===== PAGE 1 ===== FE. y | ndorstandanly s set | in among zentinte economists. Asa result, some writers have turned to the alternative of free . retical model and histor. i | banking, praising tai the he ther couritry had no central bank; more importantly; Chile had. 100. percent PNET roney. : PFinance Biuintos strongly oppose “was a haven of monetary: and financial stability, the envy. - ‘of Latin America. The: ‘reason: ‘was not. simply that the Finance, Manuel or money 2 Cue ln stated that he would Students and: faculty: alike ; find the: ¢ informal. d discussion time a aluable aspect ‘of the Mises Institute’s summer conferénces: Dr. Gordon; Professors Rothbard and Hoppe and a student continue a | cussion during. a break at last summer's Introductory Course i in. SA ~Seneuil (1 (181; 31892). ‘whio was also to | - serve as an official economic: adviser to the Chilean Min-. | istry of Finance.” Courcelle-Seneuil wag devoted to free | faire in general, but his major interest "have liked to establish a ‘governmental’ bank, but found it ~~ to'eng | politically impossible to.do sor “I would not have hesitated Le { to: propose the establishment of fa bank: by the government ny Tito this idyll of hard money a there stepped, snfortunately; ne Ir meashbabaq Bo European knowledge a and civilization, andi in 1853 it hired 1 co asity st he Franti of economics i in the new v University of 1 entral ‘banking and the estab- free ng system: Eritering an academic | vacuum; Professor Couircelle-Seneuil quickly became ex- : tremely influential in Chile, © persuading the © government ===== PAGE 2 ===== charismatic teaching style produced : a host of highly influen- - wold last only for 90 days and (b) that the maximum note tial disciples, who dominated Chilean economic thought and © issue would be 1,5 million pesos. The fiat notes would not political economy for decades. Lo ~~ belegal tender, but would be receivable in taxes or other The Law of 1860 created a free bankers’ paradise i in payments to the government. Second, the government Chile. Anyone or any group could set up abank and issue ~~ induced four of the leading banks to agree to receive the notes. There were no reserve requirements, no minimum ~~ Banco Nacional notes at par, and also to turn over to the ~ capital or loan requirements, no limits on loans to direc- government all coin taken in to help eventually redeem - tors, and no inspection by government agencies. Only two the bank notes received by the government. Third, the minor restrictions were imposed: a maximum note issue government agreed to issue 1 million pesos worth of bonds of 150% of the bank’s capital, and a ban on very small to bekeptasa guarantee for any of the inconvertible bank | denomination notes under 20 pesos. All else was per- notes received by the government. mitted, within, of course, the standard free-banking = As always happens with monetary expansion, this | - framework of requiring banks to red¢em their notes in. = first step was but the tentative beginning of the inflation - gold on demand.6 The Law. of 1860 continued ta be the ~~ program Another law was passed at the end of December, basic banking law of Chile until 1925. = delaying specie convertibility until six months after the As aresult of the new system of free banking, however, war with Spain was over, or, at the latest, by the end of ~ Chile rapidly embarked on-a: long-run, generally ac- Junie 1867. In addition, more inconvertible bank notes celerating course of inflation. The old haven of hard money -. ‘were made receivable in taxes. and financial stability was no more. ~~ oo Fiscal needs escalated rapidly as the blockade by the It took less than five years for the brave new free | Spanish navy led to a fall in customs revenue, and to banking system to collapse. In 1864; Spain and Peru went difficulty in repaying the public debt, held mainly by "to war over the Guano Islands off the coast of South - . England, ‘The next. step in the acceleration of inflation ~ America, and Chile went tothe aid of Peru, declaring war ~~ came in July 1866. The government borrowed massively on Spain on September 24; 1865. By the outbreak of war, from banks to help pay the foreign debt; in return, the the free banks had inflated to such an extent that they government bestowed a host of special privileges on the were vulnerable to insolvency i in amajor crisis. Hence; the banks. The law of the previous December was repealed. = war scare of 1865 led to massive withdrawals of bank ~~ From now on, there were to be no restrictions. on the | deposits and the cashing of notes from the fractional amount of loans or note issue by the banks; all bank notes 5 - reserve banks..At the point of insolvency, the banks were ~~ would be inconvertible until six months after the war, or ~ promptly saved by the Chilean government, which now - June 1867 at the latest. All banks lending money to the embarked on a path of inconvertible bank paper. First, = government would agree to receive each others’ notes at - five days after the declaration of war, it authorized the: = par for. twenty-two years, to the extent of 4.5 million W) new Banco Nacional de Chile to issue a mass of inconver: pesos. For this massive set of privileges, the banks agreed - tible bank notes; stipulating (a) that the inconvertibility © to'pay the government a fee of 2 percent per annum on any inconvertible notes outstanding. - aE Edwin Ww. Kemmerer, the American “ ‘money doctor” ont one of his .. Fortunately, the war was. shortly over, and: convert- trips to-South America to help with monetary “reforms” that led to ibility into specie was soon resumed. But the signal had the creation of the Chilean central bank been given to the banks that the government would bail them out in times of real. financial trouble, and so an ‘inflationary boom soon began, fueled by bank credit ex- ‘pansion. and ensuing speculation, The bank credit boom after 1866 led to a speculative boom in mining, as well as “an increase in. wheat and copper prices. Frank Fetter | * notes that “the banks were doing business on a very small | "margin of safety.” ? : Booms always give way to busts, and a depression set "in by 1874. Farmers and landlords went even more heavi- ly into debt; and total agricultural debt in arrears rose to. 11.7% in 1877 and to a staggering 33.6% in 1879. There. | ‘was a heavy depression in the mining industries: ‘The "Chilean government incurred heavy deficits from 1874 on. Having exhausted private nonbank, credit sources after - several years, the government in ‘June of 1878 finally turned to the already overextended ‘banks, borrowing 2.5 * million pesos per year for two years. In turn, the Treasury allowed the lending banks: to: issue 10.1 million pesos ing bank. notes, to. be receivable | in taxes. : This inflationary i issue of bank notes led to domestic ~~ inflation.and toa rapid export of specie. The “free” banks © werenow onthe ropes, then quickly, on July 23, 1878, the ===== PAGE 3 ===== Chilean government. authorized all of the banks. partici: Co | pating in the recent: loan to immediately: suspend: specie... . payments “temporarily”™—until the end: of August 1879. In the meanwhile, these now fiat bank notes would serve. ag legaltender. Infact, this “temporary” imconvertibility was. © to last for nearly fifty years. Chile had’ been: plunged into he inflationary world of fiat 1 money; and had done so in ~ therabsence of a central bank, in: fact in the. LLL of a Co | | supposedly ideal system of fin e banking. Central banking and free bank- : oo Eo . ing arenotthe only twopessible = =~ ) monetary alternatives. A third: Lo . “within a firm matrix of 100 per: oo Co cent Specie reserves. EE ERC become & apparent. “While in ' Chile, his magnum opus, a two-volume treatise on political economy; was published: . Cin France in’ 1858, and the: grateful { Chilean government | ~ financed'a Spanish translation. After his returnto France, | he continued asa prolific writer on banking, economicand: | Co historical topics, and himself translated works on political | - economy from the English: into French. He was appointed | "a member of the Council of State in 1879 and elected: a | member of the prestigious Academy of Moral and Political + Sciences three years later. - Unfortunately, Cotmeelle-Seneul’s reputation didnot | : fare. nearly so-well in, the ‘country of his major.influence. | * Courcelle-Senenilis still, to this day, de-nounced bitterly | by Chileans as being personally responsible for the con- | ll tinuing history of inflation aswell as for nearly: all. other | economic ills. As Albert Hirschman notes, Courcelle~ | "+ Seneuil has been “demonized. "9 > Unfortunately, his free- | Lo banking inflation also in retrospect discredited other, far | ~superior-reforms due to his influence: e.g, & drasticcut in | RI Chilean: tariffs in 1860; as ‘well as the privatization of | The fateful suspension of & specie e payment in 1878 was. ai blamed, ag usual in such situations, onthe “unfavorable balance of payments,” no recognition: being given tothe’ yanki ig was successfully used to; discredit his other, more | | cause of that balance—the domestic bank credit inflation. ‘beneficia contributions to the Chilean economy. - The actual reason for the suspension was:the’ imminent - sl ) | bankruptey of several of the: largest: barks: participating. it that. central banking and free-bankin z are fot the only in the government: loan. Just before: the suspension; on: i sible monet alternatives. A third route is freedom of | 3 June 30,1878, demand liabilities of the Chilean commer- pos ry SE +. bankingwithin a firm matrix of 100 percent specie reserves, | cial banks totalled 46:8 millioh. ‘pesos; specie reserves of = any fractional reserve issue being considered a violation of the | : the barks totalled only 3.45 million 1 pesos, a-Teserve ratio. © ol ing : | : | of 7.4%. Even during prosperity atthe end of 1869; total | reserves had constituted only 8% of demand liabilities. . 