Financial History to the Rescue: On Bitcoiners’ Many Troubles

It is unfair to expect technologically savvy bitcoiners to also be apt and well-read monetary economists. By no means do the skills and experiences of either have to overlap. Through the rise of Bitcoin with its explicit central banking challenge and attempt to become a worldwide currency, the subject matter of the two groups has unexpectedly clashed. All arguments that support or attack bitcoin is a head-first dive into monetary economics – sometimes exhuming centuries-long disputes among monetary economists and often blatantly distorts and overlooks money and banking arrangements of the past.

We can’t have that, can we.

One of the most delightful events in the libertarian world is the monthly Soho Forum debate run by Gene Epstein. Yesterday’s splendid showdown between Profs. George Selgin and Saifedean Ammous on the suitability of Bitcoin as a Medium of Exchange is bound to get some serious traction once the recording is on available only – look out for that!

A great debate for anyone interesting in monetary system and monetary economics more generally, this was probably the best and most entertaining of many Soho Forum debates I’ve watched. It’s a good format that forces speakers to engage and respond to one another’s arguments, which makes a two-hour conversation on something as technical and intricate as Bitcoin’s monetary role an absolute delight; even those of us deep into this nerdy rabbit hole can learn a lot and walk away with a trove of inspiration.

Channeling that inspiration into long-form, multi-part reviews of the relevant financial and monetary history is exactly what I’m going to do!

One question I often get regarding my research interests (banks, money and financial markets in the past) is the mildly offensive but absolutely correct question to ask: who the f— cares?! Bitcoin and the question of monetary regimes are perfect examples that make financial history relevant: the rise of crypto questions the fundamentals of monetary systems, systems that very rarely change. Naturally, the financial historian has an edge here, having a lot more nuanced knowledge about past monetary and financial arrangements and their operations. History becomes our (only) laboratory, to which the financial historian typically has a lot to contribute.

Moreso than other topics, fundamental questions of monetary regimes are explicitly pitted against other possible regimes – by their nature comparative and always informed by historical experience. It takes about two-and-a-half sentences before debates over money invoke some reference to financial and monetary history – as they should, since they illustrate how some (aspect of) a different monetary regime worked. Frustratingly enough, there’s a good chance that the speaker has mindboggingly little idea of what s/he’s talking about!

That’s where I like to come in. To a roomful of aspiring monetary economists at Cato’s Alternative Money University in July this year, Randall Wright‘s response to why he does monetary economics at all (“to debunk all this B-S!”) generalizes pretty well.

I’m gonna use this post to review some of the mistakes Saifedean made yesterday – and use it going forward as an updated collection of future posts on the topic, especially as I go through Saif’s promising book, The Bitcoin Standard: The Decentralized Alternative to Central Banking. The aim here is to respectfully clarify the parts of the Bitcoin arguments where I’d like to think that I have a comparative advantage – financial and monetary history – and to better develop my understanding of the monetary theory involved.

Here are some points that came up yesterday:

  • The Monetary Progression of ‘Harder Money’: the brilliance of the past is that almost any account, no matter how persuasive and compelling, is bound to run into inconvenient historical facts. The world is more nuanced than can be reasonably captured by pithy generalization (yes, I realize the irony here). In a piece attacking this bitcoiner’s creation myth earlier this year, I wrote:

This progressively upward story is pretty compelling: better money overtake worse money until one major player unfairly took over gold – the then-best money – replacing it with something inferior that the Davids of the crypto world now intents to reverse. […] Too bad that it’s not true. Virtually every step of this monetary account is mistaken.

  • The Lender-of-Last-Resort role privately provided: Many Austrians and opponents to fractional reserve banking routinely believe that banks holding less-than-100% reserve against their deposits must have a government backing them, providing emergency liquidity when such banks are inevitably run upon. This is completely false. I can point to many different historical instances that privately accounted for such risks, from private clearinghouses to insurance, to the option-clause debate in Scottish Free Banking and contingent/unlimited liability institutions.
  • …which leads us to Scottish Free Banking. There’s a famous quip by Rothbard (“Rothbard’s Law“) that describes the tendency for economists to specialize in the fields they’re worst at: Henry George specialized in land, where his writing is appalling; Milton Friedman on Money, where he’s awful etc. I usually say that the same thing applies for Rothbard whenever he writes on Financial History. Very bad. And yes, I will go through his article ‘Myth of Free Banking in Scotland’
  • Saif made a distinction yesterday between the “Medium of Exchange” and the “Payment Mechanism” involved that struck me as misleading, and I didn’t get a chance to finish my reasoning with him in person – so I’ll flush it out in a piece later on. Happily for all you Free Banking fans, it involves note-issuing Scottish banks and the bigger questions of redeemability and outside/inside money.

