Free Money

by on December 30, 2010 at 7:10 am in Economics, Education, History | Permalink

Christopher Beam's piece on libertarianism had some amusing moments:

Say we started from scratch and created a society in which government covered Money1 only the bare essentials of an army, police, and a Money3JPG courts system. I’m a farmer, and I want to sell my crops. In Libertopia, I can sell them in exchange for money. Where does
the money come from? Easy, a private bank. Who prints the money? Well, Money2 for that we’d need a central bank–otherwise you’d have a thousand Money5 banks with a thousand different types of currency.


A monetary system with thousands of banks issuing their own currency! Ho, ho, ho….those wacky libertarians where do they get their crrrrrazy ideas

Canal Images from Nick Szabo, the Minneapolis Fed, the San Francisco Fed, the Philadelphia Fed and Larry Schutts

Addendum: Scott Sumner has other bones to pick.

1 Ted Craig December 30, 2010 at 4:02 am

Why would anybody need to "print" money? Does Beam also worry about who will deliver the mail?

2 George Selgin December 30, 2010 at 4:10 am

Well, if Beam's other arguments are at the same level as what he says here about currency, then his piece is surely worthless. (Indeed, I'm not inclined to read it after having seen this little sample.)

Briefly, for those unfamiliar with the history of private bank currencies, the U.S. was unique in eventually having had "thousands" of banks of issue, with their notes sometimes bearing discounts; and the reason for that wasn't "libertarian" economic policies. It was state-government erected barriers to branch banking. Elsewhere, where such barriers were absent, the tendency was for banks to number in the dozens rather than in the hundreds (much less thousands), with substantial branch networks that both kept their notes at part and their portfolios relatively diverse (and therefore less vulnerable to shocks).

3 Stuart December 30, 2010 at 5:08 am

Nice job on the ho, ho, ho link.

4 George Selgin December 30, 2010 at 5:15 am

With all due respect to Winter, and also to Steve Mihm, the author of _A Nation of Counterfeiters_, who also happens to my colleague (he teaches in UGA's history department) and friend, that book doesn't give readers the straight dope on private currency. For starters, it fails to compare the U.S. experience with that of other nations, and thereby entirely misses the unique nature of the U.S. arrangement and the legal restrictions responsible for it. The book also utterly fails to make proper use of post-1970s research by economic historians (e.g. Rockoff and Rolnick and Weber) that has dramatically revised our understanding of antebellum U.S. banking, and especially of the role regulations played in some of the more egregiously bad state banking systems, including those that were based on misleadingly named "free banking" laws. Mihm does include a footnote referring to the literature in question, which gives the impression that he has taken its findings into account. But in fact he doesn't do so in any way that I was able to discern. (Nor did he take up my offer to read and comment on the MS while it was in progress.) Instead, to be rather blunt, his book tends to set understanding of antebellum U.S. banking back to its ca. 1970 status, when writers routinely characterized it as involving a proliferation of western "wildcat" banks and such–which was depicting banking in the antebellum west about as accurately as your average 50s cowboy movie depicted the state of "western" law and order: less boring than the truth, to be sure; but false nonetheless.

What's more, even despite all its infirmities mainly traceable to bad regulations, the antebellum currency wasn't really all that bad, and especially so by the eve of its destruction–for entirely fiscally-motivated reasons, by the way–during the Civil War. For those who doubt this, here is a little quiz: imagine that, in (say) October 1863, one purchased every banknote in circulation save those of the Confederate states, at the notes' par or face value–about $200,000,000 worth. Then suppose you sold them all to a broker in either Chicago or New York City. How big a percentage loss would you have suffered, reckoning notes that the brokers' considered "doubtful" as worthless? Go on: take a guess. I've done the numbers and will post the answer later.

5 odinbearded December 30, 2010 at 5:24 am

@Mike Huben

Somalia is not now, nor has it ever been, anything resembling a libertarian state. Your glib comment reflects an absolute lack of knowledge of libertarian principles.

the people of that time rejected the "private" solutions for reasons that were sound and obvious to them

People initially rejected the polio vaccine for reasons that were sound and obvious at the time. It doesn't make them right.

6 Andrew December 30, 2010 at 5:30 am


It doesn't move you at all that we still have exactly all the same problems that all your geniuses solved for us?

7 Andrew December 30, 2010 at 5:33 am

"There are all sorts of situations the private market isn’t good at managing, such as asymmetrical information (I know my doctor is qualified to treat me because he has a government license)"

Just the first example: I would bet someone a lot of money, if he were honest about it, that he doesn't actually know if his doctor has a license or not.

8 Outsider December 30, 2010 at 6:23 am

Anyone ever thought that what is in fact emerging might be what is best?

Or if not best in principle best in practice.

Some blend of socapitalism.

