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Ideas, interests, and free banking

At the Coordination Problem blog, Pete Boettke remarks that economists are more comfortable with theories of politics that focus on the narrow self-interest of participants rather than on ideas. Ideas matter, though, and many policies cannot be explained purely in terms of self-interest. A group exists that benefits from a policy, but it makes arguments couched in broader terms that have wide appeal. Sometimes it need not even take an obvious success or failure to shift the policy despite the influence of entrenched interests; a change in the appeal of the ideas can make the difference.

A possible case in point, mentioned in another of Pete’s recent posts, is education. (This is going to be a bit of a digression, but I hope an instructive one.) For a long time it was simply assumed that education is a necessary government function, and that governments should own the schools as well as funding them. Even now the ideological presupposition in favor of government education runs deep. Think about the last several U.S. presidential elections. The contenders in the general elections were George W. Bush (Phillips Academy, Yale, Harvard Business School), Al Gore (St. Alban’s School, Harvard, Vanderbilt Law School), John Kerry (St. Paul’s School, Yale), Barack Obama (Punahou School, Columbia, Harvard Law School), John McCain (Episcopal High School, U.S. Naval Academy), and Mitt Romney (Cranbrook School, Brigham Young, Harvard Law and Business schools). Not only did they all attend private colleges (except for the U.S. Naval Academy, which although government-owned has admission procedures like those of the elite private colleges), all went to private high schools and all who went to graduate school went to private graduate schools. And yet, rather than say, “Private schools certainly worked for me; they can also work for many others,” they focused on government schools. The same is true of such people as Bill Gates in his philanthropic efforts; Ed Glaeser, the Harvard professor of urban economics professor who sometimes writes on education; the publisher of The Nation magazine, Katerina vanden Heuvel; and many others. They all went to private high schools and private colleges!

The idea that all or at least most education must be government education is being partly worn down by experience and reporting. The Netherlands and Sweden have voucher systems for primary and secondary education, as do some localities in the United States. More important, recent research has shown in detail that in quite a few poor countries, parents who are themselves poor eschew free government schools in favor of private schools, which they prefer for their greater effectiveness both in terms of cost and educational results. Although I see some change occurring because of these experiences, I doubt they will be enough to change the balance of opinion from favoring government schools to favoring private schools. The change that has to happen is in the realm of ideas–even emotions–rather than self-interest.

Okay, now to the application to free banking. Although there are strong interests present, I suspect that ideas are the main barrier. Supplying the monetary base, like education, is one of those things that people think must be done by the government, despite the historical fact that it has often not been done by the government and despite the very bad record of governments in maintaining the purchasing power of currencies they issue. Bitcoin and the like, if they become widely used enough, will be like the private schools of India, or for that matter, the United States: able to pry minds open a bit, not enough to change the balance of opinion in favor of free banking.

So, how can the balance of opinion be changed? My ideas, and work, have been in the realm of historical research and argument, aimed at the small audience that cares about such things. It is not enough. Other people using other methods will come forward, I hope, and find some part of what I and others have done to be valuable. Some of us who blog here have been on the case for a generation now and we still don’t have traction even among monetary economists to get them to recognize that the question of monopoly versus competition in money is a key issue, not to be dismissed in a couple of paragraphs before proceeding with the rest of the discussion. Something on the order of a change in the Gestalt of the public, or at least of economists, is needed, and the issue is how to do it.

  • Paul Marks

    I believe that the move to state domination of education was the central mistake in the 19th century (although preceded by the move to state domination of education in the Prussia of Frederick the Great in the 18th century – the idea that education was state dominated in Scotland is a myth, schools were voluntary, local and Church [not national government] dominated in Scotland) – leading to all the other mistakes of the late 19th century and the 20th century.

    If education is "too important" to be left to ordinary people and voluntary institutions, then is not provision for the poor, and the old and the sick? The "logic" of state dominated education leads straight to the Welfare State – and the worship of the state explains such events as the destruction of the Constitution of the United States.

    In 1933 Franklin Roosevelt basically used the Constitution of the United States as toilet paper – doing things that even George III (in the depths of his illness) would not have done. For example, stealing privately owned gold (with threats of ten years in prison for the "crime" of owning gold) and voiding both government and private contract. Such unlimited government (tyranny) made a nonsense of the principles of the Constitution of the United States. Yet Mr Roosevelt was re elected by some 60% of the vote (against the moderate Governor of Kansas) in 1936.

    Why? There were many reasons – but the cult of government (government as somehow sacred – as the answer to all problems) taught to children in the government schools (and in private schools with teachers who had been taught approved doctrines – by the sheer domination of state education in "teacher training" and so on) is the main reason.

    The idea of thinking for themselves – of getting the Constitution of the United States (only a few pages long) and making a judgement as to whether or not the government was violating it, had become alien to the public.

    They had lost their freedom (the freedom of their minds) long BEFORE Mr Roosevelt acted.

  • Kurt,

    As usual your comments are interesting and thoughtful. I strongly agree with the importance of ideas and education.

    But calling bitcoin money is a stretch. I doubt that it provides the unit of account (the most essential function of money) for anything. Those few who accept bitcoin in payment usual price in dollars and exchange the bitcoin immediately for dollars (or Euros or something of more stable value). Though holding on to them are speculators or ideologues.

    Given the nature of money, it is hard to imagine (not for the lack of education) a unit of account gaining the wide acceptance needed for money to be money without government endorsement (hence the provision in the U.S. Constitution that does just that along with weights and measures etc.). Currency boards, which you and I have a fondness for, also require government issued base money. But stable money can get by without that but not, I would argue, without a government defined unit of account (ounce of gold, or whatever). Bitcoin doesn't cut it.

