Scott Sumner  

A few thoughts on free banking

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Izabella Kaminska has a few thoughts on free banking:

This week I strayed into the absolutist world of free-banking enthusiasts.

Now, it's not like I haven't come across these guys before -- they lurk everywhere -- but this week I discovered they don't just represent an extreme economic faction, they (like goldbugs, bitcoiners etc) seem to be reason and logic deniers.

I've written about this before so I don't want to bore people. But the main issue I have with them is that they appear to have no understanding or appreciation of the cyclicality of systems or the fact that whenever we've had free-banking systems they've resulted in chaos or alternatively co-beneficial collusion to the point the system is not free by the standard definition of free.

It's really not a difficult point to understand. Systems are cyclical. And as Chris Cook always says there is a fundamental paradox inherent in the system which drives that cyclicality: namely, if it's liquid it's not neutral and if it's neutral it's not liquid.

This comes down to the fact that value is based on asymmetry.

Nor do the free-banking enthusiasts appreciate that central banks are mostly the product of private cartels. Nor do they appreciate that most economies already feature a huge plethora and mix of public and private monies that trade side by side. Nor do they appreciate that it was standardizing certain subjective values like weights, distances, time itself that has allowed society to cooperate, grow and thrive. (If we all had a different understanding of when 3pm is, there would be chaos.)


I must admit that I found this to be very annoying, but not for the reasons you might assume. I consider myself to be neither pro- nor anti-free banking. Rather I'm annoyed because I greatly respect the high quality research being done by free banking enthusiasts, and hate to see the entire group dismissed with belittling insults.

I have no doubt that Kaminska has run across a few ill-informed free bankers on the internet. I've run across more than a few uninformed Keynesians, monetarists, Austrians, MMTers, etc., on the internet. But any reader of her post is going to assume that she is being dismissive of the entire school of thought.

I'm going to give Kaminska the benefit of the doubt and assume that when she wrote the final paragraph of the passage quoted, she was completely unaware of the scholarship of some of the world's leading experts on the history of free banking, such as Larry White, George Selgin, Kevin Dowd, and Bill Woolsey. The alternative to too depressing to contemplate.

Update: Commenter Travis reminded me of David Glasner and Kurt Schuler, and I'm sure there are many other names I've forgotten.

Her post is much longer, and George Selgin has already posted a fairly devastating reply on the specifics. Let me just add that in my view free banking is a great idea for banking but a horrible idea for monetary policy. I prefer a monetary regime that is completely divorced from the banking sector. The monetary authority should focus on adjusting the supply and demand for the medium of account in such a way that its value is stabilized. I define the stability of money as a gradual increase in NGDP. Do that, and you can completely deregulate banking, including the right to issue currency.

PS. And now I eagerly await Noah Smith's scolding of Ms. Kaminska for her impolite "reason and logic deniers" comment. (For those who don't know, Smith once scolded me for a post that defended Kaminska, but which Smith (wrongly) thought was insulting her.)

PPS. I never deny reason and logic, just common sense. OK, I was a logic denier in this post, but just that one time.


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CATEGORIES: Finance




COMMENTS (29 to date)
TravisV writes:

Shouldn't you have mentioned David Glasner? He wrote a whole book on free banking (I own it):

http://www.amazon.com/Banking-Monetary-Reform-David-Glasner/dp/0521022517/ref=tmm_pap_title_0?_encoding=UTF8&sr=&qid=

Also Kurt Schuler.....

TravisV writes:

George Selgin just commented on this topic:

http://www.freebanking.org/2014/11/24/dizzy-miss-izzy

http://www.freebanking.org/2014/11/21/good-and-bad-news-from-the-uk

Carl writes:

If you disagree with me, you are a "reason and logic denier". Love that bit. Let's just savour it in all its glory for a while.

J.V. Dubois writes:

Scott: my thing against free banking is that we actually already have it. We already have private banks issuing their own monies directly used for transactions - they are called bank accounts and debit/credit cards. There are countries like Sweden where there are now shops that do not accept physical cash (only bank monies) - a policy actively promoted government, if you can believe it.

