 This weekend, we're joined by Dr. David Howden, another great young and upcoming Austrian scholar. Dave is the chair of the economics department at St. Louis University in Madrid, and he's the editor of an important new book entitled The Fed at 100, a critical review of the Federal Reserve System. This book provides a purely Austrian critique of the Fed, and it's got an important chapter by David about the pre-fed banking history of America that had a huge effect on why the Fed came into being. We'll also discuss with David his book Deep Freeze about the Icelandic banking crisis in 2008. He'll tell us what lessons both Americans and Europeans might draw from this crisis, including how Iceland benefited by allowing some of its biggest banks to fail. Stay tuned. Ladies and gentlemen, welcome to Mises Weekends. I'm your host, Jeff Deist. We're very happy to be speaking this weekend with Dr. David Howden from Madrid. David, how are you today? Hey, I'm doing well. How are you doing? David, first off, let me congratulate you as co-editor of your new book, The Fed at 100. Your co-editor was, of course, our own, Dr. Joe Salerno. Tell us a little bit about what motivated you and Joe to produce this book. Yeah. Well, Joe and I got the idea about a year ago or a little bit over a year ago, and the motivation is it's the 100-year anniversary of the founding of the Federal Reserve. This is quite troubling for us, for many people, because it's put on a pedestal now even higher than it's ever been in the past. Joe and I and, of course, many other Austrians or every other Austrian out there and every other rational free thinker can't understand why this is so. We decided to enlist our fellow Austrians and we put together this little book, and the chapters in it all deal with problems, whether case studies of past crises that the Fed caused or that it worsened by its policies after the fact, or more standard theoretical issues with central banking and the Fed in particular. David, you have a great chapter in the book about the history of US banking prior to the Fed. I think there's a lot of ammunition in that chapter for us to explain the criticisms that Austrians sometimes get that business cycles and booms and busts occurred prior to the advent of central banking in the United States. Yeah. There's this idea that we had to create the Fed in 1914 to solve all these crises that were happening at the time. It's true that there was all these crises that were happening in the decades leading up to the creation of the Fed, but when you look back at the official record, they're not caused as a result of a free market in banking or a free market in money in general. They're really caused by all these interventions that the federal government had put in place and the state legislatures as well had put in place over the years. In my chapter, what I really try to do is take this notion that the Fed was created in 1914 and it came out of nowhere, that there was problems that needed to be solved. So Congress took it upon itself to create the Fed and that's really only half the story. The real story is that all of these problems in the banking sector had been stewing for decades and they were the result of interventions that the government had done into the banking industry in general and finally the problems got so bad that the only possible solution to them seemed to be the creation of a lender of last resort and the creation of a monopoly money supplier through the Federal Reserve. So the interesting thing when I go through this article is I trace back the history and that I show that the seeds were really sown back in the free banking era, which is a little bit strange to most people because the free banking era of course was a period where there was very little regulation on the banks and the states, but they were allowed to operate with fractional reserves and what I trace out is the history from there about how a typical Austrian business cycle resulted in the late fifties because of fractional reserves during the free banking era and this crisis at the end of the 1850s brought forth some interventions by the government that hampered and hamstrung the banking system a little bit, made it a little bit less free and that in turn caused more crises to stew and to occur later on in which caused more interventions and this whole process just continues for about for about 40 years until we get to 1914 and the solution to end all solutions, I suppose. David, it almost seems as though some people don't understand that monetary inflation, i.e. expansionary monetary policy, existed prior to central banking. Yeah, absolutely. There's a myth going around and Joe Salerno is so good on this. There is this myth going around that under the gold standard, we had a gold standard, which a lot of people equate as being no monetary policy whatsoever, no credit creation, no fractional reserves, things like that. But the truth of the matter is the gold standard that existed for much of history was not really the pure theoretical gold standard that we're looking at. It was more this one which did have low