This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

Me, Murray, and Milton

While I was debating Lord Skidelsky in London yesterday, Milton Friedman's son David posted this response to Lew Rockwell's assertion that his father "is almost nobody outside of mainstream economics."

David's reply has elicited many responses, including a few referring to yours truly not, thank goodness, as a Rothbardian, but as a self-styled "Austrian" economist. As David seemed to be under the impression that that characterization was correct, I added my own comment, which I reproduce here for the sake of further distancing myself from Austrian disparagers of the late, great Uncle Milty:

David, for the record, I don't "describe myself as an Austrian," and haven't done so since graduate school. Indeed, I consider myself no less a fan of your dad's work than I am of work by Hayek and Mises. I think a good economists [sic] cannot concern himself or herself with belonging to any school, or being loyal to one. I'm pretty sure your dad would have said the same. It was others who labelled him a "Chicago" economist, while the only label he sought was "good" economist.

Rothbard, on the other hand, was only too determined to identify himself with the Austrian School and, more than that, to both take part in a personality cult, built around von Mises, and attract such a cult himself. One sign of the presence of such a cult is precisely the scorn its members heap on potential rivals to the cult figure.

As a monetary economist (I don't pretend to judge Rothbard's other economic contributions) Rothbard was mediocre to bad. His version of the Austrian business cycle theory was naive–in essence it equated behavior of M consistent with keeping interest rates at their "natural" levels with the elimination of fractional-reserve banking, an equation that holds only with the help of about a dozen auxilliary assumptions, all of which are patently false. He then went on to conjure up an equally false history of banking and of bank contracts designed to square his theory of the cycle, with its implied condemnation of fractional reserve banking, with his libertarian ethics.

Thanks to all this nonsense people like myself and Larry White (who does still call himself an Austrian) have to waste oodles of time debunking his ideas–we most certainly haven't simply "ignored" them–that we'd rather spend attacking central bankers' shenanigans.

To add to the record, I had the privilege of getting to know both Murray and Milton. Like most people who encountered him while in their "Austrian" phase, I found Murray a blast, not the least because of his contempt for non-Misesians of all kinds. Milton, though, was exceedingly gracious and generous to me even back when I really was a self-styled Austrian. For that reason Milton will always seem to me the bigger man, as well as the better monetary economist.

Follow-Up: A blog styling itself the EconomicPolicyJournal insists that my blog and comments together amount to a logical muddle. For the record (and in case the "EPJ" (sounds even better, doesn't it!) finds it unworthy of…er…publication, I replied by noting that if there was an error of logic the esteemed journal itself was gulty of it, since, far from being the same as Rothbard's ideal, Friedman's frozen base proposal did not (1) call for a gold standard, (2) call for abolishing fractional-reserve banking, or (3) call for a constant stock of money in the usual sense meaning a constant stock of public money holdings.

  • speedmaster

    I really wish the "hard" libertarians would ease-up on Milton Friedman a bit. I concede that he still supported a central bank/Fed, and I think was involved in WWII-era tax withholding, both no-nos for many Austrians and hard libertarians. But stepping back and looking at the big picture, Milton Friedman was one of, if not the biggest, proponents of individual liberty and free markets in the 20th century. And he seemed like a wonderful human being on top of that.

  • robread

    I am interested in George's description of Rothbard's monetary theory:

    'His version of the Austrian business cycle theory was naive–in essence it equated behavior of M consistent with keeping interest rates at their "natural" levels with the elimination of fractional-reserve banking, an equation that holds only with the help of about a dozen auxilliary assumptions, all of which are patently false'

    Does anyone know where George has developed this theme (a detailed critique of Rothbard's position) in more depth? I am particular interested in understanding what the assumptions are that would need to hold for the 100% reserve case to be valid (Obviously one of them is the assumption of price-levels that instantly adjust to changes in the demand for money), but it sounds like it goes deeper than that.


