Sunday, November 30, 2014

David Glasner — What Is Free Banking All About?

I notice that there has been a bit of a dustup lately about free banking, triggered by two posts by Izabella Kaminska, first on FTAlphaville followed by another on her own blog. I don’t want to get too deeply into the specifics of Kaminska’s posts, save to correct a couple of factual misstatements and conceptual misunderstandings (see below). At any rate, George Selgin has a detailed reply to Kaminska’s errors with which I mostly agree, and Scott Sumner has scolded her for not distinguishing between sensible free bankers, e.g., Larry White, George Selgin, Kevin Dowd, and Bill Woolsey, and the anti-Fed, gold-bug nutcases who, following in the footsteps of Ron Paul, have adopted free banking as a slogan with which to pursue their anti-Fed crusade. 
Now it just so happens that, as some readers may know, I wrote a book about free banking, which I began writing almost 30 years ago. The point of the book was not to call for a revolutionary change in our monetary system, but to show that financial innovations and market forces were causing our modern monetary system to evolve into something like the theoretical model of a free banking system that had been worked out in a general sort of way by some classical monetary theorists, starting with Adam Smith, who believed that a system of private banks operating under a gold standard would supply as much money as, but no more money than, the public wanted to hold. In other words, the quantity of money produced by a system of competing banks, operating under convertibility, could be left to take care of itself, with no centralized quantitative control over either the quantity of bank liabilities or the amount of reserves held by the banking system.…
Uneasy Money
What Is Free Banking All About?
David Glasner

14 comments:

Ralph Musgrave said...

Free banking (at least according to the first sentence in the link below) is a system where there is no central bank. So presumably there’s no base money. So what about what MMTers call “savings desires”, i.e. the desire for Private Sector Net Financial Assets? A slight problem there, I think.
http://www.iea.org.uk/sites/default/files/publications/files/upldbook115pdf.pdf

Matt Franko said...

This Glasner guy needs a heavy dose of Bill Black imo....

Brian Romanchuk said...

The idea appears to be that there are no required reserves. Canada already has that, and we have a central bank. The central bank controls clearing, and acts as a lender of last resort.

Banks hold government paper for liquidity management. Thus the net savings flows work roughly the same way.

Matt Franko said...

Kaminska: "systems are cyclical"

NOT TRUE.

A system can be cyclical or not.... ours has been seen by some operating in a somewhat cyclical fashion over short time periods but this is not a fait accompli. .

We absolutely possess authority to operate our economic systems in a more linear fashion....

this is not so apparent to people with higher amounts of libertarianism in them...

Matt Franko said...

How is going from 2 humans to now 7B humans exhibiting cyclicallity or equilibrium?

Tom Hickey said...

Ralph, he says later in the post that his use of "free banking" is different from other uses. from what I can determine, he means endogenous money in the sense of providing the quantity demanded based on cost (terms)rather than exogenous money in the sense of a fixed quantity and letting cost (interest rate) float. In his notion of free banking banks fix the terms (cost to borrower) and let quantity float with demand. In this view,

I assume that increasing liquidity preference is the manifestation of the law of reflux as people save more (and deleveraging is saving) and borrow less. But the law also operates though continual payment of principal and interest on schedule so that the deposits created by loans continually "reflux" to banks in a creditary system using accounting entries rather than notes.

The traditional notion of free banking depended on banks issuing notes. His notion of free banking includes a digital creditary system without any need for notes.

Neil Wilson said...

Free banking is what we already have.

The banks liabilities are pegged to the fiat currency - hence why they are expressed in dollars or pounds or whatever. Otherwise they would be denominated in themselves.

That means they are convertible on demand. So the bank has to destroy its own liabilities and supply the peg liabilities, or take the peg liabilities and create it's own liabilities.

The constraint on the bank is the same as the gold standard - that people will take their bank liabilities and convert them to the peg liability.

