Swiss Referendum on 100% Reserves

by on November 5, 2015 at 7:25 am in Economics, History | Permalink

A Swiss group has collected the 100,000 signatures necessary to require a national referendum on requiring banks to hold 100% reserves.

In a nut shell, the proposal extends the Swiss Federation’s existing exclusive right to create coins and notes, to also include deposits.  With the full power of new money creation exclusively in the hands of the Swiss National Bank, the commercial banks would no longer have the power to create money through lending. The Swiss National Bank’s primary role becomes the management of the money supply relative to the productive economy, while the decision concerning how new money is introduced debt free into the economy would reside with the government.

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.

Hat tip on the Swiss proposal to Dirk Niepelt who offers further comment.

Here is the Stanford report of his passing, well done, and here are previous MR mentions of Girard.  He was one of the world’s great thinkers.

I think that recent developments in the Middle East, starting with the behavior of Hamas during the Gaza war and continuing with the behavior of ISIS, have struck a nerve among those inclined toward the civilization vs. barbarism axis.

Even if you do not believe that conservatives are right, you have to acknowledge that the news cycle suggests that we are in a civilization vs. barbarism wave. In my opinion, that is why Rand Paul is doing so poorly in the polls. You can criticize him as a candidate, but it is hard to argue that the other candidates are so stellar that they outshine him. I just think that the public is more receptive to the conservative axis than to the libertarian axis. This may always be true, but it is particularly true now.

Here is the full post.

Peter Olson and David Wessel write:

The natural rate of interest, also called the long-run equilibrium interest rate or neutral real rate, is the rate that would keep the economy operating at full employment and stable inflation.

You’ll find comparable statements from Paul Krugman, and here is the underlying Laubach and Williams paper, and more recently and ungated here (pdf).  Here are a variety of Brookings presentations.

Personally, I get nervous when I read about natural rates of interest, although I accept the core conclusion that currently low interest rates are not mainly the result of Fed policy.  I also find all this talk of natural rates of interest…historically strange.  A few points:

1. David Davidson and Knut Wicksell debated the natural rate of interest concept very early in the twentieth century, in Swedish I might add (see Carl Uhr’s books on Davidson and Wicksell).  Most people believe Davidson won those debates and even Wicksell seemed to concede.  Whether a given rate of interest both maintains full employment and stable inflation depends on the rate of productivity growth, for one thing.  It can be that no single rate of interest can perform both functions.

2. Keynes devoted a great deal of effort to knocking down the natural rate of interest concept (pdf), which he viewed as unforgivably Austrian.  He made the simple point — endorsed by modern Keynesians in other contexts — that the intersection with liquidity preferences at the margin shapes rates of interest, and thus there could be multiple natural rates of interest.  He also argued that in many settings there was no rate of interest whatsoever that would maintain capitalist stability.

3. In postwar economics, the Keynesians worked to keep natural rates of interest concepts out of mainstream macroeconomics.  I read Tobin as very much along the lines of Keynes.  Here is material on Hicks, Hansen, and Modigliani (pdf).

4. As Scott Sumner has pointed out, the older natural rate of interest used to truly be about price stability.  Nowadays that has morphed into “two percent inflation a year.”  Yes a definition can be changed, but still I find that intellectual maneuver strange and it implicitly suggests there may be multiple natural rates of interest; neither “zero” nor “two” is a special number.  There is also a blurring between the rate of inflation, the increase in the rate of inflation, the expected rate of price inflation, and so on.

5. Milton Friedman warned (pdf) not to assign too much importance to interest rates when thinking about monetary transmission.  On pp.10-11 he expresses his reservations about the natural rate of interest concept, which he calls the “natural” rate of interest with quotation marks:

What if the monetary authority chose the “natural” rate — either of interest or unemployment — as its target?  One problem is that it cannot know what the “natural” rate is.  Unfortunately, we have as yet devised no methods to estimate accurately and readily the natural rate of either interest or unemployment.  And the “natural” rate will itself change from time to time.  But the basic problem is that even if the monetary authority knew the “natural” rate, and attempted to peg the market rate at that level, it would not be led to a determinate policy. The “market” rate will vary from the natural rate for all sorts of reasons other than monetary policy.  If the monetary authority responds to these variations, it will set in train longer term effects that will make any monetary growth path it follows ultimately consistent with the rule of policy. The actual course of monetary growth will be analogous to a random walk, buffeted this way and that by the forces that produce temporary departures of the market rate from the natural rate.

