—My Research

—James Watt and Steam

—Banknotes and Growth

—Private Coinage

—Wholesale Payments

—Free Banking

—Deflation

—Other

Courses:

-ECON 4100

-ECON 4030

-ECON 4710
-ECON 4850
-ECON 8090
-ECON 8610
-ECON 8620

-INTBUS 5100

—C.V.

Personal Stuff

—Bike Riding

—My Dogs

—Peter Selgin

My Research

My principal research areas are monetary and banking theory, monetary history, and macroeconomics.  I also dabble in the history of economic thought.  My current major research projects have to do with the potential contribution of commercial banknotes to economic development and the theory and history of private coinage. Two other topics that have always interested me are free banking and deflation.

James Watt and the Progress of Steam Power

In researching my book on private coinage I learned a lot about the early history of steam engines.   Consequently I found myself co-authoring, with my UGA colleage John Turner, several papers critically assessing the claim that James Watt's engine patent held back British industrial progress, including this published comment on a paper by Michele Boldrin and David K. Levine, and a working paper, "Strong Steam, Weak Patents, or, The Myth of Watt's Innovation-Blocking Monopoly, Exploded."

Banknotes and Growth

The paper currency in circulation today consists almost exclusively of irredeemable notes issued by public authorities.  These notes represent scarce savings to their holders.  But the authorities that issue them, and central banks especially, squander that savings by investing it in low-return assets.  The waste could be avoided by reviving commercial bank notes--private, paper IOUs that can perform the same medium of exchange role as fiat money, while also serving as a vehicle for productive financial intermediation.  In our working paper, "Banknotes and Economic Growth," Bill Lastrapes and I show that even a partial commercial banknote revival could give a substantial boost to economic growth

Private Coinage

Lately I've been exploring historical episodes of private coinage - rare instances in which governments allowed private mints to flourish.  Economists have almost universally tended to support governments' traditional coinage "prerogative," claiming that private mints would tend to issue inferior and irregular coins. They often appeal to Gresham's Law, according to which bad coins will tend to drive good coins out of circulation.  But Gresham's Law is more properly understood as explaining what tends to happen when governments do monopolize coinage while trying to force the public to accept bad (debased or lightweight) coins.  On this see my EH.net Encyclopedia entry on "Gresham's Law" and my JMCB article " Gresham's Law: The Good, the Bad, and the Illegal" - JSTOR link.)

Far from giving effect to Gresham's Law, the private coinage episodes I have looked at so far tended to have the opposite effect, with mints producing inferior coins being forced out of business by their more reputable rivals.  The private coinage episode that followed the discovery of gold in California is a relatively well-known instance of this.

A less well-known episode took place during the first, critical decades of Great Britain's industrial revolution. The Royal Mint struck hardly any copper or silver coins after 1775, and so left British industry without decent official money with which to pay workers, who typically made less than 15 shillings a week. In 1787 a major industrialist began issuing his own copper pennies and halfpence, and soon a private coinage industry consisting of more than 20 independent mints, most of which had been started by former metal button makers located in Birmingham, was supplying most of Great Britain's small change. The story of how private industry managed to solve problems that had thwarted the Royal Mint's own attempts to supply small change, and of how the government eventually re-asserted its coinage prerogative, forms the subject of my recently-published book, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821 (University of Michigan Press and the Independent Institute).  Here are some blogs concerning the book, from Marginal Revolution and the Mises Economics Blog.  Here is the YouTube video of my my F.A. Hayek Lecture, "The Private Supply of Money," concerning the theme of book.

An early version of the manuscript for Good Money included a "Ramble 'Round Old Birmingham," which takes readers on a numismatic tour of Birmingham in 1829.  Time-travel affecionados can take the tour by clicking here.

Two recent works, Angela Redish's Bimetallism (Cambridge University Press 2000) and Thomas Sargent and François Velde's The Big Problem of Small Change (Princeton University Press 2002) discuss Britain's 18th-century small-change problem and how it delayed the emergence of the gold standard. Both mention the private copper coinage, but wrongly assume that its success was due to the invention, by Matthew Boulton, of the steam-driven coining press rather than to the competitive nature of the private coinage regime. My Economic History Review paper, "Steam, Hot Air, and Small Change: Matthew Boulton and the Reform of Britain's Coinage." (Blackwell-Synergy link) refutes this view and explains the real reasons behind the superiority of the private copper coinage.  A second paper, "The Institutional Roots of Great Britain's 'Big Problem of Small Change'" (forthcoming in the European Review of Economic History) blames the persistance of Great Britain's small change problem on the monopolistic nature of its official coinage system.

