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The Cobden Survey

In June, 2010 the Cobden Centre in London released a report on "Public Attitudes on Banking," based on a questionnaire to which 2000 Britons responded. The findings of that report have since been offered, both by the Cobden Centre itself and by others, as proof that many people today believe that banks store rather than lend money surrendered to them in exchange for deposits payable on demand.

This week, for instance, a blogger named James Miller (whose article appears as well at and ZeroHedge, among other sites) wrote:

[U]sually depositors don’t fully realize that their funds are not really there in whole. In a 2010 study commissioned by The Cobden Center, it was found that 74% of U.K. residents polled believed they were the legal owners of their banking deposits. And while 61% answered that they wouldn’t mind if their money was used for additional lending, 67% responded that they wanted convenient access to what they saw as their money. Whether or not one regards fractional reserve banking as a clear case of fraud, it seems that a good portion of the public is wrongly informed on the mechanics of modern day banking.

But as even a careful reading of Miller's own summary of it should make clear, whatever else the Cobden survey may demonstrate, it most certainly does not demonstrate that most depositors think that the money they hand over to banks sits in the banks' vaults (or perhaps in those of a central bank) until some or all of it is either withdrawn or transferred to specific others by order of the original depositors.

Unless the questions they pose are chosen very carefully, survey results can easily mislead, and are indeed sometimes designed precisely with that end in mind. That isn't to say that the Cobden survey was intended to mislead–I am in fact inclined to believe that it wasn't. But it misleads nonetheless, thanks to the utter ambiguity of several of the questions it poses.

Consider the first survey question: "Why do you keep some of your money in a current account?" 15% of respondents answered "For safekeeping" and 67% answered "For convenient access," while only 10% answered "Because it earns interest." The predominance of the first two replies over the third might appear to suggest that most people suppose that their money is being stored. But the responses may be just as readily interpreted to mean that they consider fractionally-backed deposits to be both more convenient and safer than cash kept on one's person, at home, or in a cash register. Indeed, in these days of deposit insurance, it is hard to see why anyone concerned with safety, even exclusive of other considerations, would hesitate to prefer a fully-insured demand deposit balance to cash, while being perfectly indifferent to the dangers stemming from the lending of "their" deposits.

In reply to the survey's second question, "Who do you think owns the money in your current account(s)?", 74% answered "The account holder," while only 8% said "The bank." Another 20% answered, "Both the bank and the account holder." Proof that many British bank depositors don't know what their banks are about? Hardly. The responses instead prove nothing more than that the question posed can be interpreted in two different ways, depending on the meaning given to the word "money." Cobden Centre types, steeped in Austrian monetary economics, may insist that "money" ought to mean what others call "base" or "high-powered" money; but the fact remains that for most people, including most economists, a fractionally-backed bank deposit or note is itself "money." The latter, more common usage is implicit in standard working measures of national money stocks such as M1, M2, and so forth.

So, who owns the "money" in someone's current account? Well, it is in fact owned by the account holder, or by the bankers, or by both depending on how money is defined. If "money" is taken to mean "base money," than when someone accepts a demand-deposit credit from a banker in exchange for "money," that person surrenders ownership of the "money" to the banker, while becoming the owner of a deposit credit–a claim against the bank–of the same nominal value as the surrendered sum. But now suppose that by "money" we mean money in the broader sense, including demandable bankers' IOUs. By this definition, of course, the depositor continues to "own" the deposited sum, because instead of merely surrendering ownership to "money" he must now be understood to have merely exchanged one kind of money for another. The banker now owns the surrendered base money, while the depositor owns broad money consisting of a redeemable deposit balance. It thus follows that all of the respondents to the survey question, including the 2% who said "I don't know," may have been perfectly well informed of what their banks were up to, differing only in their interpretation of the question, or in the extent to which they were (understandably) baffled by it.

The survey's third question is equally ill-posed. It asks respondents to say what percentage of their current accounts is (1) held as reserves; (2) lent; (3) used to speculate on financial derivatives. That 66% answered "I don't know" is surprising only because one would expect the percentage replying so to such a question, calling as it does for a specific magnitude of which even many expert economists must have been unaware, while posing as alternatives two possibilities that are not in fact mutually exclusive (money might be simultaneously "lent" and "used to speculate on financial derivatives"), to have been closer to 100! The response proves, in any event, that at least two-thirds of those surveyed were not convinced that their "deposits" were fully backed by reserves.

Oddly, we are not given (as we are with regard to the other questions) a breakdown of the other responses to question 3, and so cannot say more than this. But it is at least possible that none of the 2000 respondents actually believed that his or her current account was backed 100% by reserves. If anything, the fact that we are not told what percentage of those surveyed answered this key question in accordance with the presuppositions of the anti-FR crowd ought to lead one to suspect that the percentage was in fact very low. Survey question 4, however, asks respondents to indicate "how they feel" about their banks making loans using current account deposits, and finds that 33% think the practice wrong because "they have not given [their bankers] permission to do so." Thus support appears to be given to the upper-bound ignorance quotient of 2/3.

But here once again the question is ill-conceived, not to be sure because it is ambiguous, but because it is what survey designers call a "suggestive" question, and as such one that nudges respondents in a particular direction. The question, in full as it appears in the report, reads as follows:

You may or may not have been previously aware that banks lend out some of the money deposited within current accounts by their customers to fund loans [sic]. Which of the following best describes how do [sic] you feel about the fact that your bank lends out some of the money in your account as loans [sic]?

The subtle, implicit suggestion here, perhaps unintended, is that banks are not systematically informing their customers about what they do (so that customers "may or may not" be aware of it), and that their conduct is such as might be expected to arouse some definite "feelings" among those customers.

If you doubt that the manner in which the question is posed favors the most-frequently offered response–that is, if you doubt that the question is such as tends to favor expressions of dismay regarding what bankers' regard as business as usual–imagine getting the following message in your voicemail, where the words indicated by **** are inaudible: "Hello. You may not be aware of it, but **** has been **** your ****. How do you feel about that?" Forced to say either "fine" or otherwise, I venture to guess that you'd admit that such a message leaves you "feeling" like someone who has been decidedly, albeit mysteriously, snookered.

Addendum (August 4 at 5:05PM): I had not bothered to comment on the Cobden survey's fifth and final question, because I found it so loopy that I hardly knew where to begin. I ought to have observed, nonetheless, that 26% of those surveyed responded to it by choosing, of several alternatives, the one that said "We should ensure that banks keep reserves equal to 100% of deposits." Would the respondents have made the same choice had the response in question been lengthened by adding the words "while allowing them to collect from us annual fees of somewhere between 5% and 10% of our average balances"? Unless Cobden redoes the survey, I suppose we'll never know.

  • Peter Surda

    Dear professor Selgin,

    if anything, this survey proves that my argument, that you refuse to address, is correct.

    People store money in the banks because that allows the to use the services the bank provides. Bank can store cash more efficiently than an individual due to economies of scale. Bank can pay interest. But these two points do not explain why these deposits act as substitutes from economic point of view (i.e. why they are money substitutes / inside money).

    What you miss is that storing money in the bank allows a person to use cheques, electronic transfers, accounting ledger, ATM and other useful services (i.e. "convenient access" according to the poll). These facilities decrease transaction costs compared to specie. This is why these deposits are accepted by market participants as equivalent to money (i.e. they act as substitutes from economic point of view).

    Since in the system of fiat or gold, these services do decrease transaction costs, depositing money in the bank increases money supply if the bank performs fractional reserve banking. With fiat/gold, the distinction between these two types of demands is empirically indistinguishable, as they can only occur, by definition, simultaneously.

    However, as professor White argues with great insight, the transaction cost difference between bank liabilities and specie is an empirical issue and not inherent in all possible systems. Bitcoin demonstrates that these two demands can indeed empirically occur distinctly. Bitcoin is form-invariant and bank liabilities do not decrease transaction costs. If the transaction costs of specie is sufficiently low, bank liabilities never become substitutes to money. Transaction costs, somewhat surprisingly maybe, separate the medium of exchange function from the credit function of money.

    Your position conflates the demand for lower transaction costs with demand for investment. That is why it's wrong.