There is still wisdom in those words.  You will note that in contrast Michael Woodford has worked to make interest rates more central to the discussion (pdf), and he is one reason why the natural rate of interest concept has made a comeback.

6. When Sraffa debated Hayek and argued the natural rate of interest was not such a meaningful concept, it seems Sraffa won.  Empirically, this Hamilton, Hatzius, Harrison, and West paper shows the natural rate can indeed be all over the place.  Here’s Carola Binder: “The more commonly reported 90% or 95% confidence interval would of course be even wider, and would certainly include both 0% and 6% in 2000.”

7. I sometimes read these days that the “natural [real] rate of interest” consistent with full employment is negative.  To me that makes no sense in a world with positive economic growth and a positive marginal productivity of capital.  It might make sense in 1942 Stalingrad, where the rate of growth was mostly negative.

Of course economic theory can change, and if the idea of a natural rate of interest makes a deserved comeback we should not oppose that development per se.  But I don’t see that these earlier conceptual objections have been rebutted, rather there is simply now a Kalman filter procedure for coming up with a number, combined with the triumph of empiricism, and in some quarters the desire to rebut the more extreme critics of the Fed.

I view the Laubach and Williams work as a highly useful “check” on the estimates of future rates of interest as contained in market prices.  (The market in fact does not seem to be crazy, relative to the model.)  But what macro properties will that likely future low interest rate world have, natural or otherwise?  There we do not know, and you will note that forecasts of inflation dynamics have not exactly been stellar, nor were most 2006 forecasts of future employment prescient.

I doubt these procedures are coming up with a “the natural rate of interest” in a meaningful form.  Or alternatively, look to Woodfordesque definitions, something like “what the rate of interest would be if prices were flexible.”  That too is a kind of (modal) forecast of interest rates, let’s not use the historical connotations of the natural rate of interest concept to smuggle in forecasts of prices and employment as well.

In any case, this is an interesting case study of how weak or previously rebutted ideas can work their way back into economics.  I don’t object to what most of the people working on this right now actually are trying to say.  Yet I see the use of the term acquiring a life of its own, and as it is morphing into common usage some appropriately modest claims are taking on an awful lot of baggage from the historical connotations of the term.  We’ve had the term “interest rate forecasting” for a while now, so let’s bring that one back into prominence.  It’s much clearer about what we are actually justified in trying to do.

Surprisingly, two variables can explain 38% of the metro area variation in the single-family growth from 2000 to 2004 to today: the number of jobs today relative to 2000 to 2004, and single-family house prices relative to the prerecession peak. The change in the unemployment rate had no statistically discernable effect.

Both measures have an intuitive relationship with the housing market. What these results suggest is that net job growth may not be enough to drive a single-family recovery. Instead, long-lasting scars from the housing bubble remain an issue.

That is from Adam Ozimek.

Writing in Quartz, Atanu Dey and Rajesh Jain have a very interesting argument that historically slow growth and many of India’s other problems can be traced back to its extractive constitution, which was largely inherited from the British.

For nearly a century, India was under comprehensive colonial British rule. As can be rationally expected, the government that the British imposed on India was not primarily directed towards development, but rather towards extraction. That is only reasonable because wealth extraction is the rationale for colonial rule.

The British, therefore, created the institutional structures, which necessarily includes the government that controlled India through comprehensive government control of the economy. This structure administration and control was left intact when the British decided to leave India, and was taken over by the government of Independent India. Although India attained political independence from the British raj, Indians did not become free of a controlling—and extractive—government.

…The conclusion has to be that India’s problem is structural and systemic, and not idiosyncratic. If the constitution were to change, the ultimate rules of the game would change, the policies (the derived rules) will change, and thus the action on the ground (the play of the game) will change, and therefore the outcome will change.