  • George Selgin

    Speedmaster, Milton long regretted the part he played as a young economist in the move to tax withholding; and by the 80s he had come around to advocating a frozen monetary base, which is an approach to shutting down the Fed that I myself favor. So even with respect to these matters there's no reason at all why even the most uncompromising libertarian shouldn't want to regard Milton as a comrade in arms. If he took longer to become almost as radically libertarian as Rothbard, the fact was merely a measure of his desire to form his own ideas gradually rather than receive them en bloc from someone else.

    • speedmaster

      Thanks, Dr. Selgin. I am a huge fan of the great Dr. Friedman. And it bothers me when he is maligned by other libertarians. The world is a much better place for having had him. His books like Free To Choose were lifelong eye-openers for me. 😉

    • vikingvista

      Regarding tax withholding:

      "I think it's a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war. … I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now."

      –Milton Friedman 1995,

      This may be construed as regret, but calling the crime "necessary" and wishing for unicorns doesn't evoke sympathy from me.

  • George Selgin

    For robread: I more-or-less concur with Hayek's view that a "neutral" monetary system will stabilize MV/N, where M is the money stock, V is money's income velocity of circulation, and N is the growth rate of the labor force. Under a gold standard this is equivalent to GmV/N, where G is the monetary base and m is the "money multiplier." Murray in contrast favored a pure gold standard. So, for his ideal to be valid it must be the case that GV/N will be stable. In fact there's no reason why this should ever tend to be so, since in a pure gold system G, V, and N all vary independently to at least some degree.

    In some of his writings Rothbard seems to equate a pure G system with a constant M system. Were that special assumption itself valid (which of course it isn't), Murray's ideal conforms with Hayek's only in the special case in which the ratio V/N is constant.

    • Eric Dennis

      Prof. Selgin, Did you mean that N is the size (rather than growth rate) of the labor force, so that with your labor productivity norm the growth rate of nominal income matches the growth rate of the labor force (rather than the second derivative)?

  • David Stinson

    " Milton long regretted the part he played as a young economist in the move to tax withholding; and by the 80s he had come around to advocating a frozen monetary base, which is an approach to shutting down the Fed that I myself favor."

    Does that mean that Friedman was in effect a supporter of free-banking? I am a total neophyte but my impression was that his was not a name normally associated with free banking.

    • George Selgin

      Milton was in fact a supporter of free banking, though his support for it was half-hearted. On this see my Cato Journal paper, "Milton Friedman and the Case Against Currency Monopoly."

      • David Stinson


      • RickDiMare

        Prof. Selgin, I'm not an economist, but nevertheless enjoying your article "Milton Friedman and the Case Against Currency Monopoly," which I'm critiquing from a U.S. Constitutional perspective.

        I'm wondering if you care to give your opinion as to what Friedman means by "the technical monopoly of a pure fiduciary currency … makes essential the setting of some external limit on its amount" (pg. 289).

        Could Friedman be hinting at the need for a regulatory income tax on fiat money (that can only be consistently levied by the government holding the monopoly)?

        Also, I read your footnote several times about Friedman's use of the phrase "pure fiduciary currency" (and still having trouble understanding it) but is it possible this was Friedman's cryptic way of referring to the Federal Reserve Note, and his belief that this particular fiat currency is "pure" (because the U.S. Congress controls its issuance, and also regulates its distribution via its income taxing powers)? And that other (non-Federal Reserve issued) currencies are "impure" because they would be "twice removed" fiat currencies, i.e., a fiat currency redeemable for another fiat currency?

        I could be way off base here. Maybe Friedman means something completely different by "some external limit," but I thought it couldn't hurt to ask.

  • Martin Brock

    A "full reserve" gold standard always seemed ridiculous to me, but I wouldn't call Rothbard a cultist. I didn't know him personally, but if he founded a cult, Lew Rockwell inherited the leadership. I've heard Rockwell say conciliatory things about free banking advocates, and he understands the distinction. Rothbard was a zealous (maybe overzealous) proponent of his ideas, but his followers don't seem cultish to me, not in the way that some Randians do. Rockwell is an iconoclast, but he doesn't seem authoritarian to me. I can't imagine him suing anyone for "stealing his ideas".