Some additional housekeeping from yesterday:

  • Saif: “There was no real estate bubble on the Gold Standard”.
    • Yes, Selgin said, the Florida 1920s housing bubble leading up to the Great Depression. No, Saif correctly objected, that wasn’t a real gold standard, but a central bank-planned Gold Exchange Standard.
      Ok, fine – I’d agree with Saif here. How about the 1893 Australian banking crisis? Classical Gold Standard, no central bank, but a property boom and bubble-like collapse nonetheless.
    • A response might be “but fractional reserve banking!” but a) that’s a topic I’ll delve into much more, and b) this is started to sound like a No True Scotsman fallacy…
  • Saif: “Central banks hold gold – they don’t trust each other enough to hold currency”
    • Saif probably misspoke here, since he couldn’t possibly believe this; looking at any central bank’s balance sheet would instantly dispell such beliefs. Central banks generally hold no more than 5-8% of their assets in gold, and often a lot more than that in foreign currency-denominated asset. The ECB holds about equal parts (7-8% of assets) in gold and foreign currency. I routinely follow the weekly changes in the Riksbank’s balance sheet and even after a more extreme QE programe than the Fed’s (as % of GDP), it holds more FX than it does SEK-denominated assets (and no more than 5% in gold). The Bank of England technically doesn’t actually have any gold at all on its balance sheet, but holds gold in storage at its vaults (on behalf of other countries and the UK Treasury).

Bear with me over the next few months, as I make my way through Saif’s book and engage with these thrilling debates. Feel free to interrupt/comment on Twitter at any point if you think I’ve made a factual/empirical error, error in reasoning or in relevance to Bitcoin.

And yes, keep in mind that this is a respectful inquiry into fascinating topics with people who agree on like 92% of everything. Feel free to call me out for unnecessarily snarky and offensive thing as we go along – and welcome to the party!

On Translating Earnings From The Past

A few days ago, John Avery Jones published a great piece on the Bank of England blog (“Bank Underground”), investigating how much Jane Austen earned from her novels in the early 1800s. By using the Bank’s own archives and tracking down Austen’s purchases of “Navy Fives” (Bank of England annuities, earning 5%), Avery Jones backed out that Austen’s lifetime earnings as a writer was probably something like £631 – assuming, of course, that the funds for this investment came straight from the profits of her novels.

Being a great fan of using literature to illustrate and investigate financial markets of the past, I obviously jumped on this. I also recently looked at the American novelist Edith Wharton’s financial affairs and got very frustrated with the way commentators, museums, and scholars try to express incomes of the past in “today’s terms”, ostensibly vivifying their meaning.

For the Austen case, both Avery Jones and the Financial Times article that followed it, felt the need to “translate” those earnings via a price index, describing them as “equivalent to just over £45,000 at today’s prices”.

Hang on a minute. Only “£45,000”? For the lifetime earnings of one of the most cherished writers in the English language? That sounds bizarrely small. That figure wouldn’t even pay for the bathroom in most London apartments – and barely get you a town-house in Newcastle. The FT specifically makes a comparison with contemporary fiction writers:

“[Austen’s] finances compare badly even with those of impoverished novelists today: research last year by the Authors’ Licensing and Collecting Society found that writers whose main earnings came from adult fiction earned around £37,000 a year on average”

Running £631 through MeasuringWorth’s calculator yields real-price estimates of £45,910 (using 1815 as a starting year) – pretty close. But what I think Avery Jones did was adjusting £631 with the Bank’s CPI index in Millenium of Macroeconomic Data dataset (A.47:D), which returns a modern-day price of £45,047 – but that series ends in 2016 and so should ideally be another 7% or so from 2016 until May 2019.

