 We're here at the University of Freiburg, in Freiburg, West Germany with Professor F. A. Hayek, the author of many famous books and undoubtedly one of the world's greatest living economists. In fact, many of us in the free market movement or hard money movement would say that Professor Hayek is definitely the world's greatest living economist. It's a particular pleasure for me to be here doing the interview personally because Professor Hayek had a great influence on my early understanding of the free market system and how it works and my reading of his work since then has heavily influenced my understanding of free market economics, et cetera. So it's a pleasure to be here and I'd like to ask you, Professor, my first question. I wonder if, since our audience is mainly interested or at least very greatly interested in the theory of money and how it infects their investments, et cetera, I wonder if we could talk for a minute about how money evolved without the help of governments and in present time it seems very much the hindrance of money from government interference. Carl Minger talked about the evolution of money as sort of a natural phenomenon. How did money come about and what's happened today to mess up things so much? See the great trouble is the money wasn't allowed to develop further. After two or three hundred years of coins, all the governments put their hands and stopped any further developments. They were not allowed to experiment on it. Money hasn't been improved. Money has rather become worse in the course of time because unlike, say, you refer to Minger and it's quite true that Minger and before in June when Mandereal made law, language, money, the three paradigms of spontaneously growing institutions. Now fortunately, law and language have been allowed to develop. Money has originated in original form but as soon as it was there in its most primitive form it was frozen. Governments say it must not develop any further and what we have had since in development were matters of government inventions, mostly wrong, mostly abuses of money and I have come to the position of asking, has monetary policy ever done any good? I don't think it has. I think it has done only harm and that's why I'm now pleading for what I've called denationalization of money, not in this book. I hope I will live long enough after thinking in this book to add another book on money, which is very interesting but it's a movement by moral issues seem to be more important even when the monetary problems. More fundamental, yes, I would agree. But to stick on the money subject just for a minute, I'll never forget it was at our conference, the National Committee for Monetary Reform Conference in Lausanne, Switzerland at the beautiful Borovage Hotel where you first introduced this theory of competition and currencies. In an excellent speech that was very well received and since has been printed into a pamphlet form and then a miniature, then a small book. Earlier before when we were chatting I showed you that in the recent edition of Fortune magazine, even Fortune magazine has picked up on discussing this controversial theory of competition of currencies. Let me ask you, how do you think that it would work? Would the major banks such as Chase Manhattan issue currencies or would there be gold coins issued or how would it? I still believe that my original plan is right but I'm afraid I've come to the conclusion that politically it's completely utopian. Governments will never allow and even bankers do not understand their idea because bankers have all grown up in a system in which they are so completely dependent on central banks, government institutions as vendors of last resort. After many experiments there's hardly a banker who would understand even what I'm arguing. So I may not be revealing half a secret by devising a roundabout way. After all in the modern world hand-to-hand money, coins and paper is no longer the most important. Credits and credit cards are a substitute where the governments can stop people from issuing money. They can hardly stop them from opening accounts and something unless they introduce a complete system of exchange control. Except that I said before, I do not expect that any bank will understand it but there are other people who are suitable for it. My hope is now that one of the big dealers in the raw materials will prepare to open accounts which we will redeem in so much of current manners as are necessary to buy this list of raw materials. Only in the form of accounts which it pays out in whatever currency they are needed or in any currency enough to buy this list of raw materials which will make his unit, call it the solid, these standard units are ever being used in circulation. People will very soon begin to keep their accounts in solid, the only thing which is trustworthy. It's always a thing where many people can compete. Most of them will probably choose the same list. If one of the big men has started this, others will imitate it. So I think we can forget about existing money and existing banks and we get the system of accounts which will displace money. That's a fascinating concept. Maybe the unit one day will be known as the Hayek. Continuing on just for a minute on the money issue, it occurs to me that the fundamental flaw in Friedman's theory of monetary control is becoming more and more evident today. We have electronic transfer of money, we have credit card money, we have complicated computerized analysis of the money supply yet in spite and because of these things the federal authorities are even admitting that they don't even know what the money supply is. They can't put their finger on it. How in the world could you have a theory based on a tight definition of increasing the money supply at a particular rate which varies from time to time? If you don't know what the fundamental money supply is. You know about 40 years ago I once wrote a sentence something like this. One of the worst things which could happen would be if mankind ever forgot the quantity of money except they should never take it literally. And that's why I still believe it is true that the price level is determined from the quantity of money. But we never know what's the quantity of money in this sense is. I think the rule ought to be that whoever issues the money must adapt the quantity so that the price level will remain stable. But to believe that there is a measurable magnitude which you can keep constant with beneficial effects I think I was completely wrong. I mean I will add you see I don't like criticizing Friedman not only because he's an old friend because outside monetary theory we are in complete agreement. Our general view on what is desirable and what is not was almost identical till we get on to money. But if I told him what I mentioned before that I very much doubt whether monetary policy has ever done anything good he personally