national neck?

Anonymous November 6, 2009 at 2:57 pm

The nice thing is, I think this teleological view is restricted to quick textbook summaries that want an opportunity to include a picture of a big Polynesian rock. Anything you read about fiat currency and revenue raising – the Monte Vecchio, John Law, the Bank of England, etc. – always mentions warfare because, as Selgin says, that was the whole point.

But I don’t think that has to always be a negative story. It fought fascism and it allowed republican governments financed by liberty-demanding creditors to win wars over monarchies financed by whatever treasury they saved up or stole over time (monarchies who had no recourse to creditors who shunned capricious, liberty-threatening monarchs). Of course it isn’t an unalloyed positive story, but neither is it an unalloyed negative story. An important point, I think, is that a state dependent on credit is forced to cede power to it’s creditors in a way that monarchies never had to, and when the creditors of the state are distributed across society, that decentralizes power. In that sense, fiat currencies don’t threaten a liberal, globalized society – they are largely responsible for creating it. And of course, it goes without saying that there are always attendant risks.

Anonymous November 6, 2009 at 3:10 pm

An important point, I think, is that a state dependent on credit is forced to cede power to it’s creditors in a way that monarchies never had to…You are just wrong about this. Most monarchies have depended heavily on their creditors to finance what they could not get by taxes (and of course to finance what they could get by taxes but which they could not immediately lay their hands on). Indeed, because pre-modern bureaucracies were often so small taxes themselves had to be “farmed” out (in France they were literally called “tax farmers”) to individuals who for a slice off the top would collect taxes for the monarch. You are just wrong, wrong, and wrong.

BTW, this was as true of the Roman Empire as it was of the early modern states of Europe as it was of the various Chinese dynasties as it was of the Incan Empire.

Anonymous November 6, 2009 at 3:15 pm

It is true that most monarchies depended heavily on their creditors. However, they used their formidable powers of persuasion in coerce creditors into lending them money. Witness the downfall of the Medici bank, once they began lending money to princes.

The chief method of coercing banks to become creditors to the crown, because they knew the dangers of doing so, was by restricting trade or granting special trade privileges. An example is wool that was exported from the northern countries to the southern countries. A fine book on this is “History of Corporate Finance” by Baskin and Miranti.

Anonymous November 6, 2009 at 3:19 pm

I would argue though that these were mutually beneficial relationships. Anyway the fact remains that creditors were entities which monarchs had to deal with and which they depended upon, particularly to finance the one major activity of government at the time, warfare.

Anonymous November 6, 2009 at 3:23 pm

For a time they were mutually beneficial. Monarchies, however, had a habit of not paying back their debts through various methods. Ultimately, lending to princes led to the downfall of many banks.

You are absolutely right in your second sentence. If you scroll up to where I mention de Soto’s book, this is a point he makes frequently. My hunch is that the Dutch developed the first stock exchange in order to facilitate the hiring of mercenaries because they couldn’t raise a large enough regular army.

Anonymous November 6, 2009 at 3:19 pm

OK, when I say “monarchies had no recourse to creditors” I didn’t realize you’d take me so literally. That was my fault. I’m not saying they didn’t have any creditors. I’m saying creditors have traditionally been much less willing to lend to monarchies than republics (for very obvious reasons). That (1.) gave monarchies the incentive to morph into constitutional monarchies that creditors would feel more comfortable lending to, and (2.) gave republics a great advantage in war time. And you’re exactly right about tax farmers – that’s the whole point. That’s what they were left to rely on in France, while England had access to significantly more credit. It’s not that no credit was accessible in France, but less was. I’m making a marginal point here, not an absolute one.

Anonymous November 6, 2009 at 3:26 pm

I’m saying creditors have traditionally been much less willing to lend to monarchies than republics (for very obvious reasons).

I’d also argue that this is wrong too. The relationship between the French monarchy from the time of Henry IV to that of Louis XVI is perfectly illustrative of this; the French crown (bankrupt that it so often was) depended heavily on its creditors to finance its wars. Of course this generally well known. What is less known is that Prussia and Britain – both monarchies of varying types – were also heavily indebted to their creditors. Both nearly sunk under the weight of their debt – a fate which France actually met.

As for France and Britain and tax farmers, Britain also had its own tax farming system, though it worked differently by being decentralized – so that is the difference between the two.

Finally, France as much access to credit as Britain did; France was after all the most powerful economy in 18th century Europe, had the most powerful land army, etc.

Anonymous November 6, 2009 at 4:03 pm

Yes, but which of the three – France, Britain and Spain – are famous for heavy reliance on creditors and which are famous for defaulting on their creditors? And after the serial defaults, which of the three could raise money at high interest rates and which of the three could raise money at low interest rates?

Britain and Holland consistently had higher debt burdens per capita and lower interest rates than France and Spain.

RE: “Finally, France as much access to credit as Britain did”

Then why did it pay higher rates when it had a bigger economy and a lower total debt burden? In what sense is that “as much access to credit”? I’m having a surprisingly hard time finding a continuous data series on debt burdens and interest rates for France and Britain, except for a few snapshots in James McDonald’s book. But those snapshots indicate consistently higher debt burden per capita, smaller economy, and lower interest rates for Britain. To me, that says “greater access to credit”. Douglass North agreed and also made the liberty-public debt connection.