There are now even financial products like Xapo Debit Card that automatically converts all payments recieved on your account into non-monetary assets (with Xapo it is bitcoins) and back into monies when you use the card for payment. There is a very healthy international bank money market so no matter what money you personally use, you can travel all around the world and pay comfortably without ever seeing or touching official local government currency.

So in the end it all boils down to a difference in preferred monetary policy. But even here free banking people are divided. For some reason most of them prefer that unit of account should be fixed - like tied to gold. You and me prefer different system where it is steadily growing following some rule. But I see no substantial difference here in terms of free banking basic ideas. Free banking people should officially declare victory and move to something else.

vikingvista writes:

Although those innovations you describe are interesting, don't confuse "free banking" as you use the phrase with free banking as the free banking school uses it. One has little to do with the other.

Scott Sumner writes:

Thanks Travis, I added those names.

JV. Good points, but when I say "free banking" I mean unregulated banking, not ability to issue debit cards, etc. Banking is extremely heavily regulated, and getting more so every day.

Greg Jaxon writes:

Scott, I wish you would not dismiss the possibilities for good "monetary policy" arising as a spontaneous order from a free-banking system. Whether one or another theorist predicts a system you recognize as beneficial, the actual performance of a live market will always surprise all of us.

The concerns about cyclical aspects of a living money supply were addressed by the free-er systems in place prior to WWI. As Jim Grant (and Antal Fekete for that matter) point out, the original Federal Reserve Act envisioned the reserve assets having a high proportion of short term commercial paper. Both those authors refer to this as "self-liquidating debt" and 91 days was a typical term. Having the money base consist of assets that come AND go with the ebb and flow of seasonal economic activity would seem to cover the dominant cycle and just about any other that might manifest itself in a changing NGDP. The very existence of such bills (and the due diligence necessary for their "Acceptance") constitutes a direct measurement of core GDP and is not subject to central agency policy whims or data skews. So long as the fractional circulation credits riding atop those assets also expand and contract proportionate to their backing reserves, I don't see where the resulting "policy" will differ much from what you believe would be a wise and flexible centrally planned supply.

vikingvista writes:

Greg,

So long as the fractional circulation credits riding atop those assets also expand and contract proportionate to their backing reserves, I don't see where the resulting "policy" will differ much from what you believe would be a wise and flexible centrally planned supply.

Aside from the public choice issues inherent in any form of central planning.

Andrew_FL writes:

"standardizing certain subjective values" Holy cow. I'm sorry not to be rude but I don't think she understands what economists mean when they use the word value. "Subjective value" doesn't refer to value in sense 4, it refers to value in sense 3. Value in sense 3 can't be standardized, nor would it helpful in any way to try to do so. Cooperation doesn't require that anyone agree that something has the same value in sense 3-if it did, cooperation would be impossible.

Nor does she understand she could call whatever time she likes 3 pm, as long as she knew the formula to convert her clock's time to someone else's. One wonders at the chaos that must result from those places that don't observe daylight savings time, or people who insist on using military time. Why, it must be absolute bedlam for all of society because those people have to take an extra few seconds to calculate what time everyone else would say it is.

Clearly she doesn't understand, that it was merchants who standardized measures of gold in equivalent weights of grain, and common law only codified these measures, as part of enforcement of contracts and adjudication of disputes. It was only later that Kings and Governments created their own measures, which in turn had to be based on the pre-existing ones.

And clearly she does not understand that it is not "collusion" for a bank that says "My unit note is a promise to pay the bearer on demand 32 ounces of gold" to exchange notes from another bank who says "My unit note is a promise to pay the bearer on demand 16 ounces of gold" at a ratio of 1:2. It's just mathematics. Nor is it "collusion" if the second bank measures gold in grams, for the first bank to figure out the conversion factor between grams and ounces!

One sort of wonders though, what to make of such a glib new agey statement as "systems are cyclical."

michael pettengill writes:

Why wasn't the shadow banking system from 2001-3 to 2008 conforming to the unregulated anything goes criteria of "free banking"??