0 The largest lending bank, and the most ardent advocate. _ of suspension, the Banco:Nacional, was the'most unsound. = “lower than the average of 5%, it als July 11, it had loaned ‘out-noi le [ -vapital to its own directors: During the next. anions Chile made only orig: i for _ feeble attempt: toreturn to gold. I | exchange rate between: the peso and English pound was: o£." Doubleday, 1965), pp: 221. Prank W. Fetter, Monetary Inflation in Chite (Princeton: | | -Princeton University Press; 1931), p. 7... | i During the 1860s, two: commercial houses in: Santiago . began to issue and: cireulate notes, but at Teast one of Shem, 14 pence to the peso, the Chilean: government: insisted returning to gold at. 18 pence to the peso. The subsequ . appreciation, of the] peso; and monetary ary: ge: in Chile led to a run. orn the: banks in 1898, ar manent return. to fiat money. ; later, “the Chilean ovis i € aper money, was: established permanently.” And what of Courcelle- oo special od in 1855; id, Born nthe Dordogne Cou ho the di uy pousinally g ned: the other gold—ex- Bie standard: nations inthe dustbin of history, and fiat oe le-Seneuil? He had: the good + i - fortune to return in triumph to: France: in 1868; after the victory of his ideas and before: their consequences would EE nitrate. minesconqueredi ina war against Peru.in the early | 1880s. ‘Thus, Professor’ Courcelle-Séneuil’s: legacy in | . The Chilean experience ‘highlights an important point: | Lo general laws sgsinat fraud and: theft. ‘Notes on scaleloans to itsown: ‘directors: J Bef re susponsion, on = ERIS “On the most st prominent example of this undue h haste, eed Ey am spent indebted to Professor Joseph Salerno of Pace | * University for calling my attention to this: is problem: ad to the of the banks. Not only: was. its reserve: ratio in in: : 1869 3 far dl relevant literature. 2 Identity ” Revi SA ics, 2 (1988), pp. 247-957. | 98; ‘when the market. Identity, Review of £ nomics, ¢ PP. 2Albert 0. Hirschman, Journeys. Toward Progress: (New | rin 1852. Albert. 0: n, “Jean. Gustave Cour- le Seneuil had studied law, | ; d anit i dfirmin hishome province; had written 3 "many articles: for the Journal des Economistes; and had | publiched: & small book in. 1840: on: Credit and Banking. He | LE ‘briefly held a high post in the French Ministry of Finance after | ds the 1848 revolution; and published: a successful textbock on | n celle-Seneuil (1813-1892), The New Pulgrave: Dictionary of | Le . Boonomics, 1G (London: Macmillan, , 1987); pp: 706-708. : : edie] endence from Spain, the Chilean currency CL consisted solely of freely circulated European. gold and | silver coins. Independent Chile imposed a bimetallic | 3 ===== PAGE 4 ===== Doane ; standard, but the fixed x. rate. of 16: 5: 1 overvalued old oa “and undervalued silver, and the resilt was an- effective : - gold standard. In 1851, the fixed ratio was’ changed to. oo | 16.4:1, but silver was s still undervalued, and the gold Te standard continued. | Co Fetter, Monetary Inflation, Pp. 2. %0n. the farflung activities of Edwin 0. Kemmerer nec imposing the gold-exchange standard and central banking “in the Third World, see: Robert N. ‘Seidel; “American Re-- formers Abroad: the Kemmerer Missions in South America, i 1923-31,” Journal of Economic History, 32 (June 1972), pp. * 520-545; Emily S. Rosenberg and Norman L. ‘Rosenberg, “From Colonialism to. Professionalism: the Public-Private Dynamic in United States Foreign Financial Advising, 1898-. 1929,” Journal of American. History, 74 (June 1987); and | Murray N. Rothbard, “The Origins of the Federal Reserve,” oo | (unpublished MS), Pp. '50,60-61. SRS Co Hirschman, “Courcelle- Seneuil” n. 'p] 07. Murray Rothbard i is the. 84. Holl 1 distinguished professor of ‘economics at the University of Nevada, Las Vegas, and is - TL Come Study this Summer “at the ER “Ludwig v von Mises University” J uly. 8-15, 1989. Stanford University Stanford, California . | Instruction will be conducted on \ introductory, inter. “mediate and advanced levels with courses covering 50. areas. of interest, Faculty for hig § summers « conference = will include: Murray N. Rothbard. Chisitman Cel University ¢ of Nevada, Tas Vegas es RA ) Robert Batemareo: Co ae Hoppe co i : Mvp Cele Le University of Nevada, - " Fraser Instituté: A ‘Sheldon Richman Williamson Evers ~~ et Institute for Humane | Hoover Institution Gli Studies co - Roger! Garrison: ©. on Je h: or | Auburn University’ | Sa Josep Salerno © | DavidGerdon = George Selgin - - - Mises Institute oo Ea ERE University. of Hong Korg Ho Deborah Walker - ape, Mark Skousen | Loyola University. Rollins Coe : Jeffrey Herheron EEN * Washington gra. 2 Jefferson Colege For more. information write or : phone t the o Ladi v von . 1 ‘Mises Institute, Auburn University. he \_ | Auburn, A Alsbama, 36849, 205): 8442500 The first is that the monopolization of banknote issue by | ‘monetary’ authorities all-over the world has been the -.. greatest ‘blunder ever ‘committed in monetary and bank- | ing policy. The second is that economists’ failure to clearly understand the implications of monopolized note issue | - “has been the greatest. blunder ‘ever committed in | ~~. monetary and banking theory. Monopolized note issue is | SEEN policy’ blunder because it has been the main cause of + instability of money supply. and of consequent monetary | ~ disturbances, Had note issue been allowed to develop |. freely ‘and. competitively, we probably would not have “come to: think of money as something that “will not vice president for academic affairs at the Ludwig: von Mises manage itself.” The failure of theorists to understand the | Institute; "implications of monopolized note issue has been a blunder . of theory: because it hasled to their approval of monopoly in the one industry where it could do the greatest harm. The Implications of Freedom (in Banking and Note Issue by George A. Selgin (This article i i§, ; the first of fwo parts based ona lecture given. at the Mises Institute’s Austrian Economics Colloquium at Auburn. University.) 1 wish to defend two controversial claims i in this article. Note Issue and Monetary Stability Whats sobantly monetary stability? How do we want : the banking system to behave? I take for granted that | . .monetary stability means that. the supply of money is - |. neither excessive nor deficient relative to the wants of the : | <7 public. To.a¢complish this, a banking system should in- cel “crease the supply of bank money whenever: the public’ 5 | oC + demand: for it—relative to some given level of income— | gTOWS; ‘and it should reduce the supply of money whenever “the public's demand for it relative to its income falls. At oocalk other times the supply of money should not be changed: | at all. Finally, ‘the ‘banking system should supply the 1+ public with the right mixture of different types of bank - money, including currency and deposits of different kinds. Obviously, real-world banking systems do not work: | IC this way, Why is that? The three most important reasons | ~}.. + are-as follows: 1) unwarranted changes in the supply of | So “base” or “high-powered” money—the stuff banks hold in 1 reserve; 2) unwarranted changes in the reserve ratio; and, | unaceommodated. changes in the publics relative de-- | mand for currency. The first of these reasons is the main :|* cause of undesirable, secular maladjustment of the money - | + supply, whereas the third is the most important cause of | “cyclical: maladjustment. This, at least, has been true for © all banking systems with a ‘centralized’ currency-issue. : ~~ But how significant would these causes of disequilibrium "be in a system with competitive. note issue? The answer’ | s. 1 is, motvery. ‘Compared to centralized banking, free banking | REE offers relatively. little. scope: for disequilibrium money supply: EE r e matter. of the monetary base. In” “monetary systems with centralized note issue, the liabil- Se -ities—hoth' purrency and deposits—of the privileged bank Ja issue: > inevitably become: part of the supply of base | : Ek “Consider firs KE ===== PAGE 5 ===== LE created deflationary pressures: that would nothavearisen ° | under free banking. All" told; then, changes in the monetary base would bea much less significant source: of "have been under central banking. : B All of this assumes free banking: has to-be based on a commodity, such as gold. Today, another alternative ex- 1 istsitoestablish free banking onthe basisof a frozen stock | © offiat base money, such as Federal Reserve Notes. In this | CL arrangement banks would issue paper-claims redeemable | - in base dcllars, to be held by the public; the base dollars | ~~ scope-at all for monetary disequilibrium stemming from cL unwanted changes i in the size: of the monetary base. i. Next let's consider how the reserve ratio would: behave i in a free: banking system. Tt is-often assumed that unregu- | lated: banks, issuing convertible notes, could expand! their of Freedom in Banking and Note Issue” to students and ~~ : Saculty at the Jansing and Economics Colloquium spon- : AL hold any definite fraction of base money reser- sored by the Mi ises Institute: at Auburn. n University. So. ves. Statements: ‘in many textbooks even imply that this “would occur with'checkable deposits were it not for the © presence of statutory reserve requirements. Yet in many. money. That is true even with a \ commodity sta an d ard; Li © countries for many years ‘banks were not constrained by a fiat standard the: liabilities of the central bank are the ~~ statutory reserve requirements, and the supply of only kind of base: money. This comes about because other : banks, stripped of their ri ight te issue notes, dre anxious were relatively unhindered in their. ability to issue notes. 