26 May 2010

A Challenge for the Free Bankers

All Posts 21 Comments

I was reading Mises’ discussion of the trade cycle in Human Action (the Scholar’s Edition, if it matters). I am sorry but it seemed to 100% confirm Salerno’s position in the recent spat. (I’m not going to bother hyperlinking; if you don’t know what I’m talking about, I envy you.)

Now don’t get me wrong, White, Horwitz, et al. could still say that Mises’ writings in this section of Human Action are consistent with their position, but prima facie he seems to be saying exactly what Salerno attributes to Mises.

So my question is this: Are there any passages in Human Action that would prove uncomfortable to Salerno? In particular, are there any passages where Mises says that the issue of fiduciary media–within the limits that would exist under free banking, perhaps–could have positive effects? I saw not a word of this in the sections directly treating the trade cycle. There, Mises unambiguously said that any expansion of fiduciary media caused the trade cycle.

(However, he seemed to be assuming an initial equilibrium. So the loophole White and Horwitz could claim is that Mises just didn’t deal with the situation in which there is an increase in the demand for money, which is exactly counterbalanced by the issue of new fiduciary media.

To say it one more time in different words, what I am now asking is if there is any place in Human Action where Mises positively affirms the view of White and Horwitz?

And by the way, please don’t point to Mises’ support of free banking and his insistence that government prohibitions on FRB are unnecessary. That per se means nothing. There are several passages where Mises clearly says that issuing fiduciary media period causes the trade cycle, so he presumably thinks that it’s a dinky little trade cycle when the fiduciary media issuance isn’t backed up by the government. Indeed, he literally says this in the sections I read today.

So what say you, kids? Can you find a passage in Human Action where Mises clearly says that a world of no fiduciary media is worse than a world with the fiduciary media that would occur under free banking?)

21 Responses to “A Challenge for the Free Bankers”

  1. Louis B. says:

    I hate to admit my ignorance of this debate, but does the Mises/Rothbard/Salerno side actually oppose a completely free-market banking system?

  2. Jacob Hedegaard says:

    Is it really THAT interesting debating what Mises thought over what system would actually be best – assuming that wise academics doesn’t care who said something, besides respectful acknowledgement, but instead treasures real arguments.

    • bobmurphy says:

      If I used the criterion “Is this topic really THAT interesting,” I wouldn’t ever post anything.

      • Jacob Hedegaard says:

        I just though the ‘challenge to free bankers’ should be to argue whether they are right, and not if Mises thinks so or not.

        What Mises thoughts were might be interesting in a historical perspective, but I don’t get why the debate is being used as argument pro et con free banking?

  3. Bob Roddis says:

    Didn’t this issue arise because White and Horwitz claim Mises as their authority? Of course, truth should prevail regardless of what Mises said, but if Mises doesn’t support White and Horwitz, then………………….

  4. Ash Navabi says:

    I’m just curious: is there an issue that the vast majority of Austrians think Mises was wrong about?

    • bobmurphy says:

      Some of his discussion on the creative genius is a little weird. You get what he means, but it sounds like he is saying praxeology doesn’t work on geniuses.

  5. Tom Woods says:

    Ash, I think there are numerous issues that numerous Austrians would contest in Mises, but I can’t think of _one_ that the _vast majority agree_ was wrong.

    • ADA says:

      What about his stance on monopoly price? Won’t most Austrians agree with Rothbard on this issue? Namely, that it is not possible to distinguish between a monopoly price and a market price.

      • bobmurphy says:

        I don’t know how many would. Israel Kirzner agrees with Mises. I hang around Rothbardian circles so I don’t have a good sense of the views of “most Austrians.”

  6. Leo says:

    So is the Mises Institute the most extreme libertarian “think tank”? Is there any other group that tends to advocate for even less government?

    • Giedrius says:

      Try http://www.freedomainradio.com, IMO they look at the problem from the roots.

    • Giedrius says:

      There is, but I (very probably correctly) assume it interferes with Bob Murphy’s religious believes, so he censored link I gave.

      • bobmurphy says:

        FYI I didn’t censor anything, it must have been your first comment and so my filter automatically held up your comment.

        • Giedrius says:

          I’m sorry then, it seems I made conclusions to early 😉

  7. Josh Hanson says:

    I don’t have an example for you, but then neither does Horwitz, by his own admission. In Reply to Salerno’s Four Propositions on Mises and the Free Banking School, he states that “there’s no explicit statement by Mises but it is the only logical conclusion one can draw from other explicit statements he makes.”

