Josh Barro and the Gold Standard

A few days ago, when it was announced that former Cato Institute president John Allison was under consideration for treasury secretary, Josh Barro of Business Insider dismissed the man as a “nutcase”. Why? Because Allison believes that the Federal Deposit Insurance Corporation (FDIC) generates a moral hazard that contributes to financial crises (a statement I agree with).

This slur irked one of the economists at Cato, George Selgin, who took to twitter to challenge Barro. In the exchange, at one point, Barro indicated that the desire of libertarians to return to the gold standard confirms the “nuttiness” of libertarians and the people at Cato.

And here, Barro allows me to make a comment on the gold standard. The sympathy towards the gold standard is not sympathy towards gold per se, but rather sympathy for reducing the capacity of governments to exercise discretion. Basically, each time you hear some academic economist mention the gold standard, what that economist means is rules-based monetary policy.

The gold standard era (1875-1914) was not an image of perfect monetary policy. It is not a lost paradise that we ought to strive to. However, the implicit rules imposed by the system did favor more stability that would have been the case with discretion during that era. In fact, the era of central banking with the Federal Reserve has not been that great relative to the gold standard era (and in the world of central banks, the Fed is pretty good). A lot of the scorn that the gold standard era has received had to do with regulatory policy towards banks (notably regarding restrictions on branch banking which forced more volatility) or with the role of changes in international demand for assets (see here). Thus, in spite of its many flaws, the gold standard was not that bad (but it was not* gold per se that was helpful – it was the shunning of discretion by governments).

To be sure, I do not favor a return to a gold standard era. What I do like, and what I think John Allison likes as well, is the return to rules-based monetary policy. Josh Barro should have been intellectually generous and understand this key distinction. By not making that distinction, of which he must be aware given his background, he debased the debate over monetary policy.


BC’s weekend reads

  1. Freedom of the Athenians (book review)
  2. The Myth of the Myth of Barter
  3. Trade Liberalization and Growth: New Evidence (pdf)
  4. From West Philly to Gulshan e Iqbal and Back
  5. Obama’s Witness for the Prosecution
  6. When Your Dream Lovers Die

On Scottish Free Banking (a Canadian Perspective)

Yesterday, George Selgin responded on Alt-M to a series of (relatively) recent paper that posit the impossibility of private money. While Selgin does criticize the theoretical reasoning of the papers, the majority of his case is based on the historical experience of private money – notably the Scottish experience with free banking.

I wanted to write something on this, but Selgin got there faster. Indeed, the historical evidence of free banking in Canada, Scotland, Sweden and the limited experiences observed in France and elsewhere provide a strong backing for soundness of private money. Selgin is right to emphasize this.

However, I can provide a small piece of evidence to support his case. It is not only scholars like Selgin who believe that the historical experience of Scotland was positive. As far back as 1835 and as far away as Canada, the robustness of the Scottish free banking experience was lauded. Consider the following quote from a report to the House of Assembly of Upper Canada (modern day Ontario):

“In Scotland, private banking has long existed and fewer failures have occurred there than in any other part of the world; their Joint Stock Banking Companies embrace some of the following principles by which the public are quite secured and the institutions useful as Banks of Deposit and circulation, while the stock is above par, and proved to be a good investment”

This report was actually presented in Canada arguing that Scottish free banking was a solution to a longstanding problem in the colony : dearth of small denominations. The “big problem of small change” was a real issue in the colony and created important frictions. The problem was most likely created by the fixing of exchange rates between the different currencies at levels dissonant with the actual value of different currencies so that “bad money drove out good money” (see Angela Redish’s work). The report recommended legislative actions to encourage the formation of banks that would issue private notes to solve this problem. Newspapers in the neighboring colony of Lower Canada also praised (in the early 1830s) the role that banks played in easing the problem of “poor money”.

I have made an initial foray on this with Mathieu Bédard of Aix-Marseille School of Economics (and we plan to make another few) and  showed that the role of free banking in improving economic growth was considerable exactly because of the issue of private money. While Canada is a small, it provides some additional support to the claim that private money can indeed exist, survive and be superior to state money.

Source:  House of Assembly of Upper Canada. 1835. Report of the Select Committee to which was referred the subject of The Currency. Toronto : M.Reynolds Printer.

P.S. Below there is a picture of a half-penny issued by the Quebec Bank in 1837 showing that there was even private coinage in Canada.


Around the Web: Greece Edition

  1. Tyler Cowen has been owning this debate.
  2. Unfortunately, Greek citizens have been too fed up with the rest of the world to listen.
  3. (Perhaps libertarians and their arguments were just late to the party.)
  4. This is still the best concise sociological analysis of Greece and the EU I’ve come across.

It’s worth noting here that the overwhelming majority of ‘No’ voters – the ones who just rejected the EU after their elected, far Left leader walked out of talks days before said talks were scheduled to end – don’t want to leave the EU. Confused? See the Cowen link.

Matthew and I had a dialogue on Greece awhile back here at NOL that might be of interest.

Free Banking Beats Central Banking

In “More Bits on Whether We Need a Fed,” a November 21 MarginalRevolution blogpost, George Mason University economics professor Tyler Cowen questions “why free banking would offer an advantage over post WWII central banking (combined with FDIC and paper money).”  He adds, “That’s long been the weak spot of the anti-Fed case.”

Free banking is better than central banking because only in a free market can the optimal prices and quantities of goods be determined.  Those goods include the money supply, and prices include the rate of interest.

There is no scientific way to know in advance the right price of goods.  With ever-changing population, technology, and preferences, markets are turbulent, and there is no way to accurately predict fluctuating human desires and costs.

The quantity of money in the economy is no different from other goods.  The optimal amount can only be discovered by the dynamics of supply and demand in a market.  The impact of money on prices depends not just on the amount of money, but also on its velocity, that is, how fast the money turns over. The Fed cannot control the velocity since it cannot control the demand for money, that is, the amount people want to hold. Also, even if the Fed could determine the best amount of money for today, the impact on the economy takes several months to take effect, and so the central bankers would need to be able to accurately predict the state of the economy months into the future. Continue reading

Selgin on Bernanke

Some of you have probably already seen Roger Lowenstein’s overly laudatory, but still useful and interesting, article on Ben Bernanke in the March 2012 Atlantic. As a good antidote, you should check out George Selgin’s thorough and informed critique of Bernanke’s first of four lectures on the Federal Reserve. Bernake seemingly unreflectively repeats many gross myths about the history of banking. Although these myths are widely believed by mainstream economists who who are abysmally ignorant of history, Bernanke has specialized in monetary history and should really know better.

Jeffrey Rogers Hummel