Was Mises for Free Banking?

[axiomata]

I came across an interesting blog post of at The Austrian Economists blog (http://austrianeconomists.typepad.com/weblog/2009/09/is-it-white-is-it-selgin-is-it-horwitz-.html) that using some quotes from Mises' lectures in 1952 makes the case that Mises would in fact favor free banking (not a 100% reserve requirement that Rothbard and others later advocated).


"Therefore the dangers of credit expansion were not very great as long as the credit expansion was the business of private banks and private businesses subject to commercial laws. As long as the surplus banknotes could be returned to the bank of issue for redemption, there was a check on credit expansion, and there couldn't be credit expansion of any considerable extent."

I don't intend to start another free banking vs full reserve banking discussion, as that has been done before, but I just wanted to share the finding.

[axiomata]

The preceding post on the blog (http://austrianeconomists.typepad.com/weblog/2009/09/mises-defining-inflation-the-monetary-equilibrium-way-in-1951.html) may also be of interest.


On this blog and on various discussion fora over at Mises.org and this summer at FEE, the battle has raged over how Austrians might define inflation, with folks like me and our "monetary equilibrium" view of inflation as a supply of money greater than the demand to hold it on one hand and the Rothbardians with their "any increase in the money supply not backed by an increase in gold" view on the other. Often part of this battle are claims about what Mises had to say, especially by the Rothbardians who want to claim Mises exclusively as their own.

One of the commonly heard positions, on both sides, is that Mises adopted the monetary equilibrium perspective in his earlier writings, such as The Theory of Money and Credit, but by the time Human Action rolled around, he was more clearly of the Rothbardian view.

I had the chance this morning to skim through a FEE volume that collected lectures Mises gave at the Foundation in the summer of 1951. Note that date: it is AFTER the publication of Human Action. In the lecture on "Money and Inflation," Mises defined inflation the following way:


Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.

This is exactly the same definition of inflation that Mises gives in TTOMAC (p. 272, 1980 Liberty Press edition). The 1951 lectures are available from FEE as The Free Market and its Enemies (2004) or online here. Check page 44. [UPDATE: to be clear, this means that Mises would agree that an increase in the quantity of money that brings the supply up to match the demand for cash balances is NOT inflationary.]

So it would seem as though our buddy Lu was pretty consistent throughout his career in adopting the definition of inflation that the MET crowd does, and not the Rothbardian one. That doesn't by itself make Mises right (though I believe he was), but it does mean that those who accept the Rothbard definition can't say the ME definition is somehow "un-Misesian" or "un-Austrian," which they do incessantly on the web.

Finally, for those folks on the Mises Institute discussion boards who think the concept of "the demand for money" is also somehow nonsensical from an Austrian perspective, perhaps you want to think again because Mises had no problem with it. In fact it was Mises who really developed the cash balance approach to the demand for money that is now largely accepted in the discipline. Discussions of monetary theory and banking theory and practice in the Austrian blogosphere would be greatly enhanced if people talked about what Mises actually said rather than what they'd like him to have believed, not mention actually knowing how banks work.

[bill50]

In the The Theory of Money and Credit he was definitely for free banking as you describe it. I haven't read Human Action to know what he advocated in that book.