Selgin Enters the Blogosphere

by Don Boudreaux on May 31, 2011

in Monetary Policy, Weblogs

Here’s the best news that I’ve encountered in a while: George Selgin is now blogging!

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vikingvista May 31, 2011 at 8:09 pm

About time.

Marcus May 31, 2011 at 9:49 pm

No, it’s about banking! ;-)

vikingvista June 1, 2011 at 1:01 am

About time…value of money, then?

Methinks1776 May 31, 2011 at 8:44 pm

Another can’t miss blog. Thanks for letting us know. That’s quite a group of bloggers he’s gathered there.

Tms May 31, 2011 at 9:23 pm

The econtalk episode where he and Russ discuss free banking is one of my favorite econtalk episodes.

Octahedron June 1, 2011 at 3:20 pm

Can you link it to me?

tms June 2, 2011 at 11:00 am
MIchael E. Marotta May 31, 2011 at 9:52 pm

As a numismatist, I profited greatly from Selgin’s work on The Buttonmakers. In fact, it tied in with Jane Jacobs’s The Economy of Cities in which she contrasted Birmingham with Manchester.

I recently read The Denationalisation of Money and Selgin seems to have strayed from that work’s important thesis that absent government controls, a free market in banking would impel toward tighter credit and stronger promises. As I understand it both from Hayek and from history, there is no telling what forms banking could take, once, like computing, it is unregulated. I liked Hayek’s analogy to the art dealer who can make lithos of famous works: he much maintain their market value. For that, I look to share stocks. I have a collection of antique stocks and bonds. They take a variety of forms and formats – some have par value, others do not; some pay dividends, others do not; some have voting rights, others do not; and so one – and yet in every case, the market can bid them up (or not) far beyond their issue price or par value. Thus, too, with money from banks.

I have examples of Disney Dolllars, Canadian Tire Money, McDonald’s Coupons and many many more. We have enough examples to suggest validated theories. Unfortunately, economists are not numismatists.

kyle8 May 31, 2011 at 10:32 pm

I often wonder, is there no midway point between a national bank monopoly and totally unrestricted banking?

My best guess is that with unrestricted banking you would indeed get a tendency for high reserves and sound lending practices.

However, there would be many many incidences of stupidity, bankruptcy and out right fraud as well.

I would be happier if we just kept the basic system we have now, but greatly restrain the monetary power of the Fed, and allow banks to operate more freely of the Fed’s control, while still keeping some sound lending and reserve requirements.(in fact more conservative ones than we have right now).

Sam Grove May 31, 2011 at 11:46 pm

However, there would be many many incidences of stupidity, bankruptcy and out right fraud as well.

So let’s nationalize stupidity , bankruptcy, and outright fraud…right?

The market seeks correction for such things, political government seeks to prevent corrections.

vikingvista June 1, 2011 at 12:37 am

“I often wonder, is there no midway point between a national bank monopoly and totally unrestricted banking?”

There is a whole spectrum of points between the status quo and liberty.

kyle8 June 1, 2011 at 5:15 am

Well in this case I might be more prudent to chose one just short of liberty. Since we have an imperfect system, but one which has done a pretty remarkable job of funding our financial requirements through over a half century of incredible growth since world war two.

The conservative in me says not to make wholesale changes in the direction of something that hasn’t really been tried in two hundred years. Maybe we could experiment first.

I know our libertarian ideas always work great on paper, maybe not as expected when they meet the real world.

vikingvista June 1, 2011 at 12:17 pm

It is scary to give up the familiar, even when the familiar consists of the abuse of innocents. Less violence is better than more. I’ll take what I can get.

tkwelge June 1, 2011 at 2:53 pm

“Well in this case I might be more prudent to chose one just short of liberty. Since we have an imperfect system, but one which has done a pretty remarkable job of funding our financial requirements through over a half century of incredible growth since world war two.”

A remarkable job indeed…

I have trouble with the idea that the quality of a system can be measured by its ability to keep fraud afloat…

George Selgin June 1, 2011 at 8:06 am

Your “best guess” puzzles me, Kyle–indeed, it is the sort of guess I’m trying hard to combat by pointing to contradictory evidence. How do you square your guess against the evidence showing that, with the exception of the banks I discuss in the Free Banking post, there have been none of any significance that held more than about 33% reserves even in early modern times, and that since then ratios have been much smaller? How do you reconcile it with the Scottish system’s reserve ratios of between .5 and 2.3% ca. 1810? Were these low ratios the products of some “restriction” at work in the Scottish system and, if so, which?

