File under: What the hell has gone wrong with Gary Gorton?
I have long been a huge Gary Gorton fan, but since the 2008 crisis, he's become very careless and naive in his discussions of monetary history. I pointed this out at some length in an essay on his 2012 book, "Misunderstanding Financial Crises":…
Today I got a copy of a new WP by Gorton and Jeffrey Zask called "Taming Wildcat Stablecoins." @lawrencehwhite1 and I have already warned of the isleading nature of the now de rigueur "stablecoin issuers are like wildcat banks" meme. Here's Larry's essay:…
And here's mine, concerning misleading claims about antebellum "wildcat banking":…
Gorton and Zhang's paper (which is not yet available online) repeats many of the misleading arguments Larry and I criticize. But it does worse. I'll review it when it's publicly available. For now I'll just give one one example of the kind of history it exemplifies.
At one point, Gorton and Zhang ask, "Should the sovereign have a monopoly on money issuance?" Good question! Their answer? "As shown by revealed preference in the table below, the answer is yes":
Revealed preference? Do Gorton and Zhang seriously imagine that that what were political decisions of the countries in question, all reflected consumers' preferences? If so, that can't possibly know the stories behind their table!
Consider, for example, Napoleon's establishment of the Bank of France. Read about it here and then tell me whose preferences it "revealed":…
Even the decision to establish a uniform U.S. currency during the Civil War also had nothing to do with consumers' preferences: if it had, there'd have been no need to a punitive 10% tax to force state banks to quit issuing their own notes:…
I might address every item in Gorton and Zhang's table, showing how little consumers' preferences had to do with the rise of currency monopolies. Instead I refer you to Very Smith's classic study, _The Rationale of Central Banking_, for the facts:…
One might have expected Gorton and Zhang themselves to refer to Smith before dishing up their naive theory of why we have ended up with so currency monopolies. But they didn't bother.
Nor did they consult Calomiris and Haber's excellent and highly relevant _Fragile by Design_.…?
Nor did they consider any of the voluminous writings on successful decentralized currency systems, such as Larry White's classic work on Scottish banking:… (Scotland, heaven forfend!, still has several commercial banks of issue.)
That fiscal motives played a much more important part in 19th-century and earlier decisions to establish currency monopolies never appears to have crossed their minds. Yet this is hardly a far-fetched view! Details here:…
But why delve into the actual history of currency monopolies, and consider the different motives and political considerations in play, when you can just suppose, like the good Dr. Pangloss, that "all is for the best in the best of all possible worlds"?

In short, Yecch.
P.S.: Forgot to mention the one historical study Gorton and Zhang _do_ refer to: Fung, Hendry, & Weber's "Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies." For part 1 of my 3 part critique of that paper, see…
@threadreaderapp, kindly unroll.
For "that" please read "they." (I am typing with a sling on!)

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More from @GeorgeSelgin

19 Jul
My Gorton and Zhang critique series continues with a look at their discussion of antebellum U.S. currency (pp. 23ff.) Although their discussion of that history is better than many other recent ones (see…), it is still misleading.
Although GZ recognize that most bank failures back then had nothing to do with "wildcat" banking, they still exaggerate the extent to which antebellum currency was (literally) "subpar."
Just as CZ "cherry pick" by focusing on US currency experience, ignoring what happened elsewhere, they also cherry pick from the diverse US record. I've already noted how they ignore the Suffolk System's successful achievement of a uniform New England currency--a "good" cherry.
Read 18 tweets
19 Jul
Gorton and Zhang's highly eccentric interpretation of pre-Fed banking crises isn't just inaccurate: it's topsy-turvy. And, like many of their paper's historical claims, it is contradicted by a wealth of evidence from other banking systems. 1/2
The _fons errorum_ of this and many of GZ's other mistaken arguments is their assumption that private monies must be 100% backed by reserves or Treasurys, or otherwise fully guaranteed by the state, to be stable and to trade at par.
While such arrangements can contribute to stability, they are neither necessary nor sufficient. Indeed, the Treasurys-backing requirement for national bank notes, for example, was a fundamental _cause_ of instability under the pre-Fed national currency system.
Read 8 tweets
19 Jul
In my last thread on Gorton and Zhang's new working paper, I criticized their criteria, in Table 1 of their paper (p. 5) for selecting among options for regulating stablecoins. Here I turn to the paragraph immediately following that table, which itself calls for a thread.
Here they claim that the option of requiring that stablecoins be 100% backed by reserves or Treasurys "ties two forms of money together at a fixed ratio," thereby making "a shortage of one pf the forms of money" likely.
To illustrate, they point to the currency shortages that plagues the pre-Fed national currency system (1866-1014). They say these were caused by nat'l banks reluctance "to move all the Treasuries to back national bank notes," that this caused deposits to expand instead, and
Read 15 tweets
18 Jul
I ended my first thread on Gorton and Zhang's new working paper (…) by observing (with a nod to work by the late, lamented George Kaufman) that bank runs aren't necessarily a bad thing:…
That makes for a neat segue to my next criticism, concerning GZ's table 1 (p. 5). Here they consider various "Options to Address Stablecoins," asking of each whether it (1) would eliminate runs on stablecoins and (2) would make it unnecessary for their users to scrutinize them.
Based on those assumed goals, they narrow down acceptable options to three: treatment like ordinary banks, 100% reserve (or Treasurys) backing, or replacement w/ CBDC, that is, outright prohibition.
Read 24 tweets
18 Jul
I see now that, despite my fond hope of having a last, quiet day off from work (I have been o leave recovering from minor surgery), I have to continue my (probably futile) attempt to counter Gorton and Zhang's misleading article. But before I do, some preliminaries.
First, I am not doing this because I'm especially fond of stablecoins, or because I don't think they need to be regulated or even because I don't consider them especially risky. Personally, I wouldn't touch a stablecoin with a 10-foot pole.
Nor am I pitching any sort of "free banking." I only want people to understand how past free banking systems worked, and what self-regulating capacity they harbored, because I believe this understanding will help inform sounder bank regulatory policies.
Read 6 tweets
18 Jul
Reading Gorton and Zhang's new WP on stablecoins, I have the sinking feeling I'd have to write a book to expose all of its errors. The first pages alone contain another paper's worth.…
Consider this closing claim of their paper's opening paragraph: "'Stablecoins'...aspire to be used as a form of private money and so are allegedly backed one-for-one with government fiat currency." "And so"?
Do CZ mean to say that anything that "aspires" to be private money must pretend to be 100% fiat backed? What, then, of transferable bank deposits? Are they not "private money" in fact? Do their issuers pretend that they are 100% fiat backed? I don't think so.
Read 28 tweets

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