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A Free-Banking Fantasy

gold atm

Everyone fantasizes about something now and then. But even I was surprised (and not at all displeased) to discover that at least one person besides me–Warren Gibson–fantasizes about…free banking! Better yet, he's invited anyone who wishes to stroll down fantasy lane with him to witness his vision of what a Wells Fargo branch might look like, if only governments would leave it and other banks alone.

I hope my readers will accept Warren's kind invitation. And the last thing I want to do is to spoil his personal pipe-dream. Still I can't help wanting to take advantage of the tantalizing picture Warren paints to dispel some common misconceptions about free banking, and especially about what a future free banking system is likely to look like.

"The first thing we notice," say Warren as we enter his fantasy bank, "is a display case showing a number of gold coins and a placard that says, “available here for 1,000 Wells Fargo Dollars each, now and forever.”

Hold it right there. In the past competitively-supplied banknotes, including those of free banking systems in Scotland and elsewhere, were convertible into either gold or silver, because back then "real" money consisted of gold or silver coins. But if you think that a return to free banking in the future would mean returning to a gold (or silver) standard, you'd better keep dreaming. Banks themselves, first of all, aren't in the business of establishing new monetary standards. A banker's job is to get people to trade whatever basic money they already employ, which is to say whichever basic money is in common use, for his or her bank's IOUs. Those IOUs will, in turn, be made redeemable in the same sort of money they were substituted for in the first place. That "Gold has physical properties that have endeared it to people over the ages—durability, divisibility, scarcity to name a few," though true, is irrelevant once some other stuff, whatever its physical properties, has come to be generally accepted in its place. The long and short of it is that, were I able to wave a magic wand right now, eliminating all obnoxious banking laws, disbanding the FOMC, and privatizing the Fed's remaining bits, including its clearing and settlement facilities, chances are we'd still find ourselves be on a paper dollar standard. Sheer momentum alone would tend to keep the dollar going, while the fact that the supply of basic dollars could no longer be expanded would, if anything, make the dollar appreciate. That's not saying that the new dollar standard would be perfect–far from it. But neither will it go "poof" and have gold appear, like magic, in its place.

So our future Wells Fargo may be allowed to issue all the IOUs it wants to, including circulating paper ones. But odds are that, unless other steps were taken to re-establish a gold standard, its IOUs will be promises to pay, not gold, but old-fashioned Federal Reserve dollars.

Warren manages, thank goodness, to avoid another popular misconception about free banking: the neo-Rothbardian claim that it would lead in practice to 100-percent reserves. "Wells Fargo," Warren says, "practices fractional reserve banking." But what, Warren imagines his companion asking, keeps Wells from issuing way more banknotes and other IOUs than it should? "The market will stop them, that’s who," says Warren. He's right, but "the market" can't work as he imagines it will. "In my scenario," Warren says,

Consumer Reports and a number of lesser known organizations track Wells Fargo and other banks. These organizations post daily figures online showing the number of Wells Fargo dollars (WF$) outstanding and the amount of gold holdings that the bank keeps in reserve to back these dollars. Premium subscribers, I imagine, can get an email alert any time a bank’s reserves fall below some specified levels. Large depositors will notify Wells Fargo of their intention to begin withdrawing deposits and/or demanding physical gold. Small depositors piggyback on the vigilance efforts of big depositors. They know it is not necessary for them to pester the bank when the big guys are doing it for everybody.

Terrific: Wells Fargo is free to go wild until Consumer Reports gets 'round to publishing its annual Fractional Reserve Bank special, in which Wells, assuming it is still around, earns it "unsatisfactory" rating, whereupon a run wipes it out at last. Runs, you see, are a little like pregnancy, in that there's no having part of one only. And if you think it makes sense for a worried depositor, large or small, to "notify" his bank before running, I strongly urge you to keep your money under a mattress. Finally, even if Consumer Reports or some other (presumably private) watchdog could somehow manage to supply real-time reports on Wells Fargo's reserve ratio, just how are consumers supposed to distinguish a reserve ratio that's just dandy from one that portends disaster? As we'll see, they can't do it by just guessing–and especially so if their guesses are as wildly off as Warren's are. (More on that below.)