is convinced that a good monetary policy foundation will work for everything. Well it certainly leads to my next question that is in light of the total mismanagement of money by governments. Government control over money in the central banks. In light of this the third world debt crisis the huge build up of loans at last count there was something on the order of $600 billion loan to the third world countries. In light of this terrible situation still being controlled or at least the central banks claim to be controlling it. Well in light of all that what do you think is the outcome for the third world debt crisis as it's being called? What do you see as the outcome? I don't know. If we are very lucky I doubt whether it should be as lucky we may get through it without either assumption of inflation or new controls being clapped on. I don't quite see how it can be done but I still hope it may be done. But the only good thing I hope to see is that people are becoming somewhere aware that the present monetary system is not really satisfactory and that we will have to consider very fundamental reform. I don't think anybody is yet going far enough. I much sympathize with the people who would like to return to the gold standard. I wish it were possible and personally it cannot be done for two reasons. The gold standard presupposes certain dogmatic beliefs which cannot be asked and we justify it and our present generation is not prepared to re-adopt beliefs which were all traditions that have been discredited. But in more series I believe that any return, any attempt to return to gold will lead to such fluctuations in the value of gold that for better reason it would break down. So although I much sympathize with the gold standard people, I don't believe that is a possible way. I think in the long run when you make a much more radical proposal, how we get over the transition period I don't know. It's certainly a difficult question. It seems to me that your solution or some type of solution that gets money back to a stable evaluation so people can trust money is absolutely fundamental to the survival of a free western civilization. And what's discouraging is that as you say the likelihood of adapting your very, very radical proposal is probably only very, very slight at least at this time. And then on the other side the idea of returning to any sort of gold standard I agree with you doesn't seem to be politically feasible. And if we continue in the present situation with these massive budget deficits and continuation of inflation it seems to me that the only outlook seems to be for a continuation of the status quo ups and downs but basically long-term currency depreciation. If I may interrupt you a moment. I hesitate to speak about because it involves another frightfully important problem which I have been much interested in which I haven't studied. So question of the supposed necessary help to the underdeveloped countries. Now I believe some such help ought to be brought but I have argued 40 years ago that it ought to be taken not in the form of government to government help but in the form of private investment governments only coming in in the form of guaranteeing freely payment of capital and the returns of such investments. That I argue surely enough not with regards to the underdeveloped countries but with regards to post-war help of the United States to Europe. I think the same principle to the underdeveloped countries. I don't think governments ought to give a penny to other governments. They can help private enterprise by guaranteeing against political risks which essentially involves a problem of free transfer of returns and capital. There you could exercise a very considerable pressure because it would stop giving such a guarantee to any country who has failed before. Right. And that seems to be the root of the problem because it looks like most of these third world countries, even the larger countries with a sizeable economic base and a huge amount of natural resources like Brazil, will really find it impossible to repay these debts at least in the short term. But not a rival. It may be one more than effective help can really give if it's according to the sensibility of the political system. This distinction governments cannot make but private industry can. Agreed. Agreed. But since we have this system, I mean this system that isn't working well now and it looks like if you examine the fundamentals that the long term outlook tends to be for more and more currency depreciation. I know that Ludwig von Mises once said in a tricky little quote, he said government is the only agency that can take a useful commodity like paper, slap some ink on it and make it totally worthless. Yes, indeed. It seems like to me, examining the fundamentals, that that's probably the longer term outlook. But that's my personal idea of how the scenario will develop. Nobody knows for sure. But in general, without getting into all the specifics, I know we don't really have time now, but do you see the future as being more and more inflation and currency depreciation, or do you think that we could have a massive depression because of the government's mismanagement of money? Many of the things have, in the last two years, moved very much better than I hoped. That particularly in England, with that you would be able to bring inflation down as low as she has done, and the same to some extent in America, is very encouraging. If they can bring down inflation to zero and stay there, I think the position of the leading countries can be saved. But I'm not sure that means the position of their banks can be saved. They are no longer mainly dependent on the economy of their own country. Well, I have nightmares about the possible banking crisis, but I don't like to talk about it because I haven't studied currency as sufficiently. Many of our attendees that come to our conferences and have been coming to our conferences for years tend to be ahead of their time, at least they have for the last 10 years, in the sense that they go contrary to current investment thinking. And they, years and years ago, one of the first groups of investors to understand that in periods of long-term currency depreciation, gold is a good investment, and they own the little gold as a hedge in the same way Europeans have for years. Today, all of our attendees are asking themselves their question, reexamining their case for gold. Do you really think, in light of the present trends, that you could say for the long-term holding, would government paper money be a better long-term holding for gold? Certainly not. I mean, that's a whole different issue with the investment issue from the what is desirable as money. In my sense, I can't say I invest in a large trading gold, but my item into the source are gold coins of a certain number. I mean, everything should go wrong. That would be something. But