Ep. 149 George Selgin Critiques MMT and Debates Murphy on Free Banking
Monetary economist George Selgin agrees with Bob on the flaws with MMT, but then the two continue their debate (started at the Soho Forum) on fractional reserve free banking. The episode also includes George’s background and thoughts on Bitcoin.
Mentioned in the Episode and Other Links of Interest:
- The YouTube version of this interview.
- George’s monograph Praxeology and Understanding.
- Mises’ book Theory and History.
- Bob’s review of MMT.
- George and Bob debate at the Soho Forum.
- George’s article (co-authored with Larry White) defending fractional reserve free banking. Bob’s recent QJAE contribution to the debate.
- George’s articles at Alt-M on Canadian free banking, and 3 devoted to Scotland: one, two, and three.
- George’s interview on crytopcurrency.
- Help support the Bob Murphy Show.
The audio production for this episode was provided by Podsworth Media.
About the author, Robert
Christian and economist, Chief Economist at infineo, and Senior Fellow with the Mises Institute.
I like that you guys can beat up on each other in articles and whatnot and have these friendly conversations. I do gotta say I think Selgin has convinced me on free banking.
It is an impressive exchange. I had to listen attentively and pause and rewind.
Bob carves into the meat of the arguments with surgical skill, then presents the dissection to the class to review what we learned. In terms of value to me it stands up there with the best EconTalk episodes.
I still feel that the discretionary power granted to the fractional-reserve banker comes-up too short in these discussions. The various branches of justifications for it revolve around “there’s just sometimes not enough liquidity” but I reject the hubris inherent in that view. It’s like a Keynesian claiming that there are ‘underutilized resources’ because they think that they know better than the market what resources should be used, and which are better left unused for now.
Economists generally acknowledge that it is an exercise of power to command resources, or labor (digging Keynesian holes). But they tend to ignore that it is also an exercise of power to produce tokens of value with the imprimateur of the ‘Dollar’. It’s the essence of ‘fiat’.
Blockchain based currencies suffer no practical lower bound on divisibility, which allows us to avoid the historical episodes of ‘liquidity scarcity’ we encountered when the numismatic coin of the realm became too scarce. And they do that without granting fiat money-creation power to any individual or bank.
George Selgin does a masterful job presenting his arguments, but when engaging them at face value, you are led to imagine bankers to be a literal ‘homo economicus’ — that the discretion they exercise is only guided by marginal profit opportunities. Some of us know people and history better than that.
Maybe I should add; there is no objection to a bank printing ‘bank notes’ under its own name, as they once did. This is analogous in some ways to a corporation issuing bonds. The value of those bank notes is not fixed to the ‘global dollar’ but can rise and fall by market valuation of them.
It looks much different when the banks form a cartel wherein they agree to honor each other’s fiduciary credit at face value. This makes their issuance functionally equivalent to the dollar (until you can’t get at your savings anymore, that is).
What is the difference between a 5 year CD and a demand deposit?
Ok, now what is the difference between a 1 second CD and a demand deposit?
Would you have any objection to banks issuing 1 second CDs and lending out the deposits in the same manner that demand deposits are lent out today?
I think it helps to ask ‘what is really going on here’.
Saver Sally has deposited some of her savings with Banker Ben. Enterpreneur Eustace is looking for funds for his project.
Eustace could go to Sally directly and bid for her to invest her savings, but Sally doesn’t know Eustace’s business and can’t make an qualified decision about whether to accept.
Banker Ben says ‘I’m specialized in deciding what can be profitable’. He doesn’t know Eustace’s business either, but he has some expertise at evaluating business plans in a market, so he can provide a legitimate service as investment specialist. Sally and Eustace agree to give Ben agency in this decision on how to invest Sally’s money.
But Selgin asks us to give Ben another function – a privelege and power to create the money ‘based on’ Sally’s savings.
The immorality of this may be so obvious as to be unseen. Why not give Ben the ability to just create money without Sally’s deposit?
Selgin argues, “if Ben is limited in money creation by the degree of Sally’s trust in him as a Bank, why, that’s a ‘regulatory function’ and we don’t need to worry that we’ve allowed him the god-like power to conjure-up fool’s gold out of a few keystrokes.”
Economists agree that quantity of savings by the Sallys legitimately regulates the degree of investment in enterprises. We also agree that the role of allocation of savings to productive enterprises is a legitimate specialization. We do not agree on giving Ben the power to spin gold out of thin air.
The occurance of disasters (‘shocks’) is an invalid justification. Shocks have natural effects on the real available resources. Giving Ben the power to print tokens of value after destruction of real resources is not, counter to his claims, some magic elixir that restores them; It merely gives Ben the power to bias survivability of the shock towards his friends snd sycophants.
We no-longer live in an era where a scarcity of physical specie can present a real problem for availability of divisible tokens of value. We have blockchain. The banker cartel has no more raison d’etre beyond self-interest…
obfusticatory apologists like Selgin notwithstanding.
I’ll add: The problem here, folks, is the discretionary power over the survival of economic enterprises given to an ensconced priesthood. It is political in nature.