Of course anyone is free to “guess” anything they like about the consequences of unregulated banking. But to be of any merit such guesses ought to be more than sheerguesses. They ought to have some basis, whether inductive or deductive. I know of neither basis warranting the conjecture you make, which is also tirelessly repeated by the 100-percent crowd–as if mere assertion were always a match for any amount of evidence.

Martin Brock June 1, 2011 at 10:29 am

“Fractional reserve” seems a misnomer to me. The expression suggests that the standard of value (gold or whatever) is the only thing a bank has “in reserve” to satisfy depositor demands. Free banks also have the collateral securing their credit, even if this collateral is only the valuable labor of a borrower. In fact, a free bank needs nothing else in “reserve” in principle.

Under a gold standard, a bank must exchange other assets for gold before satisfying a depositor demanding the standard, but this requirement is an arbitrary artifact of the gold standard, and the requirement seems archaic to me. I’m one of your biggest fans, but I don’t get the gold standard, and I certainly can’t advocate gold or any other single commodity as a statutory legal tender for all debts.

As Proudhon realized, the labor of borrowers itself could be the standard of value in principle. Labor is hardly a commodity, so putting this principle into practice might be difficult, but explaining the idea to people might help them to understand why “fractional reserve” banking is not fraud.

Unlike gold, practically all of us possess labor, and unlike gold, our labor is effectively inseparable from us. Unlike gold, the value of all labor is a substantial fraction, even a majority, of the value of everything that human’s value, and its possession is necessarily decentralized.

By contrast, the total value of all gold is a small fraction of the value of everything, and concentrating the possession of gold is very practical. A gold standard invites statesmen to construct rents so as to concentrate gold in the hands of a few (their own hands), and this concentration poses obvious problems for a system of credit with gold as the standard of value and legal tender.

kyle8 June 1, 2011 at 1:23 pm

My assumption was based purely on the thinking that while there was competition between Free banks and Fed controlled banks that the Free banks would have to offer more security for depositors since they would not be a part of FDIC insurance.

Of course if they did not, but instead had even smaller reserves then I would not risk my money in one.

Methinks1776 June 1, 2011 at 2:59 pm

Kyle8, there is no magic reserve amount that makes a bank (or any leveraged entity) completely safe. Your fear of throwing away the current Frankenstein system is pretty irrational.

tkwelge June 1, 2011 at 3:00 pm

“How do you reconcile it with the Scottish system’s reserve ratios of between .5 and 2.3% ca. 1810? ”

Rothbard makes a compelling argument that the Scottish system was hardly a system of “free banking.”

I really like you, Selgin, but you seem to be almost angry at Rothbard. I don’t get it… You both essentially want the same thing. I like how you ask your “questions” without recognizing the attempts that some people have made at answering them.

Personally, I’m closer to your camp than Rothbard’s, but don’t bite the hands of your potential allies.

tkwelge June 1, 2011 at 3:04 pm

“From the beginning, there is one embarrassing and evident fact that Professor White has to cope with: that “free” Scottish banks suspended specie payment when England did, in 1797, and, like England, maintained that suspension
until 1821. Free banks are not supposed to be able to, or want to, suspend specie payment, thereby violating the property rights of their depositors and noteholders, while they themselves are permitted to continue in
business and force payment upon their debtors.”

Is Rothbard way off base here?

George Selgin June 1, 2011 at 3:44 pm

Actually, tkwelge, it isn’t so much Rothbard as his devoted followers who raise my hackles, in part because of their excessive reliance upon his work. For instance, Rothbard’s screed on Scottish banking has been refuted by White long ago, yet continues to be referred to as if it was never answered despite free bankers repeated references to White’s reply (in the second edition of his book on Scotland, which is readily available online from IEA). If I had a nickel for every time I had to point this out, I could retire!