The drain to Government bonds and national savings in the existing system is precisely that effect. The banks have to bid back liabilities from the drains or they run out of pegged assets.

Similarly for money to move between private banks, one private bank has to take a liability in the other and create its own in exchange. That is what the interbank lending system achieves at the end of the day - pegged assets of some or all of the other banks in the system and the main peg.

I continue to find it amusing that all these words are spilt asking for exactly what we already have.

Anonymous said...

Quote: "I continue to find it amusing that all these words are spilt asking for exactly what we already have."

Great isn't it? I haven't involved myself in political discussions for some time now because the plebs are too stupid to even know that most of the so-called populist reforms are what TPTB have ready put in place and are the problem.

I've given up. I ever time I discuss economics I have explain the fundamental accounting equation and how there is no such thing as taxpayer funded spending at national level. It's like people have no idea how balance sheets work and I'm talking to finance guys.

Hell, I can't even get fcking communists on leftypol and /r/socialism to reject the neoliberal framing.

Every time I go /r/basicincome there is some idiot posting some new taxation scheme to fund a UBI. It's completely hopeless.

Matt Franko said...

Sept; sounds like Russell Brand's MO

The basic differentiator between us and them is the amount of libertarianism (anti-authority) present in them is way too high... .. has to be... there is really no other basic difference... rsp

Bob said...

I doubt that a Leninist would be more accepting of MMT, Matt.

Anonymous said...


Quote: "The basic differentiator between us and them is the amount of libertarianism (anti-authority) present in them is way too high... .. has to be... there is really no other basic difference... rsp"

I guess that is why I'm getting more success talking the Nazis of /pol/ than anywhere else. How did we get to the point where extremist far right ethic nationalist are only ones open minded about the power of government to organize a national economy?

I guess National Socialism is coming back cause they seem to only anti-neoliberals left.

Neil Wilson said...

"I guess National Socialism is coming back cause they seem to only anti-neoliberals left."

Remember before they started their genocide, the Nazis did get the trains running on time - precisely by taking control of the economy and issuing the right sort of money to get the job done.



Matt Franko said...

But the Nazi's were also manifestly zealous for the gold/silver....

So the Nazis might have used a state currency but they used it begrudgingly like Lincoln did during the civil war. It was neither of their preferences. ..

The plan for Lincoln and the Nazis was always for once the major hostilities stopped, to get back under and subject to the metals as soon as possible. ...

So both Lincoln and Hitler had this libertarian aspect about them where they came up short...

We dont suffer under these same libertarian limitations as Hitler or Lincoln.

For a person on the right, you have to examine their material relationship with metals (gold, guns, etc), for a person on the left you have to examine their material relationship with pharma (drugs).... if there is a relationship with these materials apparent, the people come up short of the mark.

Matt Franko said...

Here's Augustus, he couldnt stand to see an image of himself created in silver so he had them confiscated and put equivalent metals in the temple of Apollo UNDER HIS NAME (the key word here being UNDER):

"Silver statues of me-on foot, on horseback, and standing in a chariot-were erected in about eighty cities, which I myself removed, and from the money I placed goldn offerings in the temple of Apollo under my name and of those who paid the honor of the statues to me."

The question comes down to "WHO is in charge?" or better "Who has authority?" Our ancestors knew it as it was they (humans) who possessed the authority and not metals...

So we may have been able to throw the yoke of metals at this point (1971), but we can see there are still many among us (recent Greenspan statements come to mind) that would readily have us go back to having us under them....

And then more lately from an historic perspective, we still dont get the "sources" (of our authority) correct due to the Darwinist/Spencerist agnostic/atheist theories that have been running amok since mid 1800s... (this is a newer development...)

And we find ourselves focused on "differences" or results of subtractive comparisons rather than the individual minuends and subtrahends in our equations.... so it becomes all about "the deficit" or "inequality", "tuning", "tempo", "efficiency", etc... many of us not able to be primarily mindful of "sources" in the system.

So we still have a way to go.