Economics 313: Money and Banking
Section 001
Fall Semester, 2014
Towson University


Description / Online logistics / Grading
Requirements / Academic integrity / Course outline

Instructor: Howard Baetjer, Jr., Lecturer, Department of Economics
: Stephens 104B (I have moved!)
Phone: Office: (410)-704-2585
             Home: (410)-435-2664 (No calls after 9:00 p.m., please)

Office hours: Mondays and Thursdays, 5:00 – 6:30, and by appointment
Required Texts and readings:

1. George Selgin, The Theory of Free Banking, available online at and/or in a photocopy packet at the university bookstore. You must bring hard copy with you for class discussions, so print it yourself or purchase the packet.

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 (6th,7th, 8th or 9th edition should all work)

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, where there are many available for under $20 including shipping.

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

6. Free Banking blog.  Subscribe (for free) at; read the posts as they come in.

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.  Students may subscribe online at for 10 weeks at $19.95 – that’s 28 cents a day. That includes print, and the Mobile Reader app.  Alternatively, students may subscribe for 15 weeks at $29.95 at  I will assign WSJ articles from time to time, but you’ll be able to go read them in the library if you would prefer not to pay for a subscription.

Other Resources -- The Economics Department’s Web Site: The economics department has a useful web site. Its internet address is In particular, note the "Research Resources" 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 fall 2005 run of the course I followed Dr. Horwitz's fall 2000 syllabus closely.  In 2007 I continued to use much of what Dr. Horwitz did, but with a number of changes to suit my own abilities and inclinations.  For fall 2010 and subsequent terms I have made more changes, but the course is still largely Prof. Horwitz's.  I am responsible for any weaknesses or errors, of course.

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 fit to do so, assuming, of course, that they could get customers to accept the money they issue.  Members of the public would be free to choose the notes offered by different banks just as they are free to choose the checking and savings accounts offered by different banks now.  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.  Because in free banking there would be no monetary authority conducting monetary policy, interest rates, which now receive so much attention from the officers of the Fed, would be beyond bureaucratic influence; they would be determined by market forces.  Whether this would be a good or a bad thing I am honestly not sure.  We'll discuss it.

Free banking’s surprising and radical (to today’s audience) recommendations have 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 thereafter understand and participate intelligently in discussions of money and banking matters, including monetary 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. I still have not decided how we will end the course, maybe with a close look at Bitcoin and its prospects for success, and implications for the world’s moneys if it does succeed. Final assignments are to be determined.

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, on Blackboard I will post notes on the reading, paper assignments, and additional reading assignments.  The university software should enroll students automatically in a Blackboard site for every course; please check that it actually has enrolled you in the Blackboard site for this course, read my "Announcements" and explore the system.  Note that in "Student Tools" there is a student manual that describes the system. 

Please check the accuracy of your email address on Blackboard 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 year, at the advice of colleagues for whom doing so has worked well, I have created a closed Facebook group for all of us in the course. It is called “Money and Banking, HB, fall 2014”; it’s here: (I think you must send me a request to join.) I will use this group page for any announcements. Check it frequently throughout the term for additional web-based reading assignments, schedule adjustments, etc.

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 Facebook group page for any schedule or assignment changes.

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

Short papers
Final exam


I will determine class participation grades based on class attendance and contributions to class discussions.

Unless special circumstances intervene in a particular case, I will deduct one point from the ten points of participation credit for every class meeting missed after the first four misses. The reason for my counting attendance so heavily is that much of what we learn we will learn in dialogue, discussion, and my Socratic presentations in class. In order for those to work well, people need to be present and up to speed on previous class discussions. I hope you will learn a lot from talking with each other. You can’t do that if you are not in class.

The portion of the class participation grade based on contributions to class discussions I will base not on whether a comment or answer is right or wrong—often we won’t be able to know that for sure—but on how well it helps us all make sense of what we are studying. Asking a thoughtful question about a passage from the reading, for example, or helpfully expanding on a fellow student’s insight, is excellent participation. Note well: participation must be grounded in the course readings to be valuable. No ill-thought-out, baseless comments, please! By contrast, answering a question with a directly pertinent quotation from the readings is sweet. Read carefully. Underline. Share what you learn.

