 We are talking monetary chaos today with Joe Salerno, Academic Vice President at the Ludwig von Mises Institute. Mises.org is the website, M-I-S-E-S.org. Joe's a professor at the Business School at Pace University. He's the editor of the Quarterly Journal of Austrian Economics, author of the book Money, Sound and Unsound. Starting on April 15th, he's going to be teaching a course at the Mises Academy called Understanding Monetary Chaos. The Mises Academy, you can get at academy.mises.org. And Joe's going to be teaching this course for six weeks and it looks so interesting with a bunch of really interesting topics. I thought I'd have him come on and give us a sneak preview of these items one at a time. So Joe Salerno, welcome to the program. This course looks like a lot of fun to me and it's on topics that are of importance to us all. Even the ones that seem perhaps more obscure than others are actually really quite important. So for example, you start off talking about what might seem to the average person to be a lot of inside baseball. Who was right about the 1920s? Were the 1920s an inflationary decade or not? Was Rothbard right to say they were? Was Friedman right to say they weren't? There's actually something very important that's embedded in this, but let's start off with that question. First of all, why does it matter whether or not the 1920s were inflationary or not? It matters because it's the explanation, or at least the Austrians believe that the inflationary 20s is the explanation for the Great Depression. The monitorists claim that there were errors caused by the Federal Reserve system in contracting the money supply in the early 1930s. That, in fact, was responsible for the length and the depth of the Great Depression. There was a garden variety as their story goes, recession, and the Fed made it worse. But the Austrians do believe that the Fed is the culprit in all of this, but we believe that it began much earlier. In fact, the Fed began inflating the money supply in 1921. Now, the monitorists, that is, Milton Friedman, the early Friedmanites, believe that prices didn't rise during the 1920s. How could it be an inflationary decade? Now that's a problem because just looking at consumer prices doesn't capture the full extent of inflation. In fact, we know that inflation has many different implications, ramifications in the economy. So what the Austrians look at, in addition to rising consumer prices, are what's happening to stock market, what's happening to the real estate market, what's happening to agricultural land. During the 1920s, we had big booms, and you might call them even bubbles, into the stock market and in real estate. In addition, we had an increase in the money supply. Now, the reason why it didn't show up in consumer prices, the Austrians argue, is the fact that there was such a huge increase through technological progress in the amount of goods and services that were being produced in the American economy. Radio came in, electricity, refrigeration, mass production of cars, and that kept prices down. So the natural tendency in the free market to keep prices falling all the time, unless that tendency is offset by an enormous expansion of the money supply which occurred in the 1920s. So are you saying that somebody like Friedman and the Chicago School in general would look at the 1920s, would look at trends in stock prices, and say there was nothing unsustainable about that? Yes, in fact, that's what they do say. They think that, they really can't explain these minor recessions, they just occur every once in a while. But the 1920s was a great decade, wholesale prices actually stayed pretty constant the whole time from 1921 to 1928, and they didn't think to do anything untoward going on with the economy. I wish I could remember the statistic, I've heard Jeff Herbner use it, in terms of the rise in stock prices in the 1920s as compared to the 20th century as a whole. And it's just multiples and multiples of times greater, so it would seem that there's something unusual, something off-trend going on in the 1920s. Now the Chicago people will say, as you say, that the Fed is to blame, but they'll say the Fed is to blame for inaction after the fact, that the Fed allegedly sat back, allowed the money supply to contract, which it could have prevented. It could have prevented the contraction of the money supply, and it could have stopped the failure of thousands of banks. That, they say, is what really made this stock market crash into the Great Depression. Yeah, that's the story that they give, and that's a narrative that has been accepted by everyone, including Ben Bernanke, for example. But the Austrians would point out, and Jeff Herbner has done some nice work on this, that in fact continually tried to reflate the money supply. But they were frustrated in this in the early 1930s by the fact that American citizens didn't trust the banks at that point. They were pulling out their checking account deposits, and banks themselves were worried that failure was looming on the horizon. So they were pulling in their loans and building up their reserves. So what we had was a year or two of falling prices. We did have some deflation. But the problem was that instead of allowing prices to fall naturally, and of course wages to fall, First President Hoover and then President Roosevelt took steps through either law or through moral persuasion to keep wages up. That is, they didn't allow wages to fall, which meant that profits disappeared to thin air. So firms began to hold cash instead of investing. So the lengths and the great depths of the Great Depression was caused by these government actions that interfered with the adjustment of the labor market. Well, if people want to get the standard Austrian take on the Great Depression, is there anything better than Rothbard's book America's Great Depression? Is that the definitive work? I would say that that is a definitive work on the Great Depression. There are many other works on myself that have defended Rothbard's work against a monetarist named Richard Timberlake. We're going to go over that in the course. We're going to go over his criticism of Rothbard and my defense of Rothbard. So I think that'll be very, very exciting. It'll bring in a lot of views that are held by Friedman, and it will counterpose them to the views held by Murray Rothbard. The next topic in your course has to do with deflation. Let's hold that off for a minute because we've covered that a little bit in the past on this program. And if we don't get to it, people can just go back and look at other episodes, although I'd love to talk to you about it because you have written so effectively on it. But I do want to talk about the so-called war on cash a little bit. Why is it that governments ideally would prefer a cashless society? Is it because cash is so anonymous and untrackable? That's one reason, and that's one of the two main reasons. Really, cash transactions are anonymous. There is no paper trail or electronic trail, and governments, because of the war on drugs, have increased their surveillance of citizens. So it's not just the war on drugs, it's not just money laundering, but they really do want to track every movement in our lives. And a perfect way to do that is to track someone's economic transactions. That tells you a tremendous amount about their activities. Now, the other reason I would think, because when you said there was only one reason, I thought, alright, what am I missing? It must have something to do with the fact that