Other than the government intervention to prevent massive losses for those who thought money market funds were just like FDIC checking and deposit accounts, and then the Fed injecting trillions into the economy to offset the shrinkage of the shadow banking system money supply, or course.

J.V. Dubois writes:

Scott: "when I say "free banking" I mean unregulated banking"

This to me seems as too broad a definition. There are numerous regulations, from anti-money laundering regulations, anti-fraud regulations (such as banks knowing their customers), there are deposit insurance regulations and many more. As with most things I think free banking can be measured on a scale, not in some binary manner like "any regulation = slave banking" and the moment when there is no regulation whatsoever then it suddenly becomes "free banking"


Free banking people should say which regulations are problematic for their ideas and why. I always thought that the key thing for free banking is that banks should be able to issue their own currency, not that they should not be subject to anti-terrorist laws. As for former thanks to revolution in payment systems during last 20 or so years it is all but a reality.

And I mean it in a good way because otherwise "free banking" is just a label for wide variety of people from those who really want to abolish anti-money-laundering regulations to those who disagree with deposit insurance to those who want gold standard or those who want banks to have physical paper currency. In other words it is a mess.

Nick writes:

Professor Sumner (and commenters),
Thanks for the suggested reading, it's definitely a topic in which I'm underinformed.
How many of the pro free banking economists you listed see free banking the way you do (no regulations, divorced from monetary policy)? I've read some, but not a lot, of well researched writing on free banking and it's mostly about monetary policy. I've also read a few very good things focusing on FDIC, of course. Do many of these thinkers feel your solution is a good second choice? While Kaminsky was being pretty insulting in her reply, I do feel like the word 'absolutist' accurately describes my issues with the free banking advocates I personally run across.

Andrew_FL writes:

@J.V. Dubois-If you define "free banking" in such a way that a system in which there are reserve requirements, deposit insurance, etc. as "free" because banks can issue debit cards, it is you who has the idiosyncratic definition of free banking.

As far as I could tell reading "Free Banking in Britain", the Scottish system's only "regulation" of any kind, was the fact that, at least initially, banks were, with some exceptions, required to be unlimited in their liability (which is even stronger than it sounds, because Scottish bankruptcy law was stronger than English law). Anti-money laundering laws were not present in the historical examples of reasonable approximations to true Free Banking. Neither was deposit insurance. Apologies if it strikes you as a "mess" to point out that banking without regulation means banking without regulation.

J.V. Dubois writes:

Andrew: fair enough but then it seems that we are talking about a really broad definition of "free banking". And if we are at it why focus on banking in the first place? If we talk about regulations there are other sectors with probably more sever restrictions - from medicine, through telecomunications and many more. Why special treatment just for banks?

As for my idea of what free banking is about one can have a look at wikipedia:

"Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency (banknotes)"

So I would say that ability of banks to issue own money has to be up on the list of "free banking people" if it warrants special mention. And for all practical purposes it was achieved (who cares about "paper currency" today)

Additionally banking while target of some specific regulations is probably also one of the most globalized industry. If you don't like US bank regulation you can still use foreign banks. It is common for people to have bank accounts in Switzerland or Luxembourg and use those accounts freely even while residing in other countries. I personally have accounts in 3 different banks in 3 different jurisdiction using two currencies (US Dollar and Euro) and I have no issues using these services.

Additionally you have huge and healthy "shadow banking" sector. You have commercial payment products such as Paypal or Google Wallet. You have financial products that essentially provide deposit services in bitcoins. You have hedge funds, money market funds and numerous other institutions that are perfectly capable of offering essentially banking services without being heavily regulated. The competition is huge and truly global.

If the only way "free banking" people can have what they want is if and when all financial institutions in the world (even those in Zimbabwe and Afghanistant) will be unregulated then good luck. If their goal is that ordinary citizens can use unregulated financial services then they already won. It is already out there. This is my point.

vikingvista writes:

JV,

Few would argue that there has been worldwide growth and innovation in the financial sector, as there has in other industries. And within that sector, there are highly competitive elements.