Besides, the 100-percenters and the free bankers aren’t on the same side. I consider those who would ban fractional reserve banking to be no less enemies of freedom, and of economic prosperity, than apologists for central banking. One group wants to inflict inflation and major cycles on the people; the other wants to deprive them of what has historically been a very important kind of financial intermediation. A pox on both their houses!

vikingvista June 1, 2011 at 4:06 pm

“I consider those who would ban fractional reserve banking to be no less enemies of freedom”

This is precisely the reason the 100%-reserver Rothbard opposed banning fractional reserve banking. Self-proclaimed followers of Rothbard who advocate banning fractional reserve banking don’t know the first thing about Rothbard.

tkwelge June 1, 2011 at 10:07 pm

Could you, I don’t know, point out where Rothbard is wrong or at least point me to the valid literature? I’ve managed to find White’s response and I’m reading it now. Unless Rothbard is outright making up facts, it is hard to see how the scottish example represents true free banking separate from government.

George Selgin June 2, 2011 at 4:24 am

As you’ll see as you go through White’s essay, Rothbard made a number of inaccurate claims about Scottish banking, including the claim that the Bank of England served as a Lender of Last Resort to the Scottish system.

As for the suspension of 1797-1821, as White observes, it would have been problematic for the Scottish banks to retain a distinct “gold pound” while England switched to a paper pound. There is, perhaps surprisingly, no evidence that Scottish bank’s depositors and note-holders objected to the decision, though in principle they might have brought suit–whether successfully or not is difficult to say.

Martin Brock June 1, 2011 at 9:51 am

Or we can dump the basic system we have now, and you can extend credit through an institution retaining the lending and reserve requirements that you wish the basic system we have now would establish. If you don’t find such an institution, you may create one. You get what you want, and if I want something else, I also get what I want.

What’s the problem with this approach? Maybe your chosen bank can never fully insulate itself from systemic effects associated with my chosen bank, and vice versa, but the current system obviously doesn’t insulate you from systemic effects either. It insulates some people from their own poor lending practices, but if you’re an unemployed construction worker in Nevada right now, the current system hasn’t protected you.

Imagining that any system of credit can always protect everyone from loss is delusional. Risk is unavoidable in reality. Someone always bears the risk. Socializing the risks while “privatizing” the rewards of extending credit is the raison d’être of central banking.

kyle8 June 1, 2011 at 1:27 pm

Perhaps, perhaps, perhaps. Nevertheless, despite the current downturn our present system has a pretty good track record.

I don’t like throwing the baby out with the bathwater. Like I said, why not do some small scale experimentation? A lot of things have changed since the late eighteenth century.

Martin Brock June 1, 2011 at 3:48 pm

I’m all for small-scale experimentation. TARP and QE1&2 weren’t exactly small-scale. That’s the problem.

vikingvista June 1, 2011 at 6:18 pm

“our present system has a pretty good track record”

Yeah, we better temper any talk about ending the abuses of the Federal Reserve system. Following your cautious conservative principles, we better tread lightly on altering America’s foreign wars, the illegal drug trade, public education, the income tax, Medicare, and Federal government debt as well. After all, we’ve done pretty well with all of those things. The present system has a pretty good track record.

Tms May 31, 2011 at 11:02 pm

“My best guess is that with unrestricted banking you would indeed get a tendency for high reserves and sound lending practices.”

Selgin argues that reserves may actually be very low , but bank capital would be high. Or at least that is the way it was in Scotland when they had free banking- reserves as low as 1-2 percent.

Martin Brock June 2, 2011 at 9:20 am

He should emphasize this point and frequently explain the distinction between a bank’s “reserves” and its “capital”. Some banking systems (including Canada’s healthier system) have no reserve requirement. A bank with no reserves at all is very possible, and a bank with neither reserves nor capital is also possible. A bank’s depositors could hold practically all of the capital. The bank could simply provide an accounting service to individuals extending credit individually and accepting all of the risk individually.

DG Lesvic June 1, 2011 at 4:29 am

Wanna Bet that that will just be another of those “Austrian” blogs that abuses or banishes critics altogether.

Watch for someone named Nikolaj, who gives those people fits.

If he shows up, that’ll be fun.

DG Lesvic June 1, 2011 at 4:31 am

By the way, those people have a hopeless contradiction between their Free Banking and Monetary Equilibrium, since the monetary discipline of their Free Banking would exclude the inflationism of their Monetary Equilibrium.