    • George Selgin

      Peter it is you who are confused. Nowhere do I equate demand for lower exchange transactions costs with demand for investment. But I can note that these things can go hand in hand, and do in fact go hand in hand, in the shape of fractionally-backed bank IOUs. The problem isn't that I'm unaware of the transactions service motive–it is that you cannot seem to wrap your head around the empirical fact that people can acquire all the services you mention most readily and cheaply by also allowing banks to serve as intermediaries. Your continued suggestion to the contrary–that the services are available only in so far as they are linked to the "storage" of basic money–are easily shown to be false. (White, to whom you appeal, himself has argued that 100%-backed warehouse receipts cannot easily circulate as money and are therefore capable of offering rather fewer than more "transactions services" than fractionally-backed banknotes.)

      Your suggestion, finally, that the absence of any transaction-cost disadvantage of a base money relative to liabilities convertible into it suffices to rule out any monetary demand for the latter simply neglects banks' function as intermediaries and the consequent possibility that they can encourage people to substitute their IOUs for base money by sharing interest earnings with them. That is no less possible with bitcoin than it is with any other base money.

      As a general point, if I'm to reply regularly to you I must insist that, in claiming to find fault with my posts, you refer to things I actually say in the post you are criticizing. Otherwise I must argue, not only with your own positions, but also with those (instanced here in your middle paragraphs) that you attribute to me without the slightest evidence that the attribution is warranted. To be called upon routinely to correct your bold misrepresentations is something I'm quite naturally unwilling to take time to do.

      • Peter Surda

        Dear professor Selgin,

        you define inside money as bank liabilities. But inside money are also substitute media of exchange. Look at wikipedia (

        Inside money is a term that refers to any debt that is used as money.

        You see? It does not say that inside money are bank liabilities, there is another qualifier, that it is used as money. In other words, inside money is a subset of bank liabilities.

        Contrary to your claim, I am aware that people can obtain the aforementioned services from the bank more efficiently (at least with fiat/gold), indeed I confirm that. But you miss that this is an empirical issue.

        I do not neglect the possibility that people deposit into a bank to obtain interest. Indeed I confirm that as well. But this alone is an insufficient reason for people to accept this instrument as a medium of exchange. This is why not all zero maturity instruments that are transferable from technical point of view also act as substitute to money, even with gold/fiat.

        So you fail entirely. You redefine the term "inside money" to avoid the issue of money supply, which is the actual conflict between fractional reservists and full reservist. But on the other hand, you produce sentences like "In a mature free banking system, commodity money does not circulate, its place being taken entirely by inside money." confirming that you are talking about money supply!

        The way I see it, you have three options.

        Either you admit you are not talking about money supply, and that your argument is a useless tautology (i.e. that all loans require a counterparty).

        Or you admit that you are talking about money supply, and then admit that whether bank liabilities are or are not inside money is an empirical issue and only coincidentally sometimes equals to loans.

        Or you continue to contradict yourself, switching between using "inside money" in the meaning of bank liability, and substitute medium of exchange as it fits into the sentence.

        • George Selgin

          "you define inside money as bank liabilities. But inside money are also substitute media of exchange."

          You are wasting my time, Peter, as I insisted you try not to do. I nowhere defined "inside money" to consist of any old bank liabilities, but consistent with my understanding of "money," as taught by me for a quarter century and counting, to mean "generally accepted exchange media" have in fact consistently defined the phrase to refer only to such bank liabilities as are generally accepted exchange media. Once again, you pretend to disabuse me of a view I never held, and do so without even pretending to supply evidence showing that I hold it. Then, when I do try to respond to you, you misrepresent my responses in the same fashion–usually by sticking in an "always" or "never" where I never put it.

          Yours is, in short, the procedure not of a scholar but of a lawyer, and a not terribly scrupulous lawyer at that. As I warned I would do, I am not engaging you further in exchanges that make use of it. The sort of argument you want to have is one you need to have with yourself, as you alone are the source of the opinions you are so anxious to dispute!

          • Peter Surda

            Dear professor Selgin,

            I do not claim to be a scholar. I'm just a random nobody on the internet that's really curious.

            Last month, you wrote at this:

            "However the term “inside money” is one with several different meanings in the literature. In my Theory of Free Banking I made it synonymous with private bank demand liabilities; others define inside money as only those demand liabilities backed by private debt instruments."

            So, your current claim that

            "I nowhere defined "inside money" to consist of any old bank liabilities, but consistent with my understanding of "money," as taught by me for a quarter century and counting, to mean "generally accepted exchange media" have in fact consistently defined the phrase to refer only to such bank liabilities as are generally accepted exchange media."

            is erroneous. You magically pop in or out the "medium of exchange" as it fits into a particular sentence.

            But that's not the main issue. If you prefer, we can ignore that completely. The main issue is that you're dodging arguments. You're behaving as someone suffering from cognitive dissonance. Instead of confronting me, you're complaining. I reformulated my position several times, with no effect.

      • Peter Surda

        For a better illustration, let's examine the two demands.

        Let's say you want to earn interest. What do you do? You deposit your cash into the bank.
        Let's say you want to be able to transfer money quickly. What do you do? You deposit your cash into the bank.

        These two demands are empirically indistinguishable, and if there is FRB, an increase in the money supply occurs.

        Now, let's imagine that cash has super low transaction costs.

        You want to earn interest. What do you do? You deposit your cash into the bank.
        You want to be able to transfer money quickly. What do you do? You do NOT deposit your cash into the bank, you just use it directly.

        The two demands become empirically distinguishable, and the money supply is unaffected by the demand for lending money.

  • I agree that much of the survey and reporting thereon has been misleading, I am neither well informed by your use of the term "base-money" as it applies here.

    ""If "money" is taken to mean "base money," than when someone accepts a demand-deposit credit from a banker in exchange for "money," that person surrenders ownership of the "money" to the banker, while becoming the owner of a deposit credit–a claim against the bank–of the same nominal value as the surrendered sum.""

    Is there somewhere on these pages where a definition of "base-money" fits with the explanation of it being passed around in a banking-customer transaction?

    • George Selgin

      Thanks for the question, Joe. I suppose that this Wikipedia article is as good a place to start as any, and hope it may be all you need.

  • crislingle

    George, Is "thank" some sort of subjunctive form of "think" as in your above sentence …"it most certainly does not demonstrate that most depositors thank that the money"…?

    Or perhaps depositors are thankful for their deposits…or…?


    • George Selgin

      Cris 'ol buddy, as you know perfectly well, "thank" is simply the Georgia spelling of "think," just as "dawgs" is the Georgia spelling of "dogs." Still, for the sake of other readers less conversant with exotic foreign languages, I have now rendered it in standard English.

      Missed you at the Guatemala Friedman celebration, by the way. Bali 2013, perhaps.

  • In regards to the survey, it may well be that the survey does reveal that James and Jane Goodfellow are not well versed in money and banking, and more importantly, nor do they care to be well versed. That James and Jane merely want storage, access, convenience items, loans, etc. That how these items are delivered to James and Jane Goodfellow is not important to them, the importance to them being that the items are in fact delivered and that the items are delivered in a cost effective and convenient way.

    The above being said, the survey may also reveal that James and Jane, although unfamiliar with the intricacies of money and banking, want the unknown system to protect their deposits. That the storage, access, convenience items, loans, etc. that they require/demand needs to simply be done in a manner that also protects their deposits.

    In summary, the survey may well reveal James and Jane merely want a convenient and safe system. Fractional banking, central banks, intermediaries, open market operations, money supply, etc. are of little interest. Rather the interest is in delivery of services and safety. It’s not a want to be ignorant, it’s rather that James and Jane expertise lies in other areas and expenditure of resources on become masters of money and banking is a waste of resource when they simply demand delivery of services and safety.

    • George Selgin

      All well taken, W.E.H.; I would add that in a world of deposit insurance the sort of "rationale ignorance" to which you refer goes much further than otherwise. The survey has nonetheless been understood by its sponsors and others as proof that many people believe their bank deposits to be fully backed by cash reserves. My claim is, not that people should know more about banks than they do, but merely that the survey does not prove that they are ignorant in the specific manner that would constitute grist for the anti-fractional-reserve mill.