amounts of reserves, large amounts of fractional reserve note and deposit creation, a lot of federal interventions and state level interventions as well into the banking sector. So this whole, it's almost like this, it's almost like this straw man argument they put up that we had a free market and banking, it failed. Hence, we put in place the Federal Reserve to stop these failures from taking place. The reality is we had an almost free market and banking during the free banking period in the middle of the 19th century. It issued federal reserves, fractional reserves rather, and this caused crises to take place, which then resulted in more interventions at the end of the government that completely destroyed the banking system's ability to function in any rational way. David, you make another important point in this book about how so many economists, even ostensibly free market economists seem to have this tremendous blind spot when it comes to money. What is it about money that makes it so hard for so many people, including trained economists, to view it as a commodity? It's a funny question. Economists in general as a group are actually pretty free market oriented, if I could say so, with a couple people here and there that are not so much on side with free markets and with a couple maybe areas where they think that the government should be intervening, like national defense, for example. But then, despite all this, you get to money and it's their unanimous. Central banks are the only way to manage money. And part of it, I really think the problem is twofold. On the one hand, in the States now we've had a hundred years of central banking. In most countries, it's been even a little bit longer than that. I'm from Canada. It's been a little bit less than that. We got our central bank, the Bank of Canada in 1935. Now, what that leaves us with is basically every living economist today has never seen an example of a free market in money. All they've known is central bank orchestrated monetary policy. So it's very difficult for them to tangibly grab a hold of a banking system which never operated under a central bank and see that it can work. So that's the realist side of me wants to say it's just ignorance because we've never actually seen a free market in money. But more deeper than that, maybe in the economics profession, there's just all these assumptions when you get to money that are complete nonsense that make it appear as though it can only be controlled by the government or by a monopolist central bank. So for example, for most economists, it's almost unfathomable that you could have a money which was backed by a commodity or convertible into some type of physical good. It's almost accepted at face value that you have to have fiat money, paper money that has no backing to it whatsoever, no, no valuable commodity that it represents. And since it doesn't have to be backed by anything, the cost to produce it is effectively zero. So the standard line of argument says, well, if the marginal cost to produce fiat money is zero, competitive firms will just keep producing it without any limit and pretty soon you'll get a hyperinflation and in the destruction of your monetary system. So to stop this terrible outcome from happening, we need to put it monetary policy in the hands of a nonprofit motivated central bank and that will fix the problem. But it's like they address the wrong problem. They're well-intentioned given the assumptions that they make. They're trying to, I don't really hold it against most economists that they advocate the central bank for this reason. They're trying to stave off a hyperinflationary worst fate, which I can sympathize with. But where they make the mistake and where they don't realize it is this assumption that all money is fiat and that there could never be any alternative to this whatsoever, notwithstanding the historical examples that prove that there can be. David, in the introduction to your book, Hunter Lewis lays out some of the incredible failures of the Federal Reserve by any objective measurement. How is it that central banks managed to retain so much credibility among the economics mainstream? You know, there's a good chapter in the book by Doug French to address this. He calls it Arthur Burns. The PhD standard begins and the end of independence. And the way that the Fed deals with its failures in the past always seems to be, since it can't deliver the goods that it promises, monetary and financial stability, it appeals to different types of successes. So in Doug's article, he talks about how back in the fifties and sixties, the shift began to get practitioners from the financial world out of the Fed, people who actually understood how money works in the real world. And they started adopting PhD economists. And of course, now we've got to the point where the Federal Reserve is completely manned and womanned by PhD academic economists who don't have much experience with money in the real world. And every time a crisis happens now, and this one is a really good example, the Fed, when it fails, it's not a failure because of it. It's a