9 George Selgin December 30, 2010 at 6:45 am

I also would like to ask Mr. Huben to indicate just which private-market practices he has in mind in suggesting that such practices were responsible for the Great Depression and deserved to be (and actually were) prohibited for that reason.

10 Russ Nelson December 30, 2010 at 6:54 am

George, it's typical that legislators will name their bills after their short term effect. Unfortunately, the long term effect of any legislation is usually the opposite of what is intended, so that most bills become ironic over time.

11 Andrew December 30, 2010 at 7:36 am

The point is, private banks did create money, and…and…and…private banks STILL create money.

The chicken-littles have some remediation in store before they can actually get into the ring.

12 y81 December 30, 2010 at 8:17 am

"Let's take a look at the libertarian paradise Somalia."

And then, for an equivalent argument, let's take a look at the regulatory paradise North Korea.

13 Andrew December 30, 2010 at 8:47 am

If he wants to go after bonafide anarchists with Somalia that would be one thing, although even that would be like going after Marxists over North Korea, and some of these examples like the USSR and East Germany are a lot like 'centralized anarchies.' They come together around the back end. The person these guys love the most, Abraham Lincoln, gave us the civil war that corresponds well to the 'anarchy' of a Somalia coming out of its own civil war realignment.

Libertarians are not anarchists. It's a definition thing. I suspect Somalia has exactly nothing of the property rights and supporting institutions that libertarians prefer. Communist rule followed by war probably took care of those. ("During 1990, in the capital city of Mogadishu, the residents were prohibited from gathering publicly in groups greater than three or four.")

It's bass ackward thinking. If you want to argue real world against idealism, that's fine. Argue unachievability. But you can't argue that Somalia is the libertarian ideal.

I do think the state can wither away as we develop more effective and efficient institutions, and if we get the state to loosen its grip on industries it is demonstrably poorer at, by starting with the things that obviously aren't public goods, but that in no way means I want to start with violent revolution.

On the other side, I wish the pragmatic libertarians didn't feel the urge to make fools of themselves in order to signal their practicality street Kred. No, it's not easy to make fun of Ron Paul. It is easy to sit in a room of like-minded climbers and make fun of caricatures.

14 Bartman December 30, 2010 at 9:37 am

Hong Kong dollars are issued by commercial banks: Standard Chartered, HSBC and the Bank of China(HK).

Same thing in Scotland and Northern Ireland.

15 T. Shaw December 30, 2010 at 10:01 am

I need to apologize to college professors. I (knee-jerk) thought Christopher Beam was one of them clueless college professors.

Sorry! I find he's a 2006 (that would make him maybe 26 years old – I have older ties I don't wear) Columbia U. journalism grad, and got his journalist genes primogenitur from his father Boston Globe columunista, Alex Beam.

Comprehensive ignorance: above is ad hominem, and it all applies.

16 KAZ Vorpal December 30, 2010 at 12:09 pm

Why would we want the government to cover a standing army or police force?

The United States had neither, for well over the first century of its existence, and was better off for that.

17 George Selgin December 30, 2010 at 1:17 pm


(1) there must have been a time when U.S. banks weren't at all regulated;
(2) If there was, it was surely when the country got started.
(3) Shah's [sic] Rebellion took place back then.
(4) Bad banking had something to do with "Shah's" rebellion.
(5) Therefore freedom in banking failed.
(6) and so did libertarianism generally.

I'm happy to note that (3) is correct, allowing for the misspelling of "Shays." (The other claims are all wrong.)

18 jorod December 30, 2010 at 3:29 pm

We could abolish the Fed…then the government would put its money in Pet banks like Andrew Jackson did.

19 DontBeAnIdeologue December 30, 2010 at 7:00 pm

Ideas for policy should be taken from anywhere as long they as make sense, help achieve or policy goals (which we obviously do not all agree on), and actually work. Goal-based policymaking should be the ideal. NOT process legitimizes outcome, which some ideologies (like L/O) tend to have. Goals should always come first – that tends to be a major dividing point between honest (meaning non-opportunist and non-status seeking only) Libertarians/Objectivists and many Social Democrats/modern non-fool Liberals.

Libertarianism (and Objectivism) have plenty of good ideas which we do and should draw from, but like any ideology, have plenty of flaws. For a thorough, and much better critique, try this:

Keep in mind, as the above writer states, that many disagreements have to do with *irreconcilable value conflicts.*

20 phil m December 31, 2010 at 11:35 am

If monopoly were a sound economic policy, we'd be having this conversation on a black-market internet system in the United Soviet Socialist States of America.

21 SONORAMA December 31, 2010 at 6:30 pm

In the United States, it is NOT illegal to print your own paper currency. In Ithaca, NY, right now they have had their own paper money called the "Ithaca Hour" for the past two decades.