      • “…constitute grist for the anti-fractional-reserve mill”.

        Point taken.

        You mention rationale ignorance. Then one also needs to consider the phenomena known as: moonbats. Moonbats come out pretty much each and every century about fractional banking, money changers, bankers in general, currency issues, etc. [Yawn].

        A simplified view, from the perspective of the Virginia School of political economy, is that moonbats spread fallacy via informational cascades. Moreover, as Thomas Sowell has explained many times, fallacy never dies, it merely is recycled. Hence the moonbats return.

        Good luck!

  • John S

    Unrelated, but there is a new column in Forbes re: competing currencies and the gold standard. If you have time, perhaps this would be a good opportunity to educate some Forbes readers on the benefits of privately issued money.

  • Karmaisking

    What exquisite timing!

    Just a few short weeks after challenging the free banking crowd to come up with survey data showing no one can be "fooled" into thinking deposits are kept in safekeeping by the banks, lo and behold…. Selgin has to backpeddle and twist and turn to try to show that a survey apparently indicating widespread public confusion about the issue doesn't show widespread public confusion about the issue. Hilarious!

    A few observations as I stand on my little mound of vindication:

    1. Confusion alone is enough evidence for me to satisfy my claim of "constructive" fraud. What is beyond dispute is that the public does not have a clear understanding of the issue. If theythat is in fact the case, banks are engaged in "constructive" fraud in the sense that a fundamental aspect of a service that is crucial to their lives is not clearly understood by the consumer. What other fundamental products or services (water, car purchases, hamburgers) is fraught with such confusion? By analogy assume there are survey data showing lots of people are led to believe all new cars come with a warranty on all defects when in fact they only come with a warranty on "serious" defects? Who is to blame? The public? The survey company? Or the car manufacturers?

    2. Note Selgin has called 100 percenters "morons" for even suggesting FRB could amount to fraud. Now he has to explain and twist and turn over survey data suggesting the public are confused about something as basic ("moronic"?) as the status of an at call deposit account. Take it back George, take it back.

    3. Here's a challenge: Write your own questions for the public. Right here. Right now. I'll post them on a survey website and see what the responses are. EXACTLY AS YOU WRITE THEM.

    Some suggestions:

    1. Do you believe an "at call" bank account contains an asset owned by the bank or by the depositor?
    2. Who should own a bank account – the depositor or the bank?
    3. What percentage (roughly) do you think is held back in reserve by banks (not lent out or used to trade by the bank) in order to satisfy withdrawal demand from depositors' at call accounts: 100%? 80%? 40%? 20%? 10%? 1%? 0%?

    • George Selgin

      Congrats, Karmaisking: you win the gratuitous sarcasm award for comments to this post.

      As for the rest: (1) Contrary to your assertion I never "challenged" anyone to "come up with a survey," but if I had it would hardly disqualify me from criticizing such a survey once it appeared; (2) you obviously don't seem able to grasp the basic point of my criticisms, which is that the survey questions themselves may have confused its participants more than the practices of their banks; (3) that water and hamburgers are less confusing than bank deposits proves diddly (time-shares, insurance policies, and computers are at least as confusing yet no one claims that the sellers of those things are guilty of "constructive" fraud; (4) your own survey questions are as faulty as those I criticize–indeed, the faults are largely the same ones, so evidently you didn't read my remarks with any care.

      As for my offering my own question or questions, that is something I plan to do in response to a separate request from Cobden.

      By the way, Anthony Evans, who was responsible for planning Cobden's survey (but whose efforts were constrained by requests from the survey firm), agrees with me that those like yourself who take that survey's findings as supporting the "fraud" argument are taking unwarranted liberties.

      • Peter Surda

        And what about those who interpret the results of the survey as supporting the claim that people deposit money into the bank in order to obtain access to payment systems that lower the transaction costs (e.g. cheques or wire transfers), and this demand is not satisfied by bank paying interest to the depositors?

        • George Selgin

          Peter, for goodness sake, why can't people open bank accounts both for the sake of gaining interest (or avoiding fees) and for that of taking advantage of transaction-services? Why suppose that it must be one thing or the other? I have a couple deposit accounts, and value them for both the convenience they offer me in making payments and for the fact that I get the convenience free of charge or (in the case of one account) with a modest annual interest bonus.

          Indeed, As I have pointed out more than once, fractional reserves make it easier for banks to supply payment services than warehousing of base money would, because they make it easier for banks to issue circulating paper notes, by allowing them to recoup the costs connected with that service from interest earnings. Otherwise they'd have to recoup them by charging storage and other fees, which is hard to do when ownership of the stored sums is constantly (and anonymously) changing.

          It seems you imagine that by erecting the dichotomy upon which you continue to harp, you are scoring some sort of point against me, and in favor of Bitcoin. But I think rather that you are just spinning your wheels and generating so much acrid smoke.

          • Peter Surda

            Dear Professor Selgin,

            of course they can do it for both reasons. But it is merely a curious empirical twist when these reasons coincide in the same product, i.e. inside money. It is not an economic rule. Which is my whole point. Apparently I'm not very good at communicating it.

            If the lower transaction costs can be satisfied without issuing a debt instrument (e.g. by a form-invariant monetary base, of which Bitcoin is an example), this results in a pressure for empirical separation of the demand for lower transaction costs and for investment. If the transaction costs of the monetary base are sufficiently low, the function of medium of exchange completely decouples from the function of credit, and FRB would have no effect on the money supply. FRB would merely serve for maturity transformation.

            Bitcoin is an empirical proof of this distinction between the demand for investment and demand for a derivative medium of exchange. In a low-transaction-cost-base monetary system, even if people deposit money into banks in order to gain interest, in order to perform payments, the payer withdraws the money, transacts on the base level, and leaves it up to the payee whether he wants to deposit the received money or not. There is no demand for clearing services of the banks, as they do not decrease transaction costs. In other words, in such a world, bank liabilities do not circulate as equivalent to money (even though there might be secondary markets for them).

            I agree with you that if there is a derivative medium of exchange, FRB results in a lowering of direct costs, and on a free market is expected to be preferred both for the banker and the depositor. Indeed I grant you the full credit, as without your book I would still be stuck with a much lower level of understanding of FRB. But there is the big if. The existence of a demand for a derivative medium of exchange is merely an assumption, it's not an economic rule. Bitcoin exposes this. Just like it exposes, as you argue with great insight in Quasi-Commodity money, that what has historically been described "fiat money" is actually a 2×2 matrix. You show that elastic supply is not a necessary condition for "fiat money". Just like I argue that the existence of inside money is not a necessary condition for a mature free banking system.

          • George Selgin

            "But it is merely a curious empirical twist when these reasons coincide in the same product, i.e. inside money. It is not an economic rule."

            I would say, rather, that it is a nearly universal fact, which has its basis in the simple desire of people to not settle for having their cake alone when they really can both have it and eat it.

            The mere fact that it is perfectly possible to have exchange media that are convenient, but do not serve as investment vehicles for their issuers, itself doesn't prove that such media are preferable to the alternatives. You argue, nonetheless, as if people use fiduciary (that is, debt-backed) media as money only because they are as yet unaware of alternatives that would allow them to transact conveniently without bearing any risk (I abstract here from insurance). There is no basis for that suggestion in either theory or the empirical record. Instead, both suggest that people have born the risk in question, not because they had no choice, but because they generally thought the extra expected gains worth it.

            It's pretty clear that your arguments are driven by the premise that Bitcoin "trumps" ordinary bank-supplied payments media. I do not believe that you are able to sustain that premise on a priori grounds, and have given you my reasons. A final verdict concerning whether Bitcoin is in fact preferable to alternatives must of course be left to the marketplace.

          • Peter Surda

            Professor Selgin,

            I do not claim that "as if people used fiduciary media as money only because they are as yet unaware of alternatives that would allow them to transact conveniently without bearing any risk (I abstract here from insurance)."