Anonymous November 6, 2009 at 3:44 pm

Just as a general aside, in the courses on early modern Europe I’ve taken one of the most common themes is the problem of how European states – largely monarchies – were supposed to finance their activities. It was something they put a heck of effort into because all of them had such a hard time getting around their creditors. Independence was something that absolutist monarchs wanted, yet they could not achieve in large part because of the consequences of their desire to be absolutist.

Anonymous November 6, 2009 at 4:08 pm

Right! Liberty and debt finance go hand in hand!

Anonymous November 6, 2009 at 4:26 pm

No, debt finance and absolutism/authoritarianism go hand in hand!

Anonymous November 6, 2009 at 4:30 pm

Then what was this!:

“It was something they put a heck of effort into because all of them had such a hard time getting around their creditors. Independence was something that absolutist monarchs wanted, yet they could not achieve in large part because of the consequences of their desire to be absolutist.”

I thought we were finally agreeing! BTW – I highly suggest you read North and Weingast’s “Credible Commitment in Early Modern Europe” – I think you’ll enjoy it.

Anonymous November 6, 2009 at 4:33 pm

I see at sort of a vicious cycle.

Anonymous November 6, 2009 at 5:00 pm

Well, so long as we are recommending reading:Geoffrey Parker, The Military Revolution: Military Innovation and the Rise of the West, 1500-1800&Daniel Roche, La France des Lumieres (there is an English translation – “France in the Enlightenment”)

Anonymous November 6, 2009 at 4:52 pm

The best argument you can make for public debt is that it double-edged sword. I see the more wicked of those edges being used than the less wicked one.

J Cortez November 6, 2009 at 6:33 pm

Thanks for the link to the review. Agree or disagree with his arguments, I’m a fan of anything Selgin writes.

wbond November 6, 2009 at 7:01 pm

What’s wrong with being whiggish?

Anonymous November 6, 2009 at 4:07 pm

I should say “North and Weingast” – since Weingast is in the Mercatus faculty network, I wouldn’t want to offend Russ and Don by excluding him :)

Anonymous November 6, 2009 at 4:11 pm

Yes, but which of the three – France, Britain and Spain – are famous for heavy reliance on creditors and which are famous for defaulting on their creditors?

All three actually. It just isn’t remembered as much about Britain. Consider that at the end of the Rev. War that Britain was on its knees fiscally and delaying payments, etc. to its creditors.

I’m having a surprisingly hard time finding a continuous data series on debt burdens and interest rates for France and Britain…

Welcome to the early modern period.

To me, that says “greater access to credit”.

No, to me that says that Britain was doing less risky things – generally – than France was doing. France’s position as a land power in Europe explains this in other words.

Anonymous November 6, 2009 at 4:18 pm

As an aside, one of the main reasons why the British quit their efforts during the Rev. War was large part due to the fiscal disarray they were facing and the paranoia they had this would lead to a loss of India. You see this throughout Exchequer documents, etc.

Anonymous November 6, 2009 at 4:14 pm

OK “more famous”. Come on, mommsen1625, this is a relative/comparative question. We’re talking on the margin. I don’t know if historians talk more absolutely, but on an economics blog we’re inevitably going to be talking and thinking on the margin.RE: “No, to me that says that Britain was doing less risky things – generally – than France was doing. France’s position as a land power in Europe explains this in other words.”Another risky thing would be having a “Sun King”, rather than a monarch that was reigned in by the nobles back in the 13th century.

Anonymous November 6, 2009 at 4:24 pm

I don’t know if historians talk more absolutely, but on an economics blog we’re inevitably going to be talking and thinking on the margin.I’m stealing this from someone else, but I’ve always like this myself: historians come in two varieties – lumpers and dividers. Though not a historian, I’m largely a lumper.Well, France was involved in lots of land wars long before Louis XIV. Britain had a natural geographic advantage in being an island nation.

Anonymous November 6, 2009 at 4:26 pm

Sure, but the advantage of public debt and it’s compatibility with the liberal state (which you seem to be admiting in your comment below) don’t mean that such a state can’t get over-extended. Nobody is making that argument! After all, the British were able to get a hell of a lot farther before becoming more hesitant than the Spanish or the French were ever able to. That’s the point. Not that there aren’t eventual limits to borrowing – of course there are! – but that those limits are pushed out further when you have a representative government that doesn’t make creditors skiddish.

Anonymous November 6, 2009 at 4:29 pm

What debt finance does is fuel the dreams of tyrants, idealists, warmongers, etc., even if they cannot fully fulfill those dreams.

Anonymous November 6, 2009 at 4:29 pm

Pardon my denseness – but could explain the quote? I’m intrigued and amused :) And I should say, it’s always great to talk to you – I do economics, but I love reading history when I get to choose what I read. I read a lot of early American history, but a while back I read James McDonald’s “A Free Nation Deep in Debt”, which familiarized me with these issues.

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