    I don't think much of a gold standard in general. A monetary system can use gold as a standard of value, but this system seems inherently unstable to me, because gold is rare and durable (and thus hoardable) and has a supply much less elastic than the demand for credit. Rothbard's critique also seems naive to me, but he had a sense that gold is a problematic legal tender. You're an historian of gold as a monetary base, and I'm certainly not, so I won't press this point far, but the conventional critique of the gold standard (not Rothbard's) rings true to me.

    Money is not a commodity, as Rothbard imagined. It's a social network. A monetary system with some valuable resource as a standard of value and common tender makes sense to me, but gold as this resource makes little sense. I suppose a better resource has the opposite qualities. It is common, non-durable and has a very elastic supply. Something like the caloric value of grains seems a better choice, so a negotiable banknote might promise so many calories in a combination of grains of standard quality.

    I was a Proudhonist rather than a Rothbardian or an Austrian in my misspent youth. Proudhon imagined common labor as the standard of value, and this idea still appeals to me.

    I live in Athens, by the way. Can I buy you a beer sometime? I'd like to discuss money as a social network as a business model.

    • George Selgin

      Martin, I think you are wrong in thinking gold a poor standard commodity. In fact it had a very good record of long run stability during the gold standard era (see Roy Jastram's book on this, The Golden Constant; and claims about gold being subject to serious supply shocks are ill-informed: the most famous of all such, the "shock" of New World gold outflows after the conquest, translated into a European inflation rate so low that it would have had Ben Bernanke worried about hitting the zero-interest rate bound!

      Finally, the belief that a very price-elastic supply is best–which was involved in Hart and Buchanan's advocacy of a "common brick" standard, is based on the belief that it is always desirable to keep the general level of prices constant–a belief I have attempted to counter in my pamphlet Less Than Zero as well as elsewhere.

      Rest assured that my disagreement with you on these scores won't prevent me from letting you buy me a beer. Would that I could have a beer on everyone I disagreed with!

      • Martin Brock

        Doc Merlin recommended Less Than Zero at Cafe Hayek back in April. I found it a, so the IEA has lost £8.00. I'd pay to hear your LSE debate though. I don't see it at the LSE web site yet. How did it go?

        I'm still enough of a Proudhonist to dispute "debtors will have no reason to complain" on page 42.

  • chriswpt50
  • amadus

    George, can you clarify this statement, "He then went on to conjure up an equally false history of banking and of bank contracts designed to square his theory of the cycle, with its implied condemnation of fractional reserve banking, with his libertarian ethics."? Or can you lead me to something which discusses this point of view more in depth?


    • George Selgin

      There's now a large body of literature on the topic. You might start with my blog here on "The State and 100 Percent Reserves" and my article, "Those Dishonest Goldsmiths."

  • KMcC

    Slightly OT, but I'm wondering if anyone would recommend an introductory book of monetary theory for a layperson. I have no formal economics education but am keenly interested. Ditto an introductory book on banking. Thanks

    • George Selgin

      Modern "Money and Banking" texts are all the same, and full of lousy stuff. I always tell people to read Stanley Jevons' Money and the Mechanism of Exchange. Although written in 1875, it remains the best introduction to monetary economics. For a next step I like Hu McCulloch's Money and the Economy: A Monetarist Approach.

  • RickDiMare

    I don't think Friedman was wrong to support an income tax on wages, as long as it's understood that the tax really is not levied directly on wages, but rather on the "incoming transfer" of substitute or non-coin money, which is similar to what Lincoln did with our first income tax in 1861 in order to regulate the issuance of greenbacks.

    Also, the way I distinguish Friedman from "hard libertarians" is that Friedman wants government to harness, ride, tax and regulate the market "beast" (though not too much) for the benefit of society, but hard libertarians just want the beast to run wild.

    • George Selgin

      The controversy isn't about a tax on wages: it's withholding for which Friedman bears responsibility.