 “This may not be the best answer”

Where did Avery Jones go wrong in his translation? After all, updating prices through standard price indices (CPI/RPI/PCE etc) is standard practice in economics. Here’s where:


The third line on MeasuringWorth’s result page literally tells researchers that the pure price number may not reflect the question one is asking. The preface to the main site includes a nuanced discussion about prices in the past:

“There is no single ‘correct’ measure, and economic historians use one or more different indices depending on the context of the question.”

When I first estimated Mr. Darcy’s income, this was precisely the problem I grappled with; simply translating wealth or incomes from the past to the present using a price index severely understates the meaning we’re trying to convey – i.e., how unfathomably rich this guy was. There is no doubt that Mr. Darcy was among the richest people in England at the time (his annual income some 400 times a normal worker’s salary), a well-respected and wealthy man of elevated rank. However, translating his wealth using a price index doesn’t even put him on the Times’ Rich List over the thousand wealthiest Britons today. Clearly, that won’t do.

Because we are much richer today in real terms, price indices alone do not capture the meaning we’re trying to communicate here. Higher real income – by definition – is a growth in incomes above the rise in prices. We therefore ought to use a more tangible comparison, for instance with contemporary prices of food or mansions or trips abroad; or else, using real income adjustments, such as GDP/capita or average earnings.

MeasuringWorth provides us with three other metrics over and above the misleading price-index adjustment:

Labour Earnings = £487,000
using growth in wages for the average worker, it reports how large your wage would have to be today to afford what Austen could afford on £631 in 1815. Obviously, quality adjustments and technological improvements make these comparisons somewhat silly (how many smartphones, air fares and microwaves could Austen buy?), but the figure at least takes real earnings into account.

Relative Income = £591,300
Like ‘Labour Earnings’, this adjustment builds on the insight above, but uses growth in real GDP/capita rather than wages. It more closely captures the “relative ‘prestige value’” that we’re getting at.

Both these attempt are what I tried to do for Mr. Darcy (Attempt #2 and #3) a few years ago.

Relative Output = £2,767,000
This one is more exciting because it captures the relationship to the overall economy. If I understand MeasuringWorth’s explanation correctly, this is the number that equates the share of British GDP today with what Austen’s wealth – £631 – would have represented in 1815.

Another metric I have been experimenting with is reporting the wealth number that would put somebody in the same position in the wealth distribution of our time. For example, it takes about £2,5m to qualify for the top-1% of British wealth (~$10m in the United States) distribution today. What amount of wealth did somebody need to join the top 1% in, say, 1815? If we could find out where Austen’s wealth of £631 (provided her annuities were her only assets) rank in the distribution of 1815, we can back out a modern-day equivalent. This measure avoids many of the technical problems above for how to properly adjust for a growing economy, and how to capture inventions in a price index – and it gets to what we’re really trying to convey: how wealthy was Austen in her time?

Alas, we really don’t have those numbers. We have to dive deep into the wealth inequality rabbit hole to even get estimates (through imputed earnings, capital stocks or probate records) – and even then the assumptions we need to make are as tricky and inexact as the ones we employ for wage series or prices above.

The bottom line is pretty boring: we don’t have a panacea. There is no “single correct measure”, and the right figure depends on the question you’re asking. A reasonable approach is to provide ranges, such as MeasuringWorth does.

But it’s hard to imagine the Financial Times writing “equivalent of between £45,000 and £2,767,000 at today’s prices”…

Elite Anxiety: Paul Collier’s “Future of Capitalism”

Paul Collier, the controversial Oxford professor famous for his development work and his acclaimed books Exodus and The Bottom Billion, is back. But the author of Exodus and The Bottom Billion is long gone. The compelling writing and carefully reasoned world that made Bottom Billion impossible to put down has somehow disappeared. In The Future of Capitalism, Collier is tired. He is bitter. And he is sometimes quite mad – so mad that his disdain for this or that group of thinkers or actors in society consumes his otherwise brilliant analytical mind.

Instead of having his editors moderate those of his worst impulses, he doubles down on his polemic conviction. Indeed, he takes pride in offending people in all political camps, believing that it supports the book’s main intellectual point: ideologues of every persuasion are dangerous, one-size-fits-all too constricted for a modern society and we should rather turn to a communitarian social democratic version of pragmatism – by which he means some confused mixture of ideas that seem to advocate “what works” on a case-by-case basis.