    • Kurt Schuler

      I agree that Bitcoin is not money now. Its chances of becoming money seem small to me. But still, there's a chance, and it is something new under the sun, which is rare in monetary matters, so I will keep an eye on it.

      • Paul Marks

        I am very aware of my age and the number of blows to the head I have taken over the years – so it may be that I simply can not understand the value of "Bitcoin". I am told that in India actual coins (or rather things that look like coins) are produced with Bitcoin information encoded on them – to appeal to people who lack the youthful perception to see value without a physical object. However, the words "precious number" just pass me by – if I am wrong then GOOD (for this will be a great blow against the modern state – which I despise as much as the Bitcoin people do), but I can not pretend that I see the value when I do not (I could not look myself in the mirror if I pretended that I can see the value in Bitcoin).

      • Some have argued that even if bitcoin is a poor store of value it promises to be a more efficient and convenient means of payment (it is potentially possible to separate holders of bitcoin from those accepting them in payment–and simultaneously converting them to dollars). I doubt it. Here is an interesting article on some of the technical problems it has encountered:

  • Gonzalo R. Moya V.

    It has been a while now since I read Lawrence White´s book "The Theory of Monetary Institutions" ( So I will bring up two arguments that he refuted but still are sound to me:
    1. If money is issued privately by commercial banks, the cost of making bills counterfeit-proof -which is somewhat fixed- would be an incentive to make them of large denominations (and a des-incentive to make them in short denominations).
    2. If money is issued privately by commercial banks, large banks with valuable reputations would find more profitable in the long-run to not explode their money issuing ("to cooperate" rather than "deviate" using Game Theory terminology), while small young banks with little reputation to take care of would find more appealing to explode their money issuing and collect the immediate profits from seigniorage.
    What were/are Mr. White´s or your responses to those arguments? As said in the article I quoted, "otherwise free-market-oriented
    economists […] claim money to be an exception to the general case for

    • Gonzalo R. Moya V.

      Another quote from the same article that I liked: "money is not a public good, exhibiting both excludability in supply and rivalness in use. […] although money itself may not be a public good, monetary stability, or uniformity, or information about money nonetheless are."

      • Gonzalo R. Moya V.

        WCoats has a point when saying that stable money cannot "get by" without a government defined unit of account. So if money is issued privately by commercial banks, they would need to keep the unit of account of the money issued by the government, otherwirse there would be "combinatorial of n and 2" exchange rates [i.e. n!/(2!*(n-2)!)] in a single economy, which becomes more inefficient as "n" grows large. To do so however, would be like imposing a fixed exchange rate among them, with "clearings" happening not continuosly in the market, but discretely among commercial banks behind the market on periodic meetings.

        • Paul Marks

          Gonzalo – seeking "stable money" in terms of some Irving Fisher "price index level" is an error. The only "units" needed of commodity money are units of weight and purity.

  • Mike Sproul

    One thing working in favor of free banking is the slowness of economists to recognize new kinds of money as money. In 1710, people denied that paper bills were money. In the 1840's, people denied that checking accounts were money. Nowadays, economists deny that credit cards and gift cards are money. Just as well that they deny it. As soon as they recognize credit cards as money, they will try to regulate it.

  • Paul Marks

    Mike – credit cards are already regulated (there are a lots of regulations). As for "credit cards are money" – errrr the clue is in the name – CREDIT cards. Credit is not money – the business that accepts the credit card works on the assumption that the credit card issuer has the MONEY to pay up, and the credit card company relies on people their bills to it (paying with MONEY).

    Thinking that credit is money may make you very popular with your wife (sorry if that is "sexist"), but it is not true. You can indeed "buy stuff with your credit card" – but only because the credit card company pays the business enterprise, and (yes) expects you to pay them – with money.

    Not teaching people the difference between money and credit (the former must be a STORE OF VALUE not just a "medium of exchange") is one of the great flaws of modern education. Sadly fiat money is only a store-of-value due to such things as legal tender laws and tax demands (please do not try and pay your taxes with your credit card) – but once currencies (as Carl Menger explained) were commodities that people really did value (without any legal tender laws or tax demands to back them up) and that time will come again.

  • Justin Merrill

    Great closing question, Kurt. I think the in-roads for free banking are a combination of financial innovation and setting up parallel institutions where the existing state money is failing or where the political whims are more favorable. This becomes an incubator for test cases that become a modern lesson that force people to rethink the conventional wisdom, similar to the private schooling in India.

  • Picking up on the last paragraph of Kurt Schuler's post, which I have only just read, the Free Banking group makes an enormously valuable contribution merely by keeping alive in the teeth of well-funded propaganda to the contrary the idea that there is an intellectually respectable and historically tested alternative to the current dominant concepts of money and banking – at least I have found it extremely helpful in the 24 years since I started Central Banking journal. Central banks are the product of a set of historical circumstances that will pass away. In fact they are doing their best to make sure it passes away rather soon, so don't despair!

    On the specific point of the State's role, I agree with Warren Coats. Surely the unit can be defined by the State to ensure economies of scale while the production of money takes place under Hayekian conditions. To that end I am hoping to revive an idea aired in the late 1970s – see outline in my book and website and here –

    • Paul Marks

      The only honest monetary unit would be a specific weight of a commodity (of a certain purity). I doubt the state can be trusted to define such a unit – although their responsibility for "weights and measures" is Constitutional.