that doesn't mean it's a good money because this is a long-term situation. It doesn't secure in the least that gold money will be stable in the short term. I think in the present situation it will be very unstable money. Particularly so because of the chance that the price of gold could go up dramatically in price or it could go or it could drop dramatically as it has in the last several months. Have you been reading about it and does the huge size of the U.S. budget deficit discourage you? I just read in today's Harold Tribune that the U.S. budget... I think this ever did. The U.S. budget deficit is going to be over $200 billion per fiscal 1983. There was an interesting... I don't know if you saw the little clipping on this, but President Reagan had a commission study the deficit problem, government debt problem, the grace commission it was called, and they came up with some pretty shocking predictions that the deficit could grow to $300-400 billion and even toward the end of the century over $1 trillion. What impact would this have on the U.S. dollar in foreign exchange markets and vis-à-vis other real... not other, but real goods and services down dramatically? Well, all the more need for your sound monetary reform. I don't believe that we should ever have good money again before we take the thing out of the hands of government because we can't take them violently out of the hands of the government. All we can do is, by some sly roundabout way, introduce something so you can't stop. What do you think is the major problem or major threat to western civilization on a very fundamental question? Is it... do you fear or do you think the main problem or threat to western free civilization is a third world war, a confrontation between the Soviet Union and the United States or the economic and political area? No, the main danger is pacifism. That the West may become so inferior in power that one Russian threat after another will force it to go into a direction which it doesn't want. I do not believe in the danger of an atomic war. At least I don't think we break out between the major powers. Whether if Mr. Gaddafi gets an atomic bomb for somebody, that might cause threat for the effects. But I think both sides are intelligent enough to use it as a threat but not actually to use it. In the end, I would say atomic war was not a war. It's the end of civilization. Nothing else. But the danger of Russia becoming so much stronger as by her friends forcing the West not only to make concession to her but modify its own system on the Russian side is a very, very serious one. I would rely on a maximum not on the expectation that I would use my arms but that's the only way to be able to say when the Russians demand something new. I don't think the Russians will be foolish enough to begin a war against the strong opponents. So you would favor the rearmament of the United States that Reagan has proposed and the deployment of cruise missiles in Europe, that type of thing? Certains of the far as I can judge the strategic importance my impression of this is absolutely essential. And I'm greatly alarmed particularly by the European pacifist movements. I believe you knew Lord John Maynard Keynes and actually taught with him at the same university, did you not? Well, I taught at his university while he was advising government. See, my London School of Economics was evacuated to Cambridge for the whole war period and Keynes got me rooms in his college. He was most of the time advising government so we met only occasionally on weekends. We are personally very good friends. You have not seen my hundreds birthday article in The Economist about him? I did see that and I was going to ask you about that. That was reprinted quite a lot and passed around in free market circles in the United States. That was very interesting. Do you think that many of his ideas were sound but yet they were misused because in his later years and I may be incorrect in this, I'm certainly not a scholar but in later years I believe he wrote about grave concern that some of his ideas that he had come up with were being misused by governments. Well, he had the illusion that a little inflation is good but much not. He was one of the cleverest men I knew but he was not a very competent economist at all. He had strong intuitions which sometimes were right and strong conviction that he could get over any theory which he invented to justify his particular recommendations. He was in a way a great man but I don't think he was a great economist. I think that maybe he was a great investor. I've heard that he was a very excellent investor from time to time. He had major losses but I read in an article the other day in recent papers that came out about him in the 1930s he made 60 times his money in the stock market. Well, after a qualified study and I can quote him literally he confessed to me when a speculative income went broke and it turned to commodities, not stock markets. I made, I think, half a million pounds then. That's fascinating. That was a tremendous amount of money. And it was the same amount for his college. That was a tremendous amount of money. And that's a million pounds in the pre-war pound values. I also read in this article that he was a contrarian in the sense that he would look and see what was the predominant opinion of all the establishment investment advisors and bankers and then go do the exact opposite. I didn't know this story but it sounds very much like... Professor Hayek, thank you. It's been a pleasure and an honor to be here at the University for this interview. I'd like to say to our audience today that Professor Hayek has had his famous book The Road to Serfdom translated into 15 languages and the latest one, believe it or not, and here it is right here, it's been translated into, of all things, Russian. So all we need to do is find a way to get several million of these into the Soviet Union and I think we'd be a lot better off. But I think that is fascinating and I think it's a real commentary on the importance of Professor Hayek's ideas to the future of Western civilization without a true understanding of freedom and how important non-intervention is and without a thorough understanding of Hayek's concept of spontaneous order as opposed to today's system where mankind seems destined to repeat the mistakes of the past and try to inflict an artificial socialist order on mankind. If that type of policies continue then we are in for some very, very bleep times indeed. But as we mentioned today in the interview there's some very encouraging signs and I would ask everybody here today to give serious consideration to donating some money each year. Some of your profits in your business and your investments each year to the spread of Professor Hayek's ideas and other free market economists' ideas at the various institutes in the United States and abroad. Thank you.