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On not doing due diligence: Bagus and Howden on free banking

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In their recent article in the Quarterly Journal of Austrian Economics, Bagus and Howden (2010) present “quibbles” with fractional-reserve free banking. Specifically, they raise what they call “unaddressed issues” in this system, with a particular emphasis on Selgin (1988). We deem their arguments to be more substantial than “quibbles” and see them as part of a longstanding debate about fundamental aspects of monetary theory. We respond to their objections and attempt to specify how debate between the two sides might proceed more productively.

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  1. Also, it could be debated whether their example constitutes an increase in the money supply at all. As Mises points out, if the government issues a decree that uniformly applies to all money units (such as “what was previously called a half-dollar is now called a whole dollar”), this is not so much a change in the quantity of money as a change in the name of the currency (1912, p.167).

  2. Indeed Bagus and Howden refer to “inside money” (p.31), suggesting that they should also realise that the distinction between these two types of money has been dealt with in the free banking literature.

  3. This is an especially good example of the sloppiness of Bagus and Howden’s argument. Although they purport to be focusing on Selgin (1988) they make sweeping statements about the entire free banking literature.

  4. We suspect that Bagus and Howden might be attempting to make a distinction between those who fear monetary and price deflations (such as many modern central bankers), with those who fear monetary but not price deflations. We believe this to be an accurate distinction to draw, given that the subtitle of one of Selgin’s books is the “case for a falling price level in a growing economy” (Selgin 1997). However it is notable that this work isn’t even cited in their article.

  5. Bagus and Howden also make the accusation that Horwitz “abstracts from the duration of savings” (p.40). At this point, Bagus and Howden appear to want to shift the debate to one over maturity transformation (or maturity “mismatching”). We know that they are more amenable to mismatching being acceptable than other advocates of full reserves (Bagus and Howden 2009) and would simply say that this is a separate debate.


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Correspondence to Steven Horwitz.

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Evans, A.J., Horwitz, S. On not doing due diligence: Bagus and Howden on free banking. Rev Austrian Econ 25, 149–157 (2012).

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