The Nashian Re-Solution to Saifedean’s Bitcoin Standard and George Selgin’s Complaint For an Elastically Supplied Domestic Money

The Cato Institute’s George Selgin, a leading figure in the modern “free banking” school, maintains for different reasons that bitcoin’s fixed supply makes it ill-suited to becoming the monetary standard. He thinks a growing labor force under a fixed supply of money would be especially problematic: Average compensation would be driven down over time, and workers would find this unacceptable.

On Fractional Reserve Banking

What is the Fractional Reserve Banking debate All About?

Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities.[1] Reserves are held as currency in the bank, or as balances in the bank’s accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.[2]

Fractional-reserve banking allows banks to act as financial intermediaries between borrowers and savers, and to provide longer-term loans to borrowers while providing immediate liquidity to depositors (providing the function of maturity transformation).

At least one textbook states that when a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan.[3] This process is called “deposit multiplication”. However, as explained below, bank loans are only rarely made in this way.

The proceeds of most bank loans are not in the form of currency. Banks typically make loans by accepting promissory notes in exchange for credits they make to the borrowers’ deposit accounts.[17][18] Deposits created in this way are sometimes called derivative deposits and are part of the process of creation of money by commercial banks.[19] Issuing loan proceeds in the form of paper currency and current coins is considered to be a weakness in internal control.[20]

A Re-turn and Re-visit to Ruritania

… a solitary bank in a free banking system cannot pursue an independent loan-pricing policy. A “cheap-money” policy in particular would only cause it to lose reserves to rival banks. Also, no bank would be able, by overissuing, to influence the level of prices or nominal income to any significant degree, since the clearing mechanism rapidly absorbs issues in excess of aggregate demand, punishing the responsible bank. Consequently, the structure of nominal prices would not be indeterminate. Assuming stationary conditions of production, free banks face a determinate schedule of nominal money demand which strictly limits the extent of their issues.

A Central Banking Re-solution

Thus, the cost of gold arbitrage in effect determined a policy corridor in which a central bank could set its bank rate different from other bank rates.

Conjecture 1: In the long run, inflation would not be zero. Instead, there would be moderate deflation that would increase over time until reaching a rate of deflation equal to the negative of the rate of growth of world output around 2026.

Conjecture 2: There would not be periods of deflation followed by periods of inflation as was the case under the gold standard.

Conjecture 3: Price levels of the various countries would be highly, but not perfectly, correlated, much as they were under the gold standard.

My reasoning is that under the Bitcoin standard, just as under the gold standard, the money supplies of different countries would not necessarily move together, although the more tightly a group of countries are linked in terms of trade and finance, the more closely their money supplies would be linked.

The Nashian Orientation: Re-Solving Selgin and Saifedean

An Ideal Money Standard

Ideal Money (to be considered different than defining ‘ideal money’ without capitals) is a theoretical notion promulgated by John Nash (Nobel Laureate in Economics) to stabilize international currencies. It is a solution to the Triffin dilemma-the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also serving as world reserve currency.

On Mismatched Maturities

Where Saifedean and Selgin Agree

What is Nick Szabo’s view?

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