The other day, Silas Barta asked: "When are you going to talk about the economic evils of bitcoin? Like how it doesn't allow subjective central bank manipulation and such?" He's randomly asked me this in other fora as well. I guess he's really interested in what I have to say about this. The answer is - not all that much. My response was:
"Silas - bitcoin sounds like a great idea. If it can profitably respond to excess money demand that is to its credit.
I don't know.
But I'm certainly not aware of anything that's not to like about bitcoin. As far as I can tell I am pro-bitcoin. What I'm not is anti-Federal Reserve, and I think that's the point that you are confusing here and over at Bob's blog, where you were similarly convinced you had me figured out."
I'm usually fairly silent when free banking comes up because I'm not that well read on it. I will say I'm fine with central banking, but I'm not prepared to offer an opinion on free banking. I certainly don't have a problem with free banking (in the sense of denationalized currencies) amidst a central bank, such as the case of bitcoin. What would I possibly dispute about that? I'm not sure what there is to object to.
However, what I think about abolishing central banks is a different matter. I would only be comfortable abolishing central banks if I thought that free banking was somehow equipped to respond to increases in money demand. Is it? I don't know the theory behind that. It would seem to be a situation of monopolistic competition, right? They're not issuing undifferentiated goods - the value of any given bank's money is highly dependent on who else will accept it and the stability of the bank. That would imply that each bank would have market power and we'd expect some sort of money demand problems to remain (not that central banking always responds to money demand, but at least they have the opportunity and potentially the incentive to, where no such incentive seems to exist under free banking).
Anyway - my question (which I'm taking a while to get out) is more empirical than that and it is this:
A lot of prominent free bankers accept a monetary disequilibrium model of recessions and accept that we have a lot of excess money demand right now. You would think this would bring free bankers into the market. Nothing is really stopping them to my knowledge. Shouldn't the absence of free bankers signal something about the viability of free banking?
Imagine if the government manufactured cars, but did not stop the private sector from manufacturing cars too. Let's say the government didn't produce enough cars so there was excess demand for cars at a given price. If no carmakers entered the market at this point we would say that one of two things was happening: (1.) maybe there isn't actually an excess demand for cars, or (2.) maybe there's something about cars that prevents the market from optimally supplying them.
In the case of money, we can rule (1.) out at least in conversation with reasonable free bankers who do acknowledge an excess demand for money. What else is left except to conclude (2.)?
The mere emergence of Bitcoin seems to me to be proof that we really are suffering from an excess money demand problem here. I didn't need much more proof at this point, but I do think it's additional proof. But the fact that Bitcoin isn't explosively growing right now and that nobody really is getting into this game pushes the empiricist in me to be suspicious about free banking as any sort of solution to our monetary problems.
Contra Silas's strange assumptions about me, if people think they can make the world better in a non-profit way or earn lots of money by introducing their own currencies as for-profit free banks, I am 100% in support of it. It's unclear to me, though, why I should look to that as an ultimate solution to our macroeconomic problems.
There is a clear obstacle to central banks solving our problems: public choice issues, ignorance, and timidity.
What is the obstacle to free bankers solving our problems? Why aren't they rushing into a market with considerable excess demand. After all, they're supplying a product with very little marginal production costs. If free banking offered a solution, wouldn't we be awash in free bankers right now?