The grading scale is as follows:

93 - 100
90 - 93
87 - 90
83 - 87
80 - 83
77 - 80
70 - 77
68 - 70
60 - 67
  0 - 59


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 level 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—get ahead if possible.

Attendance: I expect students 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.

Unless extraordinary circumstances make some alteration of this policy necessary, every class missed after your first four misses will result in one point deducted from your course grade.

Short papers: Most weeks I will assign a paper of one to three pages to be done at home and submitted at the beginning of the next class. The first will not count (unless you don’t do it; write the paper). Your average on this part of the course will count 45% of the course grade; in calculating that average I will drop your two lowest grades. All papers 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.   On each paper, every additional error in basic correctness of writing will count more than the last.

Format: Submit hard copy only, please; submit no papers by email.  (The opportunity cost of my time going back and forth to the printer to collect your work is too high for me to bear.)  Please print with a word processor or type; double-space; format neatly.  Use a normal-sized font.  Staple multiple sheets together. 

Name placement:  Please write your name only on the bottom of the back of the last page to help me avoid bias based on my expectations of your work.

Late or missed assignments:  Late papers may 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.

The final exam must be taken on its scheduled date unless you arrange some other time with me, well before the exam date.  If some emergency prevents you from taking the exam on schedule, you must present a written explanation of the problem before the exam, or as soon as possible afterwards, so that we can make alternative arrangements.

Academic Integrity: This should go without saying, but let us say it anyway:  Be honest. Present as your own work only your own work. Your character development is far more important than your grade.  Practice integrity in your actions and you will build it in yourself.

Towson University’s student academic integrity policy is laid out in the Undergraduate Catalog’s Appendix F. It is available online at

I encourage you to work together. All of us learn a lot from talking over ideas with others. So feel free to work on problems together and to have classmates read your written work and make comments on it. BUT any work you submit must be your own. This requirement applies notably to the short papers: feel free to talk the questions over with others all you want, but let the answers you submit be entirely in your own words. Others' contributions to your thinking should be identified as such in your papers.

I will deal severely with any sloppiness in this respect. Anyone who cheats will fail the course.

Narrative Outline and Schedule of Readings

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.  Readings from the photocopy packet of readings are indicated by the last name of the author.

In addition to the readings listed below, additional handouts and web readings may be assigned from time to time. If so, I’ll announce them in our Facebook group.  You will see that many portions of the narration that follows are quoted from Dr. Steven Horwitz's syllabus, and many of the readings are taken from or based on that syllabus also.

Except on the first day of class, students are expected to have done all reading assigned for the week by the time of the first class meeting that week.


We will devote the first week 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. 27

First day, no assignment

Sep. 2

The course syllabus

Friedman, chapters from Money Mischief                
S 1 “Overview”

Hazlitt, “The Mirage of Inflation”





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 of 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

There is serious disagreement among 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, interest rates, investment, and economic growth.





Sep. 9

The evolution of money and of banking institutions, subject to market forces alone







Carl Menger, “The Theory of Money,” chapter VIII of his Principles of Economics, available in your packet

F.A. Hayek, “The Use of Knowledge in Society” available online at

S 2 “The Evolution of a Free Banking System”

W 1 “The Evolution of Market Monetary Institutions”

Sep. 16

Free banks would be able to create (inside) money that they can loan at interest, but how much money would they lend?  Might they create too much?



W 3 “Money Issue by Unrestricted Banks”
S 3 “Credit Expansion with Constant Money Demand”

Sep. 23

From the macroeconomic perspective of social coordination, how much money should banks lend, and at what interest rate?  Here we consider the case for monetary equilibrium as the desideratum of a monetary system.



S 4 “Monetary Equilibrium”

S 5 “Changes in the Demand for Inside Money"

Horwitz, Steven 2013 “An Introduction to U.S. Monetary Policy,” pp. 21-27

Horwitz 2000 “Monetary equilibrium as analytical framework,” pp. 65-75, 81-2, 96-103

S 6 pages 82-85 only

Roger Garrison’s PowerPoint show, “Hayekian Means-Ends Analysis,” through slide 35 (



II. American Banking History to 1913

In this section of the course 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 purposes of this section of the course are for students to understand that there has never been free-market banking in the United States and to understand 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. 30


S 1 (again) pp. 12-15 “The U.S. Experience”

Horwitz 1992 “Regulatory Chaos and Spontaneous Order Under the National Banking System”

Horwitz, Steven 2013 “An Introduction to U.S. Monetary Policy”: pp. 5-10

To watch in class: George Selgins’s talk at Cato’s 31st Monetary Conference at 16:55-34:40



III. Central Banking Practice – how the Fed manages the money supply, or at least how it used to

Here we focus on central banking and monetary policy: how modern central banks manipulate the money supply.  This is the section of the course most pertinent to the way the world works under central banking (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. 