If having people spy on its reserves won't suffice to keep a liberated Wells Fargo of the future in check, what will? The answer is still "the market," as Warren likes to say. But it's more precise than that: it's the competitive market for bank money, including paper banknotes, that matters. In that market a bank's notes, like checks drawn on it, make their way to (mostly rival) banks within a matter of days after being put into circulation. The rivals then return them to their source for payment. After offsetting payments are "netted out," banks' remaining dues to one another are settled in basic money. Consequently, any bank that's overgenerous in its lending doesn't have to wait for some watchdog agency to complain about its reserve ratio: it gets the message, and quickly, by seeing its reserves chipped away by its rivals.* In missing this, by the way, Warren paradoxically misses the key advantage of having multiple suppliers of convertible currency instead of just one. Free banking without a role for competition is like Hamlet…(blah blah blah).

As I mentioned, Warren avoids the misconception that a free Wells Fargo would resemble a Rothbardian money warehouse. Still, in imagining that Wells' fractional-reserve status would be "clearly outlined in the contract that depositors sign and…printed on their banknotes," he risks giving credence to the related misconception that the language on current bank depositor agreements and current and past redeemable banknotes is somehow misleading. In fact, no one who actually bothers to read a modern bank depositor's agreement can have any doubt that he or she isn't doing business with a mere warehouse. And though the phrase "fractional reserves" never appeared on past commercial banknotes, such notes, I've noted here previously, far from pretending to be warehouse receipts, were clear proof of debts contracted between their issuers and their holders.

Warren's free-banking fantasy is also fantastically off in its suggestion that a future free bank might hold reserves equal to a very substantial fraction–he uses 40% in his illustration–of its banknotes and deposits. Such high numbers reflect the view, traceable to Henri Cernuschi and repeated by von Mises, that open competition would force banks to hold much higher reserves than they've gotten away with historically. But consider: even the goldsmith bankers of the mid-17th century, when there was no question of banks being propped-up by government guarantees, implicit or otherwise (there was as yet no Bank of England to serve them as a last-resort lender), typically kept reserves equal to less than 30% of their liabilities–and this despite having relatively few, larger clients and very few ways to diversify.

The goldsmiths were also, one must admit, not the safest bankers ever. But consider the Scottish free banking system. Once the dust settled from the Ayr Bank's fantastic collapse, that system remained almost perfectly safe for the better part of a century, and yet managed to do so on specie reserves that frequently fell below two percent of their liabilities. Here again, the banks had no lender of last resort to turn to, Rothbard's suggestion to the contrary notwithstanding: although Scottish banks naturally placed funds in, and occasionally borrowed from, the London money market, they could never expect help from that quarter when they most needed it, which was during emergencies that tended to be felt most acutely there.

When one considers all the technological progress in interbank settlement technology, together with a still-more impressive increase in both opportunities for banks to engage in liability management and to employ highly-liquid securities as secondary reserves, its hard to imagine why the reserve ratios of any future free bank would be higher than that of Scottish banks two centuries ago. It's therefore unnecessary as well to worry that, were a future free banking system somehow to revert to a gold standard after all, its doing so would involve substantial real resource costs.

Warren's vision of his imaginary Wells Fargo's way of dealing with runs is, I think, generally spot-on, though I'm not sure that clearinghouses would get involved in extending emergency credit as he imagines might happen. (They did so in the U.S.; but that was a peculiar response to artificial restrictions placed upon their members' ability to issue their own banknotes.) He's also correct in arguing that having competing banks of issue doesn't mean having multiple monetary standards, though he makes free banks' inclination to adhere to a single standard appear to be merely a matter of doing what's most convenient for their customers, rather than what they cannot avoid doing in a business dedicated in the first place to receiving, and making promises to repay, some preexisting standard money. To repeat: banks aren't in the business of choosing monetary standards. Unlike a light bulb, a bank IOU isn't something its issuer can toy around with. That's why you will never see such a note with "New and Improved!" written across it, except perhaps in reference to changes in its physical design. (And even that would be tacky.)

