A few thoughts on free banking
By Scott Sumner
Izabella Kaminska has a few thoughts on free banking:
This week I strayed into the absolutist world of free-banking enthusiasts.
Now, it’s not like I haven’t come across these guys before — they lurk everywhere — but this week I discovered they don’t just represent an extreme economic faction, they (like goldbugs, bitcoiners etc) seem to be reason and logic deniers.
I’ve written about this before so I don’t want to bore people. But the main issue I have with them is that they appear to have no understanding or appreciation of the cyclicality of systems or the fact that whenever we’ve had free-banking systems they’ve resulted in chaos or alternatively co-beneficial collusion to the point the system is not free by the standard definition of free.
It’s really not a difficult point to understand. Systems are cyclical. And as Chris Cook always says there is a fundamental paradox inherent in the system which drives that cyclicality: namely, if it’s liquid it’s not neutral and if it’s neutral it’s not liquid.
This comes down to the fact that value is based on asymmetry.
Nor do the free-banking enthusiasts appreciate that central banks are mostly the product of private cartels. Nor do they appreciate that most economies already feature a huge plethora and mix of public and private monies that trade side by side. Nor do they appreciate that it was standardizing certain subjective values like weights, distances, time itself that has allowed society to cooperate, grow and thrive. (If we all had a different understanding of when 3pm is, there would be chaos.)
I must admit that I found this to be very annoying, but not for the reasons you might assume. I consider myself to be neither pro- nor anti-free banking. Rather I’m annoyed because I greatly respect the high quality research being done by free banking enthusiasts, and hate to see the entire group dismissed with belittling insults.
I have no doubt that Kaminska has run across a few ill-informed free bankers on the internet. I’ve run across more than a few uninformed Keynesians, monetarists, Austrians, MMTers, etc., on the internet. But any reader of her post is going to assume that she is being dismissive of the entire school of thought.
I’m going to give Kaminska the benefit of the doubt and assume that when she wrote the final paragraph of the passage quoted, she was completely unaware of the scholarship of some of the world’s leading experts on the history of free banking, such as Larry White, George Selgin, Kevin Dowd, and Bill Woolsey. The alternative to too depressing to contemplate.
Update: Commenter Travis reminded me of David Glasner and Kurt Schuler, and I’m sure there are many other names I’ve forgotten.
Her post is much longer, and George Selgin has already posted a fairly devastating reply on the specifics. Let me just add that in my view free banking is a great idea for banking but a horrible idea for monetary policy. I prefer a monetary regime that is completely divorced from the banking sector. The monetary authority should focus on adjusting the supply and demand for the medium of account in such a way that its value is stabilized. I define the stability of money as a gradual increase in NGDP. Do that, and you can completely deregulate banking, including the right to issue currency.
PS. And now I eagerly await Noah Smith’s scolding of Ms. Kaminska for her impolite “reason and logic deniers” comment. (For those who don’t know, Smith once scolded me for a post that defended Kaminska, but which Smith (wrongly) thought was insulting her.)
PPS. I never deny reason and logic, just common sense. OK, I was a logic denier in this post, but just that one time.