1 to keep on. hand notes issued by the: central bank to. give “0 What was it that made the: reserve multiplier finitein | | Even under a gold standard, a contest for notes of the 7 Justas for deposits, any issue in excess of the publics - - @ == bank develops among the unprivileged banks, aggregate needs {for some given level of income) leads to | - taking the place of what (under fi ee note i fue) woildbe © ® redeposit. of the excess, mainly at rival banks. Banks a contest for gold. Banks end up treating. the central send the notes’ through the: clearinghouse tobe redeemed, | banks liabilities as reserves, using them to settle clear-: "like somany checks, Net clearing debits have tobe settled | { ings. Thus these liabilities become part.of the monetary in base money. Since the exact incidence of net ‘debits base—a kind of high-powered. money: ‘What's 1 more, they ~ cannot be known with certainty, every bank will, in an- are a most unstable type of high-powered money, because ~~ ticipation of such debits arising at any particular clearing | they can be increased or withdrawn at any time at the session, keepa balance of base money on hand. The size whim of the central bank, This causes a multiple expan- = «of the balance is determined according to the same prin- | . | sion or contraction of loans and ‘deposits by all other ciples which determine the size of other private firms’ | | banks. All large inflations in recent history were aresult = holdings of precautionary and transactions balances of ! | of expansion of this kind -of high-powered money; the = hank deposits. | : t- | economics of gold mining make it impossible for the supp- ~~. These determinants of reserve-demand do net imply = | ly of gold-ever to expand’ for: very long at an: excessive rate. a constant average reserve ratio; for in a free banking | Foo Had note issue never been monopolized, ‘the mon- System there is one circumstance when the reserve ratio i | etary base in most countries in’ the West would have = Will change: it is when the public's real demand for free- t | consisted of gold: no bank would have exclusively been bank notes:and deposit-credits expands or contracts over | abletohaveits liabilities heldby other banks asreserves, ~~ time. For example, as the demand for notes increases, | | © | orused tosettle their clearings with:one another, instead = ‘mere notesbecome “lodged” in circulation, and fewerenter . | of being routinely redeemed. Additions to the stock of the clearing mechanism. As a result of this, gross bank ‘monetary gold. are, of course, Jimited ‘by the: profitability clearings fall along: with other measures ‘of nominal | of gold mining. Notwithstanding conventional wisdomto = spending. Since the transactions and precautionary . ; | the contrary, this makes the supply of monetary gold = demand for bank reserves is positively related to the co endogenous. Most of the alleged gold “supply shocks” in. volume of ‘clearings, the new, optimal reserve ratio will be . | history actually occurred in response to falling prices, that lower than the actual ratioof bank reserves to liabilities. | | @: they were provoked by an increase inthe relative price Assuming that the nominal supply of reserves is fixed, : woof gold. They, therefore represented movements along'a = banks will: adapt to the new situation by expanding their . | gold-supply schedule rather than shifts in that schedule. balance sheets ‘through new loans and note issues until 1 Furthermore, many of these movements were a result of the volume of gross clearings returns to its former level. | government { interference in the monetary: system, which oo Ineffect, thebanks i changes inthe he velocity of; Toney | | ‘monetary disequilibrium under free banking: than they 1 themselves; however, could be used exclusively ‘as bank | ‘reserves. Obviously this kind of reform would provide no | - deposits did not explode. This was even true when hanks |. to their: customers who ask for cash, . these: banking systems? For competitively issued notes, | ===== PAGE 6 ===== | with equal and. opposite changes i in. its nominal quantity: wn become part. of its reserves in the future when they are | the money multiplier adjusts passively to the wants ofthe sent back for: redemption, In short, a free banking system |. ‘public. This is very desirable; it is ‘manifestly not what Lov is. readily capable of: accommodating changes in the | | happens in regulated and centralized banking systems. - public's currency ratio simply by adjusting the form of its This brings us £6 the third and final cause of ‘monetary - ~~ outstanding liabilities, without provoking any un- disequilibrium in ‘conventional banking systems: unde desirable changes in the total quantity of those liabilities. commodated changes-in the public’ § currency ratio, that S * Such a banking system isnot “inherently unstable” in the? k is, in’ the public's. preferred ‘mixture of currency. and sense meant by Friedman and Mints. Indeed, Friedman “4 - deposit balances. It is now well known that, in centralized © and Mints. themselves realize this advantage. of free note’ || banking systems with a constant monetary base, an in- ~ issue. That fact did not inspire them, however, to argue | 1 | crease in the public's relative demand for.currency. leads in favor of free banking. Friedman uncharacteristically 1 to a riet loss of bank reserves, which in turn leads toa. dismissed. the idea ‘as: ‘being. politically impossible, al- ‘| much larger, disequilibrating- fall inthe: volume of "though. he has recently become more open to it. As for | deposits, Likewise a fall in the demand for currency leads ae, Mints; he was frankly opposed to fractional reserve bank- |. | to an equal expansion ‘of bank reserves, which—in the ook ing. in any form; he did say, however, that those who | | absence of adjustments by the central bank— will cause a weren't entirely. opposed to. fractional reserve banking | disequiltibrating, multiple expansion of deposits, Histori- © - were being inconsistent: and $eigieal | in not argu ing for i. . Co AE PUI EE SE competitive note i issue. | oa Had note i issue never been mo- ye RE Note Issue and Monetary Theory * nopolized, the ‘monetary. base a NT 0 Regrettably most economists. failed to poe any of the in most countries. in the West ~~. potential advantages for monetary stability of freedom in would have consisted of F gold. 0. note issue. Instead, they completely misunderstood the “role played by bank notes, treating them as if they must always ‘be high-1 owered money, and using this approach +. tojustify and-defend the. ‘monopolization of note issue in Rl cally, such ungpensansl hash in’ he. demand for co : | currency have been a very important cause of monetary ‘banking systems everywhere. The irony is that it was 5 crises. Here in the United States, an ‘uncompensated fall’ ol really the: ‘monopoly privilege in. note. issue itself" which | | in currency demand was largely responsible for the post- = caused notes to become high powered. ‘The very thing that - | World War Inflationary boom: On the other hand, unde: . was perceived as giving central banks the power to control | commodated growth in currency demands played. amajor the. money" supply was also the principal cause of the lg role in the pre-Federal Reserve money Danis s and also i in Co money supply being out of control i in the first place. Lo the “Great Contraction” of 1930 10 1933. Fe EL 5 Take, for example, the case of England. The Bank of ” EE Such. disturbances caused by: changes in’ curréncy i ol England enjoyed; limited monopoly privilegesi in note issue Lg demand are what monetarists: like: Henry Simons; Lloyd oo from the time of its establishment in 1694. For the next J -f Mints, and Milton Friedman have i in mind when they refer p century and: a half, England was subjected to numerous |. 3 J ‘to the “inherent instability” f fractional reserve banking, - .-moretary. crises, including the long-lasting Bank Restric- | H Yet this. instability is really: not inherent in fractional = = tion during which the price of gold appreciated in terms SE reserve. banking at: alli Tt: is: only inherent in fractional: BER of bank ; money: ‘Many. of these crises were blamed on the |. i reserve banking. systems that lack freedom of note issue, SE ‘overissue of bank notes. But rather: than ‘appreciate: the ‘ : . | including, in particular, all central banking systems: This ~~ unique ability possessed by the Bank of England to engage | coo is because the notes of a. privileged ‘bank of issue come to - all other banks in a ‘general expansion, the reformers’ { 1 | lead a kind: of “double life” as so-called: “high-powered” Ce targeted: the already underprivileged country banks for I | money. ‘These notes are not really always high powered: =~ the. strictest ‘regulation. The ultimate consequence’ of | ‘when inthe hands of the public they resemble other types ~~ Peel's Bank Act of 1844 was to strip those banks entirely | of “mild mannered” bank money. It is when they « enterthe ‘of their powers of note issue, actually enhancing the power |: | tillsof commercial banks that they become “super”money. ~~ of the Bank of England: It was as if the traffic police no | The ebb and flow of these notes to and from bank reserves: revoked the. licenses: of a pack of ‘speeding bicyclists | causes their: power: to. change; thereby also: galsing the rs without noticing that the bicycles were being chased by |’ oo ke. total money stock to. increase and to diminish. +. anout-of-control tank, and then put the tank in charge of | | Nothing of the sort occurs under complete | freedom of directing traffic! 