Instructor: Howard Baetjer, Jr., Lecturer, Department of Economics
Office: Stephens 101K
Phone: Office: (410)-704-3551
             Home: (410)-435-2664 (No calls after 9:00 p.m.)
Email: hbaetjer@towson.edu
Website: http://pages.towson.edu/baetjer/

Office hours: Monday, 3:45-5:00, Tuesday, 11:00-12:45, and by appointment
Required Texts:

1. George Selgin, The Theory of Free Banking, 
2. Lawrence White, The Theory of Monetary Institutions
3. Articles and book chapters in a photocopy packet available only at the bookstore
4. Frederic Mishkin, The Economics of Money, Banking, and Financial Markets (7th edition)

Note well: Only four chapters of Mishkin's book are required, but they are important.  We have been denied permission to photocopy these chapters, so the cheapest way to get them is to buy a used book, either at the bookstore or on Amazon.com, where there are many available for under $15 including shipping.

5. Additional readings may be distributed in class or made available through our Blackboard site.

Recommended Reading: The Wall Street Journal. A great way to keep up with current economic news and to improve your ability to apply economic theory to the real world.

Other Resources -- The Economics Department’s Web Site: The economics department has an excellent web site. Its internet address is http://www.towson.edu/econ/. In particular, note the "Useful Economic Data Sources" entry, which contains links to a wide variety of economic data and news sources.

Acknowledgment: This course was initially developed by Professor Steven Horwitz of St. Lawrence University.  I admire his teaching and his scholarship, and I have become fascinated by the questions he raises about how the American banking system should be organized.  In my most recent run of the course in fall 2005 I followed Dr. Horwitz's syllabus closely.  In this run I continue to use much of what Dr. Horwitz did, but with a number of changes to suit my own abilities and inclinations.

Course Description:  This is an unusual money and banking course in that it takes seriously proposals for free banking—leaving banking and the issuing of money to the free play of market forces, with government’s only role being to protect property and enforce contracts.

In free banking, no central bank (such as the Federal Reserve System [“the Fed”] in the U.S.) would have a monopoly on issuing money; instead private, competing banks would supply money when and if they saw profit in doing so.  In free banking, then, there would be no such thing as monetary policy: no central bank would manage the money supply.  Instead the money supply would be determined by market forces at work on the banks that choose to supply money.  In free banking, interest rates, which now receive so much attention from the officers of the Fed, would be beyond bureaucratic influence, determined by market forces. 

Free banking’s surprising and radical recommendations have intriguing and persuasive bases in both theory and historical experience, as we shall see.

The purpose of the course is not to promote free banking, however.  Rather we will use the strong contrasts between free banking and government-controlled banking to illuminate the basic principles and issues in money and banking.  In broad terms, the goal of the course is to help students learn these basic principles and issues so well that they can afterwards understand and participate in discussions of money and banking matters, including history, monetary policy, banking regulation, interest rates, inflation and deflation.  There is always plenty to learn about money and banking; the goal of the course is to give students a sound framework on which to build their continued learning.

Within this high-level goal of the course are more specific goals.  We will seek to understand the evolution of money from barter, and money’s essential role in economic order and economic progress.  We will examine the evolution of banking institutions such as banknotes, checking, and clearinghouses, and study the essential role of the interest rate in coordinating saving and investing.  We will examine some episodes of banking history in the U.S., giving particular attention to restrictions on freedom in banking and their consequences.  We will look closely at the theory and practice of central banking today, including the details of how the Fed manages the money supply and how it may respond to the political pressures it feels.  To emphasize the importance of monetary stability, we will examine the consequences of the two kinds of monetary instability, deflation and inflation.  We will close by investigating some of the controversies about monetary policy, considering how free banking might help solve policy problems.

Again, the overarching goal is for students to understand the fundamentals well enough to make their own well-informed judgments about banking regimes and policies.

 Online logistics: We will make regular use of Blackboard, a web-based system for facilitating academic course delivery.  In particular, I will post there announcements, notes on the reading that will help you prepare, paper assignments, and additional reading assignments.  Absolutely as soon as possible, all students should enroll in this course's Blackboard site.  To enroll, follow the instructions on the internet at http://wwwnew.towson.edu/adminfinance/OTS/training/documentation/Blackboard/Version%206/Enroll_Student.pdf.  Once you have created a Blackboard account and enrolled in this course's Blackboard site, please read my "Announcements" and explore the system.  Note that in "Student Tools" there is a student manual that describes the system.  Check "Announcements" frequently throughout the term for additional web-based reading assignments, schedule adjustments, etc.