            What are you talking about? My argument is precisely that people come to realise the most comfortable way of transferring money and that is what they start to prefer. Sometimes it means the use of inside money, but sometimes it does not. Yet again you appear to be suffering from cognitive dissonance by refusing to confront my claim and instead making up something else avoiding confrontation.

            My argument that people choose media of exchange based on transaction costs. There is not only ample empirical evidence to support that, but economists across the whole spectrum, including non-austrians, seem to agree on that. This is valid across commodities (e.g. gold vs. silver), money base vs. money substitutes, and the use of foreign monies in international trade (e.g. Krugman wrote two papers on the last aspect).

            Schlichter (2011), Hoppe (1994), de Soto (2009), White (1984) or Salerno (2010) all argue that people use money substitutes as a medium of exchange because they have lower transaction costs.

            But for you, there is no "basis in theory" for my position. You also claim that you gave reasons for his position, although I cannot actually see any.

            So what is your problem with my position? If I issue bank liabilities in a form of a pile of crap, if I provide sufficiently high interest and noone doubts my ability to honour the claim, this pile of crap would magically begin to circulate as inside money?

          • Peter Surda

            This is what you write in Theory of Free Banking:

            When inside money first emerges, although bank notes are less cumbersome than coin, and checkable deposits (in Ruritania) are both convenient for certain transactions and interest paying, some coin might still remain in circulation.

            Yet now you forget about it.

            If a monetary base has sufficiently low transaction costs, the reasons 1 and 2 fall away, and only the 3rd one, interest paying, remains. According to me, this is an insufficient condition for these instruments to be accepted as a medium of exchange.

            Address that if you dare.

          • George Selgin

            "My argument [is] that people choose media of exchange based on transaction costs."

            They do. And also according based on relative rates of return–though you don't get the last part. You just don't seem to see that, if two potential exchange mediums, A and B, offer identical transactions services, but B has a higher expected return, B will tend to be favored.

            By its very nature, a non-(nominal)-interest bearing base money can always be rate of return dominated by claims against it that are backed in part by interest-earning assets; yet the claims if cleverly designed may be just as convenient for transacting, if not more so, than base money itself.

            Your last post is bizarre. Neither the passage you quote nor anything else I say in TFB is at all inconsistent with what I've just written here, or with what I've been saying all along. That you bold the parts about convenience while leaving the part about interest in plain text doesn't change things!

          • Peter Surda

            What you miss is that if transaction costs of monetary base are sufficiently low, debt instruments increase transaction costs. With Bitcoin, this is demonstrated by such an instrument being technologically incompatible with Bitcoin. There is also the counterparty risk inherent in all debt instruments, and absent with the monetary base, so even technologically similar implementations of monetary base vs. debt instrument would nevertheless have different transaction costs.

            So your assumption that A and B offer identical transaction is again, just an assumption. Absent identical costs, the optimal course of action for a holder of an interest bearing instrument that does not decrease transaction costs, if he wants to use a medium of exchange, is to redeem it and transact using the monetary base. That way he minimises his transaction costs.

            You also provide no evidence to support the claim that payment of interest can supplement an increase in transaction costs for a medium of exchange. You just repeat it.

          • George Selgin

            So, instead of transacting with a claim, you redeem the claim and then transact using the redemption medium, and this extra step somehow reduces transaction costs?

            Peter, I think you have at some point blown the little light bulb that's supposed to go off in your head when you realize that you've been talking nonsense all wrong.

          • Peter Surda

            Yes professor Selgin,

            this is the effect of a monetary base with low transaction costs, and you can empirically observe such a behaviour with Bitcoin. It is also consistent with the argument of professor White that

            Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. But these are empirical factors, and not something inherent in all possible monetary systems. [emphasis added]

          • Peter Surda

            You can also observe the same effect with fiat money, to a lesser extent. It is often more convenient to pay with debit/credit card when abroad, even though there are several processing layers behind it (a payment processor, a forex transaction, card issuer, two banks, …), than paying with (foreign) cash, even though the latter transaction contains no intermediaries.

            GoWest, at , documents how adding Bitcoin into a transaction reduces transaction costs when sending money from USA to China.

            You are in error if you assume that increasing the number of steps involved in transaction always increases transaction costs.

          • Peter Surda

            Furthermore, even though the act of redemption/withdrawal and the act of paying are logically two steps, empirically (with a low-transaction-cost base) it's only one. The payer withdraws the amount directly to the payee and does not act as a middleman, i.e. he does not take a hold of the monetary base during the transaction.

            This is all observable with Bitcoin, so you can't say I'm making this up.

  • Bill Stepp

    For something to be money it must be both a generally accepted medium of exchange and a store of value, like Federal Reserve Notes (a k a greenies or Bernanke bucks). Credit cards, debit cards, and bitcoin are not money.

    • vikingvista

      A person does not hold onto something for the purpose of future trade if he doesn't consider that something to be a store of value (i.e. of future value to someone else) for at least that period of time. Therefore strictly speaking, any medium of exchange is already necessarily a store of value for each person using it. We can talk about relatively a gradient of relatively better or worse stores of value, but the old textbook criterion "store of value" doesn't seem to add anything beyond the criterion "medium of exchange".

  • Karmaisking

    Talk – especially on free banking – is cheap.

    If the argument is so obviously in favor of the free bankers, if the public simply cannot be fooled on the issue, if the questions previously provided are so obviously "wrong", it must be so easy to write your own questions. Child's play.

    Let's not wait.

    Write them out now. Here. Cut the talk. Let's have the simple questions you would ask, which were so obviously lacking in my post. I don't want to wait.

    If you can't do that, right now, never – ever – call 100 percenters morons again.

    • George Selgin

      Kamaisking, you are all misplaced bluster. Of course I will call anyone I wish whatever I wish whenever I please.

      And the issue has never been whether some people are "fooled" by banks. Exchange is not generally meant to be foolproof, which is why there is such a notion as that of caveat emptor. Those who are perplexed by banks are free to put their cash under their mattresses, or somewhere where it is even less likely to be disturbed, if it will fit there.

      • Karmaisking

        Questions please.

        I have my fingers on the cut and paste keys. Ready. To. Go. Which website do you want to use for your "oh so simple" questions? SurveyMonkey? FluidSurvey? Zoomerang? FreeOnlineSurvey?

        I'm all "misplaced bluster" – but you've suddenly gone all coy and coquettish on giving up a couple of simple questions. You're like a 16 year old on her first prom night. All nervous and shaky. Come on. Don't be so shy. Give it up. Let's have them.

        For such an elegant and clever writer you can so easily and quickly be caught out in your own "moronic" bluster.

      • George Selgin

        Really, Kamaisking, you and other anti-fractional reserve types flatter yourselves in imagining that substantial numbers of adults are are less intelligent than you are.

        I have already told you why a survey suggesting that some indeed are less intelligent (even that is conceivable, as I have admitted) would establish nothing. But as you continue to pester me, here is my suggested question; there's no need for more than one:

        "When you deposit some cash at your bank, do you suppose that your banker (1) stores it all in his safe (or perhaps in a safe at the Federal Reserve) where it stays until you come back for some or all of it, or (2) that he keeps only some and lends the rest, so that he can earn interest with which to cover the bank's costs and earn it a profit"?

        I repeat: I have no doubt that some persons will respond that they think that banks just store their money, just as some probably still believe that warts come from toads. But I also have no doubt that a world designed to conform to such persons' limited intelligence, whilst denying the rest of us the right to engage in peaceful acts of exchange for the sake of protecting them, would be as intolerable as it is unfree. To plead for it to be so designed is certainly no better than to suggest that, because some persons are not equipped to tangle with racehorses, liquor, or annuities, responsibly, no one should be allowed to mess with them.

        Finally, let me remind you that it isn't the sort of persons who may not know what banks are up to whom I referred to as "morons." It is persons like yourself who evidently do know what banks are about, but imagine that they are part of an anointed, perspicacious minority, who alone have cottoned-on somehow to bankers' otherwise meticulously-kept secret, and are determined to protect the great unwashed from being duped by it, not by informing them of the truth, so that they may then freely decide whether to pull their money, but by banning the supposedly secret practices, even though that means that others who seem to understands the secret as well as you do, yet still don't mind keeping bank deposits, must also be denied the right to do so, that is, to knowingly engage in peaceful, voluntary exchanges with those bankers. And all this while crowing about being the hardest of hard-core believers in freedom and free markets!