Government authorities continue to this day to make a botch-job of coinage, as is evident from Argentina's recent experience, which I discuss briefly in "Argentina is Short of Cash--Literally" (The Wall Street Journal, January 5, 2009).  If you think my article exaggerates the situation there, have a look at this video documentary. 

Wholesale Payments

Although the small-value or retail component of modern payments systems has tended to become less regulated and more fully privatized in recent years, thanks to global competition and new forms of "electronic" money, government monetary authorities are now more heavily involved than ever before in large value or "wholesale" payments. Starting around 1990, government monetary authorities in many countries began taking steps to limit activity in conventional "deferred net settlement" arrangements for clearing wholesale money transfers; and in many places deferred net settlement has been abolished altogether in favor of so-called "real-time gross settlement." Most economists have supported these reforms, claiming that traditional deferred net settlement systems involve inherent "market failure" problems. "Wholesale Payments: Questioning the Market Failure Hypothesis" (ScienceDirect link) presents a contrary opinion.

Free Banking

Interest in free banking increased during the 70s owing to the perceived shortcomings of monetary regulations (including central bank behavior) and also thanks to studies of the pre-Civil War U.S. "free banking era" by Hugh Rockoff, Arthur Rolnick, and Warren Weber, showing that that regime was far more successful than had previously been supposed.

The U.S. "free banking" episode was, nevertheless, far removed from genuine monetary laissez faire.  A closer approximation was the Scottish free banking era, which ended in 1845 and was the subject of Lawrence H. White's 1984 book, Free Banking in Britain.  Since 1984, numerous other free-banking episodes have been uncovered and examined.  My article, "Free Banking in Foochow" (in Kevin Dowd's volume, The Experience of Free Banking) examines one of many Chinese cities that had free banking systems until the early decades of the twentieth century.

My main interest has been in the general, theoretical implications of monetary deregulation.  My 1987 Economic Inquiry article (with Lawrence White) on "The Evolution of a Free Banking System" offers a partly conjectural history of how banking institutions evolve under laissez faire.  Such a conjectural history serves to motivate assumptions about the structure of a free-banking system.  My 1988 book, The Theory of Free Banking, and my 1994 Economic Journal article "Free Banking and Monetary Control" (JSTOR link) explore the determinants of the supply of bank money under free banking.  My Cato Journal article, "Legal Restrictions, Financial Weakening, and the Lender of Last Resort" and my 1994 Critical Review article, "Are Banking Crises Free Market Phenomena?" dispute the claim that banking panics are a problem inherent to fractional reserve banking, and propose a "legal restrictions" alternative the the conventional theory of banking panics.  My article, "In Defense of Bank Suspension," for the Journal of Financial Services Research, argues (contra. Diamond and Dybvig) that, in the rare event of a general run on a free banking system, solvent banks could protect themselves without harming their customers by exercizing a contractual right to suspend payments.  Finally, my and Lawrence White's 1994 Journal of Economic Literature article, "How Would the Invisible Hand Handle Money?" (JSTOR link) surveys pre-1994 writings on monetary laissez faire. This article as well as most of the other articles mentioned above are gathered, with an introduction, in my 1996 book, Bank Deregulation and Monetary Order.  (Check my C.V. for details, including the locations of individual articles.)

While my research treats fractional-reserve banking as a potentially stable and largely beneficial market-based institutional arrangement, some (though not all) self-styled "Austrian" economists claim that it is both inherently fraudulent and inherently inflationary. I respond to some of their arguments in my Independent Review article "Should We Let Banks Create Money?"

The claim that monetary systems can function smoothly in the absence of government regulations sometimes raises the question, Why do governments intervene in money?  Although economic misunderstanding and pressure from special interests within the banking industry account for many observed forms of intervention, Lawrence White and I suggest, in our 1999 Economic Inquiry paper, "A Fiscal Theory of Government's Role in Money," that government intervention in the money industry has largely been a result of fiscal pressures to extract revenue from money holders.

Here is an interview I did on free banking for the Richmond Fed's Region Focus magazine, and here is a podcast from Russ Robert's EconTalk.

Deflation

My main theme is that deflation isn't always a bad thing, and that it can even contribute to overall macroeconomic stability so long as the rate of deflation mirrors the rate of productivity growth.  (It is also desirable for prices to rise when productivity suffers a setback, so my argument is for deflation in good times only.)  Many of today's monetary theorists and central bankers reject this viewpoint, holding instead that monetary policy should aim at a more-or-less constant price level.  In my opinion, arguments for a constant price level or "zero inflation" fail to come to grips with the implications of productivity changes, which these arguments tend to ignore.