Be very careful, when you enroll, to record your email address accurately, because I will use Blackboard's email facility to notify you to look for new announcements about assignments.  Check the accuracy of your email address by sending a test message to yourself from within the Blackboard system: if you can reach yourself that way, then I can reach you; if you can't, then correct your email address on Blackboard and try again.

This syllabus is posted online.  You will find it in the Course Information section of our Blackboard site and at my website.  Any changes to this syllabus, once the term begins, will be posted online rather than handed out on paper.  Accordingly, it is your responsibility to watch the Announcements on the course Blackboard site for any schedule or assignment changes.

Grading Procedures: Grades for this course will be based on students’ scores on weekly in-class quizzes, frequent short papers, and a cumulative final examination.
 

In-class quizzes Short papers Final exam Total

30%   30%   40%  100%

The grading scale is as follows:

93 - 100 90 - 93 87 - 90 83 - 87 80 - 83 77 - 80 70 - 77 60 - 70   0 - 60

A  A-  B+  B  B-  C+  C  D  F

Grades in the A range are awarded only for excellent work, work that shows mastery of the subject. Grades in the B range indicate good work, work that shows significant grasp of the subject. Grades in the C range indicate satisfactory work. We all know what D and F mean.

Course Requirements:  

Each week I'll expect you to do the reading for that week carefully before class; then we will use class time to discuss what we have read, sort out difficulties, and practice what we have learned.

Preparation: I expected you to have studied all the assigned readings for each week by class time, and be prepared to write about and discuss those readings.  Prepare carefully.  Use the "Notes on the Readings" that I will post on our class Blackboard site.  These notes will tell you what to study carefully, what just to read, and what you can skim or skip.  They will also give you hints about what sorts of questions might show up on quizzes.  

This is an upper class course in an institution of higher learning.  Standards of performance will be high.  I expect you to work long hours, study thoroughly, master a lot of information, and demonstrate that mastery.  We will be covering a great deal of information.  Keep up with your reading--keep ahead if possible.

Attendance: Students are expected to attend every class meeting.  If for some good reason you must miss a class, please let me know why at your first reasonable convenience (preferably before the class you miss).  Do your utmost to attend every class.

Though I earnestly want you to attend every class, attendance does not count toward your grade; no credit is given for perfect attendance, and no deduction is made for never showing up.  Attendance only "counts" in that it helps you learn more, and therefore score better on the exams (not to mention the in-class quizzes) than you otherwise would.

Quizzes: To motivate you to prepare carefully every week and to stimulate discussion, I'll give a short quiz every week (or nearly), usually at the beginning of class.  Quizzes will consist of problems, short answer questions, or a short essay.  Your average on these quizzes will count 30% of the course grade; in calculating that average I will drop your two lowest grades.  Please write your name only on the bottom of the back of the last page.  This is so that I don't know who you are as I grade your work.  Not knowing who has written a paper helps me avoid inadvertent bias.

Short papers: Most weeks I will assign a paper of one to two pages to be done at home and submitted at the beginning of the next class.  Your average on these papers will count 30% of the course grade; in calculating that average I will drop your two lowest grades. All should meet the following standards:

Writing quality:  Papers must be clearly written, using correct grammar. They should be sensibly organized, edited, and proofread.  Grammar, punctuation, spelling and the like will count up to half the paper's grade.
Format:  Submit hard copy only, please; no email submissions.  Please print with a word processor or type; double-space; format neatly.  Use a normal-sized font.  Staple multiple sheets together. 
Name placement:  As with quizzes, please write your name only on the bottom of the back of the last page.

Late or missed assignments:  Quizzes must be taken on their assigned dates; no make-up quizzes will be given; I will drop the two lowest grades.  Late papers will be penalized 5% per 24-hour period (including weekend days), beginning at class time the day they are due.  Please submit late papers to my faculty mailbox or the slot on my office door; write both the due date and the date and time when you drop it off on the back of the paper by your name.

• Any written work you submit should be your own words, or identified as ideas you got from someone else.
• Any time you use wording other than your own, put it in quotation marks and identify the source (e.g., "As my roommate Michelle explained it to me, 'Inflation is terrible for old people on fixed income.'"
• All charts and graphs you submit must be drafted by you alone.
• When in doubt, ask me.

The readings for each week are given in the table below.  Readings from the main textbooks by Selgin and White are indicated by "S" for Selgin and "W" for White.  In addition to the readings listed below, additional handouts and web readings may be assigned from time to time. See the Blackboard site for announcements about these.  You will see that many portions of the narration that follows are quoted from Dr. Steven Horwitz's syllabus, and most of the readings are taken from or based on that syllabus also.

