Wildcat Banking, as George observed, was an experiment that does not need repeating. This lasted from the Revolution until the Civil War, when Lincoln issued the country's first paper currency, and also doubled the size of the federal budget with it to fight the war. This would have been impossible with all the various forms of currency floating around then. George counted 9 of them, but said Greenbacks were the preferred form. I wrote about that in my peer-reviewed paper for the World Economic Forum here: https://peemconference2013.weaconferences.net/papers/a-brief-history-of-american-paper-money-with-emphasis-on-georgist-perspectives-scott-baker/
Making anything count as money is an invitation to criminality, which hardly needs a further invitation.
For an even more in-depth discussion of wildcat banking, see Stephen Mihm's book: "A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States."
And why should the honest citizen pay taxes when the dishonest citizen prefers to trade seashells, or, more likely today, cryptocurrencies, whose involvement in fraudulent transactions still exceeds its legitimate value in transactions to date. Aside from Local Exchange Traded Currencies, like Berkshire Bucks, which can be quickly and reliably converted back to dollars at a BB value of 1.05 to the $1, there is little to nothing to recommend other country based currencies.
Gold-backed? Banks pretended to try that but buried the exchange offices so deep in the woods that few people could ever effectuate the exchange of bank currency to gold, and that's BEFORE hired thugs would rob them of their gold on the way back (see Stephen Mihm's book, previously cited).
Instead of providing more mischief opportunities for banks, which are already too creative in this endevour, the federal government should reissue Greenbacks whenever the Output Gap - the difference between what a country produces, measured by GDP, and what it COULD produce, given its natural and human labor resources - shows less goods and services are being produced than the country is capable of, i.e. in a recession or depression. By tying such issuances to the Output Gap, inflation won't be a problem, since it is shortages and monopoly, plus Land Speculation and hoarding (shortages, again) that cause inflation.
The banking sector, like the overall FIRE sector, needs more regulation, not less. We all pay for it otherwise.
I also would say that the idea that slow deflation might be Good, Actually is just terribly misguided. Deflation sets a floor under the risk free rate of return, and especially in a world of "secular stagnation" and slowing or reversing population growth, it will be extremely difficult for interest rates to stabilize at the level that would harmonize the IS-LM relationships.
Given the headwinds we face -- the serious possibility that the natural real rate of interest may be negative much of the time, over the coming decades -- if anything, we should be raising our inflation target a bit, to 3% or 3.5%, instead of 2%. The 2% target is just the number the Bank of New Zealand came up with as a compromise between a goal of price stability (i.e. zero inflation), and the goal of maintaining room to lower the real rate to fight recessions. We have since learned that the real-world economy is significantly more recession-prone than we thought in the '90s, and we should update our policies accordingly.
Regarding the claim that “Money and banking are goods and services like any other." it seems Henry George would've likely disagreed here as well.
From Progress and Poverty (Book 1):
> Nothing can be capital that is not wealth.
> When we speak of a community increasing in wealth [...] we mean that there is an increase of certain tangible things.
> Such things have an exchange value, and are commonly spoken of as wealth, insomuch as they represent as between individuals, or between sets of individuals, the power of obtaining wealth; *but they are not truly wealth*, inasmuch as their increase or decrease does not affect the sum of wealth. Such are bonds, mortgages, promissory notes, bank bills, or other stipulations for the transfer of wealth. [...] Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community that includes as well those who promise to pay as those who are entitled to receive.
> Money may be said to be in the hands of the consumer when devoted to the procurement of gratification, as, though not in itself devoted to consumption, it represents wealth which is; and thus what in the previous paragraph I have given as the common classification would be covered by this distinction, and would be substantially correct. In speaking of money in this connection, I am of course speaking of coin, for although paper money may perform all the functions of coin, it is not wealth, and cannot therefore be capital.
> Between the theory that commerce is the exchange of commodities for money, and the theory that it is the exchange of commodities for commodities, there may seem no real difference when it is remembered that the adherents of the mercantile theory did not assume that money had any other use than as it could be exchanged for commodities. Yet, in the practical application of these two theories, there arises all the difference between rigid governmental protection and free trade.
> That this universal truth is so often obscured, is largely due to that fruitful source of economic obscurities, the confounding of wealth with money;
I am arguing the case for what amounts to receipt money and offer construction bricks as the tangible asset held on deposit (not directly, but by contract with brick producers) by banks. Why bricks? They have a constant global demand. They can be produced easily without harm to the environment. They do not require storage in heavy guarded vaults. And, they last for centuries.