But,

1. Banking regulations are not like regulations in other industries, by a long shot.

2. With few exceptions in the world, commercial banks do not issue their own notes (either digital or physical)--they issue the "notes" of central banks which aren't even notes in the historical sense, but rather basic money.

3. The management of that basic money under political geographic monopolies is different with different incentives than when managed under competing commercial institutions.

These differences have significant effects on the macro economy. Or so say the free bankers.

Andrew_FL writes:

JV, the focus is on banking because money is at the root of the business cycle.

None of the things you describe are the ability to issue bank notes and are not comparable to the ability to issue bank notes. This seems to be the central problem with your thinking.

J.V. Dubois writes:

Vikingvista:

1. There are industries like healthcare, food processing, energy and utilities, telecomunication, weapon manufacture and many others are arguably even more regulated than banking sector.

Plus again banking is heavily globalized so even if US banks are heavily regulated maybe banks on Cayman Islands or Luxembourg are not. And as opposed to trying to purchase health services (when sick), electricity, pay your phone bill or buying a gun - with banking services you have an opportunity to actually use services of these foreign banks. It is not comparable, by long shot.

2. By the same logic no banks ever issued their own notes - they issue notes of units of account (be it gold or central bank money)

I claim that if you deposit your money on bank account all you own is promise of your bank to pay you back that ammount - a bank liability, an electronic bank note.

However, more importantly you can have this promise in your pocket in form of bank card and use it to purchase stuff. Bank money is regularly used as medium of exchange. Your counterpart in transaction (or his bank) can decide if he accepts this electronic bank note from your bank. Most of the time all bank monies deliver on promise to hold the exchange rate 1:1 to whatever currency they are tied to - exactly as banks from freebanking era promised to keep some parity to gold or some other precious metal.

However if you are unlucky - such as recently some people on Cyprus - the promise of your bank to purchase back their bank note for central bank money may not be fulfilled. In that case no other bank would accept transfer from your account nor would you be able to withdraw central bank money from ATM .Your "money" would evaporate. How can this happen? Because it is just bank money, not central bank currency.

I claim that when you use credit card issued by commercial bank you are using that bank private money.

3. It is not only about "geographic monopolies". Again you also have bitcoin credit card in the same way you have dollar credit card. As far as I know bitcoin is not related to any "geographic monopoly". This is how it can work: https://www.youtube.com/watch?v=di88knQveQY


J.V. Dubois writes:

Vikingvista:

1. There are industries like healthcare, food processing, energy and utilities, telecomunication, weapon manufacture and many others that are arguably even more regulated than banking sector. I am not saying this because I support this regulation but just to show that banking sector is hardly unique in this way.

Plus again banking is heavily globalized so even if US banks are heavily regulated maybe banks on Cayman Islands or Luxembourg are not. And as opposed to trying to purchase health services (when sick), purchasing electricity plan, your phone service or when buying a gun - with banking services you have an opportunity to actually use services of these foreign banks. In this way banking is not comparable, it is much freer than aforementioned industries by long shot.

2. By the same logic no banks ever issued their own notes - they issue notes of units of account (be it gold or central bank money)

I claim that if you deposit your money on bank account all you own is promise of your bank to pay you back that ammount - a bank liability, an electronic bank note.

However, more importantly you can have this promise in your pocket in form of bank card and use it to purchase stuff. Bank money is regularly used as medium of exchange. Your counterpart in transaction (or his bank) can decide if he accepts this electronic bank note from your bank. Most of the time all bank monies deliver on promise to hold the exchange rate 1:1 to whatever currency they are tied to - exactly as banks from freebanking era promised to keep some parity to gold or some other precious metal.

However if you are unlucky - such as recently some people on Cyprus - the promise of your bank to purchase back their bank note for central bank money may not be fulfilled. In that case no other bank would accept transfer from your account nor would you be able to withdraw central bank money from ATM .Your "money" would evaporate. How can this happen? Because it is just bank money, not central bank currency.

I claim that when you use credit card issued by commercial bank you are using that bank private money.