        Perhaps, come to think of it, I ought not to have called you morons. I ought to have called you hypocritical morons.

  • Karmaisking

    I'll side-step the low blow (you must already have tenure) and focus on the fun bits:

    OK, finally (finally!) I extracted a sample question from you which we can agree to post on a website. Great. Yes, yes, I know people are morons (100 percenters especially) and it proves nothing but it's fun nevertheless to find out what the unwashed plebs think about their own bank deposit (not that they really should be expected to know, but let's entertain ourselves shall we?).

    But, upon reading your initial attempt at a survey question, the question is so leading I feel a ring going through my nose and I'm being tugged in the direction of the question. How about this version:

    'When you deposit cash in your "at call" checking account at your bank, do you suppose the bank: (1) keeps it at the bank available for you to withdraw, or (2) keeps only some (or even none) of it at the bank and lends out most of it to borrowers?'

    The fluff is irrelevant. Why put in all the other stuff? We are asking about the status of an at call bank account, not about bank profits, bank interest and Federal Reserve safes. That stuff is irrelevant to the issue at hand and leads the reader to suspect – rightly – something is wrong with the question.

    Can you agree to the wording? Yes or no. No insults please. Try your very best to avoid the vitriol. It's so… unbecoming of you.

    Once we agree on the wording (this shouldn't be hard), I'll post it on a survey website and see what comes back from random readers. Or a professional survey company can pick it up and run with it.

    • Peter Surda

      I can obviously speak only for myself, but I don't care what the bank does with the money I deposit into the current account. I don't even care if I can withdraw it or not. They can wipe their asses with it if they want. I do almost all of my payments electronically. To me, fiat cash and even gold cash suck. I don't have a way of storing them securely, I cannot verify their authenticity (not being a numismatist), I can't even use them to pay for many of the goods and services I purchase. I don't care if historically, the monetary base was the origin of money. Even if gold was money, I find it unlikely that I'd use gold coins. Here I have to side with professor Selgin when he writes "In a mature free banking system, commodity money does not circulate, its place being taken entirely by inside money."

      Yet, simultaneously, I recognise that this is an empirical issue and a result of transaction costs of particular monetary systems. It is not an economic rule.

    • George Selgin

      (1) I mention the Fed because some respondents may know that banks may keep reserves there rather than at their own premises (leaving it out would make the choices non-exhaustive); (2) "at call," besides being a technical term the meaning of which may not be known to many, in fact presupposes a loan rather than a bailment; (3) to avoid "leading" respondents I am happy to amend my question to end simply with "lends the rest so as to earn some interest."

  • Karmaisking

    Oh, and on the issue of "free exchange" – I failed to mention I'm OK with free banking provided (1) there is a "warning notice" that comes with any "at call" bank account which ensures the vast majority (at least 80%) of people are disabused on any misunderstanding on the issue (fraud or misleading conduct is NOT a "voluntary exchange" and the common law has had a long history of requiring clear contractual terms to be communicated to the parties involved) and (2) legal tender laws are abolished.

    I never said I was a 100 percenter, but I admit I do like de Soto's arguments compared to yours. He hits the embezzlement and fraud points reasonably well. As does Murray.

    You apparently don't mind fooling people. All part of the rich tapestry of "voluntary exchange" I suppose? Perhaps fraud shouldn't exist at all as a legal concept? Perhaps the very concept is "anti-market"? Caveat emptor = Fraud should be legal? I'd love to know where you see illegal fraud occurring the market, if not in banking. You've defined it out of existence – so selling a bomb to a sucker and "leaving" 50,000 miles on the clock when the car's done 500,000 miles should be allowed as "caveat emptor" I suppose, because everyone knows used car dealers lie?

    I have a book you'd probably like to read. By Ayn Rand. And a film you might like to see. "Wall Street". It's looking tired now, but still seems right up your alley.

    • George Selgin

      "You apparently don't mind fooling people. All part of the rich tapestry of "voluntary exchange"

      Oh cut it out. The claim that bankers intentionally and systematically "fool" people–which is hardly the same as the claim that people are sometimes confused about what they do–is one I have steadfastly denied. Caveat emptor means that buyers have a responsibility to inform themselves before undertaking exchanges, and that disappointments that stem only from their failure to do so are (or ought to be considered) no ones fault but their own.

  • Karmaisking

    Agreed Question For Survey:

    'When you deposit cash in your checking account at your bank, do you suppose the bank:

    (1) keeps it at the bank available for you to withdraw when you need it, or

    (2) keeps it at the Federal Reserve available for you to withdraw when you need it, or

    (3) keeps only some of it and lends out most of it (or even all of it) to other borrowers so as to earn interest?'

  • Karmaisking

    I've posted the agreed question on a survey website. Let's not mess this up by linking it here and having free bankers take the survey (that would distort results).

    Rest assured I'll come back and post the results in a couple of months.

    Enjoy "voluntary exchange" in coercive (fraudulent?) fiat money world in the meantime.

  • Karmaisking

    What the heck, here's the link:

    So far, in 24 hours, 3 responses:
    1. One response.
    2. No responses.
    3. Two responses.

    No, this is not a significant size sample but let's wait and see. No contributions free bankers, but feel free to email it to non-expert friends.

    • George Selgin

      Let's hope the 100-percenters don't cheat either. Curious to note, K: whereas if free bankers did respond, they could do so truthfully and yet support their own position that deposit contracts don't confuse, whereas 100-percenters, to "cheat" the survey, must pretend to not know what they do know in fact.

      • Peter Surda

        The alternatives are more nuanced that you portray, professor Selgin. It's a 2×2 matrix. One issue is whether FRB is fraud or not, and the other one whether credit expansion causes the business cycle. One can, like me, hold the position that credit expansion causes business cycles but FRB is not fraud.

        Similarly as the other parties, I also attempt to explain how it is possible to establish the system I hold to be the macroeconomically more stable one: have an inelastic monetary base with ultra-low transaction costs. It has the advantage that, unlike either the freebanking or the full reserve model, it does not require a legal reform, and it already has a working implementation demonstrating that such a system is not only a theoretical model, but empirically possible. Even though it's poorly understood.

        As I attempted to explain earlier, with sufficiently low transaction costs of monetary base, bank liabilities do not evolve into widely accepted media of exchange. That prevents credit expansion even if FRB persists.

        Also, with sufficiently low transaction costs, people will tend to switch over irrespective of banking regulation or legal tender laws. The only way to prevent this is if we reach a totalitarian dystopia.

  • vikingvista

    Prof. Selgin,

    You are too generous about the intentions of the survey designers. Why didn't they ask the obvious question, "Do you know that banks loan out deposits?" and follow with, "If not, how important was it for you to know?" How could this not be intentional?

    Is there anyone alive in the Western world today who has not, for their entire lives, had access to a dictionary or encyclopedia or teacher that could have revealed to them this distinctive feature of banks, if they did not desire to know it? Did I not see this mentioned in one or more episodes of "Schoolhouse Rock" when I was a child? The idea that it has not been common knowledge for a very long times seems untenable.

    Clearly, those who wanted to know, did know, and those who didn't care to know, as with anything, have every right to not care.

  • Karmaisking

    How ironic: Bankers taking from segregated accounts is now legal in the US! Not embezzlement or fraud. Given it's now "the law' and anyone who questions "the law" is a "moron", I'm sure Selgin fully supports this decision.

    On the other hand, some of us "moronic" Rothbardian (genuine free market?) types think this decision is rubbish and yet another sign we're headed for complete and utter disaster.

    For Selgin, who cowers before "The Law", this is presumably all part of the rich tapestry of the free market. For Selgin, this judgment simply indicates you should read the fine print terms very, very (very!) carefully when you open your segregated gold accounts in future. Stupid, stupid you if you don't understand "the law". Caveat emptor guys, caveat emptor.

    Article reference below:

    Some of us 100 percenters think this is simply another corrupt BS judgment by a legal fool.