It is fitting to remember that Fred Foldvary and I were presenters at a session held in Edinburgh, Scotland at the conference of the International Union for Land Value Taxation and Free Trade back in 2010 (I think). I argued the case for a return to money fully backed by something tangible, nothing that during the early decades of the Bank of Amsterdam' existence as a deposit bank, the global economy experienced sustained non-inflationary growth. I am not a proponent of mining, refining, minting and storing gold, silver or other precious metals to back depositor balances. But, I do think there is at least one tangible commodity that has all of the positive characteristics of previous metal and none of the negative: construction bricks.
I first heard of this idea from Nic Tideman, who presented it to the Russians sometime after the fall of the Communist system. The proposal is not original to Nic, however. It was written about by James Buchanan; but, even he was not its originator.
it seems someone needs to write about the connection between the land and money problems. Also to address The Great Taking. please contact me if interested - 7173577617
Wouldn't it be possible to have a largely free market for banks and banking services (with fewer regulations) but still have a central bank and one main currency, but make it easier to start new banks and so on?
That’s possible, but I don’t see that as a good rationale for opposing full free banking. The main problem with the central bank is its continuous over-expansion of money. I agree that there’s a benefit to having one main basic money, but that would be a likely development with free banking anyways. What free banking would create is a market in private cash or bank-notes. Just like we have checks from different banks today, with free banking in the past, there was also cash of different banks.
Interesting article. How would, or would we, have an insurance system for deposits in free banking?
But on the broader point of monopoly, all property is a form of monopoly. The trick is balancing investment incentives and allocation efficiency, as I wrote:
"… there is a kind of “spectrum” of optimal property rights. No ownership results in high allocative efficiency (anyone can use the property) but low investment incentives, resulting in overuse. When ownership rights are too strong, however, investment incentives are high but allocative efficiency is low, so the property is not used in the most efficient ways. In both extremes, the end result is not optimal…"
Along with Henry George, I wholly disagree.
Wildcat Banking, as George observed, was an experiment that does not need repeating. This lasted from the Revolution until the Civil War, when Lincoln issued the country's first paper currency, and also doubled the size of the federal budget with it to fight the war. This would have been impossible with all the various forms of currency floating around then. George counted 9 of them, but said Greenbacks were the preferred form. I wrote about that in my peer-reviewed paper for the World Economic Forum here: https://peemconference2013.weaconferences.net/papers/a-brief-history-of-american-paper-money-with-emphasis-on-georgist-perspectives-scott-baker/
Making anything count as money is an invitation to criminality, which hardly needs a further invitation.
For an even more in-depth discussion of wildcat banking, see Stephen Mihm's book: "A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States."
And why should the honest citizen pay taxes when the dishonest citizen prefers to trade seashells, or, more likely today, cryptocurrencies, whose involvement in fraudulent transactions still exceeds its legitimate value in transactions to date. Aside from Local Exchange Traded Currencies, like Berkshire Bucks, which can be quickly and reliably converted back to dollars at a BB value of 1.05 to the $1, there is little to nothing to recommend other country based currencies.
Gold-backed? Banks pretended to try that but buried the exchange offices so deep in the woods that few people could ever effectuate the exchange of bank currency to gold, and that's BEFORE hired thugs would rob them of their gold on the way back (see Stephen Mihm's book, previously cited).
Instead of providing more mischief opportunities for banks, which are already too creative in this endevour, the federal government should reissue Greenbacks whenever the Output Gap - the difference between what a country produces, measured by GDP, and what it COULD produce, given its natural and human labor resources - shows less goods and services are being produced than the country is capable of, i.e. in a recession or depression. By tying such issuances to the Output Gap, inflation won't be a problem, since it is shortages and monopoly, plus Land Speculation and hoarding (shortages, again) that cause inflation.
The banking sector, like the overall FIRE sector, needs more regulation, not less. We all pay for it otherwise.
I agree with Scott Baker here.
I also would say that the idea that slow deflation might be Good, Actually is just terribly misguided. Deflation sets a floor under the risk free rate of return, and especially in a world of "secular stagnation" and slowing or reversing population growth, it will be extremely difficult for interest rates to stabilize at the level that would harmonize the IS-LM relationships.
Not sure if you can read this without a NYT subscription, but Paul Krugman some years back wrote a short description of the Investment/Savings + Liquidity/Money model, and how it underpins basically all of modern monetary policy: https://archive.nytimes.com/krugman.blogs.nytimes.com/2011/10/09/is-lmentary/
Given the headwinds we face -- the serious possibility that the natural real rate of interest may be negative much of the time, over the coming decades -- if anything, we should be raising our inflation target a bit, to 3% or 3.5%, instead of 2%. The 2% target is just the number the Bank of New Zealand came up with as a compromise between a goal of price stability (i.e. zero inflation), and the goal of maintaining room to lower the real rate to fight recessions. We have since learned that the real-world economy is significantly more recession-prone than we thought in the '90s, and we should update our policies accordingly.