India needs a new constitution that is consistent with a nation of free individuals living in a complex, modern, large economy. This modern constitution has to be one that guarantees economic freedom to the individual, prohibits the government from making any laws that discriminate among citizens, guarantees freedom of speech and the press, prohibits the government from entering into businesses that are properly the domain of the private sector, and so on. In other words, India needs a constitution that protects the comprehensive freedom of the individual: economic, social and political.

What would be the best form of constitution for India? Westminster or Presidential? First past the post or proportional rule?  Single-member or mixed-member districts? Plurality rule or Borda count? Federalism? Certainly. But what kind of federalism enforced in what way? A Supreme court? How appointed? And what would be the most important rights to codify in a bill of rights?

So many books on China recycle the same stories and historical anecdotes, but this one tells the story from the point of view of economic history.  It is scholarly yet readable, interesting throughout but best in the first half, runs up through contemporary times, and does not have too much overlap with any other China book.  Here is one excerpt:

The urban entrepreneurial elite in eighteenth-century England benefited from absolute and unconditional support from the state, which shielded them against resistance from below.  This support was justified by the increasingly dominant ideology of classical political economy…The dominance of this ideology can be understood against the backdrop of Europe’s interstate conflict that urged state makers to ally with capital in building up its military capacity…The entrepreneurial elite in eighteenth-century China, in contrast, enjoyed only relative and conditional support from the state.  It is true that the Qing state elite never saw the mercantile elite as their antinomies and were diligent in facilitating their business and helping them secure their property rights in merchant-merchant or merchant-official disputes…But when it came to managing conflict between entrepreneurial profits and subsistence of the poor, the state elite often favored the latter at the expense of the former.

File under capitalist oppression is underrated.

Definitely recommended, you can buy the book here.

*The Midas Paradox*

by on October 27, 2015 at 2:27 pm in Books, Economics, History | Permalink

The author is Scott Sumner and the subtitle is Financial Markets, Government Policy Shocks, and the Great Depression.  Here is part of the Amazon summary:

Economic historians have made great progress in unraveling the causes of the Great Depression, but not until Scott Sumner came along has anyone explained the multitude of twists and turns the economy took. In The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Sumner offers his magnum opus—the first book to comprehensively explain both monetary and non-monetary causes of that cataclysm.

Drawing on financial market data and contemporaneous news stories, Sumner shows that the Great Depression is ultimately a story of incredibly bad policymaking—by central bankers, legislators, and two presidents—especially mistakes related to monetary policy and wage rates. He also shows that macroeconomic thought has long been captive to a false narrative that continues to misguide policymakers in their quixotic quest to promote robust and sustainable economic growth.


On a summer visit to the grave of Karl Marx, Ben Gliniecki found that he would have to pay £4, or about $6, to pay respects to the man who sounded the death knell for private property.

Mr. Gliniecki, a Marxist, said no.

“Personally, I think it is disgusting,” the 24-year-old political activist said. “There are no depths of irony, or bad taste, to which capitalists won’t sink if they think they can make money out of it.”

The charity that looks after this cemetery has long taken swipe at a different irony: Karl Marx’s decision to buy a burial plot in a private London graveyard over the then state-provided alternatives. They say their cover fee subsidizes the upkeep of a cemetery where 170,000 other people rest.

And note this:

The German philosopher…once predicted the “hot tears of noble people” would be shed over his ashes…

The WSJ article is here, via Vic Sarjoo.

The subtitle is The Man Who Conquered the World, and this is one of the very best non-fiction books of the year, quite possibly the best.  Virtually every page is fascinating and should be read carefully.  It makes intelligible a period of history which is so often a blur to the unfamiliar Western reader,and rather than just throwing a bunch of dates and facts at you it tries to make them intelligible in terms of underlying mechanisms.  Here is one summary bit:

The harshness of the Mongolian habitat and the complexities of nomadic pastoralism help to explain the many potentialities of Mongol society eventually actualised by Genghis Khan.  Care of massive and variegated herds and flocks produced a number of consequences: adaptability and ingenuity of response and initiative; mobility and the capacity for rapid mobilisation; low levels of wealth and of economic inequality; almost total absence of a division of labour; political instability.  Migration meant constant alertness and readiness to fight, since wealth in livestock is almost by definition highly vulnerable to raiding, reiving and rustling. Managing large animals was inherently more strenuous and dangerous than tending crops, so the very nature of pastoral life produced a hardier breed than would be generated by the peasantry.  Migration in peacetime also produced martial qualities via the surplus energy available for fighting, since in a pacific context warriors could leave the minutae of herding and droving to women and children.  when the fighting came, it was less destructive than for sedentary societies that had to defend fields of crops, cities, temples and other fixed points.