22 Michael Smith January 1, 2011 at 4:21 am

Mr. Selgin:

Thank you for setting the record straight on the facts as well as identifying the numerous logical fallacies committed here by the critics of free markets.

The problem with so many such critics is not simply that they've been indoctrinated with a mix of Marxist myths and lies about history — that would be bad enough, but at least it would be correctable — no, the really tragic thing is that somewhere along the way their faculty of reason seems to have been turned off, leaving them unable (or unwilling) to evaluate new data and new arguments. For all intents and purposes they are completely impervious to persuasion. Even when their criticisms are answered as calmly and effectively as you answered them here, they refuse to change their minds.

But I certainly appreciate your comments everywhere I see them. So thanks again.

23 Bill Stepp January 1, 2011 at 7:25 am

Re: Jackson, the 2nd Bank of the U.S. and the pet banks, he didn't renew the charter of the former because of any principled libertarian opposition to a central bank, contra Rothbard, but because some of its owners funded his political opponents and wouldn't countenance his policies. He wanted the deposits it held placed in the banks of his southern political supporters. In other words, the destruction of the 2nd Bank (which was 85% privately owned) had everything to do with politics and policies, and nothing to do with libertarianism. Why MNR didn't get this has always been a mystery to me.

The solution would have been to get rid of whatever central banking functions it might have had, and to let it continue as a private bank without any government-granted privileges. But then Jackson was the polar opposite of a libertarian (contra Rothbard), a mass murdering, stealing thugster, as his papers in the Richardson set make all too clear.

24 George Selgin January 1, 2011 at 8:28 am

Mr. Potts: I was referring the the value the notes would have commanded if sold at the time to brokers in New York or Chicago. The overall discount would, in fact, have been <1%. The numbers can be found in my <i>Economic Inquiry article, "The Suppression of State Banknotes."

25 SaulOhio January 2, 2011 at 2:50 am

Michael Smith: I too have observed the same thing. And the irony is that they accuse you of the same thing, of refusing to change your position in the face of evidence. In the case of this most recent economic crisis, they blame free markets. No matter how many government regulations you name, no matter what interventions the government has implemented, no matter how clearly those policies dominate the housing, mortgage and financial markets, no matter how clear the evidence is that those interventions caused the crisis, they keep blaming free markets, and accusing you of being an "ideologue" and ignoring evidence for daring to disagree with you.

Its called psychological projection.

26 Anthony L January 2, 2011 at 4:26 am

"Anyone ever thought that what is in fact emerging might be what is best?
Or if not best in principle best in practice.
Some blend of socapitalism."
What Happened, Happened! I sometimes wonder if we should all just throw our hands up and say 'we can't change what happened'. Truth is things are this way because people with strong incentives and the power to enact all kinds of rules have made it this way. They don't always get what they want but leave a mess behind in many cases. We work well despite the mess but at some point someone has to tidy-up a bit. Check out Human Action in audio at or iTunesU for the reasons this "blending" of systems is dangerous and not a healthy compromise at all.

27 MichaelM January 2, 2011 at 4:36 pm

I'll note for mulp that Shays' Rebellion took place during the 1780's, right after the only hyperinflation we've had since the Revolution, a situation caused by — surprise of surprises — the over-issuance of public scrip paper, both by Congress and the new state governments during the Revolution. Shays' Rebellion itself took place within the context of Massachusetts' attempts to fund its own public debt.

Just because you're near the Founding, doesn't mean you're in a time of small government utopia.

28 Floccina January 3, 2011 at 9:59 am

I am more than willing to modify my views, and I'm not a historian so I'm appreciative for the historical background. I'm still just not seeing the desirability of multiple currencies. What is it you feel that the market would be doing more efficiently with the ability to print bank notes? How do you feel the market would keep from trending back towards a monopoly without geographical scarcity in bank branches?

So Tim do you feel like we should consolidate MasterCard, VISA, American Express and Discover?

29 John Zube January 9, 2011 at 12:09 am

Have a look at my beginnings of a free banking bibliography at – Currently I am expanding the free banking A to Z compilation that is on – Help to put all such titles on a CD, DVD or external HD – or even online, if you can afford that.Including all discussions, samples of such issues.
The history of free banking is still insufficiently explored. All the many prejudices and errors on the subject are not yet systematically compiled and refuted. Look up

30 John Zube January 9, 2011 at 12:11 am

Have a look at my beginnings of a free banking bibliography at – Currently I am expanding the free banking A to Z compilation that is on – Help to put all such titles on a CD, DVD or external HD – or even online, if you can afford that.Including all discussions, samples of such issues.
The history of free banking is still insufficiently explored. All the many prejudices and errors on the subject are not yet systematically compiled and refuted. Look up

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