Lawrence White

Quotes From

Competition and Currency (1989)

• From a subjectivist perspective, it is clear that the defining set of attributes of money is to be sought in the role that money plays (and alone plays) in the plans of individual economic agents. This immediately rules out approaches that focus on the statistical behavior of an aggregate as the essential criterion for deciding whether components of that aggregate ought to be considered money. Moneyness is a property conferred an item by individuals’ plans, not by the econometric performance of an aggregate containing that item relative to an aggregate omitting it.#
• The question of a natural monopoly in the production of money is distinct from the question of an inherent market tendency toward convergence on a single monetary standard. . . . That all coins are manufactured of like metals in like weights, and that all notes and deposits are redeemable for standard coin, no more indicates a natural monopoly in money production than that the standardization of brick composition and size indicates a natural monopoly in brick production.#
• Bank note producers did not gain a foothold in the currency industry until they could produce trustworthy currency cheaply enough in competition with specie.#
• The rules-discretion conundrum presupposes the existence of a monetary authority whose behavior must be either dangerously inflexible or dangerously flexible. An evident means of resolving this dilemma is to cultivate a monetary system not under the rule of a central authority.#

Free Banking in Britain (1995)

• [A] bank cannot make additional loans (acquire more bills) without either also attracting additional depositors or note-holders, or reducing its specie reserves.#
• Free banking thought has little in common with the sort of argument for a pseudo-gold standard that depicts stabilisation of the exchange rate between a distinct national currency and gold as the optimal rule for central bank policy. #
• In an unregulated system one bank would choose to hold another’s notes as reserves in place of specie, assuming zero interest yield on both assets, only in the event that such extensive economies of scale characterised the issue of bank notes that the market for notes supported fewer firms than the market for deposits. #
• It is hardly appropriate to use the supposed need for a lender of last resort as an argument for central banking if it is the legislation fostering central banking that creates the need.#
• Free banking as a monetary regime thus comprises two conceptually distinct elements: (1) unregulated issue of transferable bank liabilities, and (2) unmanipulated supply of base money or basic cash.#
• The currency principle, as formulated to apply to the nation as a whole, operated at an irrelevantly high level of aggregation.#
• The type of transactions by which notes are put into circulation is irrelevant to the question of whether the stock of notes is excessive.#
• Linking the volume of money to a nominal magnitude such as the nominal quantity of bills offered for discount, itself a consequence of the volume of money via the price level, left the volume of money and the price level indeterminate.#
• In recommending that the Bank of England exercise discretion by distinguishing one case of adverse balances from the other and treating the two differently, Gilbart was in effect recommending that the Bank of England should act toward (e.g.) the Bank of France in the way that a competitive issuer acted toward its co-participants in a note-exchange system. Persistent reserve losses signalling a fundamentally excessive circulation should be met by contraction, but random week-to-week variations need not.#
• Imports and exports of gold bullion were not necessarily analogous to imports and exports of specie under a purely metallic currency. Gold bullion has non-monetary uses, so that some imports of bullion would not naturally affect the money stock. For the Bank of England to link its issues to international bullion movements would result in its over-issuing while gold flowed in, creating a boom, and later over-contracting when gold flowed out, creating a recessionary panic.#
• [The currency school’s] proposed rule for regulating the volume of a mixed currency would accomplish their stated aim of keeping the value of the monetary unit the same under a mixed currency as it would be under a purely metallic currency only under the supposition that the velocities of bank notes and specie were identical. #
• It may be nearly costless to print up additional notes and to initiate their circulation through loans or purchases of commercial biills, but it is quite another matter to maintain their circulation in a competitive environment under redeemability.#
• The larger the share of total circulation and deposits supplied by the expanding banks, the greater will be the role of the relatively disruptive process of external drain in bringing the expansion to an end.#
• The English ‘one-reserve system’, whereby the Bank of England alone held substantial specie, was, as Bagehot explains, the product neither of conscious design nor of natural market evolution. It was instead ‘the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank’.#