    I might now add another survey: What the heck is a "segregated gold account"?

    • George Selgin

      Drats, Karmaisking: you have exposed me! I now confess that, yes, I believe that whatever is legal is fine. That is why I write articles which, when correctly interpreted, can be seen as defending central banks and all sorts of monetary regulation and intervention. That is why I think the distinction that other free market types have made between law and legislation is rubbish. Basically, I love the government and think it can do nothing wrong. Nothing.

      I must say though that I find it rather disappointing to learn that, with all my efforts to mask my true beliefs and make them appear quite opposite what they really are, someone has managed to see the truth. I just hadn't counted on anyone taking the time to read my arguments with as much patience and discernment.

      But of course, that's what I get for having assumed that the persons I was criticizing were morons. How utterly mistaken you have proven me to be!

  • Karmaisking

    I think I've proven how widely read I am on the topic of FRB and I well know your views on the subject. I guarantee you've never read Dr Chris Leithner and I recommend his book if you get yourself a copy. It again hits the free banker argument quite hard.

    Whether you agree with what's written or how it is written is irrelevant. I've made the effort and backed it up with self-evident references (of varying quality, admittedly, but this stuff is difficult to write about in Keynesian academia – as you are well aware).

    I've seen every YouTube video of your talks. I respect you as an excellent teacher and lecturer. I particularly liked this one:

    I've also read what you've posted on FRB on this website, which is pretty substantial.

    The following is absolutely clear:

    1. You use the "it's been the law for over 150 years" argument as one of the primary arguments – if not the main argument – to support the idea that FRB cannot be fraud. Once it becomes the property of the bank, the argument is over as far as you are concerned. You don't really push deeply into the idea whether it SHOULD be the property of the bank. You just say it's the law and it's the right decision. The law and your view of what the law should be line up on this topic. End of story.

    2. de Soto and Rothbard push far more deeply into the contention that the property analysis should proceed from deeper principles of law and morality. That requires an understanding of libertarian principles, praxeology and moral philosophy. With the greatest respect I think you have little or no knowledge on all three.

    3. Axiomatic principles of praxeology deliver the following pretty obvious conclusions: (1) private property is consistent with individual liberty and allows peaceful co-existence in a world of scarcity (Hoppe) (2) property requires a possession in the physical world to have one owner (Hoppe and recent stuff on IP law by Kinsella) (3) FRB creates joints claims or ownership in a thing that can only intrinsically have one owner, thereby violating this principle (Hoppe, de Soto, Rothbard) (4) because of this "trick" "low quality" credit money (or fiduciary media) is created from higher quality money (historically gold and silver) (Mises) (5) this breaks down when trust breaks down in the functionality of fiduciary media (Mises) (6) government steps in to perpetuate the trick (all of the above and throw in White and Selgin and the other free bankers).

    You need to be steeped in Hoppe's analysis, and Mises' analysis, and de Soto's deep historical analysis to "get" this from a moral point of view.

    I don't blame you for a narrow education.

    I blame you for judging others.

    I'm shockingly bad at this myself and despite my stellar awards etc in economics at university I hated the professors so much I couldn't stomach any more of it and went into law. I admit I can't see my own intolerance and sometimes become a "hater" of bad ideas. I think you consider yourself enlightened but you're not. You're just stuck at a shallower understanding and can't break out because you've not gone deeply into moral philosophy. It's an indictment on the narrow skill base of the economics profession and you're much better than most, but still not at the level of, say, de Soto or Rothbard or Hoppe. Which is why de Soto get it right, and, in my humble, very human, very imperfect, very intolerant mind, you get it wrong.

    In any case, we are fighting over the number of angels that can dance on the tip of a needle because we are so far, far away from either free or 100 percent banking that we don't need to have these internecine squabbles. I'll leave it at that.

    • George Selgin

      Karmaisking you need to make up your mind. At 1:40AM you are snide and contemptuous of my unbridled legal positivism; by 8:58AM you are telling me I'm just not sufficiently well read. Well, I've read Messrs. Huerta de Soto and Hoppe–and more than I want too, thank you very much.

      But you cannot have read very carefully my paper on the goldsmiths, or you would know that the legal status of bank deposits I defend there is one that was founded on the ancient understanding that loose coins, having no "earmark," could not but be treated as an exception to the general rule that ownership doesn't necessarily follow possession. You may not like that traditional conclusion; but it had a perfectly reasonable foundation, and was far from having been obscure.

      Moreover, in erecting it the law also provided a perfectly simple alternative to persons who wanted their coin deposits treated as bailments, to wit: that they either handed the coins over in a sealed sack or other container, or supplied specific instructions to the effect that the coins were being offered only for storage. Huerta de Soto's elaborate attempt to suggest that this development of the law was somehow "wrong," as if one could stand above the slowly evolved customs and understanding that informed it and pass judgement from on high, is just so much dissembling of the usual start-with-a-premise-and-then-defend-it-by-hook-and-by-crook that characterizes the whole Rothbardian burlesque that its performers call "scholarship."

      I know enough about the notion of "legal positivism" to understand the danger of treating whatever happens to be legal as being therefore just. But there is a no less serious danger in pretending that the law, and especially customary law, does not demand any respect at all, in recognition of its ability to embody wisdom accumulated form long experience. It seems to me that attempts by the Rothbardians to dismiss, or to re-write, the customary law of bank deposits, make up a good illustration of the latter danger.

      • George Selgin

        "(3) FRB creates joints claims or ownership in a thing that can only intrinsically have one owner, thereby violating this principle (Hoppe, de Soto, Rothbard)"

        Assuming that you mean "claims of ownership" rather than "claims or ownership," this is false, and has been shown to be so oodles of times both on this site and elsewhere. A banknote isn't a title, and doesn't even resemble one, no matter how many times Prof. Hoppe says otherwise; and his and your assumption that one can determine otherwise by resort to "axiomatic principles," praxeological or otherwise, is absurd. It is a matter than can be settled only by bothering to look at a banknote.

        The best you can say for Hoppe is that, considering his belief that you don't need evidence to prove anything having to do with economics, he can hardly be expected to be right very often.

      • I must say, George, you really have a way of getting to the heart of the errors of the anti-FRB noise-makers, and your appeals back to customary law are exactly what this debate needs (although you did make some derogatory remarks about lawyers, I forgive you for them).

        I've recently been reading about trade credit 300 years ago, after trying to work out what could possibly lead historians to describe the economy as having shortages of specie. I found this: which explains the extensive use of trade credit and the role of merchants and traders as both borrowers and lenders and sometimes effecting clearings between customers. In an economy on a specie standard and without widespread use of banking, it appears current-account credit remains extensive, and in this environment no one would expect banks or financial institutions to be metal storage institutions. It would appear banks probably arose from merchants turned financiers rather than warehouses turned into unitised or divisible/transferable storage schemes.

        I wonder if you would be kind enough to entertain the position that, in a closed economy on a gold standard, that there would be a negative relationship between the interest rate and the stock of gold coin? Previously you dismissed this suggestion without really considering it, but I invite you to consider it properly. The basis for thinking this would be so is that the gold stock is a form of capital subject to diminishing marginal returns, and that the interest rate represents the opportunity cost of holding specie. I hope to hear from you on this.

    • Peter Surda

      Re: 3: Money substitutes are seen as substitute goods to money proper. People are not entirely indifferent to the use of them, that depends on their differences (e.g. transaction costs). A causal relationship between money proper and money substitute, and the fact that they act as substitutes from empirical point of view are inadequate reason to conclude they are the same good, so the objection to FRB fails, for the same reason why the argument for IP fails. If anything, Kinsella's writings lead to the conclusion that money substitutes are immaterial goods, copies (causally related substitutes) if you will, of money proper. Copying is not theft, and creation of money substitutes is also not theft. Copying can, in certain circumstances, result in plagiarism, or with respect to money, forgery, but this is not an inherent aspect of copying, and it is up the recipient of the copy whose position determines the legality of the copy, not the one who's property is being copied.