      • RickDiMare

        I think Friedman's involvement with income tax policy goes much deeper than withholding, and that it's remarkable he's so well known as standing for freedom and liberty, while supporting one of the most intrusive and oppressive taxes ever levied on working people. Maybe this contradiction is what irks Rothbard and Mises about Friedman. Rothbard clearly believed Friedman was engineering a sort of "guaranteed annual income" or minimum subsistence level, and Mises called him a "socialist" during a discussion about progressive taxation (if I recall correctly, in one of the links you provided).

        But, having said that, I greatly admire the man. I think real freedom and claiming a "property in labor" is much more complicated than most people can deal with, so while people are not claiming title to their labor and their money (by demanding coin or coin notes at U.S. banks), why not use government regulation and taxing powers, along with the (relatively blind) power-seeking behavior of the "free" marketplace, to minimize human suffering?

      • RickDiMare

        George, the following Cato article doesn't support my view that the 1935 Social Security "special income tax" and the 1942 "Victory Tax" are really a taxes on the incoming transfer of non-U.S. coin fiduciary media, nor does it seem to recognize that a tax on fiduciary media doesn't require support from the Sixteenth Amendment, but I think it does a great job explaining the adverse affects of withholding on individual liberty, as well as Friedman's involvement with withholding. Without the withholding feature, income taxes on wages are probably unworkable, so much so, that speaking about "withholding" is synonymous with speaking about the tax itself.


    • Martin Brock

      I want the Market Beast to run wild and to harness the Leviathan State instead, so I guess I'm a "hard libertarian"; however, I don't oppose something like an income tax. I favor a progressive consumption tax on the USA (Unlimited Savings Allowance) model, i.e. every citizen pays a progressive income tax, but each citizen may invest tax-free without limit, through tax-deferred investment accounting.

      I also favor very steeply progressive rates, approaching 100% at some level of personal consumption. Steeply progressive rates essentially guarantee that marginal income is invested rather than consumed, so this tax raises very little revenue from the wealthy, and that's fine with me. Raising revenue is not the point. Creating a system of decentralized authority over the organization of capital, without entitling the authorities to consume vast resources, is the point.

      The idea is to replace more central authorities with a class of wealthy people who are "wealthy" only in terms of their authority to organize capital seeking profit (added value), not in terms of an authority to consume vast resources or to organize the labor of many for the consumption of a few.

      • RickDiMare

        Martin, I like your last sentence, but I disagree that income taxes are appropriate for libertarian individuals, unless they can be collected indirectly, without infringing on the dignity and Constitutional rights of the wage-earner. The current system in the U.S. is ridiculous and one could hardly believe the U.S. stands for liberty after experiencing how it works. The annual 1040 requires us to each specify the most absurd details about our personal and economic lives, to self-incriminate ourselves, to learn thousands of pages of incomprehensible tax code that no expert even knows, then sign "under penalties of perjury," which criminal penalty the IRS is all too happy to enforce.

  • Hi Professor Selgin, a little off topic to this post, but something you've been mentioning in your comments around the web; you indicate that Milton Friedman proposed freezing the supply of base money (Federal Reserve Notes and reserves at the Fed?) and then having a free banking system of bank notes and deposits fractionally backed by this base money. You also have suggested this, rather than gold or some commodity as the base money. Maybe some day you can write a post comparing and contrasting the two systems, i.e. both free banking, but different base money regimes? I'm also curious about other base moneys like BitCoin with free banking regime on top. What are the qualities of a base money system which would provide the best foundation for free banking? Should the supply of base money be fixed, or set by a market, like mining? Both the ideal answer and the best solution given our current system would be interesting to discuss.

  • Dr. Selgin,
    Can you indicate which book or essay Friedman advocated freezing the supply base and having a free banking system?

    I read a Friedman essay a while back, as part of a compilation of essays compiled sometime in the late 1960s (I can't find it at the moment) from which I recorded that Friedman was advocating a 100% reserve requirement and a dramatically different role for Treasury. I thought it was either Essays in Positive Economics but I could be wrong. Did he really not advocate a 100% reserve requirement, or did he change his mind about it later?

  • The word you wanted was "elicited".