Yes, it’s about as nutty as it sounds. And he is all over the place, dabbling in all kinds of topics for which he is uniquely unqualified to offer advice: ethics, finance, education, family, social policy and on and on and on.

One reason The Future of Capitalism went awry might have been the remarkable scope: capturing all the West’s so-called ‘Anxieties’ – and their solutions – in little over 200 pages of non-academic prose. Given the topic, a very unfitting sort of hubris.

Apart from the feeble attempt at portraying a modern society that has “come apart at the seams,” there’s no visible story, no connection between the contents of one paragraph and the next and hardly any connection between one chapter and another. Rather, it’s a bedlam of foregone conclusions, appeals to pragmatism, dire stings to ideological ‘extremists’ on either side and a hubris unfitting for someone like Collier. I guess this is a risk that established academics run at the end of their careers, desperately trying to assemble all their work into One Grand Theory.

The most charitable thing I can say about Collier’s attempt is that it offers a lot of policy prescriptions – tax unearned land rents, tax-and-redistribute productivity increases, expand housing supply through local governments, have governments direct the Silicon Valley-clusters of tomorrow, cap mortgage finance, benefits for families, expand ethical responsibilities of firms, encourage marriage, create a new G6 (EU, US, Russia, India, Japan, China) that could overcome the global collective action problem (good luck with that!), expand Germanic vocational training and workers’ representation on company boards, embrace patriotism but never nationalism, detach ownership from control and place control with stakeholders (workers, suppliers, local homeowners).

The common denominator seems to be an imperative to do all these things that seem to have worked well in some time or place or utopia, conveniently ignore institutional or cultural reasons, while espousing all ideological positioning and political capture.

Just voicing the suggestions ought to spark at least some fruitful conversations.

Chapter 8, ostensibly concerned with the Class Divide, is an illuminating case study. It takes Collier about 36 pages (out of 37) to mention ‘class’ (not that I blame him: the concept is way too nebulous and politically infected to be meaningfully dealt with in such short space). Instead, Collier discusses all kinds of topics whose relevance to class is quite unclear: public policy for single mothers, German vocational training, lawyers and the rule of law, a Yorkshire project to encourage reading in school kids – not to mention a ten-page digression into the institution of marriage for stable families.

When his polemics, dry writing, unsupported analysis or incomprehensive treatment of a topic hasn’t put me off (I gave up on the book at least four times during the last couple of months), some of the picture Collier paints does resonate with me. There is a social and geographical divide in Britain: the economically flourishing South-East, dominated by the well-educated English and the cosmopolitan accents of almost every language on the planet, is posited against the collapsing towns of the backward Midlands or the North. If this divide is real – in support of which Collier offers next-to-no evidence – it is not clear to me that it wasn’t already captured in, say, David Goodhart’s The Road to Somewhere or Branko Milanovic’s Global Inequality, or for that matter the countless of magazine articles trying to outline the fractures that Brexit unearthed about British society. Considering the effort those authors put into mapping their divides, Collier’s attempt seems frivolous.

He can do better. Much better.
My fellow Notewriter Rick is organising a summer reading group around Feyerabend’s Against Method. The equivalent Collier reading group could be aptly named Against Ideology.

Economists, Economic History, and Theory

We can all come up with cringeworthy clichés for why history matters to society at large – as well as policy-makers and perhaps more infuriatingly, to hubris-prone economists:

And we could add the opposite position, where historical analysis is altogether irrelevant for our current ills, where This Time Is completely Different and where we naively disregard all that came before us.

My pushback to these positions is taken right out of Cameron & Neal’s A Concise Economic History of The World and is one of my most cherished intellectual guidelines. The warning appears early (p. 4) and mercilessly:

those who are ignorant of the past are not qualified to generalize about it.