failure because of what Congress allows it to do or the tools that it has available to it. So now the standard line, for example, you know, Ben Bernanke is good on this. Well, no, Ben Bernanke is not good on this, but this is Ben Bernanke's standard line. He is a researcher of the Great Depression and the Fed failed during the Great Depression, according to Ben. But the reason that it failed was that we had a poor understanding of what crises were, so the Fed was slow to act. But we fix that up because now we have academics running the show and they're more in tune with this. And when this crisis happened, the Fed needed to walk in and intervene quicker than it had in the past. So now we get these unorthodox or unorthodox monetary policies, like quantitative easing, for example, and they're put forward as a way to correct for its failures in the past. So every time it makes a mistake, it doesn't acknowledge the mistake. It just comes back with something even bigger and better in its own view so that that mistake never happens again. David, another criticism we often hear as Austrians is that we don't have a plan for an orderly transition to any kind of banking or monetary system outside of central banks. And I know that there's a chapter at the end of your new book that you co-wrote with Joe Salerno about a plan for a fedless future. And a couple of the ideas you throw out there are ideas that Ron Paul has even discussed on the campaign trail, which is the idea of abolishing legal tender laws and allowing some sort of parallel system to exist for a time. And also the idea of having the Fed cancel the US Treasury bonds that it holds on its balance sheet. So I was wondering if you could talk a little bit more about how some sort of orderly transition might take place in a way that doesn't cause huge shocks or dislocations in the economy. Yeah. Well, first of all, I'd actually just preface it by saying maintaining the system that we have now is much more confusing to understand than any shift to a free banking system would could be. So in that final chapter, what Joe and I talk about is part of it. We talk about the accounting fiction of the Federal Reserve's assets. The Fed holds primarily US Treasury bonds and bills. And it's really this accounting fiction. I mean, the Fed creates money. The Fed is essentially, I mean, in many senses of the word, although they never officially recognize this, it's a branch of the government. It's granted a monopoly right to issue money under by the Congress. And the Fed issues money and uses that money to buy US Treasury bills. Well, this is if you think about this accounting fiction, it's it's completely ridiculous that they do this. So Joe, and my suggestion is to just cancel out this debt. It's it's meaningless anyway. It's it's debt that the government issues and then buys for itself. It would be like you. It would be like you selling yourself a mortgage, which doesn't make any sense whatsoever. But somehow this this apparently makes sense when it comes to monetary policy. So the first step is you just get rid of this accounting fiction, which is highly confusing and irregular anyway. And that that would have no effect on the financial system whatsoever, because it's all it's all a superficial show. It doesn't have any any substance to it. The other thing that we talk about is that actually the banking system in America is is over reserved today. People talk about fractional reserves and we talk about reserve ratios. And the reality of the situation is that since the crisis, which broke out six years ago this month, banks have been holding more and more excess reserves. This is one of the effects of this unorthodox quantitative easing policy that the feds pursued. So banks actually have plenty of reserves right now. We could go back to a system where they back up deposits with 100 percent of reserves and it wouldn't disrupt the system in any way whatsoever. It wouldn't drain any credit from the system because they're already holding more than this. If anything, there would still be some credit available to be lent out to businesses even after we just increase the reserve ratio to 100 percent. So the move to a 100 percent reserve free banking system is actually more straightforward than anybody thinks. It's the system that we have now is the one which is confusing and nonsensical. And I don't know why economists can't see this. I don't know if they're just unaccepting of the notion that we could do this or how trouble free it would be. But if you just sit down and think about it, it doesn't take that much work to do. And I suppose the final thing that I'll say on it, just to give an example, historical example, we talk about ending legal tender laws and allowing competition and money. Now, you know, when the fall of the Berlin Wall happened, if you want to look at a good case study, go to East Germany. And all the cars were Lauders and Trevants and all of these Soviet block type cars. And they were absolutely terrible, right? Those are like those cars are like the Federal Reserve monetary policy. And all of a sudden they quit