Thread by @GeorgeSelgin

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 onlinelibrary.wiley.com/doi/abs/10.111….)

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 jstor.org/stable/203627?….)

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:

https://twitter.com/GeorgeSelgin/status/1417090818100322306?s=20

. 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 (

https://twitter.com/GeorgeSelgin/status/1416520975882010624?s=20

) 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?

@threadreaderapp, kindly unroll.