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Selgin Contra Horwitz and White on Mises’s View of Fiduciary Media

March 16, 2010

Recently Steve Horwitz has adamantly defended Larry White’s interpretation of Mises’s attitude toward fiduciary media, an interpretation which I have criticized. Steve is surprisingly uncompromising and has even gone as far as to stake Mises’s reputation as a historian of economic thought and monetary theorist on the correctness of White’s interpretation. Writes Steve:

To read Mises as a 100% reserves supporter is to disrespect him as a historian of economic thought and a great monetary theorist. The guy knew his shit and he understood monetary theory better than just about anyone who claims his mantle on any side today. To think he rejected the basics of monetary theory that inform the ME/FB [i.e. Monetary Equilibrium/FreeBanking] argument is to say that he didn’t understand some pretty fundamental economics.

In other words, Mises is a monetary equilibrium theorist who favors the creation of fiduciary media, dang it, and if he is not, well then so much the worse for Mises’s reputation as an economist. Now I suggest that before venturing out on a limb with such an irrevocable statement, it would have been wise for Steve to have consulted the book by his mentor George Selgin on The Theory of Free Banking (pp. 61-62). There Selgin explicitly denied that Mises either was a monetary equilibrium theorist or ever maintained that the issue of fiduciary media in any quantity would not generate a business cycle. As Selgin put it, correctly in my view,

A contrasting view of bank credit appears in the writings of several of the Austrian economists, especially Ludwig von Mises. . . . According to these writers any credit expansion or increase in the supply of fiduciary media–inside money [i.e., bank notes and deposits]not backed 100 percent by reserves of commodity or base money–is unwarranted. . . . In other words, all net expansion of fiduciary credit is a cause of loan market disequilibrium. It causes bank rates of interest to fall below their ‘natural’ levels, leading to forced savings and other trade-cycle phenomena. This contrasts with the view defended here, which holds that no ill consequences result from the issue of fiduciary media in response to a greater demand for balances of inside money. . . . However one intreprets it, Mises’s view of commodity [i.e., non-created] credit as the only sort of credit consistent with loan market equilibrium causes him to be critical of fractional reserve banking. . . . Indeed Mises’s support for free banking is based in part on his agreement with Cernuschi who. . . believed that freedom of note issue would automatically lead to 100 percent reserve banking.

I await with great interest Horwitz’s response to Selgin, given that Selgin expressed precisely the same view that Murray Rothbard held.

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