  • chriswpt50

    I hope you like tennis because you just got served!:

  • Paul Marks

    Milton Friedman did indeed (late in his life) favour freezing the monetary base (having changed his position from the view that the money supply should be increased in line with increases in production in order to achieve a "stable price level" – the same great error that Fisher made in the 1920s). And it is also true that Milton Friedman repeatedly said that the United States would have been better off if the Federal Reserve system had never been created.

    So, broadly speaking, what Dr Selgin says about Milton Friedman is correct.

    However, the attack on Murry Rothbard is way off. I am no friend of many aspects of the thought of Murry Rothbard (for example his account of the Cold War is basically Soviet propaganda – accepted at face vale by a man, Rothbard, who had the idea that "Uncle Sam is always in the wrong" fixed in his mind). However, Dr Selgin's post is about money and banking – so I will confine myself to that.

    There is always the danger in monetary policy (as with other aspects of economics) that an obsession with details and the finer points of theory will lead to basic principles being overlooked – this is what I believe Dr Selgin (in his general writings – not just here) has fallen victim to.

    It is a basic principle of economics (whether one calls it "Austrian" or not) that lending must be from real savings. For example, if someone is lent one hundred Dollars then some person (or some group) must NOT have spent one hundred Dollars (or more) of their income and must have made it available to be borrowed.

    It also a basic principle that two different parties can not own the same money at the same time – in short if Dr Selgin (either directly or via a bank) lends my 100 Dollars, Dr Selgin must have first had the 100 Dollars he has lent me (and chosen not to spend it) and then GIVEN UP THE 100 DOLLARS in order to lend it to me (either directly – or via a bank).

    Dr Selgin does not have the money he has lent to me till when and IF I pay him back. In short Dr Selgin works and earns X amount of Dollars, he then chooses to lend 100 Dollars to me (either directly or via a professional money lender – a banker). Net increase in the money supply – ZERO. And Dr Selgin does not have the money from the moment he hands it over to be lent out – till the moment when (and IF) I pay it back and it is returned to him.

    100 Dollars of real savings (i.e. earnings that people choose not to spend – but, rather, to lend out) can not mean more than 100 Dollars of lending.

    Sorry, but this is just basic logic – and efforts to deny it (no mater how complex and clever) are more than denying a basic principle of political economy, they are also a denial of a rational universe (of basic logic itself). It must be stressed that this is nothing to do with "libertarian dogma" – is is a matter of basic logic (100 Dollars of real savings can not mean more than 100 Dollars of borrowing), and to try an "get round it" (by various complex schemes) is to deny rationality itself.

    Murry Rothbard, rather unkindly, called the various complex efforts to "expand credit" (i.e. to lend out more money than people had really saved) "fraud", but the word "fraud" implies criminal intent. It is quite possible that bankers (and others) get so lost in their ultra complex dealings that they lose touch with basic reality. That they build a wonderful castle (far more complex than my mind can even grasp), but lose touch with the fact that is is a fantasy castle – a castle in the air.

    To turn from economics and logic to history…….

    Booms and busts did not start with the creation of the Federal Reserve system in 1913 they did not even start with the National Banking Acts of the Civil War (for example how could these be responsible for the so called "panic of 1857").

    One must remember what a "boom/bust" actually is – it is an expansion of lending (bank credit) beyond real savings (by various complex schemes – which may or may not be "fraud" depending on the level of basic understanding of the people who create these schemes) which leads to the artificial "boom", this (in turn) MUST lead to the "bust" as reality strikes back (or, rather, as the objective nature of the universe, of basic logic, is made obvious). Getting rid of Central Banking may make these "boom and busts" less extreme – but it will not stop them. On the contrary, they will still occur – and bankers (and many others) will still demand that the government "do something" to mitigate the pain of the collapse.

    After all this is how we got to central banking in the first place – I have nothing against money lenders (I do not regard usury as a crime), but a money lender who tries to lend out money that he does not have ("savings" that no one has actually saved) is (at best) committing an act of terrible folly (no matter how complex his schemes are). Such schemes inevitably collapse (the "boom" turns to "bust") and "finance economy" built on such schems collapses with them – leading to terrible unemployment and distress.