Sam Grove June 1, 2011 at 1:20 pm

If we’re agreed on free banking, what else needs to be argued?

So what if some think there should be 100% reserves while others do not?
With free banking, people can shop for banking services wherever they choose. If some want to impose reserve requirements, then they aren’t advocates of free banking.

DG Lesvic June 1, 2011 at 2:21 pm

Sam and Jeff right below have it right.

The free market itself will sort all this out.

The question is not what form the final system will take but whether the free market should be permitted to determine it, and the most important issue then is still whether there should be a free market or not. And why shouldn’t there be? Why should I give someone tthe power to make my decisions for me? Obviously that makes no sense, but giving him a key not just to my vault but my neighbor’s vault, that’s a different matter, and the real issue.

vikingvista June 1, 2011 at 4:10 pm


True free market advocates know that the market would also provide adequate solutions–if solutions are needed–for many of the things that most people believe should be illegal and enforced by the state.

jeffmeh June 1, 2011 at 1:46 pm

I would think that a truly free market would allow for competing models, with the only government protections being provision of basic criminal and civil recourse in cases of larceny, fraud, and breach of contract. A bank creates a basic contract that stipulates policies regarding reserve ratios, mismatch duration profiles, etc., and people vote with their feet (deposits). If some consumers want fully guaranteed principal, some models would support that. If others are willing to take on additional risk to chase a better yield, other models would support that. Better models would thrive, bad ones would fail.

Of course, I suspect that such failures would inevitably spur populist calls to “do something,” and we would end up in a situation similar to where we are today. Disclaimer: what I lack in economic training I more than make up for with cynicism.

vikingvista June 1, 2011 at 4:49 pm

Fraud and breech of contract the free market already has commonly used solutions for. I say keep the devil out of it.

jeffmeh June 2, 2011 at 4:00 pm

Where is this free market and those commonly used solutions of which you speak? I agree with your sentiment, but I would be willing to give the government civil and criminal jurisprudence limited to protection of person and property, in exchange for truly free banking.

vikingvista June 2, 2011 at 6:09 pm

Off the top of my head: retainers, escrows, installments, referrals, publicity, arbitration, consumer groups, inspectors, appraisers, insurance.

That’s my 60 seconds worth. Maybe others can add to the list.

jeffmeh June 3, 2011 at 3:42 pm

All good mechanisms, many of which I use regularly in my business ex ante to prevent problems. My point is that I do not currently see options outside public criminal and civil law to pursue restitution ex post, if, say, the banker ran off with my money, except for perhaps calling my uncle to break some kneecaps. But if we are talking of hypothetical free banking, I concede that I would prefer hypothetical privatized law and order.

vikingvista June 3, 2011 at 4:31 pm


Several of those solutions that I mentioned ARE ex post solutions. The choice is yours whether it is worth the ex ante cost. And as a free man, you SHOULD have that choice.

vikingvista June 2, 2011 at 8:41 pm

“I would be willing to give the government civil and criminal jurisprudence limited to”

That’s like saying you’d be willing to give Genghis Khan a couple of acres at the outskirts of your kingdom.

jeffmeh June 3, 2011 at 3:44 pm

Protection of person and property from the force of others is a valid role of government that I can support, but I agree that history has shown that the camel follows the nose into the tent.

vikingvista June 3, 2011 at 4:37 pm

“Protection of person and property from the force of others is a valid role of government that I can support”

It is a valid role for free people. It cannot be a valid role for government, because government cannot act in that role without itself using such force against others.

But I understand that it is a contradiction that you support.

jeffmeh June 6, 2011 at 1:09 pm

Viking, I believe we are debating minarchism vs. anarchism, and that we basically agree on the rights of a free people.

A free person has a right to use force only to defend his individual rights from coercion. A free person can voluntarily engage other free persons to help defend such rights. Cannot free persons voluntarily create a state limited to defending such rights? Why would a state that initiates force only in self-defense on behalf of its citizens not be consistent with the notion of a free people.

Whether the state will stick to that limited scope is a different question, and I am admittedly skeptical there.

Thanks for the civil discussion.

vikingvista June 23, 2011 at 1:59 pm

“Cannot free persons voluntarily create a state limited to defending such rights”

Of course not. A state is not a voluntary organization. A state is compulsory. There is no such thing as a state which does not employ violence against innocent and unwilling participants. At its very minimum, the state employs violence to suppress any and all competition to its monopoly authority.