Regarding the claim that “Money and banking are goods and services like any other." it seems Henry George would've likely disagreed here as well.
From Progress and Poverty (Book 1):
> Nothing can be capital that is not wealth.
> When we speak of a community increasing in wealth [...] we mean that there is an increase of certain tangible things.
> Such things have an exchange value, and are commonly spoken of as wealth, insomuch as they represent as between individuals, or between sets of individuals, the power of obtaining wealth; *but they are not truly wealth*, inasmuch as their increase or decrease does not affect the sum of wealth. Such are bonds, mortgages, promissory notes, bank bills, or other stipulations for the transfer of wealth. [...] Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community that includes as well those who promise to pay as those who are entitled to receive.
> Money may be said to be in the hands of the consumer when devoted to the procurement of gratification, as, though not in itself devoted to consumption, it represents wealth which is; and thus what in the previous paragraph I have given as the common classification would be covered by this distinction, and would be substantially correct. In speaking of money in this connection, I am of course speaking of coin, for although paper money may perform all the functions of coin, it is not wealth, and cannot therefore be capital.
> Between the theory that commerce is the exchange of commodities for money, and the theory that it is the exchange of commodities for commodities, there may seem no real difference when it is remembered that the adherents of the mercantile theory did not assume that money had any other use than as it could be exchanged for commodities. Yet, in the practical application of these two theories, there arises all the difference between rigid governmental protection and free trade.
> That this universal truth is so often obscured, is largely due to that fruitful source of economic obscurities, the confounding of wealth with money;
Responding to Raja's question...
I am arguing the case for what amounts to receipt money and offer construction bricks as the tangible asset held on deposit (not directly, but by contract with brick producers) by banks. Why bricks? They have a constant global demand. They can be produced easily without harm to the environment. They do not require storage in heavy guarded vaults. And, they last for centuries.
It is fitting to remember that Fred Foldvary and I were presenters at a session held in Edinburgh, Scotland at the conference of the International Union for Land Value Taxation and Free Trade back in 2010 (I think). I argued the case for a return to money fully backed by something tangible, nothing that during the early decades of the Bank of Amsterdam' existence as a deposit bank, the global economy experienced sustained non-inflationary growth. I am not a proponent of mining, refining, minting and storing gold, silver or other precious metals to back depositor balances. But, I do think there is at least one tangible commodity that has all of the positive characteristics of previous metal and none of the negative: construction bricks.
I first heard of this idea from Nic Tideman, who presented it to the Russians sometime after the fall of the Communist system. The proposal is not original to Nic, however. It was written about by James Buchanan; but, even he was not its originator.
Are you arguing that we should have a full reserve construction brick standard? What’s better about storing bricks over precious metals?
it seems someone needs to write about the connection between the land and money problems. Also to address The Great Taking. please contact me if interested - 7173577617
In a slightly deflationary economy (as envisioned) how does a free bank fund itself?
They would acquire funding the same way they do today. A slight deflation just means that overall prices fall a bit every year.
Wouldn't it be possible to have a largely free market for banks and banking services (with fewer regulations) but still have a central bank and one main currency, but make it easier to start new banks and so on?
That’s possible, but I don’t see that as a good rationale for opposing full free banking. The main problem with the central bank is its continuous over-expansion of money. I agree that there’s a benefit to having one main basic money, but that would be a likely development with free banking anyways. What free banking would create is a market in private cash or bank-notes. Just like we have checks from different banks today, with free banking in the past, there was also cash of different banks.
Interesting article. How would, or would we, have an insurance system for deposits in free banking?
But on the broader point of monopoly, all property is a form of monopoly. The trick is balancing investment incentives and allocation efficiency, as I wrote:
"… there is a kind of “spectrum” of optimal property rights. No ownership results in high allocative efficiency (anyone can use the property) but low investment incentives, resulting in overuse. When ownership rights are too strong, however, investment incentives are high but allocative efficiency is low, so the property is not used in the most efficient ways. In both extremes, the end result is not optimal…"
https://www.lianeon.org/p/the-dark-side-of-property
Like Breaker says, folks could still buy private insurance if they wanted it, but from past experiences, it would likely have a limited scope.
It sorta defeats the purpose of the goal of the FDIC..to prevent bank runs.
Scott Sumner:
https://www.econlib.org/the-wrong-way-to-think-about-moral-hazard/