Finally, to end on another positive note, Warren is to be commended for arguing that, were a future free banking system to witness occasional bank runs and failures, and even were it to inflict occasional losses on bank depositors and note holders, this would be no proof of its inadequacy. "Under my free banking scenario," he says, "depositors must take some responsibility for their actions." Show me a banking system where they don't have to do so, and I'll show you one that ends up being, not a dream, but a nightmare.
*Note, please, that this "adverse clearings" mechanism for constraining rival banks of issue has nothing to do with the fallacious "real bills doctrine" or with John Fullarton's related notion that bankers would be constrained to do no more than accommodate the "needs of trade" by means of the "reflux" of excess notes via loan repayments. Call it the "bad penny" theory of credit control.


  1. George,
    I completely agree with your separation of the form of banking from the issue of the currency being used and agree that it would be very unusual for most national currencies to be displaced by a private currency. If gold were to be adopted, or my Real SDR, or some other hard anchor, it would almost certainly be as a result of the government choosing to fix the price of its currency to such an anchor.

    The other Warren

  2. George:

    You talked a lot about reserves while saying nothing about assets. If I know that my bank's assets are more than enough to cover its liabilities, then I won't be bothered much if they run out of cash reserves. (I've actually had that happen at my local bank.) But I would be very bothered if I knew that the bank's assets weren't enough to cover its liabilities, and in that event it wouldn't help to know that the bank had large cash reserves.

    A bank with adequate assets can always get enough reserves, but a bank with inadequate assets can never have enough reserves.

    When it comes to bank runs and other troubles, it's assets that matter most of all. Reserves are far less important.

    1. Of course the nature of all of a bank's assets matters when it issues redeemable IOUs. I didn't mention this because I was responding to Warren Gibson's particular observations, not writing a treatise on banking!

  3. George,
    Do you think there's no place in a free banking world for money warehouses? Yes, warehouses would almost certainly charge for their services (perhaps by building a depreciation schedule into their note issues) , but there's conceivably a market for very low risk (arguably lower than notes issued by fractional reserve banks), highly liquid asset even at what amounted to at least a nominal negative interest rate. If you believe that inflation will exceed the 1.5% rate on treasury bonds, they provide a pretty good example of existing demand for that kind of asset, since they'll end up with a real negative return.

    I don't think that warehouses would be the dominant form of banking in a free banking world by any means, but I can see a place for them.

    1. Agreed. There's nothing wrong with maximising freedom of choice. And the beauty of money warehouses is that once they're in place, government can then tear up almost every bank regulation: exactly what George wants to do. That is government says to the people, "You have a choice. 1, a totally safe deposit at our warehouse bank. 2, a private bank where you're entirely on your own, just as you are when investing in the stock exchange."

    2. DMXRoid, there certainly might be some role for money warehouses. But to judge from several centuries of experience, which ought not to be ignored in speculating on the topic, it would be quite minor. (The few well-known 100-percent banks of the past were all state-sponsored, and in some cases had business only because fractional alternatives were outlawed.) Finally, the warehouses could not conveniently supply circulating notes as a bank can, because they need to collect storage fees from property owners, and thus have to be able to keep track of changing ownership.

      1. Mpesa, the moble phone accounts and means of payment in Kenya, is one hundred percent reserved and is wildly popular with more account holders than bank accounts. In the future there will be no paper currency for anyone to issue

          1. The differences are not so obvious. If a company issued prepaid debt cards and accepted deposits that constituted its liability to pay whoever accepted payment via that card AND deposited all of that money with a bank, it would be like Mpesa. The difference between either of those and banks with 100% reserves (I was referring to the Chicago Plan rather than money warehouses which would have a more difficult time clearing and settling with other banks), is that the bank deposits all of the money deposited with it in the central bank while Mpesa deposits all of the money deposited with it (the Safaricom Trust) in a bank.

          2. It seems to me Warren that on the matter in question the difference is actually straightforward enough: a money warehouse is a storage facility for high-powered or base money. Whatever is on those cellphones, it isn't base SA dollars or any other sort of base money, which you know as well as I do consists either of actual paper notes or deposit balances with the monetary authority. So, whether prepaid credit card or prepaid card or whatever is the right comparison or not, one thing M-pesa isn't is a money warehouse equivalent.

            Suppose, to make the point more clearly, that there were a gold standard. M-pesa could still work. Yet you could pry open the cellphones bearing the M-pesa (gold) balances, ready for P2P transfer, and dig through the circuitry all you like, without finding any more gold than what the electronics themselves may require.