1 3 “note issue. For: here whenever a bank's customers cometo.” = - Inthe United. States the most serious defects of the RE it demanding currency: in. exchange. for their deposits, 1 the ~~ National Banking system. can. be traced to bond- deposit g |" bank can simply draw: upona stock of niotes'produiced, as” requiremenits on note issue and to restrictions against | | itwere;by its own printing press. On its balances sheet the ~~ branch ‘banking. But instead of ‘acknowledging this and Ta | bank debits the entry for. t Hisbilitios deposits’ and then "moving to a deregulated system, the authorities chose to.g . Los oirenlatic 5 axa alll another batch of bad regulations on top of the ones! ; +. "that had failed, The new system, because it was more | -. ©. centralized, was actually capable of even greater mischief | : than what ith had replaced; vet when Pilg facts was revealed | i | ===== PAGE 7 ===== after no less than two decades its only effect wastolaunch ‘widely used money better functions as a medium of ex- still another batch of misguided banking regulations. - change than a less widely used one. It is misled, however, In short, economists’ failure to understand the im- in supposing that European integration and the ECU— plications-of freedom of note issue has led them to endorse only because Europe is obviously larger than its national monopoly in the one place where its effects.could be most components and the ECU thus would circulate more wide- (@evastating. In so doing they helped to tarnish the in- . ly than any national currency—have anything to do with 9 isible hand by involving it in regular monetary crises wider markets or better money. The truth is precisely the that were not a product of its own wrongdoing. SE _ reverse: European integration implies a uniformly raised ~ overall level of governmental interferences with market operations, i.e. of economic disintegration; and the ECU - . | ~~. ©. means the substitution of bad monies circulating in George Selgin is a lecturer at the University of Hong smaller territories by a worse one circulating in all of Kong. He will also be a member of the faculty for the Mises Europe. Institute's summer: conference at Stanford U , | July 8.15, 1989." ne 0 | piversity, | If European integration v were really meant to widen markets, there would be no need for intergovernmental negotiations or agreements. This could occur at any time simply by refraining from any restrictions and regulations regarding the inflow and outflow of goods and services across state borders. Even if other governments did not TTL I HEORY George Selgin’s book, Theory of = follow a state’s example, such a policy would invariably OF FREE ~ Free Banking: Money Supply © = ensure the state’s optimal economic integration and the BANKING | BE under Competitive Note Issues - level of wealth production and acquisition (such that any ony Se available from the Luduwig von - retaliation for another's non-free trade policies would not SEVENOULCONN Mises Institute; $25.00 hardback, ~~ ceria ; T1on-Eret , UNDER oo : LEE only harm foreigners, but invariably also inlanders). con A Ll SE - Needless to say, unilateral free trade policies com- EAS Lo : : bined with attempts to convince others of the mutual GEORGE A SELGIN CL advantage of following suit is not the integration course that governments of Western European countries have ~ been taking during the last 30 some years. Revealingly enough, the one European country coming the closest to a & - ‘policy of unilateral free trade, Switzerland, has rover shown any serious interest in joining the European Com- European Economic Integr: ation . munity (nor does it plan to supplant the Swiss Franc by and the ECU = the ECU). Switzerland—small, multilingual, sparsely en- Co " dowed by nature—has not only not suffered economically from this non-integration course; but has increasingly “outdistanced its integrationist neighbors and could con- by Hans-Hermann Hoppe | According to official, intergovernmental agreements, by 1992 a European central bank—most likely as an . ¢eivably become the world’s most prosperous country. offshoot, of the present European Monetary Cooperation Instead, what the integrationist European govern- Fund—will be established, and the ECU, in existence ments have been up to from the very beginning is the since 1979; will become the -all-European currency sup- multilateral negotiation of cartel agreements between planting the various European national monies. At the agencies possessing the powers to tax and regulate dis- same time the economic integration of the ten current - tinct populations and areas. Naturally, it is against any | member states of the European Community will sup-. ©. such government's interest to enter an agreement that | posedly be complete. would imply a reduction of its own income, If agreements between governments are at all possible, they can only ‘concern the coordination of measures designed to increase taxes and/or regulatory powers for all of the participating governments. In the field of regulatory action, in par- ticular, this implies that agreements must typically in- * volve compromising on the smallest common denominator | There are some who, for one reason or - another, doubt that this will actually happen, or that it will occur as soon | | as 1992. However, almost everyone thinks of it as ‘a generally good idea’. Yet European integration and the - ECU are nothing but bad news, , economically. as well ht morally. such that if government A regulates matter X and B the Public opinion, which will ultimately determine matter Y, their “integration” then consists of A and B whether.or not these plans will become reality, and which uniformly regulating X and ¥. Such indeed are the major presently gives them so much favorable treatment, suffers 3 accomplishments of the European integration: the crea- from two fundamental misconceptions, spread and rein- ‘tion of a steadily growing and lavishly supported @ through deliberately deceptive government Eurobureaucracy in Brussels, Strasburg and Luxemburg ‘propaganda. ; : : in addition to or, most likely, equally increased national - Public opinion is: correct as s regards its mition that © bureaucracies; the implementation of agricultural Shtogration into wider markets is economically better policies more absurd even than those of the United States, than integiution, into a smaller one, ‘and: that a more with mindhoggling waste and pervasive corruption; the 7 ===== PAGE 8 ===== unification of the tax structure through, for example, = mands of a rational, universal ethic. On the contrary, it is European-wide introduction of a value added tax (VAT), = advocated because it allows more inflation, more and numerous industrial regulations which will result in fraudulent income redistribution by all participating a general increase in discretionary governmental powers; governments than even the present one, while it simul- - massive interregional redistribution beondoggles; and taneously aggravates the problem of cyclical malinvest- ever increasing protectionist policies vis-a-vis ‘outsiders’ ments with subsequent recession periods. as the necessary complement of all of this ‘integration.’ There is another element that must be recognized if | Similarly, if the European governments were really oneisto fully comprehend the nature of European integra- eager to create a better money, this, too, could be done tion and the role of the ECU in this process. For while it unilaterally, in one stroke, and at any time. A government is true that intergovernmental agreements can only con- ~ would only have to establish a free internal market for cern a multilateral increase of the powers to tax, regulate, money and banking (that is, it would have to give up and counterfeit, and while European integration is indeed monopolistic central banking), and anything but 100 per- nothing but the establishment of an increasingly mighty cent reserve (deposit-)banking would have tobe regarded cartel of governmental exploitation and expropriation, ‘asincompatible with the rights of private property owners such a commonality of governmental interest is by no - and thus fraudulent. There can be little doubt that under = means sufficient to bring about an ultimate agreement these circumstances gold, having historically demonstrat- ~~ between governments. Governments are competitors, too. ed its status as a universal money, would quickly outcom- In fact, their competition for exclusive control over ter- pete all other monies and emerge as the one commodity ritories and populations is by nature antagonistic. Yet as best serving the function of a common medium of ex- antagonistic competitors, governments face the same change. A full-fledged gold standard would also be the problem that any attempt to form a voluntary cartel faces. optimal solution for any country desiring economic in- ~ Any such cartel is doomed to fail. and not only because of | tegration even if other governments were not likewise the pressure exerted by the existence of other, non-mem- willing to abandon their practice of monopolistically con- ~~ ber governments. In particular because of internal pres- trolled fractional reserve banking, because it would avoid ~~ sure, i.e. because of the fact that the governments which the recurring cycles of malinvestments and subsequent tax, regulate and counterfeit least and which accordingly liquidations necessarily associated with fractional reserve can draw on more prosperous societies and to be the ones | | ‘banking. financially better off, are also those governments which | Naturally, no such thing has ever been the objective have the least interest in complying with any cartel agree- of the major European governments. With a system of oo central bdnking and a pure paper money standard in - With the ECU established as place, each government reaches complete internal the all-European paper curren- autonomy for counterfeiting. That is, each is in the posi- tion to enrich itself at the expense of others simply by creating money out of thin air and buying real assets with cy, joint