Introduction
As we meet but once a week, and you will have had no time to read before our first class meeting, we will devote the first class to a general orientation to the concepts we will encounter in the course.  This will involve a lot of sorting out of concepts and drawing terminological distinctions.
Aug. 29	"I, Pencil" Friedman S 1 “Overview”
I. Free Banking and Monetary Equilibrium
In Prof. Horwitz's words: "We will begin with money’s role as a social institution and see how it facilitates broader market relationships and social coordination.  The cornerstone of this section, and in many ways the course, is Carl Menger’s theory of the origin of money.  Menger argues that money arose as an unintended consequence of barter exchange, rather than as the conscious product of human design.  The use of money in exchange has enabled us to form money prices and dramatically increase the productivity and complexity of the economy.  Money prices play an important role in economic coordination, and Hayek’s paper explicates this role more fully." Then we go on to the continuing evolution of money and of banking institutions, combining actual history with Selgin and White's conjectural history of what would evolve in a regime of real banking freedom.  This is to me the most provocative and interesting part of the course.  Suppose governments had left money and banking alone, except to do government's essential job of protecting property and enforcing contracts: What money and banking institutions would have spontaneously evolved?  This section raises the all-important question of how much money would be issued by banks in a mature free banking system and the closely-related question of how much money should be issued at any particular time.  That is, what should the money supply be?  This is the number one question for all central banks; it is what monetary policy is about.  Should the money supply be kept stable, or should it grow?  If it grows, how fast should it grow?  2-3% per year?  At the same rate as real economic growth?  The question is immensely important.  It affects interest rates, and therefore investment, and therefore economic growth.  Be clear at the outset that there is serious disagreement among outstanding economists on this issue of what the money supply should be and how fast it should grow. The free banking advocates we study paint a very positive (rosy?) picture of the money supply in a free banking system.  They hold that the money supply would be regulated well--even "correctly"--by the market discipline of competition among free banks, many of whom would issue their own notes just as they now issue their own checking deposits.  Market forces would induce banks, in their own self-interest, to supply a quantity of money equal to the quantity of money demanded (at going prices).  That is, free banking would tend to maintain monetary equilibrium, a notion whose merits we examine in some detail. At the end of this section of the course we introduce Prof. Roger Garrison's capital-based macroeconomic model to help clarify the connections between the money supply, investment, and economic growth.
Sep. 5	The evolution of money, and of banking institutions, subject to market forces alone
		Menger “On the Origin of Money” Hayek “The Use of Knowledge in Society” available online at       http://www.econlib.org/library/Essays/hykKnw1.html S 2 “The Evolution of a Free Banking System” W 1 “The Evolution of Market Monetary Institutions”
Sep. 12	Free banks are able to create (inside) money that they can loan at interest, but how much money will they lend, and might they create too much?
		W 3 “Money Issue by Unrestricted Banks” S 3 “Credit Expansion with Constant Money Demand”
Sep. 19	From the macroeconomic perspective of social coordination, how much money should banks lend, and at what interest rate?  The case for monetary equilibrium.
		S 4 “Monetary Equilibrium” S 5 "Changes in the Demand for Inside Money" Horwitz 2000 “Monetary equilibrium as analytical framework,” pp. 65-75, 81-2, 96-103 Roger Garrison’s PowerPoint show, “Hayekian Means-Ends Analysis,” through slide 35 (http://www.auburn.edu/~garriro/macro.htm)
II. American Banking History to 1913
Here we emphasize some of the ways in which state and federal governments in the U.S. have interfered with the freedom of banks and their customers to do business by mutual agreement.  The main purpose of this section of the course is for students to understand that there has never been free-market banking in the United States.  We look at how governments in the U.S. have prevented, for better or worse, free banking from existing.  We study up through the creation of the Federal Reserve System in 1913, in the process seeing some of the historical origins of that central bank. In Prof. Horwitz's words, "We will highlight the conflict between the natural forces of order and the chaotic effects of regulatory intervention.  These historical and institutional questions are crucial to understanding how past and present banking systems have worked and failed. One of themes we will explore is the degree to which market forces or government are responsible for the problems that have plagued the US banking system throughout history, with an eye toward understanding the plusses and minuses of the Fed."
Sep. 26		S 1 (again) pp. 12-15 “The U.S. Experience” Horwitz 1992 “Regulatory Chaos and Spontaneous Order Under the National Banking System”
III. Central Banking Theory and Practice
