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Block & Barnett vs. Murphy & Mises

Summary:
I don’t like their chances… Walter recently sent me his 2020 critique in the Review of Economic Perspectives (co-authored with Bill Barnett) of my 2019 QJAE article in which I weighed in on the fractional reserve banking debate. Episode 181 of the Bob Murphy Show (which hasn’t dropped as of this writing, so that link might be broken depending on when you read this) features Walter and Bill debating/discussing me on the substantive point, namely, can newly discovered gold–even in a free society with no central bank, commodity money, and 100% reserve banking–cause the Austrian boom-bust cycle? In my 2019 paper, in order to show that Mises himself thought fractional reserve banking per se caused the business cycle, I quoted his view that newly discovered

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I don’t like their chances…

Walter recently sent me his 2020 critique in the Review of Economic Perspectives (co-authored with Bill Barnett) of my 2019 QJAE article in which I weighed in on the fractional reserve banking debate.

Episode 181 of the Bob Murphy Show (which hasn’t dropped as of this writing, so that link might be broken depending on when you read this) features Walter and Bill debating/discussing me on the substantive point, namely, can newly discovered gold–even in a free society with no central bank, commodity money, and 100% reserve banking–cause the Austrian boom-bust cycle?

In my 2019 paper, in order to show that Mises himself thought fractional reserve banking per se caused the business cycle, I quoted his view that newly discovered gold could cause it too, if it hit the loan market before the rest of the market had a chance to fully adjust to the new influx of commodity money. My rhetorical point was that, if you understood Mises’ position vis-a-vis gold, then it would obviously follow that FRB per se caused the business cycle, not just “too much” FRB as Selgin & White would have it.

Anyway, Block & Barnett hit back on this point, arguing in their 2020 paper that in a free society, newly discovered gold couldn’t cause a business cycle, even in principle. However, they seem to have misunderstood the layout of my own argument.

It’s not worth spelling out the details, I’m just warning readers that they should not trust Block & Barnett (2020)’s summary of what “Murphy argues in his 2019 paper.” They at times put words in my mouth that I do not in fact endorse.

To succinctly demonstrate that they are confused about what my actual argument is, I’ll offer just one example. In their conclusion, B&B write the following, and note that the initial quotation (which I put in italics to clarify) is from my own paper (i.e. they are quoting me in the beginning of the block quote below). Note that the “[of FRFBs]” is added by Block & Barnett, NOT by me. This is part of the confusion–Block and Barnett are wrong to add “[of FRFBs]” there; that’s not the camp to which I was referring.

The claim [of FRFBs] — from Mises and Hayek through Rothbard up to writers such as Salerno in the present day — has always been that credit expansion sets in motion an unsustainable boom.” That is, according to those thinkers and Murphy, commodity credit in the form of new commodity money, both in principle and under typical conditions, has the same distortionary effects as new circulating credit; to wit: such additions to the stock of commodity money and credit cause business cycles, and thus such additions constitute market failure. 

So let me now explain why the above block quotation from Block & Barnett is confused, and shows that they got mixed up with what I was doing in my paper.

First and most obvious, FRFB stands for Fractional Reserve Free Bankers. It is guys like Selgin and White. My paper was written against them. So to reiterate, when B&B inserted “[of FRFBs]” into that words quoted from me, they mixed up me with the target of my attack.

Second and less obvious, but still important: The claim I made in that quote is something Block & Barnett agree with too! To wit, credit expansion sets in motion an unsustainable boom. (Credit expansion is the issuance of new fiduciary media, in Mises’ terminology.) So Walter Block and Bill Barnett can be added to the list of thinkers, along with Murphy, Mises, Hayek, and Salerno, who would agree with that claim.

And yet, B&B quoted that and held it up as the thing they were knocking down in their 2020 paper.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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