counterfeiting powers of governments are extended such money. No government will ever deliberately one step further. sacrifice this magic wand. If there can be agreements between governments on monetary policy at all, it can ment. To be sure, their exploitative powers could surely again only concern an increase in each government's increase with successful intergovernment cartelization. counterfeiting powers. And indeed, the European However, their power being relative to that of the compet- monetary integration policy, traditionally implemented ing governments would rise if they abstained from such a through a system of ‘flexibly fixed’ exchange rates be- ‘course of action and kept pursuing their policies of low level tween national currencies (much like the present taxation and regulation and of hard money which made “snake”), has served precisely this purpose of enhancing them the more successful governments in the first place. the state’s inflationary powers by agreeing with other Ifinstead they participate in an intergovernmental cartel, “monopolists on a policy of joint, coordinated counterfeiting. ~~ this implies benefiting less successful governments at However, this system is still unsatisfactory for each ~~ their own expense. individual government because it cannot rule out that one Why in spite of these. disincentives, has the West currency may systematically depreciate against another, German government—the most economically advanced and hence that the power of one government will fall country among the major European nations and the one relative to that of another. The ECU and the plan to with the hardest currency (except for Switzerland)— substitute it for the various national European currencies played a leading role in the European integration process? is the means for overcoming this obstacle. With the ECU The reason for this must be sought outside of Europe. The established as the all-European paper currency, such driving force behind the economic and monetary integra- | ° relative depreciation is no longer possible within the en- tion of Europe is the United States. It is the United States | j tire territory of the European Community, and thus the government that most wants it and has used its dominat new joint counterfeiting powers of all the involved govern- position vis-a-vis the major Western European govern- ments are extended. - ments, and in particular West Germany, to make them The idea of the ECU is not. pushed for economic or overcome this disincentive and instead choose the course other reasons that have anything to do with the com- of cartelization they have actually taken. Without United 8 ===== PAGE 9 ===== States governing detiiration: of relevant: European “tors (such as a lower level of taxation and/or regulation) governments the ‘European “integration” process: would". can still make its eurrency systematically appreciate | have ended as quickly as and forthe same reason: {Bat any: against the dominant state’s international reserve eur- [ strictly voluntary cartelization inevitably does. réncy, ‘which. in time would tend to erode the latter's. With: ‘the end: of World War II the United: States ‘superior: ‘military position. Post- World War II develop- government had established itself as the world’s premier ment of West Germany and the German mark, and recent- | bower; and in particular as the power that had acquired . . 1ys Japan and the yen are notable examples for such | | a status of military. dominance over most: of Western. growing “economic” threats to the United States hegemony. + Europe. Formalized also in such: later ‘agreements. as. -. From. ‘a status of ‘military superiority, the effective * NATO; the United States relation vis- a-vis the major ~~ promotion by the United States government of | . | West European governments had become a. hegemonic Lee ‘integrationist” tendencies within regions of inereasing | - one. The United States troops and military’ installations. economic strength; first and foremost, in Western Europe, is that were and still’ are: stationed: all” across: Western "the. ‘means: for: countering ‘and’ possibly: overcoming such | Europe are the most. vivid expression of the limited: “dangers of relative power erosion, and of the constraints sovereignty of the major European governments. And all - which they invariably impose on a state's internal powers. ~ “the while this hegemonic relation: has been most of taxation, ;regulation, and counterfeiting: Left on itsown | “| pronounced with respect to West Germany, whose govern- the European: integration process would have foundered "|. ment to this day has riot acquired even so much asa ‘because it works against the self-interest of the economi- | legalistic veil of sovereignty, but must openly and admit- “cally and. finaneially most successful participant. How- : tedly (if only reluctantly) conduct its. affairs within the 8 ever, , for the United States Severna ¢ the cartelization I constant: constraints of an enduring logel, status of f the Le : United States military: occupation, - ve, 1 fe Given this position of military dominsnice ( (whit me cidentally it could only achieve because it. could draw on =~ E i EAR integration and e es. +: tablishment of the ECU mark 1 a relatively. less: taxed and: regulated, ‘and hence ‘more Rd . an important step toward the. - prosperous society: that’ must. ultimately provide the. - ultimate ‘goal of: creating. a Ee ~ economic resources necessary to secure military success); one-world currency. 5 | it hasbeen only natural forthe United States government. Lon fo Sompley such potver jotteon hi fe. on of the Western Buropean power structure is of natural | {intern al and external sources, Not sifprisingly, it} as "interest, precisely because it implies such a weakening of | rved. as the springboard for higher internal taxes for = relatively: stronger governments and currencies. The |. increased “defense” expenditures. But more importantly, threat to the United States government and U.S. dollar | | beginning asearly as 1944 with the Bretton Woods agree: supremacy is thereby reduced. At the same time, by © | ment, it has served as the means for implementing an. lending active support to: an integration process that | | international monetary system: which established the '. means Buropéan-wide increased levels of governmental ».| United States dollaras the international reserve currency: TE “taxation, regulation; and paper money creation (and that “and arranged for a policy of coordinated inflation in the ~~ {8 thus bound. to- assure the happy cooperation of all course of which the United States would set the pace in" “participating governments, including that of West Ger- - the ‘process: of governmental counterfeiting and. the - many, obviously the relative loser in this scheme, yet also E central bariks of dominated foreign: states would counter- ~~ theone whose sovereignty is most severely limited), addi- fe | s Utiited: tional" room: ig created. for the: expansion of the United ; overnment’s 5 internal’ powers of exploitation. | Finally, European integration and the ECU mark an foreign: citizens; and: simultane sly the inflationary important: step- toward the: ultimate goal of creating a - potential of the entire participating banking system is ~. one-world paper currency, and a worldwide unified and - systematically inereased. {which makes the dominated harmonized tax- -regulation structure administered by a | governments Deny : onough to console themselves with Sah "United States dominated ‘world: bank and government. | Col 00 that atilast weuld get rid of all external, competitive . obstacles to counterfeiting, taxing and regulating. With . "the European integration near completion, ‘the next 7 foreseeable step in this direction will be increased by "United States efforts to ‘integrate’ the Pacific region, with Japan destined to play a role similar to that of West EN Germany on the Atlantic side. . . sition, For exch: y © All this hasnothing todo with operation of free market. | d termined by: the nary a forces. Rather than being an extension of free markets and the Various. articipating central banks. Uk: a better media of ‘exchange, it is the extension of United ting’ States government's power: bi through counterfeiting fraud: is ni [- Such. an a rn vis-a-vis. econo timate y they. are determined by purchasing power parity. ‘Statesimperial power, of a dollar imperialism built ontop | . a And ‘even if a dominated state's. central bank willingly - of it, and of intergovernmental cartelization with a inflates along with the dominating o one's, , then, other fae Lo worldwide Hiergused levels of taxption, regulation, andi In ===== PAGE 10 ===== T particular paper money inflation. heartily encouraged to pursue their chosen areas of con- For a fuller treatment of these and related matters goo. "centration, whether applied or theoretical. A new my “Banking, Nation States, and International Politics,” Be “departmental: colloquium, which begins next term, will - The Review of Austrian ‘Economics, Vol. IV (1989) - provide a bi-monthly forum for presentation and discus- (forthcoming) and “Marxist and Austrian Class Analysis,” sion of the resear being done within the department as in: Llewellyn H. Rockwell; Jr. (ed.), Marxism. Economics, wellas diverse topics of interes . Religion, Politics, and Philosophy, Auburn, Alabama: Mises . - Two of the university's re Institute te (forthcoming 1989). SET CL ly dedicated to the Sn of econom Hans-Hermann Hoppe i is associate professir of economics CL ~ the local or community by tants with ther at the University of Nevada, Las Vegas, and a senior ~~ market studies. The Center for Economic Educatie fellow of the Mises Institute. He eis 4 frequent lecturer at il part of ‘a national network of 20 centers that aim-at Mises Institute conferences. Co ~~ ‘WR . improving the quality and quantity of economics taught at all levels. Both: of these centers provide a poter source of employment. for graduate students. SN. y RE TE SST ‘The university as a whole i is also in a period of expan-" : 4 Theory of 4 Cole oe sion, It has an enrollment of over 14,000 students on a 3 | agli nd “Professor Hoppe's most recent. 