Regarding libertarian philosophy, I develop my views based on a strict interpretation of the non-aggression principle, grounded in an absolute view of property rights. This makes theory relatively easy for me, and helps resolve many – but not all – questions of application. It also helps keep me disciplined regarding topics that are or aren’t within the confines of libertarianism.
Regarding Austrian economics, perhaps it is more appropriate to say that my views are grounded in free markets; Austrian economics happens to be the closest thing to free market economics that exists. Free markets means, to me, any transaction between two or more willing participants.
I put these two together and conclude: a legal or valid free market transaction is one that does not violate the non-aggression principle. Even this may be compatible with Austrian economics, I don’t know.
In neither case have I read every work of the great masters; in fact, I have read only a little work of any of these – Mises, Rothbard, Hayek, etc. I build my views from the very simple foundations as identified above – nothing more complicated than this. I sometimes find after the fact that what I have concluded does…or does not…coincide with the views of one of these masters. I can live with either, although I always test my conclusions if I feel there is something presented that I have missed.
So on the subject of banking (and money and credit and currency), I approach the topic from a free-market viewpoint; as long as two or more people are gathered in whatever name – and they do not initiate aggression against a third party – they are free to contract in any manner they choose.
Regarding money and banking: I don’t care about inflation, I don’t care about gold, I don’t care about shadow banks, I don’t care about fractional reserves, I don’t care about business cycles; these are all issues for entrepreneurs in the free market to deal with. It’s called life. Competition, pricing, and profit and loss will send the necessary signals and separate the profitable wheat from the loss-making chaff.
In other words, leave money and credit and banking and currency to the market; thereafter, whatever will be, will be. Unless someone has a convincing argument as to why introducing force is both appropriate and not a violation of the NAP…well, there you have it. Initiating force and the NAP are not compatible; initiating force and free markets are not compatible.
With that as background, I would like to consider two posts on the topic of free banking. The first is by George Selgin, entitled Hayek and Free Banking; the second is by Joe Salerno – in response to Selgin – entitled Selgin on Hayek on Free Banking.
I guess I could have titled this post “Bionic on Salerno on Selgin on Hayek Free Banking.” But that would have been a bit much, I think. In any case, I do not fall on one side or the other in these dueling posts; I find much to agree with both, and some items where I disagree. It will be on the disagreements where I focus (otherwise it would make for a pretty boring post to write…and read, I believe).
Selgin begins by pointing to Hayek as his inspiration to look into and develop his (Selgin’s) free banking views. After introducing two pamphlets by Hayek that got Selgin to thinking about this topic, he offers:
Yet Hayek himself was no free banker. For starters, his own vision of "choice in currency" had little if anything in common with historical free banking arrangements. In those arrangements, banks dealt in established, precious-metal monetary units, like the British pound and the American dollar, receiving deposits of metallic money, or claims to such, and offering in place their own readily-redeemable liabilities, including circulating banknotes. In Hayek's scheme, in contrast, competing firms issue irredeemable paper notes, with each brand representing a distinct monetary unit.
Competition, Hayek claimed, would force private issuers of irredeemable currencies to maintain those currencies' purchasing power, or else go out of business. An overexpanding free bank, in contrast, is disciplined, not by an eventual loss of reputation, but by the more immediate prospect of running out of cash reserves.
But isn’t this the benefit of competition in a free market? The market may very well settle on free banking in a redeemable environment. As long as the possibility for any arrangement remains open, the market will sort this out. I do not understand why this suggests that Hayek was no free banker. Just because he outlined a scheme different than anything Selgin is aware of in history does not mean that Hayek’s proposal is not “free.”
I guess I will suggest that no one is a free banker unless they actually support fully free banking – this may result in redeemable, not redeemable, whatever; but free banking in only redeemable currencies or free banking only in non-redeemable currencies isn’t free banking. For those certain that the result will be currency redeemable in gold…we have no beef, as long as we agree that the market be left free to sort it out.