          3. Mpesa is not a P2P transfer of money (like bitcoin). It is a modern way of delivering a check, i.e. it electronically delivers a claim on the bank. In this case (the Mpesa case) the bank is the Safaricom Trust, which maintains the deposit accounts of Mpesa depositors and information on who owns them. I don't see how it is any different than a money warehouse if you permit that the warehouse doesn't keep bricks of gold but rather claims on the gold in Ft Knox. It was a choice of the Central Bank of Kenya to require Mpesa to deposit 100% of its reserves with other banks rather than with the CBK. I should have advised them otherwise. That seems to me to be the only difference with a money warehouse bank.

        1. The thing is that the bank that received deposits in exchange for M-pesa credits doesn't commit to maintain any particular reserve against them. Outstanding M-pesa amounts are, if not like prepaid cards, then like old-fashioned fractionally reserved banknotes. The Chicago Plan also, again, requires 100% high-powered money backing of all deposits.

          I actually think M-pesa may be the future of free banking. But it isn't a 100% reserve future!

    3. Why would money be safer in a warehouse than under a matress or in a hole in the ground? If there is no real difference of security, and considering the matresses a sunk cost, money warehousers have little to offer except saved time and effort on digging holes. The number of people who are both that risk averse *and* judge the cost of storing money for themselves higher than the storage fees, represents the potential base of cutomers for money warehouses. This I would think, is a small number. Non zero perhaps, but still pretty small.

      1. "money warehousers have little to offer" They're safer than matresses aren't they? Thieves break into houses.

        Re the idea that warehouses wouldn't have many customers, there's a warehouse of a sort that's been going for decades in the UK: it's a government run savings bank – National Savings and Investments. Billions are deposited there. It invests just in government debt, and can thus afford to pay a little interest. You could say that interest is incompatible with "warehouse bank" as some understand the phrase. On the other hand Milton Friedman advocated full reserve banking, and he advocated that the warehouse section of that banking system should indeed invest in government debt. That's in Ch3 of his book "A Program for Monetary Stability".

        1. Good point, there is some security to be gained from a warehouse. But, I did say I expected a small, but non zero clientele for money warehousers. People do use the safety deposit box services offered by banks that are otherwise not 100% reserve backed, so there is some market for security for money at zero risk, but some gradual value loss, from fees and (under present conditions, but probably not under free banking, assuming the monetary base is frozen) from inflation.

          On Friedman's proposal, he inherited the idea, actually, from earlier people at Chicago. This is in fact an old Chicago idea. It's really weird that Rothbard tried to pass it off as Austrian.

  4. I agree with George’s “Sheer momentum alone would tend to keep the dollar going.” Point.

    Re “consumer reports”, Both George Selgin and Warren Gibson place much reliance on those. Strikes me we already have “consumer reporters” of a sort: credit rating agencies, and they’re clearly incompetent. Warren Buffet pays no attention to them. I think the Chinese take a dim view of US credit rating agencies and certainly they’re regularly ridiculed by MMTers.

    Next, I agree with Mike Sproul’s point above reserves and assets. To expand on that, if a bank is currently expanding the amount it lends at the same rate as other banks, it won’t run short of reserves. However, it’s perfectly possible that it is making too many incompetent loans. But that problem only becomes apparent slowly. And when the full extent of incompetent loans are exposed (think Spain and Ireland), the bank is bust: it cannot reimburse depositors.

    I think it’s totally unrealistic to expect depositors know what’s going on. And “consumer reporters” aren’t much better. Credit rating agencies and bank regulators didn’t see what was going on when Irish and Spanish banks first loaned excessive amounts to no-hoper property developers.

    1. Ralph, I thought my remarks were to the effect that Consumer Reports wouldn't help much in this case.

      But let's be fair: the credit rating agencies were corrupted by monopoly power and perverse SEC laws requiring that security issuers become the main source of demand for ratings. There have been other bank risk rating services, on the other hand, that did their jobs well.

  5. "Sheer momentum alone would tend to keep the dollar going, while the fact that the supply of basic dollars could no longer be expanded would, if anything, make the dollar appreciate."

    Trillions of monetary base, plus tens of trillions of bonds, resting precariously on sheer momentum? Sounds like the mother of all market failures.