385 sore campus located just a few miles from the big Capitalism | book, A. Theory .of Socialism oe — "and Capitalisin (Kluwer hotels and bright lights of the Las Vegas casinos; while, Massena Hoppe } CS cademic Publishers) is avail Co being only five hours from Los Angeles. i able from the Mises Institut, ~~ While UNLV may not have crossed many minds as a CL 545. 00 har dback. o.t : place to pursue advanced studies ir economics, it should: - now-be seriously considered by any student wishing to “take advantage of a course of study emphasizing the ) BE oe Austrian school. Itis: ‘also a rare opportunity to be able to MR]... study and interact with several of the foremost scholars Le TE in Austrian economics today. | oo Anyone interested in obtaining more information BE Ls BR about the existing economics program and/or the newly J “University of Nevada, Las Vegas “created concentration in Austrian economics should write To Offer Masters Program - y ) i SE directly to the Eo 3 ment; University of Nevada, Las Vegas, outh | in Austrian Economics IE Maryland Parkway, ] has Vegas, Nevada 89154. uj "by Amy Marshall Co co FE BR The ‘economics ‘department at. the: University of . . Nevada, Las Vegas, has recently received approval for Amy. Marshall i isa 2 Mises follow and graduate student in the creation of a new concentration: in Austrian. economics within the. Theory and Policy track of the . Masters of Arts Program. The economics department - over ‘the past several years has been committed to growth and expansion. and Austrian economics has been a major focus of that expansion. With Professor Murray N. Rothbard and Professor. Hans-Hermann ~ Hoppe on the faculty, in addition to the promotion, of : Professor Roger Arnold as’ ‘department head, gives & solid base for this new program. i . : The proposed, Austrian economics concentration will: have three core courses, Course titles: and descriptions are in the process of being formalized. In addition to". ‘these core courses now under consideration, there will Bi be 30 hours of required electives and then comprehen. N { sive exams or a thesis. Most: of these: existing electives can be taken from the Austrian faculty and it is also 1 possible to have Austrian Hirseiion.o on a $H8. exam Co FE or thesis committee. | ca : The" economics: department i is vibrant. and g growing. The faculty of more than 15°is rather: eclectic, with no" ~ overriding solidarity other than that found among those : = - | interested in: Austrian economics: Al the students are BE oe economics at the University of Nevada, Las Vegas. 10 ===== PAGE 11 ===== ~ | Asa ‘response. to this, it was appropriate that the “Ke es and Ke e ianism” IE Ludwig von Mises Institute called an interdisciplinary | yu yn S | . meeting to assess the state of Marxist ideology today: April 28 - 29, 1989 CT oo “Marxism: History, Philosophy, Religion, and Economics,” {October 15-16, 1988 at the St. Moritz Hotel in New York Gutman Conference Center So "City. The attendance was high, the discussion was lively, Lo. at Harv ard: Square ~ ~~." { andthe papers were rigorous. and diversified. i. Cambridge. Massachusetts |. Professor Murray Rothbard, of the University of - Nevada, Las Vegas, presented his paper on “Marx as a - Christian Heretic.” Rothbard connected Marx’s theory of cL the direction of history with that of medieval Christian A History of Anti-Keynesian Doctrines ~ |. heresies which made no Creator-Creation distinction and Mark Skousen taught that history was in the process of unifying God and | Man into one being. Dr. David Gordon, a philosopher an The Philosopiviedl Foundations of senior fellow of the Mises Institute, spoke on the “Foun- Koynesiantom ) oo Cb dations of Marx's Philosophy and Economics,” in which he | ave nee traced Hegel's thought in Marx and showed it to be riddled Income-Expenditure Analysis | withconfusions.” “and the Chicago School ‘Professor Ralph Raico, a historian from the City Roger Garrison A TE College of New York, in his paper “The Classical- | R 1 liberal Roots of Marxist Class Analysis,” presented Keynesian and Neo eynesians ; 3 1 the thesis that the French classical liberals were Don Bellante- “t." precursors to Karl Marx in the theory of social conflict. John Maynard Keynes vs. Ludwig v von Professor Hans-Hermann Hoppe, an economist and © Mises |. social theorist at the University of Nevada, Las Vegas, Hans-Hermann Hoppe - oo un Co |. spoke on “Marxist and Austrian Class Analysis, ” in : | which he: listed ' the ways Marxists perceive social Modern Myths of Keynesian Economics “| © ‘patterns in the market ‘which actually apply to the : Co Jeffrey Herbener Co of. state. © ~~. Professor Richard Ebeling, an economist at Hillsdale Keynes and be Ani Savings Mentality | College, spoke ‘on “Eugen von Boehm-Bawerk’s arr ogousen . co. | + Critique of Marxism,” to remind us that it was this Keynesianism and. World Inflation » ~~ famous Austrian economist who refuted the Marxist ~ Joseph Salerno. Ce EE EE ‘theory. ‘of exploitation by . exposing its numerous 5 IT FE contradictions and fallacies. Dr. Gary North, econo- Keynes the Man: Hero or Villain? of mist at the American Bureau of Economic Research, Murray Rothbard i... | spoke on “The Marx Nobody Knows,” in which he gave Co vb gome: revealing details about Karl Marx's high personal income, and lavish spending habits. Profes- sor Davie, Ostgricld professor of philosophy at St. --Joseph’s College, spoke on “Marx and Mercantilism,’ Heckman at The Ludwig von Mises Institute, -... showing the affinities between the two and their Auburn University, Auburn, Alabama 36849 | Joctrines regarding free exchange. Finally, Dr. Nl SL ee Williamson Evers, a political scientist at the Hoover EEE Co Leen ~~ Institution; delivered “Marx. and the Organization of au Lo ee ooh oo Labor Under Socialism,” showing how Marx did not “Marx and Marxism: Feohoiies; +. intend for the laborer to ultimately have the freedom | ~ to choose his own profession, to change jobs, negotiate "Religion, Politics and Philosophy” SE ‘his salary, ‘etc. For more information and details contact Pat’ b Jo fre A Tucker - Cee Core “The: ‘papers from this conference will be collected into | hy Y | a book to be edited by Llewellyn H. Rockwell, Jr., and Iii is a sobering thought, that. Marxists still greatly out- Lo ‘published by the Lm: ven n Mises Institute _n number Austrians in:the economics departments in American universities. Most: ‘major philosophy departments contain one or more token Marxist professors. Marxismis ~~ | ‘actually gaining in. respectability: within-departments of || -| religion {and in many pulpits, too through: studies in ~~ || | “Liberation Theology.” Within’ the. inodern literary estab- A. Mark Thorn on. Editor _:_lishment, Marxist class-war analysis has replaced [| Austrian Economics Newsletter econstructionism as the dominant paradigm. Leaving | Ludwig von Mises Institute aside the question. of whether a shift from irrationalismto’ || Auburn University =. polylogism is progress, the last time class-war models [{* Auburn, Alabama 96549 dominated d literary criticism was sin the early! thirties. SE | | If you would like to submit an article, “book review, or an item to the “Notes and ; Transitions” column, please send it to : 11 ===== PAGE 12 ===== i {I B | — _ FIA = a _ H _ : AEE Chaos: Making A New Science : TT Dra. fo. ByJames Gleick Soo Ber TH | ECE Penguin Books, 1988 | The Gold Standard EI nil fhe 4 | | in Theory and Practice ES gehersl. James he meth ppt drat for the New 14 ho Edited bx Barry Eichen; 0 ES York Times, provides a readabl ‘and interesting account |? iE Methuen, 1985 a gr en SE . of the historical development of this new field in mathe- i.’ ~ matics and its implications, with ‘severa references to | § Like host collections of. articles on monetary reform, the Co Ss > ditional £ the " editor's introduction points to the: ‘problems of the current ~~ b lin ra d A wee a mati es pi system and the urgent need for reform. Barry Bichengreen, een limited to calculus an simple geome ry: Tt ; ; | professor of economics at Harvard, thinks the ‘biggest ‘continuous functions allowed for the existence of ol bE | ‘problems arise from the current “destabilizing” system of tions, and the use of simple figures allowed for measure- : ay went. Complex models have been built where only linear’ I Be er tia system, A — ) RY equations were used, ‘because this was thought to be: a {| with.oné another.” The gold standard i is one wayoffixingthe =~ ~~ : | problem, because:its primary virtue is “its association with + | ‘exchange-rate stability,” which, he: correctly: points out, can - be achieved with or without gold. There is “no explanation” EE | at all for other benefits that may be associated with thegold ~~ standard, like, for example; its ability tocontrol inflationand | restrain government interference. “Resurrecting the gold ~~ 33 standard,” therefore,” “would. involve significant. costs, : i. | serious uncertainties, and’ dubious benefits.” =. a i ‘The rest of the ‘volume is an assemblage. of articles | 4 | designed to bolster the original themes in his introduc- | | tien. They range from David Hume’s discussion of specie- | flow model (1752), to Robert Barro’s discussion. of price 1 levels under gold (19 79), and to Richard: Cooper's. attack on the Rothbardian 100 percent gold coin standard and: | reasonable approximation to the real world. When real- E qe | similar proposals. Also ‘included are ‘articles ‘by: BB. a - world data VARA predictions, th 1 | ‘Whale (1937), Donald: McCloskey: and