3. It is not only about "geographic monopolies". Again you also have bitcoin credit card in the same way you have dollar credit card. As far as I know bitcoin is not related to any "geographic monopoly". This is how it can work: https://www.youtube.com/watch?v=di88knQveQY

J.V. Dubois writes:

Vikingvista:

1. There are industries like healthcare, food processing, energy and utilities, telecomunication, weapon manufacture and many others that are arguably even more regulated than banking sector. I am not saying this because I support this regulation but just to show that banking sector is hardly unique in this way.

Plus again banking is heavily globalized so even if US banks are heavily regulated maybe banks on Cayman Islands or Luxembourg are not. And as opposed to trying to purchase health services (when sick), purchasing electricity plan, your phone service or when buying a gun - with banking services you have an opportunity to actually use services of these foreign banks. In this way banking is not comparable, it is much freer than aforementioned industries by long shot.

2. By the same logic no banks ever issued their own notes - they issue notes of units of account (be it gold or central bank money)

I claim that if you deposit your money on bank account all you own is promise of your bank to pay you back that ammount - a bank liability, an electronic bank note.

However, more importantly you can have this promise in your pocket in form of bank card and use it to purchase stuff. Bank money is regularly used as medium of exchange. Your counterpart in transaction (or his bank) can decide if he accepts this electronic bank note from your bank. Most of the time all bank monies deliver on promise to hold the exchange rate 1:1 to whatever currency they are tied to - exactly as banks from freebanking era promised to keep some parity to gold or some other precious metal.

However if you are unlucky - such as recently some people on Cyprus - the promise of your bank to purchase back their bank note for central bank money may not be fulfilled. In that case no other bank would accept transfer from your account nor would you be able to withdraw central bank money from ATM .Your "money" would evaporate. How can this happen? Because it is just bank money, not central bank currency.

I claim that when you use credit card issued by commercial bank you are using that bank private money.

3. It is not only about "geographic monopolies". Again you also have bitcoin credit card in the same way you have dollar credit card. As far as I know bitcoin is not related to any "geographic monopoly". Go an watch "Xapo Debit Card" on youtube to see how it can work (I cannot post links here for some reasone it causes comment not to get through)

[Ten minutes was an awfully long wait,eh, for me to get your comment versions out of spam? Actually, the word 'credit' cost you more points than the link. See our comment policies for more info. --Econlib Ed.]

James writes:

"I claim that when you use credit card issued by commercial bank you are using that bank private money."

That's not what free banking advocates are talking about when they say "private money." If you want to demonstrate that free banking advocates are wrong on some topic, then you have to stay on the same topic.

So far as I know, no free banking advocates who say that their ideals are realized by the existence of credit cards and checking accounts. Do you think you understand the content of their goals better than they do?

vikingvista writes:

“Plus again banking is heavily globalized so even if US banks are heavily regulated maybe banks on Cayman Islands or Luxembourg are not...In this way banking is not comparable, it is much freer than aforementioned industries by long shot.”

In free banking, individual commercial banks predominantly used natural competitive market regulatory signals to determine reserve ratios, capital requirements, solutions to liquidity problems, and essentially every other feature that defines “banking” aside from the usual legislated generic regulations protecting life and property that apply essentially equally to all endeavors. It is about the theory and history of a regulatory regime exists today mostly only in vestigial form.

You do sound like you’ve done little more than hear the phrase “free banking” and from that attempt to surmise what decades of scholarship in what has come to be called the free banking school is all about. But you are in luck. Some really fantastic scholars over at freebanking.org have spent the last few years posting and answering questions. I think you’d find it interesting spending some time perusing their posts. Not that you’d agree with their history or soundness of their theory, but you would at least correct your misunderstanding about what they are.

“By the same logic no banks ever issued their own notes - they issue notes of units of account (be it gold or central bank money)...I claim that if you deposit your money on bank account all you own is promise of your bank to pay you back that ammount - a bank liability, an electronic bank note.”

