Joe Salerno has commented on an interview by Lawrence White, an interview on the topics of the gold standard and banking. Salerno’s comments are here; White’s interview is in three parts: here, here, and here. I will offer my two cents on comments provided by each of them – plus a few words regarding comments made by George Selgin in the feedback to Salerno’s post.
White makes points about the bought-and-paid-for nature of many academic economists, the myth that the instability in price of demonetized gold is proof of the expected instability of gold if/when monetized, the myth that the gold standard amplified business cycles, the superiority of banking free from government edict and government backing, the fragility of the “jerry-rigged” gold-standard of Bretton Woods (although he credits the designers as “well-meaning”), and the value in debunking the superiority of central bank managed money as opposed to free-market money.
On each of these points, I am in agreement (except the “well-meaning” part).
As to the seemingly growing interest in the gold standard and other alternate money regimes that are gaining exposure:
LW: Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience. The Heritage Foundation is now showing some interest. The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.
To this point, Salerno takes some exception:
JS: A glaring omission in White’s answer is, of course, the Mises Institute, which held its first conference on the gold standard over 30 years ago. Since that time it has campaigned tirelessly for the gold standard, devoting many of its conferences and publications to sound money. Its associated academic economists and other scholars have published thousands of pages on the subject.
It is an inevitable, and unfortunate, situation regarding this feud between certain academic Austrians and the Mises Institute. Inevitable, because on some levels certain of the differences can never be reconciled absent an abandonment of the position; unfortunate, because the two camps serve different, yet what could be complementary, roles. I will expand on this feud, using this specific debating point.
White specifically started his sentence with the term “policy think tanks.” While many scholars associated with the Mises Institute publish academic papers, contribute to economic journals, etc., I am certain that the term “policy think tank” cannot be applied to LvMI – nor do I believe the Institute would want to be burdened with that chain:
Think Tank: A think tank (or policy institute, research institute, etc.) is an organization that performs research and advocacy concerning topics such as social policy, political strategy, economics, military, technology, and culture.
I associate such a thing with an organization that seeks to influence government policy – what other “policy” are they thinking about while in the tank? To my knowledge, most of those behind LvMI run as far away from government policy as possible – they are located in Auburn, Alabama, for goodness’ sakes. White’s inclusion of Cato and Heritage offer compelling evidence of my view – these are certainly think tanks dedicated to influencing government policy.
For this reason, White’s narrowed definition would thankfully exclude the Mises Institute, therefore – on a technicality – Salerno has no reason to complain. But not so fast: White offers examples in his response of influential organizations that in no way fit the definition of a “policy think tank,” for example The Atlas Network:
Our mission is to strengthen the worldwide freedom movement by identifying, training, and supporting individuals with the potential to found and develop effective independent organizations that promote our vision in every country.
We aim to cultivate, support, and inspire potential and existing free-market organization partners around the world. Currently Atlas Network serves more than 400 partners in over 80 countries worldwide.
This sounds like a well-organized meet-up group, not a policy think tank in the same vein as a Cato or Heritage.
What about The Gold Standard Institute:
The Gold Standard Institute, based in Phoenix AZ, is a non-profit educational organization dedicated to spreading awareness and knowledge of gold, and to promoting the use of gold as money. The Gold Standard Institute serves the public and promotes the general welfare through dissemination of gold’s virtues and its role in a society that values liberty and justice for all. The Gold Standard Institute was founded in 2012 by economist and monetary scientist Keith Weiner.
It is two years old and located further from the centers of “policy” than is the Mises Institute. What policy influence on this topic could they possibly have had? Regarding this Gold Standard Institute, Salerno adds:
The Gold Standard Institute was founded and is presided over by Keith Weiner, a principal in a for-profit gold fund business. Weiner received a PhD from the New Austrian School of Economics (NASE), a non-accredited institution founded by Dr. Antal Fekete, a mathematician and a proponent of the gold standard based on the long discredited real-bills doctrine.
I have written quite a bit about the real bills doctrine. My thinking on it has evolved as my thinking about “money” has evolved. While I find real bills inflationary, I find no reason to discredit the practice: if two individuals choose to trade via such means, I find no reason to stop them. It is easy to imagine a market growing for such paper, as it apparently has in the past. In this, I find no reason to criticize (“discredit”) Weiner or Fekete. I have other reasons to offer criticism (at least with certain positions held by Fekete; I am not familiar with much from Weiner), but not this one.
Given White’s inclusion of a well-organized meet-up group and separately a two-year old institute located a continent away from the beltway, one certainly can legitimately wonder why the Mises Institute is ignored.