• If Scottish banks did not hold Bank of England liabilities, or deposits at London banks (which in turn held Bank of England liabilities) as reserves, then the Scottish money stock was not specifically geared to the quality of Bank of England liabilities. In the long run, Scotland’s money stock was determined by the quantity of money demanded at the given purchasing power of the monetary unit. The purchasing power of the monetary unit was in turn determined by global supply and demand for gold.#
• In the crisis of 1839 the Bank of England turned to the Bank of France for an emergency extension of credit, to meet severe liquidity needs that had brought the BOE close to suspending payments. The Bank also arranged for sizeable credits in Hamburg. Yet no one would say that the London banking system customarily ‘depended’ on the Bank of France, or the Hamburg market, as a lender of last resort. Still less would anyone say that the London banking system was a ‘satellite’ to the Paris centre.#
• That the Bank of England had the power (in the short run) to alter the total supply of credit at the margin, and thereby to disturb interest rates, does not mean that any firm drawing on the total pool of funds in London was explicitly or implicitly borrowing from the Bank of England.#
• The issue of notes flowed naturally out of the business of receiving money in deposit and relending it. The great and widespread reputation of trustworthiness necessary to conduct that business made the banker’s promissory notes more generally acceptable in transactions than the commercial notes or bills of other merchants, thereby putting the banker in a position profitably to exchange his notes for commercial bills. #
• The function of an issuing bank was not so much to produce and sell money . . . Its function was rather to exchange recognised for unrecognised credit, or to provide a credit-certifying service based on its superior reputation. The substitution of bank notes for private bills of exchange as a circulating medium was to Scrope ‘a simple step in the division of labour’.#
• Rival banks of issue were correspondingly obliged to compete in cultivating public confidence in the redeemability of their notes. The creation and maintenance of that confidence was the production of a scarce good, subject like any other to limited economies of scale.#
• The whole point of engaging in note clearing was not simply to cancel equal reciprocal claims. It was rather to discover and settle the inequality between their reciprocal claims.#
• A monopoly supplier of currency must of necessity resort to ‘arbitrary assumptions and empirical expedients’, as ‘the elements necessary for the precise determination’ of its proper balance-sheet composition ‘are within no man’s reach’. #
• The primary weakness of any trade cycle theory invoking a ‘wave of optimism’ as its initiating impulse is that it begs the question of the origin of the wave of general optimism. Unless it answers that question it offers no account of why, from a state of equilibrium, there should occur a general shift in the demand curve for loanable funds, rather than simply a relative shift from declining to expanding industries. Secondly, it does not explain why such a shift would not simply raise the entire structure of interest rates – deposit as well as loan rates – in the market for loanable funds, leaving equilibrium in the market for currency balances undisturbed except insofar as the demands for currency and specie reserves are interest-elastic.#
• To suppose that competing banks could obey the currency principle, even were it a sound rule, was to suppose an impossible degree of collusion among them. Only a monopoly bank could act upon that sort of rule.#

The Clash of Economic Ideas (2012)

• The quantity theory is not the right theory for analyzing endogenous changes in M and P brought about by a shift in the world supply or demand curves for silver or gold.#
• The quantity theory of money assumes a vertical supply curve for money units, whereas the supply of silver is upward sloping.#
• A likely contributing factor to measured velocity’s going off its previous track was the deregulation of interest on bank accounts. If so, then the adoption of a banking reform that Friedman supported ironically undermined the case for monetary reform he had supported to that point.#

“Skepticism about Minsky’s Financial Instability Hypothesis” (2014)

• It would also be a mistake to think that the volume of checking account balances identically equals the volume of bank loans, or that banks automatically issue money in amounts corresponding to the quantity of investment and housing loans demanded by approved borrowers. Banks fund loans with non-deposit as well as deposit liabilities, and they intermediate deposit liabilities into non-loan assets (e.g., by holding reserves or bonds) as well as into loan assets. #
• An appeal to swings in investor optimism/pessimism or ‘animal spirits’ is not wrong, so much as it merely pushes the question back one stage: What explains the swings in investor enthusiasm?#