Greenfield and Yeager’s “Black-Fama-Hall” payments system is a version of “macro” free banking that is also of the “Mises” variety. There is a common unit of account, like the dollar, but rather than being defined in terms of a single good, like gold, it is defined in terms of a broad bundle of goods. The sum of the dollar prices of the items in the bundle must equal the defined dollar value of the whole bundle, but the dollar price of each good in the bundle is free to vary with supply and demand. Rather than being tied to the bundle-defined unit of account by redemption in all of the various items in the bundle, the dollar-denominated currency and deposits issued by banks are redeemable in terms of some redemption medium, perhaps gold, equal in current market value to the total value of the bundle. The price of the redemption medium varies with supply and demand. This fits into the “Mises” version of macro free banking because there is a common unit of account and the banks tie their money to it by a type of redeemability. There is no central bank providing overall guidance. Any monetary policy is generated by the interactions of the banks operating under the system.
Because of problems with the operation of the BFH system, which I call “the paradox of indirect convertibility,” some of those who found the system appealing, chiefly Kevin Dowd (and me,) began to favor a modified system that I call index futures convertibility. Again, the system assumes a common unit of account, like the dollar, with banks issuing dollar-denominated currency and deposits. There is a system of redeemability with index futures contracts that ties each bank’s currency and deposits to the common unit of account. This approach to free banking was developed on the assumption that index futures contacts would be on a price index defined on some bundle of goods. However, the system can be modified to stabilize just about anything, including a growth path for a measure of nominal expenditure. There is a sort of monetary policy, though it really just the outcome of the interaction of the banks and speculators in futures contracts. Because there is no central bank providing overall guidance, it is a version “macro” free banking and of the Mises type.
I think it is important to distinguish between “micro” and “macro” free banking, and among the “macro” free banking systems, between the Hayek and Mises types. Of course, there is a broad variety of “macro” free banking systems of the “Mises” type too. Oddly enough, the Rothbardians associated with the Mises Insitute favor a Mises version of macro “free banking.” a gold standard, while simultaneously favoring a draconian “micro” regulation of the banking system, a 100 percent reserve requirement.
What do I think? As for “micro” reforms, I think reserve requirements are at best pointless and often harmful and should be dispensed with immediately. I also favor the immediate repeal of the ban on private banknotes. I favor allowing banks to issue dollar-denominated currency and token coins on the same terms as transactions deposits. We will then see if banks can induce their customers to use them, though I expect there would be little problem. If private banknotes and token coins are successful, I would favor withdrawing all government currency, like Federal Reserve notes and coins from the U.S. Mint, from circulation.
I don’t favor abolishing deposit insurance overnight, and capital regulations are the least bad means of controlling the moral hazard created by deposit insurance. Careful and gradual reform aimed at weaning the banking system from government deposit insurance, while freeing banks from capital requirements is an appropriate long term goal.
I think the Hayek type of free banking should be permitted immediately. If some bank wants to offer deposits or currency in its own unique units, then they should be permitted to do so. Similarly, banks should be able to issue deposits or currency denominated in gold or silver. We will then see if they can induce their customers to switch to a new unit of account. I doubt it that much will come of it and that banks will continue to issue dollar-denominated monetary instruments redeemable into base money.
As for “Mises” version of free banking, I am skeptical of a gold or silver standard or a frozen quantity of base money. I don’t believe all the bugs have been worked out of index futures redeemability, but I think that is the right approach for “macro” free banking. In the meantime, I favor having the Federal Reserve target a slow and steady growth path for nominal expenditures. Imposing index futures convertibility on the Fed is a possible first step towards “macro” free banking.