JR. Zecher (1976), RE was attribute to random “noise” or “shocks”. | WM. Scammell (1965), Robert Triffin (1964), A.G, Ford ~~ ‘But then scientists discoversd that ven very simpl | (1960), Ragnar Nurkse (1944), Milton: Gilbert, (1968); and. ‘models containing nonlinear: terms: (surely ; a more realist | twocrncial governmental repertson the monetary system. + description of reality, in economics as in other disciplines) | from 1918 and 1981. The wide range of articles makesthis exhibited very complex behavior. In particular it was dis- | a-crucial series of readings for anyone inigiegted | in the . covered that small differences in. initial conditions may | future of the world monetary system. co result in large differences in the path taken by a model, : : making the prediction of future states impossible. Taking : re Richard Cooper, an advocate of a single world fia cur- - the concept of “sensitive dependence on initial.conditions”to ney issued by a world central bark, aims his’ arguments its ext chaos theorist dth B Effect RE | at several pro-gold bills that. appeared i in Congress. Tis h Teme, Chaos ists coined the term utterfly fect i « ‘the notion that a butterfly flapping its wings in Brazil may SE | unwarranted, he says, that “these proposals are ‘being «| Jimatic ch the United State 3 | treated with a seriousnessthat would have beenastonishing aah major climatic changes in the Un aes. 1 | twenty, ten, or even five years ago.” The dollar cannot be. The level of abstraction and sophistication of chaos ; 1 “defined in terms of gold because there is: “00 little gold"to . theorists. dwarfs that of yesterday’ s mathematical | cover all the dollar deposits; and if their price v were set high, . -economics. “Complex behavior .in the real world implies 1: | he fears “large-scale dishoarding.” Further, Cooper argues eomplex causes, yet in chaotic models simple equations.can 14 | that if government “experts” cannot manage discretionary generate very complex behavior, As the author notes, 1:3 | ‘monetary regimes, neither would they be wise enough to - - ‘economists study the most elusive creature of all, and they | i implement and operate a ‘non-discretionary ‘one, Tf the ‘have borrowed todls from the physical sciences whiich are 13 | government experts don’t want: discretion, they don’t have largely inappropristetothe pursuit of knowledge intheirfield. 14 : | touseit, regardless of what the monetary ‘constitution looks “Chaos theory has allowed physical scientists in such 3 tn like, That's an interesting point; but it trivializes the basis diverse fields as geography, meteorclogy, electronics ang fF 1 of all constitutional restraints against government action; seismology to handle real-world phenomena previous | like many other writers represented in this volume hetakes - thoughtiobecompletely random or too complex to under- iE i | no account of the disharmony of interests. between ‘the stand. A ‘recent program on PBS illustrated how the 13 f government, andthe market, JAT SE pehavige of the human heart. going into fibrillation. orthe |§ 12 ===== PAGE 13 ===== turbulence generated i in fluids being heated can both be shown to have a “chaotic” dimension. But chaotic behavior is still a sub-species of determinis- tic behavior, and the question remains whether determinis- tic models, linear or non-linear; ‘are. appropriate for the 3 nderstanding of macroeconomic évents. In the best tradi- - of positivist science, economic researchers are currently investigating whether such time series as stock market prices can be shown to be chaotic. It has yet to be proven i a+: macroeconomic models or better economic policy. It is not yet clear what impact the new field of chaos theory will have on economic science. It seems clear that of nonlinear equations, so that the macroeconomic vari- ables can be expected to behave “chaotically,” then economists may have to give up such standard tools as the assumption of perfect information, the perfect-market | hypothesis, statistical forecasting, and the notion that computers can somehow overcome the problem of socialist calculation. methodology. and. their use of mathematical ‘modelling; or The Evolution of Central Banks By Charles Goodhart i 0 Press, 1988 Ea Co oo - Most of us are familiar with arguments for the evolu- - tion of law, language, money, and morals. Who could have imagined a case for the evolution of central banks—the ‘| Banks have evolved naturally over time, and play a neces- sary part within the banking system.” } ~ Central banks perform a macro function of discretion- ry monetary management through open and foreign-ex- change. market operations and by setting reserve requirements. However, Goodhart defends only the evolu- . |" whether ‘the discovery that this is so will lead to better : if the economy can in fact be reasonably described by aset It remains to be seen whether such a. development } EE would lead economists. to. ‘abandon ‘their. positivist. = The Money Doctor i in the Andes: if chaos theory is simply the next step i in the takeover of The e Kemmerer Mi issions 1923 1933 y ’ 3 economics by mathematics. MT SETAE EEE FR Co Co Ce ‘By Paul W. Drake Lo | Dulte University Press, 1989 institution which has bloodlessly and imperceptibly ‘though steadily transformed free societies into essentially planned economies? In The Evolution of Central Banks, Charles Goodhart mounts-a brief but startling historical = defense of the fact that “the role and functions of Central tion of central banks’ micro functions—acting as a lender of last resort and regulating and supervising the banking : system. Historically, in developed financial systems these micro functions were performed by either large commer- cial banks or private clearinghouses. But this type of . market arrangement could not last, Goodhart argues, primarily because of the conflict of interests—profit-max- . imizing banks or clearinghouses dominated by large banks could not be impartial in helping their illiquid competitors. Out of this conflict of interest, nonprofit- maximizing, noncompetitive lenders of last resort— ‘central banks—were the natural outcome, To perform the lender-of-last-resort function responsibly and avoid haz- ~ ardous moral problems, the central banks had to under- take supervision and regulation of the banking system, Though the book’s theoretical arguments against free banking and private deposit insurance leave much to be desired, the illustration of the arguments with varied historical episodes is illuminating. The 56 page appendix on “Central Banks in Europe and Japan at the End of the Nineteenth Century” will be of great interest to students of the history of banking. PJS | Paul Drake has done excellent detective work in piec- ing together this episode from the career of one of the most important: economic consultants of all time. The “Money Doctor,” Edwin Walter Kemmerer, was a technocratic economist from Princeton University who served as editor of the American Economic Review, and President of the American Economic Association. However, he i8 most famous for his efforts as a consultant to foreign countries “and as one of the organizers of the Federal Reserve Sys- tem. in 1911, not for his theoretical contributions. At the suggestion of the United States State Depart- ‘ment, Kemmerer began a career as a consultant to foreign governments, suggesting the implementation of central banking, the supervision of the banking industry, and the . useofa national comptroller. During his long career he .- worked for and advised many foreign governments, Drake however concentrates on Kemmerer's assignments in Columbia, Chile, Bolivia, Ecuador, and Peru. These _ countries eagerly adopted Kemmerer’s recommendations "in order to gain access to foreign loans. Kemmerer was - able to place American bankers on the board of directors of foreign central banks, and his missions to South America - “proved to be a low cost method of American hegemony. When the Great Depression finally hit, Kemmerer's ol policies were dismissed, but the institution of central ‘banking remained to become an engine of inflation. South American countries defaulted on their loans; loans made possible by Kemmerer's seal of approval. These loans “went almost entirely to governments: increasing state ~ activism, improving the governments’ ability to collect taxes, and increasing the power of the executive over the legislative branch of government. 13 ===== PAGE 14 ===== “Drake: admires: Kemmerer's S; success. as a gongaliant oo a major oljective of the foreign economic policy. of the new | and defends his objectivity, but is forced to admit several = = “administiation. *"He. also proposes more centralization of | | damaging facts. For example, a large bond dealer who = government power into the hands of the executive branch: | | profited from selling foreign government bonds to American ~~ and a diminution of the Congressional role in making | citizens endowed Kemmerer's chair at Princeton, He also = economic policy. : nt helps expose Kemmerer's inconsistency. by noting that ‘This book is. the antidote for those who say that the S | Kemmerer was an anti-inflationist, a believer in the gold expansion of global markets is necessarily bullish for fre | (exchange) standard and laissez-faire, Drake also draws. © | +. . markets (e.g; George Gilder). It shows that this optimism | F | some interesting parallels between Kemmerer in the =. should be tempered by’ the prospect of globalized govern- 3 PE. + 1920s and some University of Chicago economists during ment ¢ control. J AT _ 3 a Bn the 1970s, as well as between the South American. SEE : . 