    More likely, appreciation would be preceded by a nearly complete loss of value.

    1. Luke M, Then you're free to bet on the collapse in value of the Japanese Yen: Japan's debt relative to the GDP is much bigger than the US's. But be warned: lots of traders have made the latter bet and lost.

  6. I see, Luke. Tell me, according to your theory, then, what should the value of the dollar be right now, when the Fed is capable of expanding the supply of base dollars still further, and with no evident limit?

    1. The Fed is charged with maintaining "price stability", which it currently defines as 2% inflation. You know that, so I don't know what other answer you're looking for.

      At the end of day, the Fed is a bank. A special bank, but still a bank. Its money doesn't circulate because we've been brainwashed or coerced. It circulates because, despite rumors to the contrary, it has intrinsic value.

      (I wouldn't claim that a money without intrinsic value couldn't exist – but if such a thing is possible, it must surely be limited to a scale much smaller than the U.S. dollar.)

  7. Very pleasurable article to read. But George 3 questions:

    1. Where do I get your glasses?

    2. When is the book coming out?

    3. When are you doing another interview with I notice Professor Boettke just recently and Salerno I think a little while recently did one. You're up. I ask actually because this Antal Fekete is mauling free bankers all over the place over there. You guys dislike "internet austrians," you aint seen nothing: "internet Feketeans" – whoa.

    1. SA: (1) my glasses are, alas, no longer made, as I discovered when trying to get another pair for a new prescription; (2) some time after i get round to writing it!; (3) not likely anytime soon. And I know about Fekete and his fans; I had a run in with him back in 1982, and was quite surprised to find he had re-invented himself years later as an Austrian economist. Markets for everything, as Tyler Cowen likes to say.

      1. This is kind of off topic….

        But, speaking of "fans"….Isn't it crazy the seemingly new phenomena of economist-sociology (for lack of better term) ? Are economists the new Rock-Stars? I don't know if its always been like this but the fervor surrounding economists is a very interesting developing social trend. Maybe it is a combination of the internet and Ron Paul that galvanized peoples interest in economic subjects, perhaps the financial crisis as well contributed to peoples new focus on economics.

        Austrians, Freebankers, Feketians, INETers, the post-crash Manchester students, Krug-bots, MMT'rs – witness Mike Normans fanaticism in the Murphy v Mosler debate…Economics professors are like Generals commanding new armies of laymen lemmings. You guys will need agents soon.

  8. Also, and maybe I missed it, but Dr. Selgin it would be nice if you made reference to or linked your Cato interviews and articles here. I had no idea you talked about John Law two weeks ago, I really enjoyed that but would not have known about it if I didn't already happen to be looking for something on Just a thought.

    1. SO: I think the John Law interview was something I did for NPR a couple months ago. The good folks at Cato keep their eyes peeled for such things when they air, but I myself often don't know about them until someone (like you) mentions it!

  9. My view of free banking is that the money is redeemable in rates, borrowing and lending rates. These rates are offered by a web bot who runs a spread sheet with the Black-Scholes target rates computed so no currency user can hedge the bot. The particular currency sponsored by the bot is targeted to a marketing network which has very strong self correlations, and the bot regularly publishes the relative pricing among the finite number of business in the network. All network users are free to borrow or deposit their currency at the current rates. Any material change in the variance of rates will cause the bot to recompute the Black-Scholes target rates. The currency can be carried by consumers on a multi-currency smart card, usable anywhere a retail outlet recognizes the currency using intelligent selection mechanism in the terminal.

    In fact, I recommended the venture capital community hire George to run the new venture. I am surprised he is not the CEO of a new start up.

  10. … eliminating all obnoxious banking laws, disbanding the FOMC, and privatizing the Fed's remaining bits, including its clearing and settlement facilities, …

    You omit a key feature of fiat money here, the state's declaration of an exclusive legal tender. If the state still collects taxes and other statutory rents exclusively in dollars, spends dollars exclusively and sells entitlement to its tax revenue exclusively for dollars, there is no free banking.

    … we'd still find ourselves be on a paper dollar standard.