We can also point to some more substantive reasons for why history matters to the present:

  • Discontinuities: by studying longer time period, in many different settings, we get more used to – and more comfortable with – the fact that institutions, routines, traditions and technologies that we take for granted may change. And does change. Sometimes slowly, sometimes frequently.
  • Selection: in combination with emphasizing history to understand the path dependence of development, delving down into economic history ought to strengthen our appreciation for chance and randomness. The history we observed was but one outcome of many that could have happened. The point is neatly captured in an abscure article of one of last year’s Nobel Prize laureates, Paul Romer: “the world as we know it is the result of a long string of chance outcomes.” Appropriately limiting this appreciation for randomness is Matt Ridley’s rejection of the Great Man Theory: a lot of historical innovations seems to have been inevitable (When Edison invented light bulbs, he had some two dozen rivals doing so independently).
  • Check On Hubris: history gives us ample examples of similar events to what we’re experiencing or contemplating in the present. As my Glasgow and Oxford professor Catherine Schenk once remarked in a conference I organized: “if this policy didn’t work in the past, what makes you think it’ll work this time?”

History isn’t only a check on policy-makers, but on ivory-tower economists as well. Browsing through Mattias Blum & Chris Colvin’s An Economist’s Guide to Economic Historypublished last year and has been making some waves since – I’m starting to see why this book is quickly becoming compulsory reading for economists. Describing the book, Colvin writes:

Economics is only as good as its ability to explain the economy. And the economy can only be understood by using economic theory to think about causal connections and underlying social processes. But theory that is untested is bunk. Economic history provides one way to test theory; it forms essential material to making good economic theory.

Fellow Notewriter Vincent Geloso, who has contributed a chapter to the book, described the task of the economic historian in similar terms:

Once the question is asked, the economic historian tries to answer which theory is relevant to the question asked; essentially, the economic historian is secular with respect to theory. The purpose of economic history is thus to find which theories matter the most to a question.

[and which theory] square[s] better with the observed facts.

Using history to debunk commonly held beliefs is a wonderful check on all kinds of hubris and one of my favorite pastimes. Its purpose is not merely to treat history as a laboratory for hypothesis testing, but to illustrate that multitudes of institutional settings may render moot certain relationships that we otherwise take for granted.

Delving down into the world of money and central banks, let me add two more observations supporting my Econ History case.

One chapter in Blum & Colvin’s book, ‘Money And Central Banking’ is written by Prof. John Turner at Queen’s in Belfast (whose writings – full disclosure – has had great influence on my own thinking). Focusing on past monetary disasters and the relationship between the sovereign and the banking system is crucial for economists, Turner writes:

We therefore have a responsibility to ensure that the next generation of economists has a “lest we forget” mentality towards the carnage that can be afflicted upon an economy as a result of monetary disorder.” (p. 69)

This squares off nicely with another brief article that I stumbled across today, by banking historian and LSE Emeritus Professor Charles Goodhart. Lamentably – or perhaps it ought to have been celebratory – Goodhart notes that no monetary regime lasts forever as central banks have for centuries, almost haphazardly, developed its various functions. The history of central banking, Goodhart notes,

can be divided into periods of consensus about the roles and functions of Central Banks, interspersed with periods of uncertainty, often following a crisis, during which Central Banks (CBs) are searching for a new consensus.”

He sketches the pendulum between consensus and uncertainty…goodhart monetary regime changes

…and suddenly the Great Monetary Experiment of today’s central banks seem much less novel!

Whatever happens to follow our current monetary regimes (and Inflation Targeting is due for an update), the student of economic history is superbly situated to make sense of it.

Those revenue-raising early central banks

In a piece on a rather different topic, George Selgin, director for the Center for Monetary and Financial Alternatives and editor-in-chief of the monetary blog Alt-M, gave a somewhat offhand comment about the origins of central banks:

For revenue-hungry governments to get central banks to fund their debts is itself nothing new, of course. The first central banks were set up with little else in mind. (emphasis added)

Writing about little else than (central) banks in history, you can imagine my surprise:

Reasoned response: Selgin ought to know better than buying into this simplified argument.

Less reasoned response, paraphrasing one of recent year’s most epic tweets: you come into MY house?! 

Alright, let’s make a quick run-through, then. Clearly, some simplification and lack of attention to nuances is permissible under the punchy poetic licenses of the economic blogosphere – especially so when the core of an argument lies elsewhere. But the conviction that early central banks

(a) were created as revenue-raising devices for their governments, or
(b) all central banks provided their governments with direct fiscal benefits,

is a gross simplification of a much broader and much more diverse history of early public banks. Additionally, the misconception entails what Italian banking scholar Curzio Giannini derisively referred to as overly-narrow “fiscal theor[ies] of central banks”. Since too many people believe some version of the argument, let’s showcase the plethora of early central banks and illustrate their diverse experiences.

