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Why Discuss It?

I've been busy lately preparing a long-delayed review essay on Charles Calomiris' and Stephen Haber's Fragile by Design. Although, having argued the same point for many years now, I was bound to approve of that book's thesis to the effect that banking systems, rather than being inherently unstable, are made so by bad government policies, the fact that I did only made it all the more disappointing to encounter in the same work the opinion that talk about free banking (referred to obliquely and inaccurately as "libertarian utopianism") is a waste of time because governments aren't about to embrace the idea.*

That encounter goaded me to reach for my copy of John Morley's superb 1898 essay, On Compromise, in which he asks,

How far, and in what way, ought respect either for immediate practical convenience, or for the current prejudices, to weigh against respect for truth? For how much is it well that the individual should allow the feelings and convictions of the many to count, when he comes to shape, to express, and to act upon his own feelings and convictions? Are we only to be permitted to defend general principles, on condition that we draw no practical inferences from them? Is every other idea to yield precedence and empire to existing circumstances, and is the immediate and universal workableness of a policy to be the main test of its intrinsic fitness?

In a nutshell, Morley's answer to all of these questions is, "Not a bit"–not, at least, so long as one wishes to avoid the "disingenuousness of self-illusion" and consequent "depressing deference to the existing state of things, or to what is immediately practical," that are the inevitable "result of compromising truth in the matter of forming and holding opinions":

An excessive devotion to what is 'practical' tends to make people habitually deny that it can be worth while to form an opinion, when it happens at the moment to be incapable of realization, for the reason that there is no direct prospect of inducing a sufficient number of persons to share it. 'We are quite willing to think that your view is the right one, and would produce all the improvements for which you hope; but then there is not the smallest chance of persuading the only persons able to carry out such a view; why therefore discuss it?' No talk is more familiar than this. As if the mere possibility of the view being a right one did not obviously entitle it to discussion; discussion being the only process by which people are likely to be induced to accept it, or else to find good grounds for finally dismissing it.

"Seen from the ordinary standards of intellectual integrity," Morley says, it is contemptible enough that many politicians should be unwilling to entertain an idea until they're convinced that it is "capable of being at once embodied in a bill." Still "there are excellent reasons why a statesman immersed in the actual conduct of affairs, should confine his attention to the work which he finds to do." But the fact that politicians are so preoccupied

furnishes all the better reason why as many other people as possible should busy themselves in helping to prepare opinion for the practical application of unfamiliar but weighty and promising suggestions, by constant and ready discussion of them upon their merits… As it is, everybody knows that questions are inadequately discussed, or often not discussed at all, on the ground that the time is not yet come for their solution. Then when some unforeseen perturbation, or the natural course of things, forces on the time for their solution, they are settled in a slovenly, imperfect, and often downright vicious manner, from the fact that opinion has not been prepared for solving them in an efficient and perfect manner.

If, while reading that last sentence, the words "Dodd-Frank" bounced around your cerebrum, you get the point.

Calomiris' and Haber's uncharitable treatment of the free banking literature–and, within the academy at least, nothing can be more uncharitable than to dismiss ideas while also taking care to avoid referring to, let alone actually addressing, the works professing those ideas–compels me to quote one more passage from On Compromise. This time the words, instead of being Morley's own, are ones he himself quotes from Isaac Taylor's Natural History of Enthusiasm:

An opinion gravely professed by a man of sense and education demands always respectful consideration–demands and actually receives it from those whose own sense and education give them a correlative right; and whoever offends against this sort of courtesy may fairly be deemed to have forfeited the privileges it secures.

I have a lot more to say about Fragile by Design, and especially about how its authors' commitment to a reductive sort of Public Choice theory causes them to adulterate a generally sound understanding of the legislative causes of financial crises with an excessively pessimistic, if not a fatalistic, view of the possibility of reform. But if I ever wish to get around to saying it, I had better stop blogging.
*See pp. 491-2. Although Calomiris and Haber never refer to "free banking" as such, except in its degenerate antebellum U.S. variant, that it is free bankers of the sort they have in mind is evident enough from the views they attribute to "libertarian utopians," such as their treatment of the Scottish system as most closely approximating their ideal.


  1. I personally do not find it important to look at the bank-crises standing on their own, but at the full circle of life… because sometimes it might be that the possibility of a bank crisis is necessary if banks are going to perform their job in helping our economies move forward. You could have banks being too safe.

    At this moment there is so much frantic discussions at impeding the taxpayer from having to foot the bill of a bank crisis… with no concern about whether their after tax taxable incomes could be even more reduced as a consequence.

