Jason Smith — Monetarism's epistemological nightmare

What is money?

Information Transfer Economics
Monetarism's epistemological nightmare
Jason Smith

Lord Keynes — George Selgin versus David Graeber on the Origin of Money

Who has the evidence?

Social Democracy For The 21St Century: A Post Keynesian Perspective
George Selgin versus David Graeber on the Origin of Money
Lord Keynes

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

Guest Post — Ralph Musgrave: Dodd-Frank is useless, but try this…..

Dodd-Frank is useless, but try this…..

Ralph Musgrave

On the subject of Dodd-Frank, Richard Fisher, president of the Dallas Fed said, “We contend that Dodd–Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better.” He’s right. So how do we dispose of bank subsidies?

Well it’s easy. In fact the way to do it is set out in three hundred words below (in contrast to the thousands of pages of Dodd-Frank and Basel III which fail to solve the problem). And, the system set out below has an additional bonus: it makes SUDDEN bank failures impossible.

Obviously any poorly run firm should be allowed to ultimately fail, but it’s the SUDDEN failures or RUNS ON banks that are the big problem. Anyway, the solution is as follows.

Bank creditors (depositors in particular) have to choose between two types of account. First there are checking or transaction accounts. Money in those accounts is NOT LOANED ON or invested. It’s lodged in a 100% safe fashion (e.g. at the central bank). And that means no interest for those depositors.

Second, depositors can put some of their money into accounts where the relevant money IS LOANED ON or invested.  Those “investment accounts” pay interest because the relevant money is being used. Moreover, depositors choose what’s done with their money. For example they could go for safety: e.g. have their money put into mortgages where the mortgagor had a minimum equity stake of say 20%. Or they could choose something more risky.

Next, the VALUE OF the stakes that depositors have in safe mortgages (or whatever they’ve chosen) varies with the value of the underlying assets (e.g. the mortgages). In essence, depositors buy into a mutual fund. Indeed Laurence Kotlikoff, one of the several people advocating this system, explicitly advocates mutual funds in this connection.
The net result is that there is no reason for any bank subsidy. The taxpayer WOULD STAND BEHIND transaction accounts, but since no risk is taken with the money deposited, there is minimal taxpayer exposure.

As to investment accounts or mutual funds, if a particular fund makes silly loans or investments, then all that happens is the value of stakes in the fund falls, just as it does at present when a mutual fund makes silly decisions. Those with stakes in the fund have little reason to run, in the same way as there wasn’t a catastrophic run on BP shares after the recent Gulf oil spill. And even if there is a run on a hundred mutual funds, that doesn’t have systemically disastrous results. As Mervyn King put it, “a sharp fall in equity values” does not “cause the same damage as a banking crisis”.

As to the impossibility of sudden bank failure under this system, George Selgin explained the reason very neatly. He said, “For a balance sheet without debt liabilities, insolvency is ruled out.”.

And that’s it. The solution in just over 300 words. And if you want to see the same solution set out by someone else, try this Bloomberg article by Matthew Klein, or this WSJ article by John Cochrane.

— Ralph Musgrave