Here we focus on central banking.  We look first at the some of the main justifications that have been given for central banking (that most economists agree with, implicitly at least).  Among these is the belief that central banks are necessary to prevent bank failures and crises.  Next we look at monetary policy: how modern central banks control the money supply.  This is the section of the course most pertinent to the way the world works today (and most similar to what other money and banking students are learning in more conventional courses).  In Prof. Horwitz's words, We will undertake a careful analysis of the Fed’s tools, such as reserve requirements, the discount rate, and open market operations, and how they affect its various targets.  These targets include various measures of reserves, which in turn change the money supply and interest rates.  We will discuss the flaws in this process and what they imply for the Fed’s ability to create and maintain monetary order.  We will conclude by exploring what really motivates central banks in the political environment in which they operate, including the search for seignorage and political business cycles."
Oct. 3	Why have a central bank?
		W 4 “The Evolution and Rationales of Central Banking” W 5 “Should Government Play a Role in Money?” W 6 “Should Government Play a Role in Banking?”
Oct. 10	Multiple deposit creation, the money supply, and monetary policy under central banking
		Mishkin 15 “Multiple Deposit Creation and the Money Supply Process” Mishkin 16 “Determinants of the Money Supply” Mishkin 17 “Tools of Monetary Policy” Mishkin 18 “Conduct of Monetary Policy: Goals and Targets”
Oct. 17	The political economy of central banking
		Cagan “Monetarism” W 7 “Seignorage” W 8 “Central Bank as Bureaucracy” W 9 “Political Business Cycle Hypotheses”
IV. American Banking History continued: Deflation and The Great Depression
The historical record of central banking has been poor.  Less than two decades after the Fed took control of the money supply in the United States, the country went into the Great Depression.  Persuasive scholarship puts much of the blame for the Great Depression on the Fed, which did not (and arguably could not, even if it had wanted to) maintain monetary equilibrium.  After a significant increase in the money supply during the 1920s, the Fed allowed a catastrophic decrease in the money supply in the 1930s.  This decrease in the money supply resulted in a wrenching deflation. In Prof. Horwitz's words, "We can see the importance of a banking system’s ability to maintain monetary equilibrium by seeing what happens during monetary disequilibria...  Deflation is [one] form of monetary disequilibrium and we will explore it both theoretically and through illustrations taken from the Great Depression of the 1930s. Our discussion will show deflation’s destructive potential, despite its rarity in real world economies.  We will emphasize the interplay between poor monetary policy and wage and price rigidities that can, and did during the Great Depression, turn the minor effects of excess demands for money into major economic catastrophes."
Oct. 24		Greenfield 1 “Depression” Greenfield 2 “Banks”
Oct. 31		Greenfield 3 “The Treasury” Vedder and Galloway, “From New Era to New Deal”
V. Inflation
The other, far more common form of monetary disequilibrium is inflation.  Most central banks through history have inflated their currencies most of the time, by continually supplying more money (than is demanded at going prices).  In Prof. Horwitz's words, "Here we will discuss the various economic and political aspects of inflation.  Our focus will be on the costs inflation imposes on economic systems and how that retards economic growth and socio-political stability.  We will also take a brief look at how inflation might trigger business cycles and its relationship to fiscal policy by discussing budget deficits and monetization of the debt."
Nov. 7		Hazlitt, “The Mirage of Inflation” Horwitz 2000, ch. 4 “Inflation, the Market Process, and Social Order”
VI. Monetary Policy, Monetary Rules, Monetary Regimes
In Prof. Horwitz's words, "What is the Fed up to now?  Here we will briefly try to answer this question by discussing ... the current state of [both] theory and practice in monetary policy.  Our focus will be on the debate over the possibility and desirability of targeting either some measure of prices or some interest rate.  Perhaps as no surprise, we will see that neither target is completely desirable and neither is likely to work, either economically or politically.  We will also examine the rules versus discretion debate and lead into our discussion of free banking by exploring its advantages compared to both rules and discretion.  Our discussion of deflation and inflation emphasized the importance of a monetary regime’s ability to minimize deviations from monetary equilibrium.  We can reflect on that point through a comparison of central and free banking.  The point here is not to convince you of the correctness of either side, but rather to indicate the important issues and to show which of them are at the core of current debates among monetary theorists.
Nov. 14	Can the problematic incentives of central banks be overcome?
		W 10 “Discretion and Dynamic Inconsistency” W 11 “Monetary Rules” Timberlake “Federal Reserve Policy Since 1945”
Nov. 21	*** NO CLASS MEETING.  HAPPY THANKSGIVING ***
Nov. 28	Would the alternative monetary regime of free banking produce better results?
		S 7 “The Dilemma of Central Banking” S 8 “The Supply of Currency” S 9 “Stability and Efficiency” S 10 “Miscellaneous Criticisms of Free Banking”
Dec. 5	Wrap-up and review
Dec. 12	Final exam, two hours, usual time.  Please verify this date and time against the university calendar in case I have made a mistake.

Final Exam - Tuesday, Dec. 13, 12:30 p.m. - 2:30 p.m.  Please double-check this against the university calendar to make sure that I have read it correctly.