What Type Of Free Banking Do We Want?

The article below represents the intellectual endeavours of two of the young stars of the Austrian School to address some of what they describe as “quibbles” with one of the more senior members of the School, Professor George Selgin and to some extent Prof Horwitz and our own Founding Fellow, Prof Anthony Evans. I have taken great inspiration from all of the people mentioned above, some more than others, but I fall on the side of the 100%FB for some of the reasons advocated by the two writers. Debates get heated and we get hot under the collar, but one thing is for sure: with an eye on practical politics, we must remember that the true enemy is the monetary socialism that we have today. We may have currency failure in Europe soon. In the USA we may have a final realisation that, as in the UK at the dawn of the First World War, the baton of economic leadership has moved on. These are the most uncertain of times. If we in the free market movement are to have any hope of getting anywhere, we must be able provide positive policy solutions. I would urge all mentioned here to turn attention to just that going forward, if no further understandings can be made between FRFB and 100%FB. I know for sure, I would bite your hand off today if any one of those systems was offered in exchange for an end to state supported FR banking! There is even a small chance that as this Great Recession rolls out, that is all the powers that be may be left with as policy solutions. We must be ready to provide solutions to our political masters.

Unanswered Quibbles with Fractional Reserve Free Banking

Abstract: In this article we reply to George Selgin’s counterarguments to our article “Fractional Reserve Free Banking: Some Quibbles”. Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system – even a free banking one – is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of “MV” by a FRFB system causes.

Read the whole article (PDF).

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The Privileged Few Have Eaten Everybody Else’s Lunch

Another great interview with Sean Corrigan on CNBC

Airtime: Mon. Jul. 18 2011 | 7:00 AM ET Big US banks should have been allowed to fail, Sean Corrigan, chief investment strategist at Diapason Commodities Management, told CNBC Monday. “The privileged few clustering around the Treasury Secretary and the Fed have eaten everybody else’s lunch,” he said.

AEP: Return Of The Gold Standard As World Order Unravels

Cobden Centre readers may find it heartening that Ambrose Evans-Pritchard is now showing an interest in hard money:

On one side of the Atlantic, the eurozone debt crisis has spread to the countries that may be too big to save – Spain and Italy – though RBS thinks a €3.5 trillion rescue fund would ensure survival of Europe’s currency union. On the other side, the recovery has sputtered out and the printing presses are being oiled again. Brinkmanship between the Congress and the White House over the US debt ceiling has compelled Moody’s to warn of a “very small but rising risk” that the world’s paramount power may default within two weeks. “The unthinkable is now thinkable,” said Ross Norman, director of thebulliondesk.com. … Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to “consider employing gold as an international reference point.” The Swiss parliament is to hold hearings on a parallel “Gold Franc”. Utah has recognised gold as legal tender for tax payments.

The bad news?

A new Gold Standard would probably be based on a variant of the ‘Bancor’ proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China’s central bank chief Zhou Xiaochuan two years ago as a way of curbing the “credit-based” excess.

But, amusingly, Ambrose closes with a quote from our favourite Fed chairman:

Mr Bernanke himself was grilled by Congress this week on the role of gold. Why do people by gold? “As protection against of what we call tail risks: really, really bad outcomes,” he replied. Indeed.

Homo Oeconomicus And The Monetary Basis For A Big Society

Jesse Norman’s book on the Big Society, which I reviewed recently, caused me to reflect once again on Homo Oeconomicus, that totally un-human being, that rationally calculating bundle of circuits, which mechanically responds to events to maximise its utility. We know utility is a thoroughly personal, subjective measure that is taken by the economics profession to be objective, and capable in society of being maximised.  Norman rightly ridicules this concept, calling it delightfully “rigor mortis economics”. Thus he is on the side of all economics pre-Keynes and post-Keynes, and particularly in line with the Austrian view. Norman shows that the credit induced boom of the Labour years did not create real and lasting wealth.  He shows that savings are the essential ingredient in any capital formation, and that capital formation is the wellspring of good fortune in our society. A demand-led (consumption-led) society will only end up cannibalising itself if saving, and thus capital formation, is not prioritised. However, at no point in the book do we see a discussion that we have on this website all the time: how the agent of all this credit creation is the state itself, with the monopoly central bank being able to manipulate the reserves of the private sector bank to fulfil an interest rate policy set by the politicians. ALL responsibility for the Great Recession rests in the hands of politicians around the world. Thus, a weakness in the book is that with no money reform agenda to run in parallel with a reformist Big Society agenda, the connected society may well be doomed from the outset. This is my worry with this work: that its vision does not yet sit on solid foundations of honest money. If the two were inextricably linked, then I think we’d have an economic and political agenda that is very credible, and which and would set the country on a path of peaceful and stable growth.  When people can plan for their own future, without fear of their wealth being confiscated by currency debasement, or destroyed by recurring recessions, they are in a much better position to help others. The Big Society agenda is very much in tune with the Manchester School social reformers who have inspired the creation of this web site. We wish Cameron well in his practical application of this very British tradition. Norman gives this current form of politics its intellectual muscle and brain power. I hope both will underscore their work with an honest money agenda, otherwise we will keep on having to revisit these problems every generation.