  8. Michael says:

    Mises.Institute is home to both limited government and anarchists. i would call it the “most popular, anti-state think tank, but im sure there are more anarcho “purist” think tanks somewhere with less popularityy

    Property and Freedom Society is one

  9. Steve Horwitz says:


    You have seriously distorted what I wrote by taking that clause out of its original context. You left off the opening phrase “In the first case” which indicates that what followed is true of Joe’s first proposition only. (Congratulations though, distorting quotes does put you in good company with a number of other opponents of free banking…). Here’s the rest of the relevant paragraph:

    “I think I have sufficiently met Joe’s challenge in three of the four propositions he put forward. In the first case, there’s no explicit statement by Mises but it is the only logical conclusion one can draw from other explicit statements he makes. Propositions 2 and 4 are, in fact, explicitly stated by Mises. I happily concede Joe’s third proposition and gladly admit that, on that issue, Mises cannot be considered part of the Free Banking School. However, I think I’ve met Joe’s challenge in the case of the other three. At the very least, this should demonstrate the ambiguity in Mises. However, I think it does more than that and actually shows that, to use my earlier phrase, “the preponderance of the evidence” supports the Free Banking School interpretation. Joe gave me four propositions, I provided evidence for three. That’s a “preponderance” in my book. ”

    Bob: did you read that post of mine? I’m not sure if it addresses your challenge or not.

    • bobmurphy says:

      Steve, I read it but I didn’t read Joe’s post (that you were responding to), and I also didn’t go look up the Mises quotes in context. But here is my quick reaction:

      * When Mises talks of “surplus” banknotes coming back, I think surplus means “a greater issuance of fiduciary media than its rivals.” In other words Mises is showing how if one bank expands faster than the others, its reserves will get drained. Now if the community in general increases their demand to hold money, then maybe that would allow an expanding bank to keep more of its reserves (since its own customers will add more of the new banknotes to their holdings), but still those banknotes which fall into the hands of other banks’ customers will soon find their way back to the issuing bank for redemption. Yes, people want to hold more money, but the non-customers of the expanding bank want to hold money, not the notes of some bank they don’t patronize.

      * When Mises is talking about deflation having the opposite effect (though not as bad for the reasons we all agree with), he is talking about a bank reducing the amount of previously issued fiduciary media. So his point is, after an expansion causes the unsustainable boom, and then prices adjust, it would be an additional distortion to suck all the old fiduciary media out of the system. I understand how you are arguing that “deflation” for Mises could mean either a reduction in supply of money or an increase in the demand for it (w/no change in supply), but can you explain step by step what the mechanism is? I.e. the banks aren’t destroying fiduciary media, people just want to hold more money. So how does that make the interest rate go up? Are people borrowing money to add to their cash holdings? (I’m not being sarcastic.)

      * In any event, if you admit that Mises thought free banking would keep reserve ratios at a high level (that IS what you are agreeing with, right?) then isn’t that the main point of contention? I thought Salerno’s #1 point was that Mises that FRB was undesirable and ideally the banking system would have (close to) 100% reserves. So if you are conceding that Mises thought free banking would indeed keep reserve ratios high, isn’t that basically the whole game?

  10. Steve Horwitz says:

    I don’t think that’s the whole game Bob. I think that’s an empirical question that Mises was simply wrong about. A free banking system could still maintain monetary equilibrium at a higher reserve ratio. The claim about the status of fiduciary media doesn’t require that the reserve ratio be any particular number (other than 100% or 0% I suppose 🙂 ). The principle of adverse clearings would still work with a desired reserve ratio of 50% and the claim that expanding the MS to meet a greater demand to hold bank liabilities is not a problem would still hold.

    My view is that Mises is not crystal clear one way or the other, but that the preponderance of the evidence suggests he correctly understood the monetary equilibrium idea and that his ideal banking system was free banking in which fractional reserves/fidcuiary media were permitted.

    • bobmurphy says:

      I think you are being a bit coy here Steve. I think Mises has in mind the idea that under free banking, the banks will be held to very close to 100% reserves. (As evidence–though not smoking gun I grant you–I refer to Mises favorably quoting the guy who wanted to allow banknote issue so that nobody would hold banknotes.)

      So with that hypothesis, I go through all of the quotations you guys offer (except for one or two from TOMC), and I see Mises saying, “Yeah fiduciary media causes the boom/bust cycle, but under free banking there would be dinky little amounts of fiduciary media, so the resulting boom/bust cycles would be no big deal. Problem solved.”