    Would Dr Selgin then allow all the banks (and all the companies that have become dependent on their credit – their fictional savings) to close their doors? Not "undergo and orderly bankruptcy" (code for hidden government support), simply close their doors (for the REAL assets are no where near enough to cover the liabilities – so a real "bankruptcy" must mean they close their doors) If not, his "free banking" position is not real.

    The only way to really prevent the "bust" is to prevent the "boom" in the first place – i.e. to insist that 100 Dollars (or whatever) of real savings can not mean more than 100 Dollars of lending – and that from the moment a saver has lent out the money they DO NOT HAVE THE MONEY ANY MORE till when and IF the money is paid back.

    Real savings can not lead to lending that is greater in amount than the real savings.

    And a saver does not have the money he (or she) has lent out – till when, and IF, they are paid back.

    To deny either of these principles is to deny basic rationality. It may not be technical "fraud", but it is folly.

    • George Selgin

      Paul, most the claims you offer in defense of Rothbard's anti-fractional reserve stance are ones that I have rebutted at length in numerous articles, including some on this very forum, as well as in The Theory of Free Banking. (And the assertion that fractional reserve banking is inconsistent with lending limited to "real" saving is a nice example of the sort of thing I had in mind in saying that as a monetary economist Rothbard was sometimes just plain "bad.")

      As for your references to pre-Fed crises in the U.S. (which I have also written about), they only serve to show that central banking isn't the only way to screw up a fractional reserve system. It is a well-established fact that other kinds of interventions, ranging from restrictions on branching to requirements forcing banks to back their notes with assets specified by regulators–played a crucial part in rendering the U.S. monetary system unstable before 1914. That is why no proponent of free banking has ever pointed to the pre-Fed U.S. system as exemplifying monetary laissez faire. Instead we have emphasized other systems, including Scotland's and Canada's, which were in fact relatively crisis free.

  • Paul Marks

    Sir you can not refute basic logic.

    If real savings are X then total lending can not (sustainably) be greater than X. Of course by "real savings" I am including savings in other nations – but I doubt you are claiming (like the absurd Alan Greenspan) that the roots of Western problems are savings in China (rather than credit money expansion at home). You would claim no such thing.

    And if someone lends out one hundred Dollars then that person does not have the one hundred Dollars any more (can not buy things with it – and so on) till when, and if, that money is paid back. The Devil may be able to be in different places at the same time – but money does not have same power (unless there is a weird game going on).

    On your historical examples…..

    It is alleged that Scotland was a poor place to deposit gold as banks had a habit of not returning it when asked (giving, instead, bits of paper that the depositor had not asked for). Now that charge may be true or false (it is an historical question – not a logical one), but if true it makes the Scots example a very bad one. At least for those people who think think that Franklin Roosevelt was a thief (whatever the Supreme Court said) for what he did in 1933.

    However, I repeat, the charge about Scotland is just that (a charge) it is a matter of historical debate – not basic logic. Actually (for various reasons) I am rather a fan of Scots law – and I find it hard to believe that the Scots courts gave such blatently unjust judgements as the late Murry Rothbard claimed.

    Anyway on Canada you are on less contested ground.

    It is true that the Canadian banks followed the lead of the Americans and expanded credit during the late 1920s – which is why (as well as the collapse in trade with the United States) Canada had its own boom and bust (and the bust in Canada was terrible).

    However, (and, I believe, this is your real point) the Canadian banks were more rationally organized than the American ones (due to the lack of laws against branch banking – and the lack of safety blanket Fed) – their were bank failures in Canadian history (although none in the crash of 1929 and after – the closest one was some years before), but their are failures in any line of business (if their were no bank failures at all this would actually be a very bad sign – a sign the business was rigged by corrupt court judgements and so on).

    Certainly critics in Canada at the time did not attack the banks for being too lose with credit (on the contrary they attacked them for being too mean with it) and the creation of the Bank of Canada had no rational justification (it was basically – "other nations have one, so we must have one also" the sort of "reasoning" that a school boy would be ashamed of).