    Who is we? Some people already use Bitcoin, at least in part, and other people would use gold and Wells Fargo IOUs promising gold, at least in part. This transition would occur immediately if the system were truly freed, and it could occur more rapidly if the state also declared no exclusive legal tender. A state accepting any currency of the recipient's choice in payment of taxes is easily conceivable. already does it.

    … the supply of basic dollars could no longer be expanded …

    I'm not sure how eliminating the Fed fixes the supply of dollars. The Treasury must continue printing paper currency; otherwise, its supply decreases rapidly.

    Consumer Reports and a number of lesser known organizations track Wells Fargo and other banks.

    This description of the market's policing of promissory notes is incredibly archaic, practically 19th century. First, notes issued today could be entirely electronic. Each note could carry a unique signature, and a distributed title registry could identify specific collateral backing each note. Anyone with a web browser could at any time identify the collateral securing a note in his possession. If any item of collateral were overleveraged, the market could quickly discover this fact, as easily as I discover unscrupulous sellers on Ebay. All of the technology required by this sort of system exists. A title registry could even be distributed, like the blockchain, so no central accountant could doctor it.

    … how are consumers supposed to distinguish a reserve ratio that's just dandy from one that portends disaster?

    Aggregates like "reserve ratio" are so 20th century. When a bank's record of every note it circulates, referencing every title to collateral securing each note, is a matter of public record, available to anyone with a browser at any time, these aggregates are more interesting to academics than to note holders. Insurers guaranteeing the value of notes, when collateral is lost or falls in value, still watch these aggregates, but as an individual note holder, I care more about the security of my individual notes, and my software can track this security while I sleep. I care no more about your note than I care about your house when Wells Fargo insures both of our houses.

    … banks' remaining dues to one another are settled in basic money.

    A bank would also deposit another bank's notes in the other bank to earn interest on the deposit, interest payable by the other bank from the stream of interest payments it receives from its borrowers. The first bank can't lend to these borrowers, because they've already borrowed from the second bank, and they can't obtain the existing obligation of these borrowers by demanding the first bank's reserves, because the (metaphorical) fine print on the first bank's notes don't permit it.

    Free banking without a role for competition is like Hamlet…(blah blah blah).

    Agreed. The competition need not take the form that you imagine.

    … printed on their banknotes …

    Printing ink on dead trees? Doesn't Warren have a smart phone yet? Only the poorest people, and a few fanatics with a fetish for physical currency, would read anything printed on paper notes.

    1. Martin, that the principles of adverse clearings apply to digital IOUs is already understood. The "banknotes" aspect of competition is the novel one. Of course there are important developments that may altogether displace paper, but at present the stuff is in high demand still, and the Fed's monopoly of it is absolute. So, if you want competition, you have to allow other banks to compete in supplying bits of dead trees with ink on them, among other options.

      As for legal tender, you confuse it with public receivability. There's no getting around the latter so long as there's a government to which payments are owed, that government must be given some say as to what it will receive for them. In fact, though, the U.S. Treasury actually prefers private bank money to Fed notes in payments. But it in any event prefers dollars and their equivalents to gold, bitcoin, etc. There's no getting around the "big player" influence here. But still, your references to how "some people" us bitcoin is hardly compelling: "some people" refers to a network that's miniscule compared to the network of dollar uses, whose members also (whether they admit it or not) mainly treat it as a minor supplement to their holdings of government currencies. The network economies are all in favor of existing monies, in other words.

      1. I don't know about adverse clearings, but everything I say is already understood by someone. Competing promissory notes (if not literally paper notes) are the critical novelty, but if a monopolist dictates the standard promised, particularly if the monopolist commands everyone to collect the standard and deliver it periodically to the monopolist while selling entitlement to the revenue to control credit markets, the resulting novelty is much less novel.

        If paper is in high demand, I haven't noticed. I receive practically all of my income and spend the vast majority of it electronically.

        An effective monopoly of coercive force obviously has a say in what it receives in taxes, but it may say that it will receive whatever its subjects choose to receive and spend only what it receives without selling entitlement to what it receives. Expecting a state to say so may be incredible, but we are fantasizing here. If the government preferred anything we're discussing here, we wouldn't be discussing it here.