In the last three years, the Fed has so dramatically increased its roles in the economy that textbook descriptions of its roles are for now dramatically incomplete.  We will study the expansion of the Fed's role using readings that I have not yet chosen as of August. These will be announced later so that we get up-to-date information. 


Oct. 7

Multiple deposit creation, the money supply, and monetary policy under central banking (chapter numbers may differ slightly in some editions of Mishkin’s textbook)

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”

Horwitz, Steven 2013 “An Introduction to U.S. Monetary Policy,” carefully pp. 11-17


IV. Central banking in theory

We look first at the some of the main justifications that have been given for central banking (justifications 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, in Prof. Horwitz’s words, we explore “what really motivates central banks in the political environment in which they operate, including the search for seignorage and political business cycles.”

Oct. 14

Why have a central bank?



W 4 “The Evolution and Rationales of Central Banking”
skim W 5 “Should Government Play a Role in Money?”
W 6 “Should Government Play a Role in Banking?”

The political economy of central banking



Horwitz, Steven 2013 “An Introduction to U.S. Monetary Policy,” pp. 17-21

Cagan “Monetarism”
W 7 “Seignorage” pp. 138, 139, and 163. Only these three pages required.

W 8 “Central Bank as Bureaucracy”
skim W 9 “Political Business Cycle Hypotheses”


V. Monetary Policy, Monetary Rules, Monetary Regimes

Now we get into parts of the theory and practice of money and banking that have been thrown into turmoil in the last year, during which the Fed has gone astonishingly far outside the limits of its activities in previous years.  The role of the Fed, its powers, and even its very existence are being challenged more vigorously now than they have been in decades.


 In Prof. Horwitz's words,

Here we will [discuss] ... 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.

Oct. 21

Can the problematic incentives of central banks be overcome?



W 10 “Discretion and Dynamic Inconsistency” only pp. 204-7 required

W 11 “Monetary Rules”

Timberlake “Federal Reserve Policy Since 1945”

Selgin, Lastrapes, and White, “Has the Fed been a Failure?” available at, pages to be assigned

Possibly other articles to be determined

Oct. 38

Would the alternative monetary regime of free banking produce better results?

Horwitz, Steven 2013 “An Introduction to U.S. Monetary Policy,” pp. 27-34

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”


VI. 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."

Nov. 4


Greenfield 1 “Depression”
Greenfield 2 “Banks”
Vedder and Galloway, “From New Era to New Deal”
Recommended recent blog post by Prof. Horwitz on Hoover’s interventions aggravating the Great Depression





VII. 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. 11


Hazlitt, “The Mirage of Inflation”
Horwitz 2000, Chapter 4 “Inflation, the Market Process, and Social Order”





VIII. Final Topic(s) to be determined

Bitcoin? The operation of the international gold standard? Does healthy international commerce require that all nations’ moneys be redeemable in the same stuff, whether commodity or crypto-currency?

Nov. 18

To be determined.

Larry White’ lecture on “The Federal Reserve System at 100, Success or Failure” is excellent. It’s here: This might be a good review at this point in the term.



For an appreciation of the nature of bank regulation, perhaps study the FDIC’s capital requirements here: Perhaps add a talk by John Allison or a passage from his book contending that regulations cost banks more than taxes do.


Nov. 25

To be determined. (Short week due to Thanksgiving Nov. 27)


Dec. 2

To be determined. (Last full week)


Dec. 9

(Dec. 9 is our last class meeting day; exams begin Dec. 11) Wrap-up and review





Final Exam - Tuesday, December 17, 10:15 a.m. – 12:15 p.m.  Please double-check this against the university calendar to make sure that I have read it correctly.