      Anti-FRB-ists erroneously assume that money substitute is a claim on money proper, because Mises erroneously defines them that way (actually, Mises mixes two definitions together, and than the others, including e.g. Rothbard or Salerno, take it over from him). Complementary currencies (like WIR, TEM, Ithaca hours and so on) demonstrate that there are goods that act as substitutes to money even though there is no legal link between them, only a causal one.

      Also, if monetary base is immaterial in the first place (fiat or Bitcoin), then it's not property anyway, so the whole argument about conflicting property rights fails right at the beginning.

      Anti-FRB-ists, in my opinion, argue that FRB is a violation of property rights because subconsciously they couldn't find a way of preventing credit expansion. Bitcoin demonstrates that credit expansion can be prevented without illegalising FRB.

  • Karmaisking

    Yes, apologies for the numerous typos in the post above (this topic the equivalent of crack cocaine – once started I can't stop, even when I should be tucked up in bed). "Joint claims of ownership" was indeed the intended phrase.

    I agree wholeheartedly that the history of the legal evolution of a bank deposit is useful in understanding what the law should be. However, you have a very deep-seated assumption that somehow we've been "progressing" in our understanding of these legal concepts over the last 150 years.

    I happen to think civilization goes in cycles and this is just one of many examples where the idiots have come to power and we are currently in some kind of "Planet of the Apes" movie where every bad idea in economics and law is infesting public policy around the world, not just in the US, but in the EU, in Asia (Japan especially) and in every other major economy of the world. Disaster awaits.

    This is not a test of whether you've read de Soto, but I am genuinely interested in your views:

    1. What do you think of de Soto's argument that the Romans treated a deposit as a bailment? Do you accept that this is historically accurate, or do you think he got this part of the history "wrong"? Or do you accept he's right on the historical analysis, but don't care because the Romans were stupid and backward and didn't understand how to "rev up" an economy with increased capital investment through FRB and free banking and should have allowed FRB as a legal practice, rather than threatening the death penalty over the practice?

    2. Is it possible that "evolution" in the law is not perpetual progress but rather sometimes indicates a reversion to back to corruption or bad ideas? To me we are living in a time similar to that after the French Revolution, when they tried a fiat money system that completely and utterly destroyed the French economy. It's happened before and it's happening now. (Systematic embezzlement of savings and gold by religious or political powers is one of the most frequent causes of civilizational destruction in my view.) I am amazed (amazed!) you understand the promise of a free market in money but are happy to tinker at the edges, spending much of you precious teaching time talking about pretty coins produced in Northern England during the Industrial Revolution by private coinage companies – when we are on the edge of a fiscal, economic, and financial cliff. Tenure affords you the ability to focus on your hobbies (like coin collecting?) I suppose.

    3. What do you think of de Soto's argument that, if we allow free banking, bankers will simply create another central bank through political and financial pressure when the next crisis hits, so it's a pointless exercise that necessarily gets us back to square one, is a shallow "solution" offered by shallow people and does not address the heart of the problem – eliminating the practice that gives rise to bubbles and business cycles in the first place?

    Again I emphasize we are fighting internecine battles when we should be fighting the socialist enemy but given there's no hope of winning that battle (they have the guns and the Treasury bills so we've already lost before we enter the battlefield of ideas) we may as well fight amongst ourselves.

    • Peter Surda

      Good money must be able to resist attacks from both politicians and bankers. Gold is a fail, it succumbed to both. I also find it peculiar that the "solution" to this advocated by anarchocapitalists like Rothbard, Block or Hoppe (don't know if Salerno, de Soto or Huelsmann are also anarchocapitalists) is a legal reform.

  • Karmaisking

    Agreed Peter, it is curious (even contradictory) that some 100 percenters allege the State is a corrupt, thieving psychotic organization bent on taking as much as it can from the productive, and then turning around and begging them to outlaw FRB. Like that's ever gonna happen. That's about as likely as the abolition of the central bank and the legalization of free banking. Umm… hold on, that's what this blog advocates. They must be as delusional as the 100 percenters!

    Historically, people simply fled. Once the malinvestment kicks in, there really is no solution other than de-population by any means necessary to get the surplus labor down.

    After the French Revolution, many French went to the countryside or neighboring countries. Same after the fall of the Roman Empire. After the Bank of England was established, the American Revolution kicked in, allowing free settlers the chance to live in peace far away from monetary oppression.

    As I said, I've done the analysis, and now, with no new virgin land to conquer and settle in, there is no solution. Everyone other than the 1% who control or have direct access to fiat money are completely and utterly screwed.

    There will only be cycles of poverty, oppression and madness for the masses. Like in Russia/Soviet Union. All masked by reality TV and 24 hour sports.

    As Jim Sinclair says: THERE IS NO SOLUTION.

    Nevertheless, despite the fact that this is a completely and utterly pointless exercise and despite the fact we've already lost the battle and the war, it's fun to fight amongst ourselves, isn't it?

    • Peter Surda

      I see 2 solutions: education and cryptocurrencies such as Bitcoin. In particular the latter one is appealing. Since attempts to control increases transaction costs, so a neutral decentralised system should have lower transaction costs, and that motivates people to switch, irrespective of their education/ideology.

      • Karmaisking

        Yes, education could push people to look for solutions and hopefully spontaneous solutions from the market like Bitcoin being commonly used is the key. Perhaps these spontaneous solutions (and savings accounts like Gold Money) will starve the beast, once the masses move away from traditional banking. But the masses are so stupid and so manipulated I can't see that happening anytime soon. I pray though. I pray. And I write.

  • Karmaisking

    No response from Selgin. I will treat this as a small (insignificant) victory for the 100 percenters – unless he comes back and responds to the questions listed above, to which there has been stone cold silence. I suspect (strongly) he doesn't have a copy of de Soto and hasn't read the book. But to say that to his face would be rude. I'll say it here and hope he's moved on from this post.

    • George Selgin

      Try to be more patient and more charitable, K.: I have a full-time day job, after all, and have to have time to write other posts here besides!

      I can assure you that I own a copy of Huerta De Soto's book, and that the heavy markings throughout attest both to my having read it and (in places) to the displeasure I experienced in so doing.

      As for his arguments about deposits, the amounts to what one might call "argument by etymology," by which one tries to make claims about words' "legitimate" meanings double as arguments about what actions are legitimate. That dog, as we say here in the South, won't hunt. Leland Yeager offers a trenchant criticism of the approach here. As for the merits of Huerta De Soto's actual legal claims, Henry Dunning Macleod confronted virtually identical claims almost a century and a half ago, and smashed them into itsy-bitsy pieces. (Note: Link is to the first of a series of relevant chapters of Macleod's 1878 The Elements of Banking.)

      • Karmaisking

        "Smashed to pieces"? You've got to be kidding. Nibbling at the edges more like it. From de Soto, big gobs of quality references:

        Abbott Payson Usher, in his monumental work, The Early
        History of Deposit Banking in Mediterranean Europe, studies the
        gradual emergence of fractional-reserve banking during the
        late Middle ages, a process founded on the violation of this
        general legal principle: full availability of the tantundem must
        be preserved in favor of the depositor. According to Usher, it
        is not until the thirteenth century that some private bankers
        begin to use the money of their depositors to their own advantage,
        giving rise to fractional-reserve banking and the opportunities
        for credit expansion it entails. Moreover, and contrary
        to a widely-held opinion, Usher believes this to be the most
        significant event in the history of banking, rather than the
        appearance of banks of issue (which in any case did not occur
        until much later, in the late seventeenth century)…

        Nevertheless, Callistus deceitfully appropriated
        the money, and, as he was unable to return it upon
        demand, tried to escape by sea and even attempted suicide.
        After a series of adventures, he was flogged and sentenced to
        hard labor in the mines of Sardinia…

        Indeed, Roman argentarii were not considered free to use the tantundem
        of deposits as they pleased, but were obliged to safeguard it with
        the utmost diligence. This is precisely why money deposits did not pay
        interest and in theory were not to be lent, although the depositor
        could authorize the bank to use the money for making
        payments in his name. Likewise, bankers took in time
        “deposits,” which were actually loans to the bank or mutuum

        From your source, nothing much at all.