producing those cars. And Eastern Germans just went into the West and started buying good quality, competitive, Western made cars. And there was no disruption to automotive services. Nobody complained about this. So I don't know why there's this notion that all of a sudden if you get rid of the bad alternative, the bad money producer and let private competitors get in on the show, that it would be any different an outcome from that. You are the co-author along with Dr. Philip Bogus of a great book about the Icelandic crisis of 2008. And it's entitled Deep Freeze. Tell us a little bit about the conclusions that Austrians can draw from the example of Iceland. Yeah, sure. So just to give you a brief, you know, a primer on the on the actual crisis that it had, it was monetary policy gone berserk. So extreme, extreme levels of credit creation, extreme amounts of indebtedness. And in Iceland's case, a lot of that debt was taking on taken on in foreign currencies, in particular, seemingly strange and exotic currencies, at least by Icelandic standards like Japanese yen, Swiss francs and a lot of US dollars. So in 2008, the crisis happens and it unfolds more or less like it did everywhere else, except it was much more extreme up there. Now, the the Icelandic reaction to this was was a bit of a mixed bag, some things they did really, really well and some things they did not so bad, not so well. So the big thing that we focus on that they did really well was they actually allowed a good chunk of their three main banks and banking services were provided primarily or almost almost wholly by three banks in the country. They allowed a good portion of those banks to fail, not all of them, not all sections of the bank failed, but the big portions of them. And this was really quite a positive development because although it hurt people in the short run, I mean, nobody likes having their bank fail. It kept the the banking system and and also the government and by extension, then all of the taxpayers, because they're really the people who fund the government, it kept them from being on on the hook to continually bail out this banking system. So they save themselves from going into debt to save a banking system that really deserve to fail. So that's the first thing that they did really well. It caused a little bit of short term pain. Now, in the long term, things are quite a bit better. They've got a new banking system, which is emerging. It's quite a bit more rationally run. They've learned their lesson to some degree. They're not as keen to to take on debt. And banks aren't as keen to issue loans as they were in the first place. So now we've got a much more robust, sure footed banking system forming from the ashes of the old failed one, as opposed to the case you get in a lot of European countries and in the states where you had banks that were just precarious and and toxic all around and we'll go in, we'll bail them out, we'll save them. And now six years on, we've still got precarious, toxic banks, except they're even bigger than they used to be. So in Iceland, they avoided this problem completely, not completely, but much more than we we managed to in Europe and the states. David, speak a little bit about the role of deposit insurance in the Icelandic meltdown. Obviously, what I've learned from your book is that deposit insurance operates differently in Iceland than it does in the United States, for example. Yeah, sure. So one of the big ones when you go into your bank in the States and the first thing everybody notices is FDIC insured on the door. Banks love advertising this. So depositors love knowing that their deposits are insured. But who wouldn't really love having their deposits insured? It's a guarantee. The fact of the matter is, though, in the states, there's there's a couple of significant differences. So the first is there's a limit to how much money is actually insured. You can maybe correct me. I think it's 250,000 per per account now in the states is covered by insurance in Iceland. You were covered to an unlimited amount. So any any money in the bank is safe. In the states, you're only insured if your deposit is in US dollars, which works for most Americans because because of banking regulations. Almost all deposits are in US dollars anyway. In Iceland, they would insure your deposit no matter what currency it was in whatsoever, so you would you would hold a Swiss franc or a Japanese yen bank account, something of this nature. It could be for 10 million dollars, 50 million dollars. It wouldn't really matter. And if that bank failed, you were insured. And Philip and I, what we discussed is that these two factors together really removed any kind of prudence that depositors would have in regards to the amount of money that they kept in their account or that that banks banks as a result also were not as prudent with how they use the money entrusted to them. So to give you an example, most people in the states, I don't think if you've got 250,000 to leave in your account, you probably know that there's a limit of 250,000 and you probably don't exceed that limit. Or if you