The state and liberty, are contradictory concepts. You may believe that contradiction is acceptable or necessary, but such a belief doesn’t change the logic.

WhiskeyJim June 1, 2011 at 2:02 pm

I am confused by Selgin’s post.

1. All 100% reserve banking examples he cites were government run. Are their failures examples of fractional reserve banking merits over high reserves, or failures of government bureaucracy to emulate fair market value?

2. An unregulated banking market would surely find numerous reserve percentages with accompanying advertising on confidence. I wonder why there is such an either/or conception out there.

3. One thing we do know for sure: survival in a free banking system would require much higher reserves than today’s governmental laws and Basil I, II and III. In the financial crisis, not only were Ninja loans made with nothing down, CDOs allowed ‘investments’ on top of those loans, exponentially increasing risky exposure to what turned out to be incestuous parties. In a free banking environment, those practices would quickly go away.

The choice then is not between today’s fractional reserve system and a 100% reserve system. It is the merits of allowing a market to work. I do not understand the debate.

Relatedly, one of the Left’s now popular jabs at Ryan’s suggestion that a market be introduced to Medicare is that there are no cost controls. This is jaw dropping to me; ‘pundits’ do not believe markets drive cost down?

In both examples, one either believes the market will find a balance between profit and survivability while driving down price to the consumer, or one does not believe it.

That is the real debate, and presuming what form the reserve and capital structure would take is really just a fanciful and unknowable dinner conversation.

George Selgin June 1, 2011 at 3:58 pm

“One thing we do know for sure: survival in a free banking system would require much higher reserves than today’s governmental laws and Basil I, II and III.”

Presumably you mean not redserves but capital. The Basil accords don’t impose cash reserve requirements; and Scottish banks survived very well with cash reserve ratios that were low by modern standards until Peel’s Act took effect in 1844.

The point of my post, by the way, was simply to point out–as I thought I made clear–that gthere has never been a 100-percent system of any importance that wasn’t government sponsored. That they all ended up failing was a fact of secon dary importance. 100-percenters who insist that it rather than fractional reserve banking will prevail on a free market have to account for the fact that (1) governements, which they treat as always favoring fractional-reserves, where in fact responsible for the few known 100-percent bank experiments and (2) that no 100-percent bank ever seems to have gotten off the ground without a big helping hand from big brother.

I hope this goes some way toward addressing your confusion.

WhiskeyJim June 2, 2011 at 3:28 am

Thank you George, for your reply.

I have read some of your work. I find the history of banking fascinating, and your understanding and attention to detail makes for attractive and informative reading.

I am seduced by Rothbard’s views, but I believe my comment above is in agreement with you that a banking free market would doubtless be comprised of many variations of Balance Sheets. My confusion was that I was unaware that 100% advocates sought to impose that rule on a free market.

Martin Brock June 2, 2011 at 9:41 am

Rothbard himself would impose 100% reserve banking on anyone, but he throws around words like “fraud” frequently, referring to redemption in a legal tender “on demand” for example. He uses these words more carefully than his followers, but he uses them frequently enough to encourage the following. As Selgin knows, the fine print on banking contracts never promised the terms that 100%ers imagine, regardless of words like “on demand” removed from this context.

Needless to say, if you really want “100% reserve” banking, you hardly need a bank at all. Bury your gold somewhere. Unless you’re extraordinarily wealthy, you can hold all of it with one hand.

vikingvista June 2, 2011 at 1:20 pm

“As Selgin knows, the fine print on banking contracts never promised the terms that 100%ers imagine”

You’re entirely right about Rothbard. Some Rothbardians don’t seem to realize that Rothbard didn’t advocate for state regulation of fraud–or of anything else.

But I just spent the last half hour going through my BoA checking account agreement looking for a restriction on withdrawing funds. I only looked at my BoA account, and admittedly, I could’ve missed something. I also did a search on “closing an account” looking for some indication that the bank does not promise unqualified true and literal on demand checking deposits (i.e. an unqualified promise that it can immediately pay out more reserve funds than it possesses).

Have you found such wording in your banking agreement?

