Anti- GZ, cont'd: the rise of national currency (pp. 27ff.) GZ conclude their discussion of antebellum currency by stating that, because that currency violated the NQA (No Questions Asked) principle, the antebellum "community had no money."
As I've already pointed out, regarded as a description of conditions on the eve of the Civil War, is very misleading, in part because there was by then no shortage of official coins, which were undoubtedly national NQA means of exchange.
As for state banknotes were, although discounting cont'd to disqualify them as truly "national" currencies, by the 1860s these discounts tended to be modest. Furthermore, almost all state bank notes were par monies for their "state" communities, if not in some surrounding states.
Persons wished to travel and make payments where their local banks' notes would not be accepted at par, but who wished to avoid having their money discounted (assuming merchants wouldn't bear the discount) had the option of arranging for a bank draft or traveling with coin.
I hasten to say that this was far from being an ideal situation. A truly national paper currency, done right, would certainly constitute a valuable supplement to, if not a substitute for, these arrangements.
So would arrangements, like nationwide branch banking, that might have allowed state bank notes to assume a "national" monetary character. Nevertheless, the fact remains that tp say that the antebellum US "had no money" is to resort to hyperbole.
And while the antebelllum currecy was flawed, and Civil War reforms did establish "uniform" nat'l paper currencies (Greenbacks and nat'l banknotes), those reforms also ended up doing great harm, in part because, instead of just supplementing state banknotes, they suppressed them.
As GZ note, that suppression was accomplished, not as a byproduct of the availability of national currencies, but by means of a prohibitive 10% tax Federal authorities placed on state banknotes starting in August 1866.
That such a tax was needed to get rid of state bank notes despite their inability to pass at par everywhere is highly significant. It meant that, so far as their users were concerned, such notes were as good as if not better for certain purposes than their nat'l counterparts.
(I'm unaware of any compelling market-failure argument for the cont'd popularity of state banknotes. For details see….)
Apart from their private advantages to many consumers, state bank notes had some important economy-wide advantages. These made their ultimate suppression more than a matter of a mere loss of minor advantages: it made it extremely, even tragically, costly.
One of these costs was the South's postbellum underdevelopment. When GZ note that "counties w/ access to nat'l banks saw significant ouput growth," and conclude based on this that "nat'l currency was economically efficient" (p. 28), they once again engage in data cherry picking.
But GZ ignore the fact that until 1875, total nat'l currency issues were capped; and almost all of it had been apportioned during the war to banks in the northern states. As a result of this and the 10% tax, which made state banks unprofitable in most rural areas, the South...
found itself bereft of banks and bank credit--a fact to which many schholars' attrribute its persistent postbellum underdevelopment. (See, e.g., this John James artticle….)
Since counties without national banks often had no banks at all, it's no surprise that those that did have such banks were relatively much more prroductive! (Astonishingly, the papers GZ cite on this alleged 'efficiency gain" from nat'l banking fail to consider this banal fact.)
A still more notorious adverse consequence of the nationalization of U.S. paper currency during the Civil War was the establishment of an extremely "inelastic" currency system, which was to play a central part in later banking crises.
I've already done a thread on GZ's frankly grotesque misinterpretation of the causes of those crises: . I'll only add here that, had state bank notes not been taxed out of existence, their presence might have made the total currency stock more elastic.
The big takeaway here is this: however imperfect private monies may be, their presence _among other alteratives_ may be a good thing. So to point out their flaws, and the relative merits of official alternatives, is _not_ sufficient to justify suppressing them.
On p. 37 of their paper, GZ consider--or pretend to consider--the possibility of allowing private and public currencies to coexist. But instead of actually inquiring into the consequences of such a policy, they merely ask whether such coexistence is _possible_.
Because history is replete with examples of such coexistence (state bank notes and official coins; Dominion notes and commercial banknotes in Canada, etc, etc., etc., this seems like an odd question! Of course private and official currencies can co-exist!
But not according to GK. It;s here that they resort to the absurd argument, which I criticized in my very 1st GZ thread () that private and official monies "can't" coexist because gov'ts generally haven't allowed them to!
In other words, rather than seriously consider coexistence of stablecoins and official dollars as a policy option, GZ dismiss it outright (though not consistently: elsewhere they allow for it: consistency is not a hallmark of the GZ study!).
"The United States," they write on p. 39, "decided to have a single uniform sovereign currency in 1863." And this _means_ they shouldn't tolerate stablecoins, or any non-sovereign currency, today.
Such reasoning begs the question: why bother writing a 50 page paper on how to regulate stablecoins only to declare, 4/5ths of the way through it, that the U.S. gov't definitevely answered the question in 1863?

Why bother indeed. And why bother taking such a paper seriously?
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More from @GeorgeSelgin

21 Jul
Want to write like an academic economist? Here's my sure-fire guide to Standard Econ English.
"Recent." Used with "writings" or "work" in your opening sentence to assure readers that you are au courant, which is to say, determining your subject matter the way herring determine which way to swim.
"The remainder of this paper is structured as follows." Indispensable start of your introduction's final paragraph, which you must include because the preceding paragraphs have somehow failed to do what they're supposed to.
Read 13 tweets
20 Jul
Thread: The right way to go about deciding how to regulate stablecoins.

Having explained why loose (and misinformed) comparisons with 19th century banknotes are the wrong way to proceed, I thought I'd offer some positive suggestions.
(1) Acknowledge the fact that there are many types of stablecoins, with different underlying technologies and principle uses. It is highly unlikely that any broad-brush regulatory treatment will be appropriate to all.
(2) Stop calling them "money." They are niche exchange media, not generally accepted exchange media. And that is itself not a bad thing so long as national monies are also available.
Read 13 tweets
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

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