There were other military ‘spin-offs’ from pastoralism.  Moving huge herds of animals generated logistical skills and the capacity to navigate through uncertain terrain, coordinating with far-flung comrades while doing so.

Strongly recommended, you can buy the book here.

Forget about the current troubles, or for that matter the current innovations, I’m talking about the earlier golden years.  It seems obvious to many people that Chinese growth is Solow-like catch-up growth, as the country was applying already-introduced technologies to its development.

But how many other economies have grown at about ten percent for so long?  Was there not a secret ingredient added to the mix?

Increasing returns to scale?  Understanding the importance of having networks which allow an employer to assemble so many engineers so quickly for a new project?  Something about Communist Party governance which enabled the corruption to be channeled productively into building more infrastructure rather than holding up progress?  Tiger Mom parenting combined with a relatively meritocratic exam system?

I do not find it unreasonable to postulate that two to three percentage points of that yearly growth were in fact due to innovation and increasing returns to scale in some manner.  Note that most of these innovations are useful only at China’s (previous) ppf and they are less valuable to the West, or perhaps simply not transferable.

More radically, is there some “natural,” culture-neutral rate at which innovations trickle down from the world leaders to the poorer countries?  The diversity of growth rates would seem to indicate not.  Is each country then not innovating — with varying degrees of success — by building its culture-specific net for catching and transmitting global innovations throughout the nation?

In which case we are back to catch-up growth not being entirely well-defined.

The title says it all.  That is the new book by Shane Greenstein of Harvard Business School, the subtitle is Innovation, Privatization, and the Birth of a New Network.  This extensive history is the best counter I know to the view that the internet as we know it was most of all a government project.  Definitely recommended.

In this new video, The Rise and Fall of the Chinese Economy, I discuss problems and prospects for the Chinese economy, given the latest developments.  This is the most recent addition to the Everyday Economics series from MRUniversity, and it also will be part of our forthcoming macroeconomics course.  It is done in a slightly new style, I hope you enjoy it.

The Learn More page features additional resources about this topic.

By the way, here is your China (Africa) fact of the day:

China’s investment into Africa appears to be another casualty of the slowdown in the world’s second-largest economy. Chinese cross-border investment in greenfield projects and in expansion of existing projects in Africa fell by 84 per cent in the first half of this year compared with a year earlier, from $3.54bn to $568m.

The FT article is here.


The image is from Ian Bremmer.  Here is a new and interesting Vox article, Max Fisher channeling Danny Seidemann, arguing that the Israel and Palestinians situation is in worse shape than it appears.  Hard for me to judge, but I found it stimulating reading.

They are starting to talk about pulling down Chiang Kai-Shek statues:

Fears over increased Chinese influence have grown since 2008 under President Ma Ying-jeou’s (馬英九) KMT government, which has forged a rapprochement with Beijing.

Chiang’s authoritarianism has outweighed his Nationalist credentials and his image is wrapped up in that concern, with young people in particular feeling strongly that his memory should not be celebrated.

“Chiang was a dictator. For a long time, freedom of speech in Taiwan was suppressed,” said Peter Chu, 23, a graduate student at National Taiwan University of Science and Technology. “Why should his statues be allowed to remain on any campus?”

“There have been calls for removing the statue [at my school], but the school authorities have done nothing about it,” said student and former Anti-Curriculum Changes Alliance convener Chu Chen (朱震), 18, who attends the prestigious Taipei Municipal Jianguo High School. “Every year, graduates decorate the statue mocking it.”

The full article is here, and for the pointer I thank Mark Thorson.  Here is Richard Bernstein about how Chiang’s reputation is falling in Taiwan and rising on the Mainland.