        "Some people use bitcoin" wasn't supposed to be compelling. It responded to "we'd still find ourselves be on a paper dollar standard." The point is that some of us, however few of us, may depart from what the rest of us do. I don't imagine free banking (other than Orwellian "free banking") ever occurring from the top down, but it can emerge from the bottom up among people desiring it if people are free enough to choose what they desire. If most people never desire it, that's not a problem for me.

        1. Martin,
          You said: "If most people never desire it, that's not a problem for me." But it would be. If most people and places will not accept what you want to use as money, then you can't use it as money. Its usefulness comes from near universal, or at least widespread, acceptance.

          1. The UAE Dirham isn't nearly universal or even widespread, outside of the UAE, but you can spend it at, along with the Uzbekistan Sum and the Vietnamese Dong. Information technology makes that possible, so George seems entirely mistaken to minimize its relevance in this context.

            If you want to use U.S. dollars (paper or otherwise) in your accounting, because you've always used them and most everyone around you uses them now, then you don't want free banking, and that's not a fundamental problem for me, but some people, if only a few of us, do want free banking, and we can have it without imposing it on you. The only question is: will the people who don't want free banking impose their preference on us?

            If George is only saying that they will, I suppose he's right, but then I don't know why he fantasizes about free banking at all. In terms of the U.S. dollar, eliminating obnoxious banking laws and the FOMC is hardly less fantastic than Warren's fantasy.

  11. Aside from technology the debate misses specialization, especially labor markets. What currency do I pay workers and what currency will they want? The choice is the bank specializing in local labor markets. Bankers who know the demographics, the relative supply and demand, and can evaluate skill levels. The labor banker, to survive, will keep my labor costs the most stable because the labor banker is still loaning money on labor costs, and collecting savings from labor. The labor bank wants free market exchange for its money as its specialization makes it too risky for it to automatically accept other banks notes, say from a bank specializing in housing.

    1. No, Matt. It doesn't work that way. As I said several times above, banks aren't in the business of selling monetary standards, any more than your local office-supply store is in the business of trying to sell rulers representing novel standards of measurement. Banks receive standard money, and give out IOUs denominated in same. If enough people in a community embrace a standard, the local bank has an incentive to honor it. But the bank itself will not invent it. That is not what banks do, except in some people's imagination, including, alas, Hayek's.

      1. Banks are not in the business of selling monetary standards, but if it doesn't violate banking laws, a particular bank may choose to issue notes promising a standard that its notes have not promised before. If Bitcoin prices weren't inherently unstable, I'd expect Bitcoin banks to emerge spontaneously this way. If I were a Bitcoin believer myself, I could offer credit to another believer willing to buy my house over time with Bitcoin, and since I could do so individually, a group of people could outsource the accounting for these arrangements to a business, and this business could become a Bitcoin bank, and these people could use resulting banknotes as money. If no state dictates a monetary standard, standards necessarily arise this way, and standards come and go.

      2. I probably pushed the idea of labor currency too far, I do not mean it to be standard money.

        A better definition would be to outsource the labor payment system. The bank only knows the labor market, but it knows all the labor market, more than any single employer can know. But otherwise, it does exchange its checks for standard cash. So internally, its money is really shares of the labor market. It sets lending and savings rates in units of labor market, but its target is to keep its standard cash flow variance within the standard labor unit variances. Hence it offers inflation adjusted labor prices to both workers and employers and its internal units are really 'shares of a labor bank'. Since the par value of a labor unit, in standard cash, changes, the employer always has access to borrow, or save, in 'shares' of the labor bank.

        There is an enforcement problem, it does not want to become a standard bank, it loses its value added knowledge of the labor market. Like a farm bank, really.

        1. Allow me to pollute this blog one more time and explain why I like the idea.

          The rate setting mechanism publishes the probability distribution of wages over the community. It does this each time there is a material change in its standard money flows. That distribution is the strike price in a competitive labor market. If the labor bank is large enough, and purely labor, then no employer can out bargain any other employer on wages alone. So that whole part of the equation is gone, and the labor negotiations are stricly about discovered value added, by the employee or the employer. And the protocol for computing the strike price and labor banks rates can be open source.

          The standard money issue really should go the other way, the labor bank does not want to become standard money, I missed that, my bad. If labor bank shares become standard money then the probability distribution of wages is no longer valid. In terms of Black-Scholes, the safe rate is the wage probability distribution, the labor bank wants to keep that safe.

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