I am not a professional economist, but this one seems relatively obvious to me: There are self-amplifying effects relating to monetary velocity especially in a fractional reserve banking system (which dates back to goldsmiths), e.g. people try to hold money, velocity goes down, the price of money goes up, people can’t pay back debts, debt is destroyed, in a fractional system this decreases the money supply further, etc. Velocity of trade is a public good and commons problem because if I refuse to trade with you, e.g. I don’t buy your apple for money, I only lose the part of the gains from trade which would’ve gone to me, but you lose the portion of gains from trade that would’ve gone to the apple store, and then the farmer loses the gains from trade with the apple store, and can’t buy a tractor, etc. Money is a tool in the first place for allowing trades like this, and in the presence of sticky prices and nominally-anchored contracts and debts, decreases in the money supply can cause your economy to lurch some of the way toward its state if cash had never been invented, which is bad. If you regard money as a tool to create velocity of trade, and systemic velocity of trade as a public good, the rationale for central banking seems relatively clear: It is to create the public good of money with a predictable price path, or in the Sumner version, create a predictable level trajectory for nominal GDP.
It’s possible one could transition to a system of free banking now that we have much more fluid markets, but step one would be to outlaw fractional reserve lending and require banks to create bonds or bond-equivalents when depositor money is invested in them, rather than allowing banks to falsely claim that depositor money is always available on-demand in which case black swan bank runs can blow up the system, requiring an FDIC. You have to get rid of the public good rationale for an FDIC before transitioning to a system of private insurance on bank bonds where the price signals of insurance cost will exist. You will recall that it was the problem of runs on banks (and the subsequent fractional-reserve money supply decrease and deflation) which originally led economists to think central banking was better than the alternative. Even so, it’s not obvious to me that self-amplifying velocity effects couldn’t be awful (price of money goes up, people want to hold more of it) even in the absence of fractional reserve lending.
Maybe this is just another entire field of academia that you’ve personally outperformed in a single hour of thinking about it (teasing), but why do you think that Greg Mankiw didn’t say this?
Greg Mankiw is strong evidence by authority for your claims. When a major authority in a field says “We don’t know what’s going on here, and nobody has really tried to find out,” it sets off my atrophied grad student reflexes, and I start thinking “dissertation topic!” However were I still looking for a dissertation topic, the next thing I would do would be to spend a few hours in the library, a few hours with Google, and a few hours talking to folks in my department (not necessarily in that order) to see whether Mankiw was correct or not.
As reliable as Mankiw is, he’s still just one economist; and my prior that economists as a group don’t simply ignore obvious questions like this one is pretty strong. Show me ten respected economists from a diverse array of schools of economic thought that agree with Mankiw that there really hasn’t been a lot of research or thought on this topic, and then I update further.
In addition to providing Harvard with the services of a professional economist, Mankiw also provides TV shows with a media personality, and political campaigns with consulting. He is good at all 3 jobs, but they do sometimes entail different things. Consequently “Mankiw said X” and “Mankiw said X in an article intended for publication in an academic journal” provide very different levels of evidence.
I dunno. It’s not out of reach for my model of variance within macroeconomists. I’d be more hesitant if asking Cowen and Sumner produced the same ‘nobody knows’ response.
So, yes, I’d say Mankiw’s opinion is within the range of normal economist variation. Obviously there are many professional economists who think there are sound market failure arguments in favor of a central bank or that the history of free banking shows a failure rather than success; Mankiw can only be saying that he finds their judgments inadequate, not that they don’t exist. Otherwise, he’s ignorant. And obviously one can’t say that almost the entire economics profession has completely ignored the question. It’s still an ongoing debate even among employees of the Fed.
I am not a professional economist, but this one seems relatively obvious to me: There are self-amplifying effects relating to monetary velocity especially in a fractional reserve banking system (which dates back to goldsmiths), e.g. people try to hold money, velocity goes down, the price of money goes up, people can’t pay back debts, debt is destroyed, in a fractional system this decreases the money supply further, etc. Velocity of trade is a public good and commons problem because if I refuse to trade with you, e.g. I don’t buy your apple for money, I only lose the part of the gains from trade which would’ve gone to me, but you lose the portion of gains from trade that would’ve gone to the apple store, and then the farmer loses the gains from trade with the apple store, and can’t buy a tractor, etc. Money is a tool in the first place for allowing trades like this, and in the presence of sticky prices and nominally-anchored contracts and debts, decreases in the money supply can cause your economy to lurch some of the way toward its state if cash had never been invented, which is bad. If you regard money as a tool to create velocity of trade, and systemic velocity of trade as a public good, the rationale for central banking seems relatively clear: It is to create the public good of money with a predictable price path, or in the Sumner version, create a predictable level trajectory for nominal GDP.