Initially, the banks-as-fund-raisers argument may seem reasonable; a few proto-central banks definitely were set up with this purpose in mind, with the Bank of England’s series of monopoly charters beginning in 1694 as the prime example. David Kynaston, the great historian of the Bank, eloquently characterized the relation between the government and the Bank as a ‘ritualistic dance’ in light of the periodic renewals of its monopoly charter; the Bank provided the government with funds and in return received some new privilege in addition to lucrative interest payments.

Among the dozen or so other candidates reasonably fitting the description “first central banks”, we see a wide variety of purposes, not all of which were principally – or even at all – concerned with funding their governments.

Banco di San Giorgio (Genoa, 1407), was essentially a precursor of money market funds with investors holding the City state’s debt and receiving taxing rights. Here, as in many of the northern Italian city-state banks of the 14th and 15th century, the banks-as-fund-raisers argument seems applicable (we might mention others here too, like the Catalonian Taula de Canvi, 1401, that is often considered the first public bank). Whether or not these first generation banks may be counted as  “central banks” is much less doubtful, but a topic for another day.

Amsterdam Wisselbank (1609), a much-studied institution and a trailblazer in the history of central banking, was primarily set  up to facilitate payments, specifically to simplify the chaotic muddle of coins and payment methods that abounded in the Low Countries during the 1500s and 1600s. The Bank’s lending was circumscribed, and the lending that did take place often went to the Dutch East India Company – of course, we might argue that the Dutch East India Company, with its directors appointed by the Dutch provinces, actually constituted an arm of the government and so counting this lending as government financing. Besides, the City only began using the Wisselbank for financing purposes firstly through a loan in the 1650s and then more frequently towards the end of the 17th century. Regardless, those are (decades removed) outcomes – not initial purposes.

Hamburger Bank (1619) was similarly set up with monetary stabilization in mind and adopted many of the features of the Wisselbank. Contrary to the Wisselbank, it had a credit department that right away engaged in lending to private parties on collateral. However, it seems that most of its funds were lent to the Kämmerei (municipality treasury). In economists William Roberds and Francois Velde’s account, the

problems with circulating coinage in early seventeenth-century Hamburg were, if anything, worse than in Amsterdam.

A partial vindication, at best, for the banks-as-fund-raisers argument since the Hamburger Bank was clearly set up with monetary stabilization in mind rather than government financing. In practice, however, it did finance the city.

The Riksbank: (Stockholm, 1668). Picking up from its failed predecessor ‘Stockholms Banco’, what later became known as Sveriges Riksbank (frequently credited with being the first – surviving – central bank) was tasked with facilitating trade and upholding the value of the domestic currency. In practice, this meant influencing the foreign exchanges as they stood in Hamburg or Amsterdam. Initially, the bank was explicitly prohibited from extending funds to the crown (in early 2019 there has emerged a dispute over this point among some Swedish financial historians). What is clear is that for the first fifty years or so of the bank’s existence, the rule seems to have mostly held up; not until the Great Northern Wars in the early 1700s did the Riksbank to any meaningful extent advance funds to the government.

Bank of Scotland (1695) and the Royal Bank of Scotland (1727), were both – a bit like the Riksbank – chartered to advance and improve the functioning of the domestic economy, and they were prohibited from lending to the crown. Despite the well-known political conflicts leading to the chartering of the Royal Bank, the Scottish case of rivaling banks were clearly created to advance the North Sea trade, not to finance the government or manage its debt. The third chartered Scottish bank, the British Linen Company (1745) was formed in order “to carry on the linen manufactory”. As is often the case in banking history, the Scottish case might thus be the clearest counterpoint to an argument. Further, the Scottish banking historian Sydney Checkland pointed out that the Bank of Scotland was “solely dependent on private capital, and […] wholly unconnected with the state.”. Again, the No True Central Bank objection might be raised, but it would send us tumbling into a dark definitional hole that has to wait for another time.

