I'm glad Toby's provided his thoughts on my post about the Hayek lecture - I've learnt as much about monetary theory from Toby as I have from anyone, and he brings a unique perspective to the debate. Indeed Toby and I have co authored a number of papers and his comments reflect a lengthy personal discussion we've been having.
To the outside observer it might appear that we have opposing views, so I'll take the chance to attempt to find consensus.
You'll have noticed that throughout my post I make reference to a working paper I have on the topic. I wrote it so that I could avoid internet conversations - that is where I lay out my view, and I would encourage those who wish to disagree with it to read my arguments carefully, charitably, and to write a response in kind. Clearly Toby hasn't taken the time to do so. Because I don't wish to shy from debate I will respond, but acknowledge that websites and the absence of peer-review do not engender mutual learning. If others wish to join this debate I think a prior reading should be considered a basic courtesy.
Regarding the audience, Toby swerves my main concern. I too was delighted that politicians were present. My challenge was to question whether there's a trade off between strengthening the conviction of those who are already on board with the core ideas, versus encourage those who might be hostile to question their priors and actually engage. So I'd ask Toby to consider whether skeptics are more likely to support the bill based on the event. If so, fantastic. Similarly I'm glad that some academics have said that they'll "revive their opinions" - although I'd be concerned if any academic would not be open to altering their beliefs based on new information.
In terms of substance though, Toby expressed support for the following:
- Account backed 89% by gold sat in the vault and 9% by government gilts with a repo facility and 2% by short term commercial paper of highly liquid companies with high credit ratings
I think we could debate whether this constitutes a "100% reserved account" - especially since the whole point of my example is to show that there's a very slippery slope here. I am under the impression that Heurta De Soto would *not* consider the above to be 100% reserve. So this indicates that Toby - like me - takes a broader view than the traditional defenders of the Rothbardian position.
On whether or not this becomes arbitrary, Toby says:
if you did not have a minimum 1 month time deposit, you would have all banks offering a one day time deposit and rolling it over into the next new day as a new time deposit, depriving the person of their property that they believe they have in there.
I don't see the problem with banks that do this. Whether or not people "believe they have it there" is a completely separate issue to whether or not such a practice would violate a 100% reserve requirement.
On the issue of legal priviledge, Toby says:
Allowing a systematic state sponsored legal and accounting privilege , even in your stylised fractional reserve free banking world puts banks apart as separate privileged entities to the rest of us in business. This is unethical.
I've heard this assertion countless times, and did my best to read up on GAAP to understand it better. But Toby would do us all a favour if he actually provided some concrete evidence to support this blanket assertion. I agree that many fractional reserve free bankers might underemphasise the existing legal rules that relate to banking, but this should be pretty easy for those who understand auditing law to set straight. I maintain that no FRFB intends to offer banks legal priviledge, and are therefore very open to legal specialists, auditors, businessmen etc, providing practical applications.
Toby goes on to suggest the type of contractual provision he would deem necessary:
you are de facto and de jure a timed deposit and your money will be on lent. So long as it is still in our vaults sitting on our balance sheet as a liability to you, we can allow you instant liquidity to redeem this loan without notice, however this may be denied with no right to claim against us should we not be liquid enough to satisfy your demands, then we can engage with you about a repayment plan to discharge our debt to you.
Your current account is an IOU not a receipt - it is *not* being stored for you in a vault, it is being lent out.
Regardless, agreeing on the precise wording seems secondary to agreement that such wording is possible. Indeed Wlater Block has said:
yes, under certain hypothetical and narrowly stipulated conditions, something vaguely resembling the fractional reserve system defended by Hayek could be construed so as to avoid the charge of fraud” (Block and Garschina 1996, p.91)
So why can't we focus our energies on working out what these conditions are? My article talks about option clauses and withdrawal notices as the types of contractual provisions that can be adopted to satisfy the concerns of the followers of Rothbard (note I don't claim to have invented these - they are a staple of the FRFB literature!)
Indeed Toby doesn't argue against this on the grounds of principle, but that:
I think the take up of this account would be very low indeed
So lets agree that if there's nothing wrong with it in principle allow the market to decide what the uptake is. The notion that we should prevent a type of activity occurring on the grounds that one doubts it's popularity seems a pretty easy matter to sidestep.
The way forward is to use these contractual provisions to ensure that auditing law can be met. Academic economists will not be able to specify in legal terms what they should be. This is the opportunity for non academics to contribute.
We then move on to the point about harming third parties:
if this system did set off boom and bust, there is a very good legal claim (as well as an ethical claim – all acts between consenting adults should be allowed unless they cause harm to others right?) that this should be outlawed due to the destruction to the property of others that this causes through the no doubt unintended consequences of allowing this practice – boom and bust
I deal with this argument in my paper, but I'd ask Toby whether he agrees with Heurta De Soto:
few criminal acts of negligent driving cause accidents or damages to third parties, but, all of them are offences since they imply a breach of public order” (Heurta De Soto 1998 fn 36)
See Rothbard (1982) for the argument that "potential to cause harm" is insufficient grounds to ban an activity. Even if such credit expansion did lead to boom and bust - where is the demonstrable harm? Would Toby wish to ban the automobile industry on the grounds of the "demonstrable harm" it did to the carriage industry? I own a few grams of gold. If Russia opens a new mine should I have grounds to sue them?
Toby then responds to my 3 critiques of his plan.
Point 1 - Toby asks:
In a FRFB world, with no state money and private banks, why would a demand for money suddenly change?
This misses the point - I'm not talking about post reforms, I'm saying that the plan *itself* will cause a change in the demand for money and thus be inflationary/deflationary. Current also makes this point, and I've not seen an adequate response.
Point 2 - I think Toby confuses the status quo with a FRFB environment. It's like when people use Northern Rock as an example against fractional reserves. Surely we can all agree that our debate about FRFB should exist within that theoretical system? If Toby believes that the bank has indeed created £800k without incurring any costs, I'd ask what is preventing such a bank from issuing £15bn?
Point 3 - The original claim of the plan was:
The government can now put those assets into Mutuals, which would then immediately pay off the national debt
Toby now says:
These mutuals , now loaded with £900 bn of amortising assets, then say to the government of the day, “Assign all the national debt obligations today to us and we will pay them off.”
OK, the government has offloaded the liability of the national debt in that instant but it has not been immediately paid off. I think others should decide whether this is an important clarification on Toby's part or an admission of error. I maintain that it is a logical flaw in the argument to claim that the national debt can be immediately paid off. Immediately offloaded onto other people to pay off, perhaps. But that's not the same thing.
I think we missed the constitutional moment that the banking crisis presented, and I am dedicated to ensuring that when the next one happens there is an alternative. I'm delighted to support The Cobden Centre's efforts to ignite such a debate, but I take seriously the responsibility that social reformers have. We need to make sure that our ideas are as theoretically sound as possible - irrespective of their feasbility or popularity - and then invest significant time in packaging them in such a way that they can be communicated and understood.
I'd encourage others to reflect on the parts of my article that Toby ignored - the type of activity that the talk prompted, and my suggestions for how to improve the Carswell bill. Let's get this right.
Cross posted at The Cobden Centre