George Selgin

Quotes From

The Theory of Free Banking (1988)

• Offsetting price changes due to changes in productive efficiency would not preserve monetary equilibrium.#
• Changes in the desire to hold inside money reflect the public’s willingness to lend “real capital” to and through the banking system.#
• Precisely what Mises means by commodity credit is not clear. If the phrase refers to bank issues backed 100 percent by reserves of commodity money (which would make it the complement of what Mises calls “fiduciary” or “circulation” credit) then it does not refer to a form of credit at all. A bank holding 100 percent reserves against all of its liabilities is not a credit-granting institution, but a warehouse.#
• Many past and present American monetarists would probably agree with the theoretical views [that money supply should counteract changes in velocity]. Their preference for other policies—for price-level stabilization or a fixed money growth rate rule—stems, not from any theoretical disagreement, but from their view that these policies provide the best achievable approximation to the ideal of a truly demand-elastic money supply.#
• When the expansion or contraction of bank liabilities proceeds in such a way as to be at all times in agreement with changing demands for inside money, the quantity of real capital funds supplied to borrowers by the banks is equal to the quantity voluntarily offered to the banks by the public. Under these conditions, banks are simply intermediaries of loanable funds. Thus a direct connection exists between the conditions for equilibrium in the market for balances of inside money and those for equilibrium in the market for loanable funds. #
• The aggregate demand to hold balances of inside money is a reflection of the public’s willingness to supply loanable funds through the banks whose liabilities are held. To hold inside money is to engage in voluntary saving. As George Clayton notes, whoever elects to hold bank liabilities received in exchange for goods or services “is abstaining from the consumption of goods and services to which he is entitled. Such saving by holding money embraces not merely the hoarding of money for fairly long periods by particular individuals but also the collective effect of the holding of money for quite short periods by a succession of individuals.”#
• Bank borrowers generally acquire money balances only to spend them immediately on goods and services. The demand for money, properly understood, refers to the desire to hold money as part of a financial portfolio. A bank borrower contributes no more to the demand for money than a ticket agent contributes to the demand for plays and concerts; only holders of money or actual occupants of concert seats contribute to demand.#
• Competition in the supply of base money is no less desirable than competition in the supply of bank liabilities, including bank notes, redeemable in base money.#
• Central banks’ ability to cut short the supply of currency once they possess a monopoly of note issue creates the need for them to serve as lenders of last resort in the first place.#
• Relative inflation does not reveal itself in a rising consumer price index, although it does result in an upward movement in the prices of factors of production.#
• A price index does not itself reveal whether its movements reflect changes in the conditions of real output or are symptoms of monetary disequilibrium.#
• A general increase in the demand for inside money is equivalent to a general decline in the rate of turnover of inside money.#
• It is perfectly possible that fiduciary media may arise from loans or investments involving transfer credit only [as opposed to created credit]. The expansion of bank liabilities may represent a response to greater abstinence by money holders and, hence, to a fall in the “natural” rate of interest.#
• The Bank of England was in a sensitive position: if it overissued, it lost specie abroad, which eventually necessitated either contraction or suspension of payments. If it underissued, it made the conversion of deposits to notes at other English banks impossible.#

Praxeology and Understanding (1990)

• The only meaningful sense in which action can be said to be equilibrating is the dynamic one which assumes continually changing means and ends and the absence of equilibrium proper.#
• The process of price adjustment can only be comprehended by viewing it as a dynamic process of prices which are at once equilibrium prices in relation to those that they have replaced and disequilibrium prices in relation to those that will follow.#
• Whenever one speaks of unexploited opportunities for profit one departs from the domain of theoretical science and exemplifies the perspective of the historian or would-be entrepreneur.#
• It is misleading to treat profit opportunities as having an objective basis (i.e., as existing “out there”) because it is improper to treat consumer preferences as if they existed apart from realized acts of choice.#
• Praxeology recognizes price discrepancies among identical goods only to the extent that such discrepancies may be identified with subsequent acts of successful arbitrage. In the same manner, entrepreneurial profit opportunities in general are ephemeral phenomena, formed in the imaginations of enterprising people and defined by the very actions that “eliminate” them.#
• The continuing existence of action is proof that equilibrium proper is never achieved. It is equally proof that it is constantly being striven for.#
• The pure theory that forms the heart of praxeological analysis requires a type of subjectivism distinct from the subjectivism needed in historical analysis. Praxeologists, as developers of pure theory, must consider market phenomena without presuming any knowledge of agents’ preferences and beliefs. They must view the world, not as “understanding” beings employing “common sense” to interpret a specific historical event, but as theorists in search of the logical patterns that underlie the actions of all “understanding” individuals.#
• Concrete individual ends and values have historical but not theoretical significance; that is, they are relevant to all applications of pure theory to particular, historical circumstances, but enter only as auxiliary assumptions in constructing theory itself.#
• So long as people are neither completely dull nor completely content, they must necessarily act. To ask whether general equilibrium can ever be achieved is therefore to ponder the exhaustibility of people’s imaginations.#
• Calculation makes possible a link between equilibrating action and entrepreneurs’ satisfaction of the wants of others. It allows entrepreneurs to perceive the wants of others as if they were the means toward fulfillment of their own ends. Monetary surplus represents a reward to enterprise for the successful satisfaction of consumers. But this ex post surplus is not itself to be confused with the ex ante concept of entrepreneurial profit: it is a confirmation of the fact that entrepreneurs’ imagination and understanding (of means and ends, including their own, possibly unique, capabilities) were not based upon illusion or incorrect anticipation of the future.#
• It is futile to attempt, pace Hayek, to explain “why [people] should ever be right.” Rather, acceptance of the fact that people can be right is a requirement imposed by the rules of reason themselves.#

“Bank Lending ‘Manias’ in Theory and History” (1992)

• Historical banking booms have typically involved falling rather than rising rates of interest until their final stages. This means that banking booms have usually been driven, not by changes in the demand for credit, but by rightward shifts in bank credit supply schedules.#

“The Rise and Fall of the Gold Standard in the United States” (2012)

• Hume’s price-specie-flow mechanism will operate only if nations’ price levels differ enough to move exchange rates beyond the so-called “gold export” points, reflecting transport and other costs associated with importing goods from abroad. In practice, however, disequilibrium seldom developed to the point of triggering it under the classical gold standard. Instead, so long as gold convertibility commitments remained credible, speculators had reason to buy currencies as they depreciated in the foreign exchange market, and to sell them as they appreciated. Capital movements thus served to keep exchange rates from varying beyond the gold points, making actual gold transfers largely unnecessary.#
• [A] gold standard can be genuine without being “pure,” that is, despite the presence of paper money (or spendable bank deposits) backed by assets apart from gold itself.#

“Synthetic Commodity Money” (2013)

• The distinction between discretionary and rule-based fiat-money regime is largely hypothetical, and has been so precisely because the existence of fiat money presupposes that of a monetary authority that, being materially capable of actively managing its quantity, is bound to be tempted to make use of that capacity.#
• Monopolistic provision is thus a necessary condition for fiat money to command a positive value in equilibrium, and thereby potentially serve as the foundation for macroeconomic stability. But monopolistic provision is not sufficient, for a profit-maximizing monopoly supplier of fiat currency would also find it profitable to expand the nominal stock of such money at a rate far in excess of that required to preserve its purchasing power. For this reason, the scarcity of fiat money must be contrived, not merely by monopolizing its production, but by having the monopoly producer supply a less-than profit-maximizing quantity.#