Banco del Giro/Wiener Stadtbank (Vienna, 1703 and 1705) were both established as a result of “the poor state of Austrian public finance” Like in Venice and Genoa, the banks were meant to enhance the liquidity of the government’s debt, actively contributing to reducing the State’s and the City’s interest rates respectively – and then gradually pay back their debt. While both banks did accept private deposits, and like its Hamburg and Dutch predecessors facilitated payments through their ledgers, these operations were clearly not their prime purposes. Money-raising argument vindicated.

This brief overview of some early central banks illustrate the point: banking history contains much wider experiences than a simplified money-raising argument implies. Indeed, even the First Bank of the United States – clearly an aspiring candidate to the title of ‘first’ central banks’ – seems to primarily have had trade-enhancing and economic development purposes in mind. This I say much hesitantly, since early American banking is definitely not my forte and I fully expect Selgin (and others) to correct me here.

Regardless, to claim that early (central) banks were set up with government finance in mind, is clearly an overstatement.


The title is a play on my favorite of George Selgin’s many brilliant articles, ‘Those dishonest goldsmiths’.

For the record, George Selgin is well-versed in this literature, and I’m merely using his quote as a stand-in for a common conviction among the not-so-well informed academic crowd.

Ok, Americans – here is your Eurovision Guide

“Euro-what?” I hear you ask. Great! Set your coffee aside for a few minutes and indulge in a much-required and long-overdue cultural enlightenment.

Eurovision Mania is on, so you better get with it!

Eurovision Song Contest, or “Eurovision”, is an annual music competition that’s been running since 1956 and every year sees some 40 countries participating. And it’s massive. Every participating country selects an original song – usually through some kind of nationally televised show – with an associated live performance and all those entries get to perform in front of tens of thousands of ecstatic Eurovision fans from across the globe.

In short, it’s basically American’s Got Talent merged with The Voice – but structured a bit like Miss U.S.A – with tons more glitter, spex, showtime and glamour and with twice(!) the audience of SuperBowl. Beat that, ‘Murica.

Yes, that’s some 200 million people lining up their Saturday nights (and the preceeding Tuesday and Thursday too, for semi-finals) for this:

The winner is lavished in eternal fame and glory, and their country’s broadcasting company gets the honor of splashing out on next year’s event. As Israel’s Netta and her song ‘Toy’ won last year’s competition in Libson, Portugal, the 64th version of Eurovision is held in Tel Aviv, Israel, beginning today!

Is Israel European?

Perhaps not, but that’s never stopped Eurovision before. Actually, the event is organized by European Broadcasting Union (EBU), an alliance of public service media companies – and includes associate members such as Australian, Algerian, Jordanian and Lebanon organizations. Thus, the geographical boundaries for entries into Eurovision is somewhat flexible – which is why Australia has competed in the competition since 2015!

That’s also the reason Brexit won’t affect the UK’s participation in Eurovision, thank god!

So, what is this thing – and why have I never heard of it?

Depending on who you ask, Eurovision could be anything between a fabulous celebration of European unity through culture and music, or a dull, wasteful affair of pretty freaky performances. No doubt among the competition’s 1500 entries, it has seen its fair share of strange, quirky, silly and outrageous performances (just google some of them). But it also contains the fanciest, most extravagant dresses and costumes imaginable,  friendly rivalry, great music and an outburst of colors. Indeed, a bit like the SuperBowl, the half-time entertainment has been at least as interesting as most of the performances. This year it is even rumored that Madonna is making an appearance!

In other words, across the Atlantic, Eurovision mania has descended and will be this week’s Big Thing. Indeed, at 10 pm local time (3 p.m ET), the first semi-final begins, and the winner usually emerges after a rather complicated voting procedure sometime Saturday night (6 p.m ET).

As for American’s (un)surprising ignorance of the event, it’s even become somewhat of a Youtube phenomena of introducing this long-standing pan-European institution to shockingly unaware Americans and recording their reactions. Some of them are pretty spot-on (“this is the cheesiest of music shows!”). Without passing judgment on the worldy outlooks of Americans, y’all aren’t exactly – erm let’s say – well-versed in the going-ons of places beyond your coasts.

In the Eurovision case, not for lack of trying: in the last few years, Logo actually broadcasted the event, but couldn’t muster more than 50,000-75,000 viewers and so the greatest of European non-sports events won’t be on American TV this year. Hardcore fans (list of international broadcasters) are probably best served by a youtube live-stream.