You confuse even contemporary notions of banknote and deposit. Historically banks *typically* issued their own notes--paper they created for circulation, with their names on them, not specific to any bearer, promising redemption by that bank in some stated amount of basic money (like a weight of gold). That essentially has ceased to exist (with minor exceptions). Euros and Federal Reserve Notes are not only not liabilities of the commercial bank handing them out, they aren’t liabilities at all, since the issuers--the central banks--don’t redeem them for anything. They are basic money.

Deposits are an accounting of a bank’s debt to *specific* depositors. You can transfer those liabilities with checks, but checks are not banknotes (whether digital or not).

“I claim that when you use credit card issued by commercial bank you are using that bank private money.”

You are using the basic money created by the prevailing central bank (that is what is being promised). You are using the creditworthiness of the issuing commercial bank. But unlike historical banknotes, the debt the merchant accepts on the credit card is not being circulated as a common medium of exchange--as a basic money substitute. It is straightforward debt, settled up between the merchant and the bank. It isn’t private money, because it isn’t money at all.

“Again you also have bitcoin credit card”

If bitcoin ever becomes money, and I hope it does, then you will have a point. But as of today, its acceptance is not nearly common enough for it to be properly called “money”.

J.V. Dubois writes:

Vikingvista: I would like to peruse some proposals by freebanking people, but most of the time they speak about history. While interesting I am really missing some concrete policy proposals.

As for your view of how banks work now it is mistaken. I will use an historical example of free banking era and how it compares with whate we have now.

So imagine that you are shop owner in free banking systems with account in First Midwestern. Then suddenly new customer cames and wants to buy something using paper banknost from First Eastern bank. What will you do?

1. You will probably consult your bank, possibly some memo from your bank about what banknotes are accepted by her and at what price

2. You will make a transaction if you (and your bank) deem customer's banknote solid

3. At the end of the day you gather all gold cash and all types of banknotes and go to your local bank making deposit

4. Your local bank will take various banknotes and will settle account with other banks - either for government cash or gold

What happens if you now run a shop now and offer payment by debit card? Essentially all four steps take place in few milliseconds. You (or the payment system) checks if your bank is trustworthy, if your electronic banknotes are worthy (for instance if you do not have account in problematic bank) and the transaction then gets approved with commercial banks settling interbank operations at the end of the day - in government money mostly stored in Central Bank account as reserves.

There is literally no difference except of using electronic system with much higher speed.

Also if you are using electronic transfers you are by definition using commercial bank money. Commercial banks cannot print central bank money. Only central bank can do that, and central bank then sells that money (either in form of reserves to settle interbank liabilities or in form of cash to satisfy cash demand so that commercial bank can fill ATMs) to commercial banks in exchange for their assets - mostly government bonds.

Also for bitcoin you did not get my point. Payment system revolution made it possible that you will never ever have to hold any government money. For all practical purposes you can use bitcoin as money in the same way you can use your dollars in your bank account to pay for anything in Eurozone. Because your dollar will be exhanged for whatever money is requested by your counterpart in transaction in milliseconds. After one millisecond "money" (dollars, euros, yens, gold options, apple stocks) from your account dissapear and money on account of seller appear. For all practical purposes you used whatever asset you want as "money".

Fact that modern technology now technically enables to use almost any asset as money makes banking system freer than wildest dreams of free banking people of the past.

George Selgin writes:

Scott observes, "free banking is a great idea for banking but a horrible idea for monetary policy."

For the record, I've always insisted that free banking is, as the name suggests, a banking regime, not a monetary one. The Scottish system was free banking and a metallic monetary standard, so its behavior reflected the workings of these combined banking and monetary regimes. But to treat "free banking" as implying some particular monetary regime, or as being a sort of monetary regime in itself, is a mistake.

I'm sure that Larry White, David Glasner, and Kevin Dowd all share my prospective. It's only those who confuse free banking with Hayek's competing currencies idea, or who are simply not well-versed on the subject, who treat it as a substitute for some sort of monetary rule, standard, or policy.

George Selgin writes:

Mr. Dubois writes: "Fact that modern technology now technically enables to use almost any asset as money makes banking system freer than wildest dreams of free banking people of the past."