    1. Per,

      I’m not sure about your assumption in the above link that better capital ratios force banks to take fewer risks: you say, “These regulations are stopping our banks from financing the risky future by keeping them busy profitably re-financing the safer past.”

      In the extreme case, where commercial banks are funded JUST BY shares, there’d be nothing to stop a bank advertising the fact that it specialises in risky sub-prime mortgages and trying to attract shareholders. If shareholders are willing to fund risky stuff on the stock exchange (as well as safe stuff) why wouldn’t they be willing to fund risky banks?

      It’s certainly true that improved bank capital ratios will reduce the amount of risky lending TO A FINITE EXTENT. But only to the extent that risks have been imposed on bank shareholders and removed from taxpayers. And I suggest there is no excuse whatever for taxpayers bearing any risk in the case of banks any more than taxpayers should bear the risks involved in car manufacture, the chemical industry, etc.

  2. The title “Fragile by Design” reminds me of a sentence from the abstract of a paper by Douglas Diamond and Raghuram Rajan (link below) which in reference to the liquidity producing characteristics of banks said “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these functions.”

    There has to be something fundamentally wrong with a system that in order to produce liquidity, has to risk bank runs and credit crunches. What’s wrong is that pure liquidity, i.e. money, is a liability of a bank which is withdrawable quickly or on demand, in contrast to which a bank’s assets cannot be quickly converted to cash. That’s asking for trouble, and the reality is that banks have been collapsing regular as clockwork for hundred years. Daft.

    The latter fundamental defect can be removed simply by having just the state issue money, while commercial banks / lending entities fund themselves just from shares. A bank which is funded just by shares cannot collapse. As George Segin put it in his book “Theory of Free Banking”, “For a balance sheet without debt liabilities, insolvency is ruled out….”

    1. "There has to be something fundamentally wrong with a system that in order to produce liquidity, has to risk bank runs and credit crunches. What’s wrong is that pure liquidity, i.e. money, is a liability of a bank which is withdrawable quickly or on demand, in contrast to which a bank’s assets cannot be quickly converted to cash. That’s asking for trouble, and the reality is that banks have been collapsing regular as clockwork for hundred years. Daft."

      But Ralph, it is precisely this sort of theory that Calomiris and Haber (and I also, in my article linked above) show to be utterly inconsistent with the historical facts. Diamond just can't bring himself to confront such evidence, here or in his work with Dybvig. He instead clings to a myth of "inherent instability" that presumably depends on reducing the whole of banking history to a single week in the U.S. in 1933–and getting the facts about that single week wrong to boot!

      Show me a theory that can explain Scotland between 1772 and 1845 and Canada for the last decades of the 19th century (or in the early 1930s, for that matter) and I will be all ears. Otherwise, not.

  3. Status quo bias typically wins the day and century, losing only the age. Men are less interested in their fame in posterity than in those years that they eat, breathe, spend, and give acceptance speeches.

    An eternally relevant essay. Thanks for the link.

  4. Excellent response to defeatist pragmatism. The reason for discussing things that are impractical now is 1) to make them practical in the future. We make the impractical practical by chipping away at dead inertia of the present way of thinking. Crises will eventually convince people to abandon past failed attempts and embrace new ideas. 2) The impractical gives us a goal. When the status quo fails repeatedly, in which direction should we change? The impractical guides us. 3) The impractical idea serves as a constant standard against which to measure other ideas. If an idea is true but impractical only because of obstinacy, then the impractical can aid us in assessing why and where the practical keeps failing.

  5. Pithy and succinct – as always, Dr. Selgin. Really, as always. Beautiful panache and astounding wit.

    I think if you had read my first comment a few posts back you would understand that I surf exactly this wavelength. As I was listing off Barnes and Noble titles I was trying to remind and make aware what Rothbard said, as Friedman had done as well, and as Galbraith demonstrated before them: writing books scaled for a more non-academic audience is the way into the cannon and getting the brand out there. Like them or not – thats not the point – more and more people continue to read Rothbard, Friedman, and others. Thomas Sowell is a good addition but the Pikettys, Lapavitsas', the commies and the wack-pots have caught on. We NEED Selgin on the rack at the bookstore. Reviews and academic papers are great – the 10 people here may read it(I will read it) – but the rest of us won't know about it unless Selgin is next to "Free to Choose" not just next to some SCIgen paper most of nobody wouldn't know the difference of anyway.

    Very Kindly,

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