        • Karmaisking

          And a recent quote from Gary North:

          The battle will be fought and won outside of academia. Here is where Austrians must learn to do battle.

          Inside academia, to gain tenure, every assistant professor must go through the motions of genuflecting in front of the Keynesian altar. After they gain tenure, most anti-Keynesians cannot break the habit. They sugar coat their criticisms of Keynesianism. They play the role of loyal opponents. This even include some Austrians — those who are appalled by the rhetoric of the Mises Institute and Lew They are housebroken.

          I recall one academic Austrian economist who told me that I am far too dismissive of Keynesianism, and far too contemptuous in my rhetoric. "You just can't say such things!" he told me, not grasping his grammatical error. I responded: "Yes, I can. And I do." That was in 1992. He has not changed. Neither have I.

          We have different audiences. He teaches 130 students, three days a week, eight months a year, in a government-funded minor university with no clout within the economics guild. I have 120,000 people on my mailing lists, 70,000 of them five days a week, plus readers on Lew two days a week, 52 weeks a year. I can play hardball with Keynseain twits. He must guard his words so as to curry favor with those whose opinions count in academia. He has spent his career looking over his shoulder at Keynesians, who exercise power in all of the social science academic guilds, by whose rules he must play as an outsider who is barely tolerated inside the economics guild. I have spent mine telling the crowd that the emperor has no clothes, and that his tailors are mostly Keynesians, with a few montarists pretending to hem the invisible garments. I do not abide by the rhetorical rules — "gentle, be gentle" — that Keynesian academics impose on their critics inside academia. "You sit in the corner and wait for your turn. You will get your 15 minutes. Be polite when you get your turn." That is not my style.

          Are you "that academic"?

          • George Selgin

            K, if Gary North's "style" appeals to you–we are talking about a man whose views belong to the "stone" age in more than one sense!–then there's no point in my trying to talk sense with you.

          • Peter Surda

            I thought a proper scholar is supposed to refrain from personal invectives? I rather liked North's "Mises on Money".

            With respect to deSoto, out of the Austrian writings I read, I think he provides the most thorough economic analysis of ABCT, yet the worst legal analysis of FRB. He even goes as far as to argue that causing a decrease of value of a good is illegal, something that other full reservists Austrian property rights theorists (e.g. Rothbard, Hoppe, Block) vehemently oppose.

          • George Selgin

            Peter, I leave it to others to judge whether I'm a "proper scholar" or not; but I would be something less than a proper human being were I not anxious to leave my readers without the slightest doubt concerning my reaction to Karmaisking's suggestion that I might not wish to be the sort of academic of whom Mr. North and his ilk disapprove.

  • Peter Surda

    The point I was trying to make is that I see no relevance. I'm an atheist, but don't see why that should affect the validity of North's arguments about economics. Indeed, that would be an ad hominem fallacy.

    I don't think a person who is correct on everything can even exist. I have therefore no problem with agreeing with person A about X and disagreeing about Y. Only by confrontation of opposing arguments can we even be made aware of the limits of our understanding. Also, if we agreed on everything, it would be very boring.

    • Karmaisking

      It's a bizarre form of argument. He spits out an insult like octopus ink, expecting you to focus on the insult and forget your original question. My skin is so tough it's immune. So I patiently wait for the (1) analysis of Roman law (zero) (2) analysis of mutuum contracts and their distinction from the tantundem (3) a refutation of the Hoppean axiom that a thing can't be owned by two people at the same time (or if it does it is bound to cause problems).

      I note Gary North is a lunatic on many issues: Y2K Armageddon, the moral benefits of stoning, the viciousness he had against Ellen Hodgson Brown (no doubt shared by Selgin)… the list goes on.

      However, he does well on Mises and Money, on the Keynesian critique and he slams academic tenured economists very, very well.

      Again, no response from Selgin on the substantive issue (that the academy is full of hollow men, shortly to be discredited).

      Sadly, after admiring Selgin from afar, he's become much more superficial and plastic up close.

      Illusions shattered again…

      • Peter Surda

        Well, Selgin didn't reply, but allow me.

        1 and 2: Historical examples can neither refute nor confirm economic principles. Furthermore, there are also historical counterexamples to legal relationship between money substitutes and money proper (see below), i.e. examples that show the absence of such a relationship.


        I posted above. Claiming that legally money substitutes and money proper are the same good is the same fallacy as the one behind IP (claiming that a copy is legally related to the original). Hoppe and Kinsella refute IP. I emailed with Stepahn about this in the past (he is a friend and one of the main causes of my interest in the Austrian school, and Hoppe's Democracy the God That Failed is the reason why I'm an anarchocapitalist). Stephan appears to agree with me (and Selgin) that FRB is not necessarily a violation of property rights and hinted that some other 100% reservists may also hold this opinion even though they said differently in the past. He also agrees with me that the economic and legal arguments should be analysed separately.

        Furthermore, there are examples of goods that act as substitutes to money, yet they are undoubtedly not legally related (mutual credit, various scrip and local currencies), and in some cases they are not even openly convertible. Yet their value is pegged to the money proper (I argue here: and below that the peg is an equilibrium state), and they act as substitutes to money. The Swiss WIR has existed for over 70 years. This shows that the Misesian definition of money substitutes:

        The special suitability for facilitating indirect exchanges possessed by absolutely secure and immediately payable claims to money, which we may briefly refer to as money substitutes, …

        is erroneous.

        And, obviously, if there is an immaterial monetary base (Bitcoin and to some extent fiat), these are not property (again, see Kinsella and Hoppe), so there cannot be claims on them either and the whole argument collapses, even if it was valid for gold.

        I personally don't think that gold will ever become money again, even if there was a supporting legal reform (which is already highly doubtful), due to transaction costs. At best there would be something that Mises calls credit money (imperfect claim on a commodity). Gold is probably forever delegated into a store of value.

      • George Selgin

        K, were it my goal to win over every Rothbardian I'd have gone quite mad trying long ago. One simply can't win 'em all.

        As for the rest: you complain that I don't address in detail your every argument. Well, why should I, when so many merely repeat claims I've addressed (often many times) before (e.g., Hoppe's "impossibility of multiple ownership" stuff, which pertains only if you accept his claim that banknotes are so many "titles"). And why should I trouble to respond in detail to your remarks about Usher when in response to my pointing to Macleod's discussion–a very long one that addresses precisely the other matters of Roman law that you accuse me here of failing to address–you think it sufficient to simply assert that Macleod contains "nothing much at all"!

        When I find some time I will make a post devoted to showing just how valid that last assertion is.

        Finally (and this is also in reply to Peter Surda's comments), the passage K. quotes above from Gary North contains no substantive arguments about fractional reserves or anything else: it is the sheerest blend of argumentum ad hominum and appeal to authority. When a man resorts to such arguments (as K. has done, though by one remove) the person to whom they are directed shouldn't be blamed for responding in kind, as I have done by supplying evidence that Mr. North is perhaps the last person who has any business claiming that his authority alone ought to suffice for people to believe him rather than some mere university professor.

        • Peter Surda

          Dear professor Selgin,

          if you consider North's quoted reference an ad hominem, the more appropriate response would be to point out the irrelevance right away, rather than respond with another ad hominem.

          Some people might find that unusual, but I debate because I want to learn, not to listen to people whining.

          • George Selgin

            I understand, Peter. But actually it was specifically North's appeal to authority that I intended to undermine with my remarks. In most cases such an appeal would also warrant the reply that it is irrelevant; in this one though, I hope you will agree, the temptation to point out that the authority in question was a particularly unwise one to invoke was especially hard to resist.

            Anyway, I too woul really much prefer to stick to substantive arguments, and I appreciate your urging me to overlook the other sort. I will try.

        • Peter Surda

          Also, the argument that banknotes are titles did not originate with Hoppe. It was started by Mises, in Theory of Money and Credit. The Austrians that came after him repeated this (Rothbard, Block, Salerno, Hoppe, de Soto and even the "naughty" North). To Mises' credit (no pun intended) though he also said that for an economist the exact legal status is not important, but the fact that they are convertible (I don't have the exact reference though). However complementary currencies, as they are called, show that even convertibility is not necessary.