Which brings me back to this recurring dispute between academic Austrians and the Mises Institute; I will revert to Salerno from this interview at The Daily Bell:
The GMU "Austrian" program is located in the economics department of a public university and its various programs and graduate fellowships are funded by private money from a few, large institutional donors. Its mission is twofold. First, it seeks to train graduate students in eclectic and heterodox political economy traditions with a general market-oriented thrust. As it says on the GMU website, "graduate programs in economics are noted for their emphasis on comparative institutional analysis and their concentration on the relationships among economic, political, and legal institutions.
In contrast to GMU, the Mises Institute is a private educational and research institute funded primarily by individual, as opposed to institutional, donors. Its mission is to disseminate and teach the economic theory and political economy of the "Austrian" tradition to the public as well as to promote academic research in this tradition. This it does through numerous conferences, publications of books and journals and one of the world's leading economics websites, Mises.org.
Salerno suggests that the differences are meaningless: “As far as whether any split exists between MI and GMU, it is a meaningless question because they have very different missions.”
Yet, the differences are there, and regularly rear their ugly side; for example, see Selgin in the comments to Salerno’s piece. There is too much venom in his comments for me to narrow it down at all – take a look, if you like.
What is the root of these differences? I see two, and both are spelled R-O-T-H-B-A-R-D. First is the issue of the state. Rothbard’s view is quite clear: a consistent application of the non-aggression principle will result in the removal of compulsion via state forces – no state as it is currently manifest. This is like poison to Austrians associated with “policy think tanks” and the beltway. They want to influence government policy (see Selgin, now with Cato), where Rothbard wants to eliminate the thing to be influenced (see Rothbard, no longer associated with Cato).
The second difference is on fractional reserve banking. As far as I can tell, Rothbard is the first Austrian to label the practice as fraud. Yet there are many Austrians – including those in the academic community – who do not see it this way. To my knowledge, Mises, as one example, never labeled it as such.
I agree with Rothbard on the first issue; I disagree with him on the second.
After that expansive detour, back to White:
LW [regarding critics of fractional reserve banking]: I’ll just say that those who want to outlaw modern intermediation (and by modern I mean post-Dark-Ages), and build our payment system instead on literal gold warehousing, are embracing something close to the extravagantly expensive monetary system of Milton Friedman’s caricature. It’s a kind of financial Luddism.
This comes back to the division caused by labeling FRB as fraud. I believe it takes on the elements of a moral battle, as “fraud” suggests unethical behavior – hence the extra venom in what otherwise might be merely a dispute regarding an economic theory.
Salerno addresses this point:
JS: White responds by falsely implying that all critics of fractional-reserve banking want it outlawed. By doing so, he deftly side steps the serious criticisms of the economics of fractional-reserve banking by those advocates of free banking, such as Ludwig von Mises, Guido Huelsmann, myself, etc., who are in favor of freeing banks from all political regulations while denying them government bailouts and insurance.
Salerno is correct – not all critics of FRB call for it to be outlawed (in the comments, Salerno offers: “I would venture to guess that the majority of academic economists associated with the Mises Institute do not consider it fraud under any and all circumstances”).
Unfortunately, this point of division will continue to raise its head until someone with the standing of a Salerno at the Institute writes a specific critique of Rothbard’s views regarding FRB as fraud – I do not suggest every academician associated with the Institute must agree, but someone with Salerno’s stature must write such a critique, else this controversy will continue.
If this has been done, I haven’t seen it. (I have done it many times; Salerno is free to endorse one of my many posts on this topic!)
As to the “serious criticisms,” life is made up of compromise; whatever serious criticism one might have of fractional reserve banking pale in comparison to the serious criticisms of disallowing the practice (by force, as there is no other means to disallow it).
JS: These latter critics believe that a completely free market in banking will lead to the natural suppression of “fiduciary media”, i.e., bank notes and deposits unbacked by the money commodity. But White cannot be bothered with addressing such nuanced arguments when there are polemical points to be scored with a gratuitously nasty gibe…
I certainly hold this view – as long as “natural suppression” doesn’t mean “elimination.” I don’t think anything will eliminate FRB other than law backed up by monopoly force, which, it seems to me, cannot be endorsed by anyone favorable to free markets. I think FRB can be “naturally suppressed” by the market, meaning the amount of leverage will be determined by customers of the bank and the value of its notes. In other words, naturally suppressed (regulated) by the market.
I also agree wholly with the application of the term “nuanced.” I have written dozens of posts on this topic, and have contemplated pulling it all together into one post, or more likely a series of integrated posts. There is so much nuance in the analysis; the complication presented is one reason I have left this as a contemplation.
In any case, there you have my two cents….