This is frankly silly. It amounts to a denial of the presence of binding bank regulations and of other influential forms of intervention such as implicit and explicit deposit guarantees. Of course banks do resort to technological innovations to work around restrictive regulations, but even then the result is a system that differs, perhaps very substantially, from what would emerge in the absence of those regulations.

Nick Zbinden writes:

I have always assumed, reading selgin and co that free banking basesed on stable base should produce good montary policy.

Lets assume a fiat based fixed currency stock. In my understanding this, combined with free banking, should produce pretty good montary policy. The banks profit seeking will cause them to lower there reverse ratio as far as possile or increase it depending on velocity.

So free banking should achive a fairly good approximation of stable MV and thats what market monetarism is mostly all about.

Im not, btw, douting that one also could have free banking and any other monetary regime.

vikingvista writes:

“While interesting I am really missing some concrete policy proposals.”

How is that an excuse for mischaracterizing the free banking school? You may have very interesting things to say about banking, but you really should be aware that “free banking” is a phrase that is already taken. When you use it to refer to something unrelated, it just looks like you are unaware of this fact.


“I will use an historical example of free banking era and how it compares with whate we have now.”

What history do you get that from? If you have to check with your bank about an alleged banknote from a different nearby bank, then that banknote isn’t money, is it? If you are so far removed from that bank that it indeed is not money where you are working, because you have never heard of that bank, and because therefore the bank has no reputation with you, then you may simply refuse it and place the burden of exchange on the oddball customer (like a Topeka Walmart customer trying to pay with Kenyan schillings). Or, as you suggest, you may make inquiries with a more knowledgeable entity (perhaps one of the banks you do business with) if you consider it worth your time (and whatever additional fee you might charge your odd customer).

In historical free banking regimes, a merchant say in Edinburgh, did not have to inquire with anybody about the banknotes they received from any established Scottish banks. Since all such notes were money, there was no mystery about them, and all the competing banks as well as transacting merchants already knew what to do with them.

None of what you described shows that my explanation for your misuse of the term “banknote” to refer to “deposit” was wrong.

“There is literally no difference except of using electronic system with much higher speed.”

To know that is incorrect, you first must know what free banking is. But you’ve already said you are not interested in pursuing that.

“Also for bitcoin you did not get my point. Payment system revolution made it possible that you will never ever have to hold any government money.”

Oh okay. So you don’t “hold any government money”? I didn’t miss your point. Bitcoin has no place in your defense of the claim that free banking already exists, because bitcoin isn’t even money. The day we are as surprised at an arbitrary merchant *not* accepting bitcoin as today we are surprised when they *do*, AND when longstanding reputable competing lending intermediaries are accepting bitcoin loans from numerous small depositors in return for a share of the interest those intermediaries earn on their bitcoin loans, AND those intermediations are effectively regulated only by natural market interactions rather than political legislation, then you can come back to me and rationally claim that bitcoin is an example of how free banking exists today.

“For all practical purposes you can use bitcoin as money in the same way you can use your dollars in your bank account to pay for anything in Eurozone.”

Unless the Eurozone has changed rather dramatically in the last 5 years since I’ve been there, US dollars are not money there, as any attempt to live most places in Europe exclusively using US dollars will make readily clear to anyone. US dollars (like petrol, cupcakes, and rare oil paintings) have a market in Europe, yes, but that is because it is the money used in the USA.

“Because your dollar will be exhanged for whatever money is requested by your counterpart in transaction in milliseconds.”

Rapidity of transactions, liquidity of assets, easy access to clearing prices and other financial information is all relevant to making trade more efficient. But it is not what makes a thing money. If you were interested in reading up on free banking, perhaps you could explain to me how any of those innovations matters to free banking theory, because I don't see it.

“Fact that modern technology now technically enables to use almost any asset as money makes banking system freer than wildest dreams of free banking people of the past.”

Do yourself a favor and choose to learn what free banking is. It is not about how easily individuals can trade assets. If you stop claiming that these things have anything to do with the free banking school, your posts would be more interesting.