do, you put some thought into whether it's a good deal, right? Banks don't offer that great a return. And if it's a risky bank, you could stand to lose your whole deposit. So you you actually do put some thought into it. In Iceland, this wasn't the case at all. In fact, banks were offering pretty decent rates of return on deposit accounts. Depositors could park as much cash as they wanted in there and not worry about any losses. So it's almost like banks offered this. You know, they made an offer you just couldn't refuse. You were guaranteed that you would not lose a cent on it. But on the upside, you were going to gain any return that the bank offered you for any amount whatsoever that you deposited. So the the result of deposit insurance, these two peculiarities in Iceland, was that it just got much less oversight by the general deposit or public as to how banks were run. And it also ended up with banks with a lot more cash on deposit, relatively speaking, than we saw in in any other country. David, do you think the outcome in Iceland would have been very, very different if they had been a Eurozone country? Well, I don't really think so. And you can compare this, well, with any of the other problems that happened in the Eurozone. I mean, Ireland is Ireland is the good comparison country, right? It also had a huge banking sector with some really shaky real estate loans. And it entered into crisis at about the same time. And it's not like Ireland fared any better than Iceland. In fact, you know, after after the crisis happened, this would be about in 2009, there was a big movement in Iceland in some circles to join the Eurozone that the the idea was, you know, if we just adopt the Euro, we'll never have to face a crisis like this ever again. And I don't know, it seemed completely ridiculous to me that people would make such an argument because it was so apparent. I mean, especially in 2009 that the Eurozone was just a basket case all around, right? You had between Greece, Portugal, Ireland, Spain and Italy and whatever other country Cyprus that you want to throw into it. The Euro didn't stop any of this any of these banking problems from actually happening, and it sure didn't do all that much to fix it up after the fact. So this whole argument that a lot of people and mostly it was it was to be honest with you, either politicians who wanted to gain entry to the Eurozone or central bankers who wanted to maybe gain more clout by having an even more expansive monetary union, this whole idea that adding Iceland to the mix would have been net beneficial to them is is completely ridiculous and unfounded. David, before we wrap this up, I'd like to ask you one final question. Obviously, you are the chair of the Econ Department at St. Louis University in Madrid. We've got Mr. De Soto and Philip Bogus at Ray Juan Carlos, also in Spain. We've got Guido Hulsman at Angers in France. We've got Matt Mackay teaching in Poland, Matt McCaffrey in the UK at Manchester. Are you optimistic that we are beginning to see a nucleus of an European Austrian movement? I'm optimistic in the sense that I think many of my European colleagues are much more accepting of this than my American colleagues would be. For example, Europeans are much more in tune with the history of economic thought. So they know a little bit more about the Keynes-Huyck debate, for example, or the Marginalist Revolution than their American counterparts. So they understand a little bit about what Austrians are. They might not understand it all that well. In fact, that's almost certainly the case. But they do understand a little bit about it. I'm optimistic in the sense that I meet every month that goes by. I meet somebody new who is in Europe here and they're just they're an island in their university. And they're open to these ideas. In fact, just the other week I was at a last week, I was at a free banking conference up in Malmo, Sweden, which is just across the water from Copenhagen. And there was there was maybe two dozen or let's say two dozen European free banking economists at this conference. Now, they might not be necessarily Austrian, but they're not against it either. They're sympathetic, highly sympathetic even to a lot of the ideas. And they're willing to sit down and listen. In that sense, I'm pretty optimistic about the future. And I think there is a revival happening. But instead of it being in one place, you know, instead of there being a revival like in South Royalton 40 years ago, the revival is taking place one person at a time, scattered around in universities here and there. And I think part of what's driving it is websites like Mises Org where the information is available to people. And, you know, for for one professor or one, you know, one educated lay person sitting in their home and they want to get some some correct information, they can just log on and they can be part of an online community instead of back in the old days where you needed to have a physical nucleus forming. Dr. David Howden, thank you very much for your time and a fascinating interview. Ladies and gentlemen, have a great weekend.