In an economy with constant productivity, a stable price level contributes to macroeconomic stability in a number of ways, e.g., by fulfilling the expectations of agents who expect zero inflation (and thereby contributing to the efficacy of fixed nominal wage and debt contracts), and by minimizing the burden of adjustment borne by the price system.

But a stable price level is far from being ideal in an economy with changing productivity: it does not minimize the burden borne by the price system, and it does not contribute to the efficient working of fixed nominal contracts.  The reason, in a nutshell, is that it is the stability of nominal spending (domestic final demand), and not that of the price level per se, that is crucial to general macroeconomic stability.  When productivity stays constant, zero inflation is equivalent to constant final demand, but not otherwise.  Instead, stability of final demand requires that a rate of deflation equal to minus the rate of productivity growth.  I call a monetary target based on this rule a "productivity norm."

I offer other, brief and incomplete arguments in favor of a productivity norm in short pieces I have written for The Wall Street Journal Europe ("On Inflation, Shoot for Less Than Zero," May 16, 1997) for National Review magazine ("The Price is Right"), and for The American Conservative ("Deflated Expectations"). Anyone interested in a fuller treatment of the subject is encouraged to read my 1997 Hobart paper, Less Than Zero: The Case for a Falling Price Level in a Growing Economy.

When I first began developing my thoughts favoring a productivity norm over zero inflation, I thought I was being quite original.  Alas, many came well before me: it seems the idea was quite prominent in the years prior to the Keynesian revolution.  My 1995 History of Political Economy paper, "The 'Productivity Norm' versus 'Zero Inflation' in the History of Economic Thought," reviews earlier writings on the subject.  I also have a History of Political Economy article, "Hayek versus Keynes on How the Price Level Ought to Behave," 1999 . (Surprisingly, Keynes himself came very close to embracing a version of the productivity norm with his suggestion that policy should stabilize an index of money wages.)

For details concerning articles mentioned above, consult my C.V., where books and articles are listed by publication dates.

Other Research

In addition to my writings on private coinage, free banking, and deflation, I have various papers on other subjects including: the Great Depression ("The Check Tax: Fiscal Policy and the Great Monetary Contraction,"with Bill Lastrapes; and "By Our Bootstraps"-- concerning the fallacious "high-wage" doctrine-- with Jason Taylor); the liquidity effect (Journal of Macroeconomics 1995), the requirements for a fiat-money equilibrium ("On Ensuring the Acceptability of a New Fiat Money," Journal of Money, Credit, and Banking 1994 - JSTOR link), buffer-stock money "Buffer Stock Money: Interpreting Short-Run Dynamics Using Long-Run Restrictions" (Journal of Money, Credit, and Banking 1994 - JSTOR link), the National Banking System (Business History Review 1994), the German monetary economist L. Albert Hahn (History of Political Economy 1990), and the real-bills doctrine (JITE 1989). . Some of my more recent papers apart from those mentioned earlier include an Economic Journal paper on the origins of fiat money ("Adaptive Learning and the Transition to Fiat Money"), a paper attacking the conventional claim that a system of banks expanding in unison will not face any reserve shortage ("In-Concert Overexpansion and the Precautionary Demand for Bank Reserves" - JSTOR link ), and one arguing that consumers were made worse-off by the forced removal of state-licensed banks from the currency business during the Civil War ("The Suppression of State Banknotes: A Reconsideration" -- IngentaConnect link).

Personal Stuff

Bike Riding

I got my first 10 speed in 1967--a Legnano brought back from Italy--and started racing back in the 70s--before Lance, before Greg, even before "Breaking Away"! The sport was really just getting going in the U.S. back then.  I was still just a mediocre Cat 3 rider when a knee injury forced me to quit racing in 1981.  Now I just stick to club rides.

Despite all the super-light aluminum, carbon, and titanium bikes out there I still love a good lugged steel bike.  Steel doesn't have to be heavy, by the way:  my Bob Brown weighs less than 19 pounds fully equipped, with a steel fork and no carbon parts save the hub dust covers.

With my Cinelli Super Coursa

My Bob Brown Custom (Click here for more pics of Bob's handiwork)

My Dogs

Scraggly

ca. 1989-Nov. 28th, 2003
Rest in Peace