Or are you referring to the promise of FDIC and FR bailouts of banks, should the need arise? Certainly an ACME money making machine could make such overpromises possible. But still, it seems there would be a delay that I have not yet found in my banking agreement. Some banks require mailing a form to close an account, but I don’t see that requirement with BoA.

BoA does offer savings, money market, and CD accounts under terms which I think Rothbard might not call fraudulent, but I’m not so sure about their checking accounts.

Martin Brock June 2, 2011 at 8:22 pm

I didn’t refer to modern bank accounts. I referred to bank accounts under the gold standard in the free banking era. These banks didn’t promise unqualified redemption of their banknotes in gold, and their loans were callable. A central bank as lender of last resort and the FDIC are alternatives to these earlier, free banking policies.

vikingvista June 2, 2011 at 8:46 pm

“These banks didn’t promise unqualified redemption of their banknotes in gold”

The question is: Did banks promise their depositors unqualified withdrawal of their on-demand deposits?

You have a reference, or maybe a useful search phrase, handy?

Martin Brock June 2, 2011 at 9:42 am

I meant to write “Rothbard himself would [i]not[/i] impose …”

Martin Brock June 2, 2011 at 9:42 am

I meant to write “Rothbard himself would not impose …”

I really hate the fact that I can’t edit here anymore.

J Cortez June 2, 2011 at 2:26 pm

This is great news.

George Selgin June 2, 2011 at 5:23 pm

Actually in arguing that FR banking was fraudulent, Rothbard could hardly escape implying that the polizei, or some anarcholibertarian equivalent, ought to shut it down. And he certainly did argue for setting up “anti-bank vigilante squads” charged with organizing runs and otherwise making life impossible or at least miserable for such bankers. I always wondered about this: if Rothbard believed people were being systematically duped, then wouldn’t just informing them suffice to make them run on their banks–why speak of “squads”? And then wouldn’t it make still more sense to organize, not “anti-vigilante” squads, but rather 100-percent banks that could thrive on the money withdrawn from the FR banks whose fraud was being revealed? Finally, if that would be a good idea, why hadn’t any of those excellent entrepreneurs Rothbard and other Austrians are always telling us about ever figured it out? (Please don’t answer by appealing to deposit insurance: before 1967, only one country had it; and before 1934 none did. That leaves plenty of time in which the entrepreneurs might have made hay.)

vikingvista June 2, 2011 at 7:37 pm

In spite of Rothbard’s advocacy of organized voluntary action against FR institutions, I think he was of the opinion that the usual market forces would render FR banks uncommon. Although I do think he was technically correct about the fraud, it is a trivial matter to overcome with little change in how banks operate. The fraud claim was a happy convenience for his belief FR banking caused pathologic booms and busts. I think that he would’ve found compelling your explanation of how free markets would naturally regulate fractional reserve levels. He passed away too soon, and unlike Rothbard during his own life, some of his followers seem incapable of growth.

Sam Grove June 3, 2011 at 10:38 am

I can think of only one way 100% reserve banks could function, that’s by charging service fees.

vikingvista June 3, 2011 at 1:17 pm

Rothbard’s analogy was grain warehousing. When you deposit your grain in someone’s elevator, you get a receipt for that amount, redeemable on demand. The sum of all circulating on demand receipts totals exactly the sum of grain in the elevator. You pay the elevator owner a warehousing fee. The owner does not issue multiple receipts for the same bushel of grain, lest he be discovered (by a run on his elevator) to be committing fraud.

And at the same time, there are other market mechanisms whereby you can loan your grain to someone (perhaps through a broker) in return for an interest payment. There are analogous methods for loaning your money.

His point was that what some people (FR bankers) could legally do with one good (money), nobody anywhere else could do with any other good without committing fraud.

George Selgin June 4, 2011 at 5:42 am

Right: grain warehouses aren’t banks. The law since ancient times, for good practical reasons, determined that coins–loose ones at any rate–were an exception to the rule that posession isn’t ownership. So title effectively resides with them. You could sue a money-changer or banker for not honoring a promise to pay, but not for having made illegitimate use of “your” coins. The remedy in any case was payment of the promised sum, not the return of specific property. So if you didn’t like the fact that part of your deposit was being lent, you could accomplish nothing more by going to court, had the court been willing to recognize your claim of ownership, than by simply asking to redeem the deposits.

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