1 Aefuidtis inthe 19308 and 1980s. MT A Le - ECE NE | JURE TARE A or FLAME The Economics ofa . i Cf Az werica i in 1 the World Economy: SE Pure Gold. Standard | An Agenda for the 1990’ ~~. + ByMarkSkousen : | Bye. Fred Bergsten = = LE bi Basrig von Mises Institute, 1 1988 EE ) Tastitate for International Economics, 1988 E a The probects for a gold: standard are dismal because: of the barriers erected by pressure groups and special; interests, ‘which inchides the Federal Reserve, the big f banks, the Treasury, much of Wall Street, and ff - Washington’ 8 political establishment. Yet Mark Skousen “thinks the potential benefits of a pure gold standard make i * Phisne new whook by Fred Bergstent is written for “those i who will be managing and: influencing the international |. economic poliey of the United: States from January 1989 of “until well into the next decad a. That's why this book was: -. - “| released on ‘November 9, 1988, the day after Bush was. oo "5 t Sita cause worth pursuing, By “pure” gold standard, | elected president. And given the Institute for Internation- Skousen means a roonetary system wherein 1) dollars are : 1a Econ wird influence: in Washington, this. Book 1 1s § very a : defined iri terms of a weight of gold, 2) prices are expressed’) | importan in terms of gold dollars, and 3) all paper currency and § 3 “The: globalization of markets Kas sutinr ithe ability of _ bank degusits have 100% gold backing. 3 | governments to cope,” says Bergsten. His answer to this is | more government-to-government collusion i inorder tobet- | ter manage: the economy-—“active: international. policy SE | - cooperation The first priority, he says; is “the creation of = Lo. |/ Rconomics I“ a more effective monetary regime” because the current Ce hee pes Gold: Banda I nonsystem "has “fostered huge currency misalignments” SUERTE | a ii | and “generated economic distortions,” He praises ‘the. © oo J = = EETRREN SR A ii . Reagan administration's efforts o of “groping toward OW. i nf fe ee ih . system” where central banks would agree obuyandsell uo Cp KL 5 | each others” currencies. ‘according to prearranged. CET |i “schedules, as. was ‘worked out at the 1985 Plaza Agree: SEER lj ment and later in the 1987 Louvre Accord. “‘Bergsten hp | suggests “completing the process” through requiring i “major countries to: ‘work out: the details of a system of =. | i it | target zones” for currency movernients, which would: “pro~ The economic benefits of the pure gold standard include: Bi vide a strong foundation for improving international coor- month trade cycles, eliminating inflation and currency | it | dination of national economic priorities.” y “i... +. debasement, limiting prospects. for government manipula- i '. Heinsiststhat “the dollar must come: downb aotlior. _ toh; and. Towering interest rates. Skousen highlights the - | tf 15 to: 20° percent: [in. real: terms] to: achieve ‘the needed “4p 15H? y of the gold standard from the 7th century’ B.C. and & Hi - adjustment.” Te prevent a “hard-landing” he: proposes: - ..WrACEs moet ary developments to modern: times. 1d ji that the U.S, dollar depreciate “in tandein with proposed - Perhaps the. most. valuable feature of this book is its i . macroeconomic: changes in the United States and abroad™ highly concise: summary of the four major monetary sys- Hi: i 1) a big increase in government spending (to: “increase - tems: the 100% ¢ specie standard, free banking, fiat fractional . | dit - GNP”), 2) an imposition: of consumption taxes (to... reserve banking (the current system), and 100% fiat stand- b th | iminaty the Ki a? deficit?) and 3 an. increase. eof oo ard, He lists: the > key characteristics of each, the. role of : | increase in World Bank x Feniing from $15) billion to: $25 RE ny a each one. e. Also sft is: his diss 3 |. billion. He wants the InterAmer in Development Bank's . gion: of the differences: between the 100% gold: standard ang lending to double from: $3 billions to: $6 billion. The IMF,” the “free banking” position, widely regarded as the “secon : - he says, should “doubles? its: lending; This would increase: ~~ best.” Skousen thinks there is no reason why the gold | 1 gt the total U.S: foreign aid and lending package by $200: standard and fieedom in: ‘banking aren't compatible, so long § gt billion. “A renewed role” for these: fystiutip “shouldbe . sx faudande embezzlement statutes are upheld: GBL. La Te ===== PAGE 15 ===== Ludwig v von Mises: ~~ andthe Gold Standard,” “Free Trade and Protectionism,” i : and’ “Privatization versus. Government Ownership.” An Annotated Bibliog: r aphy There are contributions from Free Market regulars Roth- |. By David Gordon ~~ bard, Rockwell, Hoppe, Mark Skousen, and others, and The Ludwig von Mises Institute, 1988 some pieces by “fellow travelers” like Tom Bethell (The American Spectator) and Robert Higgs (Crisis and hi bibliography is an immensely helpful research * Leviathan). Other welcome additions include a condensed. | tool and the first substantial bibliography since Bettina version. of Mises’s “Liberty and Property” and “A Call to | Bien Greaves published The Works of Ludwig von Mises - Activism” from Mrs. Margit von Mises, Among other high- “in 1969. It tracks Mises’s writings from his earliest work ~~ lights are: Rothbard's “Ten Great Economic Myths,” perhaps 4 | in Austria, the first being a: 1902. seminar essay, “dealing oo - with the decline of serfdom in Galacis Jas Gordon annotates. ~The last entry is his recently published remarks from 1962. Co Gordon's annotations give clear and {inbiased presen- tations of the thesis, organization; ‘and highlights of the books, articles, and reviews, For example; Gordon sum- Z| marizes an article Mises wrote on expectations, appearing in Economica (1943) in the following way: “Mises does not consider it a good objection to the Austrian theory of the business cycle that businessmen perhaps will not == = "lengthen the structure of production if bank credit expands, [0 OF kd - Ifthey do not, the business cycles will merlntiat dnomn: Coe awe nH cv. CWELL JR | of economics is s merely to explaing those cycles that do: occur.’ ck - : . IA | the most worthwhile: fourteen pages you can send to your "Congressman; Rockwell's highly-popular “A Plague from = Both Their Houses: The Economic: Advisors to Bush and | “Dukakis”; Skousen’s accessible “Understanding the Austrian Theory of the Business Cycle”; and the typically |: “irrepressible Walter Block (“The Case for a Free Market in. Co Body Parts”). The five essays on Reaganomics are sure to Cd raise. a few: Conservative eyebrows. . In short, The Free Market Reader makes a fin ine introduc- tion to Austrian-style policy prescriptions for the interested layman and the undergraduate: student confined: to. the | world of the run. of the mill economics textbook. In the tradition: of Ludwig von Mises's The Anti-Capitalistic Men- —" tality and Rothbard’s: What Has Government Done to Our The other annotations are , equally] lucid. The length of © Money?, these essays: should go a long: way toward dissemi- each ranges from one to two pages for his major books. . - nating the Austrian outlook to the general public. Haven't . Socialism and Human Action, to one sentence forminor ~~ the Samuelsons and Friedmans monopolized the Newsweek “articles. The compilation also brings tothe forefront many columns long enough? P PK NW unknown articles; some of which have yet tobetranslated. LE, “into English. The bibliography contains a separate al- . © yo ; “phabetical listing of Mises's works and ari index to the Praxeols lo, gy a Reonomi ie Science "publication itself. We can hope that this is the: precursor 2, By Hans Hermann Hoppe to the Collected Works of Ludwig von. Mises, but inthe = Praxeology Press, 1988. -.-| mean time no scholar interested in Austrian economics | 5 . can afford to be without. this = guide. JAT EN Fhis motiograph by: one of the new faces i in Austrian - | EE CIE circles addresses the guestion of methodology in economics and the: basic: differences between Austrians and other A . yr in the CONIC 5 of 5) The Fr ree e Market Rea d er: Busays i in economists. The monograph is based on Professor Hoppe's the Economics of Liberty lo lectures on methodology at the Mises Institute’s 1987 in- Edited by Llewellyn H. Rockwell, Jr. ~~. structional conference at Stanford University. | - The Ludwig von Mises Institute, 1988 “* Professor Hoppe begins by defining the typical Austri- | an n method and noting the: responses. to: it by “mainstream” Mises Institute president Lew Rockwell has put ~~. economists: He:shows that the method developed by Mises: together this collection of essays from The Free Market; the ~~ Was actually the mainstream methodology until the mid- itute’s. policy newsletter. Designed as. a: popular: intro- ~~ dle of this century, and that Mises “only” made this | duction to Austrian views on government end the economy; Co methodology rigerous, and well-defined. Kantian The Free Market Reader contains.over 70 brief items, fully philosophy, Mises's improvements to. it, and the basic indexed and organized into eight sections ranging from chain of economic reasoning are outlined for the reader: “Fundamentals” and. “Great Economists” to “Fiat Money ~~ Many errors and contradictions, of empiricism, the 15 ——————— Sol Sn ===== PAGE 16 ===== dominant - ‘methodology in’ economics , (although. largely - players,” notably governments, and from changing conjec- if ridiculed in other academic areas), are exposed here. The . “tures about what their policies might turn out to be. i separation of theory and history; the folly of forecasting, LE George Selgin, drawing: on almost forgotten writings of : and the scope of praxeology are dealt with in a straightfor- several decades ago, adding new insights of his own, launched ward, realistic,” and concise manner. While this = "cexamination of whether stability of the price level is a monograph may not be the final word on. methodology, it ti 4 poli is nonetheless one of the best instructional tools on proper criterion of monetary esity ons and policies. methodology to date. MT Tee EE 3 "