Of course, the skimpy American coverage by outlets like the New York Times isn’t exactly helping either; their angle of the “Israel-Palestine dispute” compleeeeetely miss the point of Eurovision. The event’s apolitical nature is another thing that makes Eurovision so great: politics is strictly, explicitly, unavoidably relegated to the sidelines. As in political messages and even song lyrics with too definitive political flavors are censured or expelled. For instance, Iceland’s participants this year, the controversial band Hatari, is already challenging this sacred line of No Politics Beyond This Point by their frequent pro-Palestine stunts. Allegedly, they have already been issued a final warning by the organizers; one more political stunt and they’re disqualified.

In sum: Eurovision is the biggest, fanciest, most extravagant and entertaining music event you’ve never heard of. Get on the train. A great start is by watching the recap of this year’s 41 entries.

A Short Note on Fraudulent Banking

In my piece over at American Institute for Economic Research the other week, I discussed the phenomenon of selling property that one does not (yet) own. I mentioned a left-wing and a right-wing version, but focused my efforts mostly on the right-wing “Fractional-Reserve-Banking-is-Fraud” idea.

My main point was to, by analogy, point to other fiduciary relationship – specifically insurance and airline overbooking – that fulfil the same criteria of double-ownership that is so crucial for the right-wing view. Insofar as this analogy holds, rejecting fractional reserve banking as fraudulent and illegal requires one to similarly reject insurance policies and airlines’ practice of overbooking. Regardless of where one comes down on the legal relationship between a depositor and a bank, I thought the theme interesting to explore.

Unknown to me, in one of Hoppe-Hülsmann-Block’s (HHB) early articles they devoted about two pages to addressing my main points. To HHB, there’s a “fundamental distinction” between property and property titles that render these and other analogies “mistaken”: future vs present goods. Money titles such as fractionally issued bank notes are designated present goods whereas insurance policies, parking permits or flight tickets are considered future goods. Money is the “present good par excellence to use Rothbard’s words.

HHB claims that one can legally oversell future goods, but when overselling present goods, one is committing fraud. A narrow distinction, admittedly, and we’ll see that it doesn’t fare so well. Discussing the example of airline overbooking, this distinction does momentarily save HHB from condemning airlines; yes, the airline is selling a flight at a future date, which seems meaningfully different from the instantly-available present goods bank notes ought to be. But the thing about the future is that it inevitably and predictably becomes the present. Once that future arrives, HHB explicitly admits that having more passengers at the gate than they have seats on the plane does amount to fraud. Strangely, however, HHB exonerate airlines since they are “prepared to pay every excess ticket holder off”.

Oh, and fractional reserve banks aren’t?

At this point their already weak defense falls apart. Every instance of historical bank runs include management, shareholders and governments doing precisely that: slowing down the run by paying employees, friends or relatives to deposit funds; acquiring new funding (either debt or equity) to pay off skittish depositors who want their present goods right away; or my own personal favorite, as a good student of Scottish financial history: the Option Clause!

HHB say that airlines are not committing fraud since once at the gate – on the verge of having their oversold future goods transform into present goods – they stand ready to

“repurchase [the passenger’s] ticket at a price (by exchange of another good) that the holder considers more valuable than his present airline seat.”(HHB 1998: 47)

Let’s see what the financially innovative Scots did. Their notes were subject to a legal clause, allowing management to ‘mark’ particular notes when offered up for redemption. That meant deferring the redemption claim for six months, effectively transforming the present good (the money title) into a future good (money title in six months), at the maximum legal rate of interest of 5%. That sounds like a good “the holder considers more valuable”, especially considering that these notes were effortlessly accepted in trade – i.e., the holder could instantly turn around and buy things with this note, its value gradually appreciating as the six-month date arrived.  In practice, this deterrent was only used infrequently, and then almost exclusively against English currency speculators.

Indeed, extrapolating this point, as I do in a forthcoming piece on maturity-mismatch (and have flaunted in Austrian conferences), illustrate how little practical and economic difference there would be between the opposing and deeply-entrenched Fractional-Reserve-Banking camps.

Regardless, it seems the airline-insurance-parking permit analogy still stands.