    Here I agree with you 100%.

    However, there was still that Canadian monetary expansion (credit money expansion) of the late 1920s – without it there would not have been the collapse of the Great Depression in Canada(although, I fully accept, that Canada would still have been very badly hit by the decline in trade with the United States).

    Lastly on "backing". Like the term gold (or silver – or whatever) "standard", it is a deeply unhelpful term.

    Either the gold (or some other material) is the money or it is not. Talk of "backing" or a "standard" just confuses the issue.If the gold (or whatever) is the money then the piece of paper is just legal title to a certain amount of it (that must physically exist or the person who issued the piece of paper is guilty of fraud – no matter what the courts say). And if the piece of paper is the money then there is no need to talk of gold (or any other commodity) at all – so no need to talk of "backing" or a "standard". Although why, without legal tender laws and tax demands, anyone should accept bits of paper as money is hard to see (although, of course, if people wish to write contracts that specify payment in terms of bits of paper of a certain size and with certain markings upon them – they must be free to do so).

    However, I mean no attack on you by this – such misuse of language is endemic. But it does lead to endless legal (and other) confusion.

    Still your point stands – if the late Murry Rothbard was still with us and was asked "which nation had a better banking system in the 1920s and early 1930s – the United States or Canada?" he would have to reply "Canada".

    And if asked "which nation had the better banking system before the creation of the Federal Reserve in 1913 – the United States or Canada?" he would still (in the name of honestly) have to reply "Canada".

    Telling the truth is much more important than winning an arugment – so if I have "lost the argument" by my last couple of paragraphs, so be it.

  • Paul Marks

    Oh dear I am getting my their and there confused (and, no doubt, making vast numbers of other typeing mistakes) – always happens when I am concentrating on thinking rather than typing.

    On banking – I think that many clever people find the basic trade boring.

    After all the basic trade is either looking after (safe deposit box style) the money and valuables of customers (and being paid a fee to do so – people who demand interest on such things really are greedy fools). Or it is matter of taking people's savings and (again for a fee – or a percentage of the profits) investing them by lending them out (hopefully mostly for productive investments – otherwise it hard to see how the money is going to be paid back).

    Of course people who agree to have their savings lent out can not act as if their savings were in a vault somewhere (for they are not) – they have agreed to have their savings lent out (i.e. they have agreed to risk losing part or all of their savings) in return for being paid a rate of interest.

    The above is basic banking – but bankers tend to be highly intelligent people (far more creative than I am) and so get bored and think up vastly complex schemes – partly to earn more money (at least in the short term), but also (I suspect) out of boredom.

    Of course, before you point it out, I know that Central Banks (and National Banking Acts and…..) encourage the "creative" people to take over banks and side line (or push out) the "boring" people.

    For example, the car park attendent I work with – who used to be a bank manager, till he asked (too many times) how it made sense to lend out money to people (at whatever interest rate) to buy houses – when these people were very unlikely (due to their level of income) to pay such large sums of money back.

    And this is a British (not an American) example.

    Sometimes I wish that the creative people would go off and become artists or some such.

    However, there is a role for creative people in business – in creating their own business enterprises. Not in banking – which is (or rather should be) the classic "boring" profession.

    A banker may help lots of creative people start up (and develop) profitable business enterprises producing all sorts of things (some will fail – but the business of banking is making sure that one invests more times, many more times, in ones that prosper than in ones that fail) – that should be enough to take pride in (there is no need to create vastly complex schemes – often amazingly novel and using the highest level of mathematics, but always lacking in that old thing called "common sense" or "The Gods Of The Copybook Headings").

  • George Selgin

    Paul, it seems I'm starting to dream about complex schemes, and so had better settle for letting you have the last word.

  • Paul Marks

    Sir which ever one of is correct about fractional reserve banking, the fact remains that you do more good in one average working day than I have done in my whole life.

    That fact rather puts any dispute in its proper perspective.