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The Selgin Story

Over the years George Selgin has dished out quite a bit of abuse in various and sundry blog posts to Murray Rothbard and those who hold that fractional reserve banking is inherently unstable and cycle-generating. I must concede Selgin is enormously entertaining in his balls-out, over-the-top ferocity in defense of something that he lately has been calling “monetary freedom.” Danny Sanchez noted Selgin’s most recent rant in his blog yesterday. Delivered in George’s trademark serioso, ill-humored style, I must admit it made me smile over my morning coffee. Here is a sample:

Although the first priority of every believer in monetary freedom must be to combat bogus arguments for monetary central planning, we cannot do this effectively unless we are just as relentless in exposing the 100-percent reserve movement for the moronic cult that it is, to keep its clownish convictions from giving the entire movement for monetary freedom, if not free market economics more generally, a bad name.

Moronic cult? Clownish? Now these are great polemics and I love George’s style; if he did not exist, I would invent him. But he is notoriously prickly when confronted with criticisms of his own position. He regularly trolls the Mises Community blogs sniffing out and trouncing one or another twenty-something Rothbardian “loony” (a favorite Selginian term of derision) who has worked up the temerity to utter even the mildest criticism of his idiosyncratic brand of “free banking.” But, entertainment value aside, this is unseemly behavior for a senior scholar of Selgin’s status. And it has caused Selgin to be seen as a parody of the aging and addled pedant running to and fro frantically trying to stamp out heresy but whose hilarious antics only invite further attempts to rattle and provoke him. Indeed, he has become something of a standing joke among many younger students of Austrian economics who proudly boast of being “flamed” by Selgin. Some already are joking about fashioning a T-shirt proudly displaying: “I Am a Member of a Moronic Cult.”

Given his hypersensitivity to criticism, I should hope George would be somewhat empathetic that a Rothbardian like myself responds to some of his abuse in a sharp and less than polite manner. Somehow, I doubt this though. George takes himself VERY SERIOUSLY and never seems to be in good temper, or to show the slightest shred of good will toward his opponents.

So let me briefly tell the Selgin story in less than flattering terms.

To cut to the chase Selgin’s conception of the nature and aim of “monetary freedom” can be summed up as follows:

1. He adopts the New Keynesian position that nominal price rigidities cause any change in the reservation demand for money relative to the supply of money to generate a (positive or negative) excess demand for money that requires a prolonged adjustment process involving either deflationary depression or inflation.

2. Following the New Keynesians, he uses the loaded term “demand shocks” to describe the voluntary decisions of individuals to alter the amount of money they desire to hold. For Selgin, any change in what he and the Keynesians call “aggregate demand,” i.e., total spending, even if it is the result of the voluntary actions of businesses and households, destabilizes the economy.

3. Like any garden-variety Keynesian, Selgin sees these fluctuations in aggregate demand as a market failure that must be offset by Fed policy. He thus advocates that the Fed implement a “productivity norm” that boils down to a nominal income target, a policy first proposed by Keynesian economist Benjamin Friedman in the 1970s. In Selgin’s case he would have the Fed target zero growth in aggregate demand, thereby maintaining the circular flow of money spending and income constant. Most Keynesians would target a higher rate of growth in nominal income to allow for real output growth plus a small inflationary cushion against deflation. But this is a minor difference. The outcome is that in Selgin’s world prices would trend downward by a few percent per year rigidly mirroring the productivity-driven growth in real income; in the New Keynesian world prices would trend up by a few percent a year. In both cases this would be achieved by Fed manipulation of the money supply (and interest rates)

4. In other words, Selgin wants the Fed to continually expand or contract the supply of money in order to exactly offset any change in the social demand for money. This is why Selgin, right along with Mankiw and other New Keynesians, was a proponent of QE1 and (maybe) QE2.

5. But binding a central bank to a “productivity norm” is a second best solution to economic instability for Selgin. His preferred policy is something called “free banking” or “monetary freedom.” Under the Selginian regime of monetary freedom, banks would be permitted to operate without any central bank or legislative interference, while subject to general contract law under which they would be obligated to convert their note and deposit liabilities into gold (or other market chosen commodity) on demand. In particular, banks would be able to determine their own cash reserves necessary to meet these obligations. The result would be that the supply of money is automatically adjusted to the demand for money by market forces. Furthermore, foretells Selgin, this system may evolve to the point where gold is completely expelled from monetary circulation into nonmonetary uses while a small amount is retained in quasi-monetary use as an interbank clearing asset. This evolutionary process would thus involve a massive expansion of the money supply. Moreover at the end of this process, bank money will in effect become a fiat money. But rest assured, at every step of the way seemingly infallible bankers will ensure a constant aggregate stream of money spending.

Given these views, it appears to me that what Selgin means by ”monetary freedom” is attaining Keynesian ends via market means. But I do not think Selgin’s story is plausible in the least. In fact, in my recent Congressional testimony, I gave another account of the likely outcome of a Selginian free banking system, which I advocated as the most practical means of getting rid of fractional reserve banking and suppressing the further issue of fiduciary media, that is, unbacked bank notes and deposits. Both Mises and Rothbard advocated free banking for the same reasons. In his last major publication on the subject, Rothbard proposed free banking under a genuine gold standard as an “excellent [albeit second-best] solution” to the problems of inflation and the business cycle.

Both Mises and Rothbard were therefore “currency school” free bankers–as I consider myself to be–who believed that the money supply should behave like a purely metallic currency and who rejected the “stabilization” of aggregate statistical constructs like the price level or total spending. For currency school free bankers, free banking is a means for suppressing all political influence on the supply, value and distribution of the money commodity and allowing these variables to be determined exclusively by market forces. Period. Selgin on the other hand reveals himself as a Keynesian free banker who wants to stabilize a meaningless aggregate by employing a peculiar scheme. In Selgin’s scheme, a certain narrow class of banker-entrepreneurs are uniquely privileged as error-free automatons and the particular market in which they operate, in contrast to all other markets, is “efficient” in the neoclassical sense of almost instantaneously adapting supply to demand.

N.B. In this response to George I never once alluded to the issue of whether fractional reserve banking is fraudulent or not, a question that he seems to be fixated on.

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Contact Joseph T. Salerno

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.