It’s possible one could transition to a system of free banking now that we have much more fluid markets, but step one would be to outlaw fractional reserve lending and require banks to create bonds or bond-equivalents when depositor money is invested in them, rather than allowing banks to falsely claim that depositor money is always available on-demand in which case black swan bank runs can blow up the system, requiring an FDIC. You have to get rid of the public good rationale for an FDIC before transitioning to a system of private insurance on bank bonds where the price signals of insurance cost will exist. You will recall that it was the problem of runs on banks (and the subsequent fractional-reserve money supply decrease and deflation) which originally led economists to think central banking was better than the alternative. Even so, it’s not obvious to me that self-amplifying velocity effects couldn’t be awful (price of money goes up, people want to hold more of it) even in the absence of fractional reserve lending.
Maybe this is just another entire field of academia that you’ve personally outperformed in a single hour of thinking about it (teasing), but why do you think that Greg Mankiw didn’t say this?
Greg Mankiw is strong evidence by authority for your claims. When a major authority in a field says “We don’t know what’s going on here, and nobody has really tried to find out,” it sets off my atrophied grad student reflexes, and I start thinking “dissertation topic!” However were I still looking for a dissertation topic, the next thing I would do would be to spend a few hours in the library, a few hours with Google, and a few hours talking to folks in my department (not necessarily in that order) to see whether Mankiw was correct or not.
As reliable as Mankiw is, he’s still just one economist; and my prior that economists as a group don’t simply ignore obvious questions like this one is pretty strong. Show me ten respected economists from a diverse array of schools of economic thought that agree with Mankiw that there really hasn’t been a lot of research or thought on this topic, and then I update further.
In addition to providing Harvard with the services of a professional economist, Mankiw also provides TV shows with a media personality, and political campaigns with consulting. He is good at all 3 jobs, but they do sometimes entail different things. Consequently “Mankiw said X” and “Mankiw said X in an article intended for publication in an academic journal” provide very different levels of evidence.
I dunno. It’s not out of reach for my model of variance within macroeconomists. I’d be more hesitant if asking Cowen and Sumner produced the same ‘nobody knows’ response.
Scott Sumner is aware of free banking and seems somewhat supportive of it. Same for Lars Christensen. Alex Tabarrok is critical of the Fed and Cowen in response is critical of the anti-Fed case. (But note that the anti-Fed case is not the same as the case FOR free banking—I don’t know Tabarrok’s actual policy preference.) I can’t find any Krugman mentions of free banking but he has offered arguments for a central bank. David Andolfatto, VP of the St. Louis Fed, has said that he sees some merit in free banking arguments but finds some of its modern proponents focusing on weak criticisms of the Fed. He even claims that he invited George Selgin to give a lecture on free banking to that Fed branch. Vera Smith, a Hayek student, claimed that central banking won out due to political motives and historical accident rather than sound economic theory. Keynes, in a passage that isn’t quite about free banking, offered a criticism of bank incentives that suggests banks suffer a problem of liquidity preferences that central banks do not, and this can be read as an argument for central banking. (His argument is similar to yours about bank runs.) Brad DeLong included on a course syllabus a 1974 paper on free banking which argued that there was enormous variation in success in free banking in the U.S., with massive hyperinflation in some areas and stable currency in others. I don’t know DeLong’s actual position on the topic, but “the data suggests that free banking is unreliable” wouldn’t surprise me. Of course the footnotes in that paper refer to other papers on central banking, and searching citation will find other research on free banking v. central banking, some of it negative. One of these papers, Whaples’, surveyed economic historians and found they near universally agree that the free banking period in the U.S. didn’t hurt the economy.
So, yes, I’d say Mankiw’s opinion is within the range of normal economist variation. Obviously there are many professional economists who think there are sound market failure arguments in favor of a central bank or that the history of free banking shows a failure rather than success; Mankiw can only be saying that he finds their judgments inadequate, not that they don’t exist. Otherwise, he’s ignorant. And obviously one can’t say that almost the entire economics profession has completely ignored the question. It’s still an ongoing debate even among employees of the Fed.