Saturday, November 7, 2015

A Murray Rothbard Idea Becomes Mainstream

Tyler Cowen observes:

After interest in the 1930s Chicago plan of Fisher and Simons died off, Murray Rothbard and other libertarians were virtually the only people calling for 100% reserves. More recently, however, the idea has almost become mainstream. Consider Martin Wolf’s FT column:
Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.
…Banks create deposits as a byproduct of their lending. In the UK, such deposits make up about 97 per cent of the money supply. Some people object that deposits are not money but only transferable private debts. Yet the public views the banks’ imitation money as electronic cash: a safe source of purchasing power.
Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network. On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated. Yet credit cycles are still hugely destabilising.What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt.
…A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well. 
Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.

1 comment:

  1. While it's nice to see a Rothbard mention, it would be better if Cowen distinguished the Rothbardian 100% Gold Reserve Standard from the 100% Fiat Reserve Standard (of the Swiss referendum and the FT article). While Rothbard's idea would eliminate central bank-induced monetary inflation, the fiat standard would just streamline it. The Fiat Standard allows the central bank to expand the money supply however much they like ... but I'm sure they'd use this power wisely.