J.V. Dubois writes:

George and Vikingvista: I am really at loss here. All you talk about is some vague "binding regulations" without really addressing any substance of my arguments:

1. Banking is international. If you want to have a bank account in a bank in a country that does not require deposit insurance then you are free to do so. For instance as far as I know there is no obligatory deposit insurance scheme for banks on Cayman Islands. Mitt Romney has an account there. You can do the same from your home using courier to deliver documents.

2. Additionally you can get virtually all banking services you may want using international [shadow] banking sector. And you can use these services comfortably from your home - from almost anywhere in the world.

This is incredibly important point, because if you call for getting rid of regulation you should take into account what is the relevant market here. With banking services and thanks to internet and communication revolution the market is truly global.


PS: vikingvista: While I disagree with how you define money or your view on free banking era it is insubstantial for my argument. So let's modify my example and let's assume that shop owner immediately recognized your bank note for "money" that it is.

At the end of the day he would bring this banknote to his own local bank and he would deposit it on his own account (since he does not want to have all that cash at home for safety purposes). His commercial bank would then take that bank note and trade it on interbank market for their own banknotes/gold. So exactly the same thing that now happens in few milliseconds when you pay for something via debit card - only instead of gold commercial banks settle their debts using government (central bank) money.

J.V. Dubois writes:

Maybe to better state my opinions I will try to use an example. For me "free banking" can be compared to a hypothetical movement that fights to alleviate some Utah pornography regulation so that you can buy paper magazines with dirty picture in stalls - an initiative that already exists for 100 years (disclaimer: I know nothing about Utah porn regulations, but I just bet on the fact that they exist)

1) Who the hell cares about paper magazines in an era of internet porn? And I assume that watching porn on internet is perfectly legal and available option in Utah.

2) If you wish you can obtain even paper magazines legally by ordering it online.

Yeah maybe selling pornography is the most "regulated" aspect of life in Utah, even more than banking sector because it is outright banned. But it is "free" in some other places in the world and people in Utah have multiple ways of accessing this market. So why to fret about this nowadays?

Just declare victory and maybe focus on the real issue - for instance promoting freedom of use of internet as it is far more important an issue for general liberty including access to pornography.

vikingvista writes:

JV,

“All you talk about is some vague "binding regulations" without really addressing any substance of my arguments”

Perhaps I have been misunderstanding you. Your argument seems to me to repeatedly be that innovations in the speed of clearing technology between banks means that free banking effectively exists today. I then repeatedly explain how that is irrelevant to whether free banking exists or not. And of course a 10 minutes perusal of freebanking.org gets you plenty of explanation of how clearinghouses worked, so you must know that modern innovations in that technology have no bearing on your argument. Neither of us, apparently, thinks his points are getting addressed.

“For instance as far as I know there is no obligatory deposit insurance scheme for banks on Cayman Islands. Mitt Romney has an account there. You can do the same from your home using courier to deliver documents.”

Again, a mystery to me why you would think this means that free banking exists. You are of the opinion that the Cayman Islands have a free banking regime? For the sake of argument, let us say that it is true. You then are claiming that FDIC, capital requirements, Federal Reserve lending policies, and other US banking regulations therefore have no significant effect on the US banking industry? Is that because you think that almost no Americans use these American banks, but instead do almost all of their banking through the Cayman Islands or “shadow” banks? Do you personally avoid using the conventional commercial banking system in your country? When you talk to people around you, do you find it harder to find someone who uses or does not use conventional commercial banking?

I just can’t see how you can seriously claim that, e.g. in the US, conventional US commercial banks with all their associated regulations are not a substantial part of the banking industry in the US, or that their effect on US banking is so slight as to have no appreciable macro effect.

“While I disagree with how you define money or your view on free banking era it is insubstantial for my argument”

You don’t think it substantial to an existing state of an economy what people predominantly do? I think that is one of your mistakes, which is why I keep mentioning it. People predominantly use money. People do not predominantly use bitcoin. People predominantly use conventional commercial banks. People do not predominantly use banks in the Cayman Islands or shadow banks.

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