the ability to take cash out of the system in some way restricts banks' abilities to expand the money supply? You're absolutely right, Tom. In fact, what constrains banks from inflating, and the Fed itself from inflating too much, is the fear that at some point there'll be some sort of a financial crisis, as we saw in 2008, and people will then lose confidence in the banking system. They'll lose confidence that their cash that they had deposited is still in the banking system and can be withdrawn. So cash is the one thing that is the weak link in the banking system. That's something that allows people to control how much inflation can go on in the system. Even with federal deposit insurance on all deposits, you still have this leakage that is that people can just go to the bank, write a check, and take their money out of the bank, and the bank would lose reserves in that case. Then that would cause a failure of banks. When the bank has X amount of cash on hand, it tends to expand the money supply Y percent. But if it has, let's say, X minus 3 percent amount of cash on hand, it can only increase the money supply a correspondingly smaller amount. Would it be right to say a deflationary effect if we were all to suddenly demand cash out of the banks? Yes, absolutely. In fact, that happens during Christmas season. When people want small cash to make small transactions, they withdraw billions of dollars from their checking accounts or savings accounts, and that deflates the reserves that the banks have available to lend money. So they would have to contract their lending, but the Fed steps in at that point and injects billions into the banking system to offset the reserves that are being drained out by people simply going and taking money out of ATM machines or going to their banks and what's going on. And then at the end of the shopping season, the merchants will redeposit that cash, and the Fed will then drain the cash that they had injected earlier in the season out of the system. So yes, we have a very powerful effect as just everyday depositors on how much the banking system as a whole can deflate. Another one of your topics here is beware of false gold standards from Bretton Woods to the dollar bill standard. This is an important topic in part because there's so much confusion on this subject. For some reason, especially the LaRouche people are really bad when it comes to this. If some person utters the word gold, they immediately pounce and say, this person favors the gold standard. The president of the World Bank favors the gold standard. The chance that the president of the World Bank favors the gold standard is about the chance that I'm going to become the president of Zimbabwe next year. But they hear gold and they have no ability to make distinctions or have any subtlety whatsoever. And this is also true, I think, in the popular media. If a reporter hears the word gold, he jumps to gold standard. But as you say here, there are a lot of fake gold standards. I remember back in the 1980s even, early 1990s, Jack Kemp was talking about the gold standard, but it wasn't really a gold standard. I remember Murray Rothbard at the time or in the early 1990s saying, you have to ask, are there any gold coins involved circulating among the public? That's one way to know whether it's a real gold standard or not. That's correct. In fact, the gold standard has been blamed along with inaction of the Fed for the Great Depression. And so now, you know, it's been defamed. It's been defamed by Keynes the Barber's Relic. And as I said, recent economic historians have gone back and claimed that there were golden fedders on the government, which prevented them from reflating the money supply and putting things up right during the Great Depression. The gold standards that failed in the 1930s and then again in 1971 were not real genuine gold standards. Gold coins were not in circulation. In fact, in the latter period of the Bretton Wood system from 1946 to 1971, it was illegal for an American citizen to even own gold, let alone convert their dollars into gold. So there was really no gold in the system, at least at the level of the average individual or citizen. What happened was that the central banks, foreign central banks, foreign governments, they could exercise some discretion in taking gold out of U.S. And the U.S. was really the country that held the gold reserves for the world, especially in the Bretton Wood system. But these were not real gold standards, Tom. In fact, because foreign governments were willing to hold gold dollars, they never really exercised their rights to convert the dollar into gold until at the very end of France and a few other countries began to demand their gold because they didn't trust that the Federal Reserve would be able to convert their dollars into gold. Now, Joe, leaving aside the fact that a lot of Austrians these days would be inclined to say they want a complete separation of money and state, nevertheless, just for conceptual clarity, maybe you might describe for us what would an authentic gold standard look like so that we can tell it apart from the phony version. In the 19th century, the so-called classical gold standard was an authentic genuine gold standard. Even with central banks, there was what was called the golden handcuffs, if a central bank increased the reserves of the banking system by printing its own notes, then that would allow the bank system to stand their own deposits and so on. That would increase the money supply and that would drive up prices in that country. And when prices rose in that country, people began to purchase more imports from foreign countries and foreigners were discouraged from purchasing higher price goods from the country that was inflating. Now, foreigners did not want American dollars. You had to pay for that balance of payments, the deficit, by sending gold. And when old sorts of drain out of the country, that put a limit on how much the central bank could continue to inflate the money supply. In fact, at that point, they began to lose reserves and they became fearful that the public in the country would begin to pull out gold because of the gold that was leaving the country. So they were afraid of bank runs, sure. And then what that led to, of course, was them stopping the inflation and allowing prices to begin to fall in the country and then the gold would return as their exports would become more competitive, let's say, on foreign markets and their own citizens would buy fewer imports. So in other words, it was about payments at which gold flowed at limited inflation. Joe, let's turn to deflation after all. It never seems to go away as a subject of consternation, hand-ringing and panic. And you wrote an article for the Quarterly Journal of Austrian Economics that I think was very helpful in identifying different types of deflation, whether or not we should be concerned about it, and so on. And so I want to just hit on that. I want to first ask you why falling prices, if that's what we mean by deflation. If we're talking about price deflation, why falling prices are not such a bad thing? And then I want to follow that up with a couple of questions of my own. Yes. Well, falling prices, I mean, in everyday life, when people see prices of goods falling, for example, prices of HDTVs, which 10 years ago were $3,000 to $5,000, you can now get an HDTV for $500. I don't think anybody in their right mind would say that that's a bad thing. And it's also not a bad thing that, for example, when personal computers were first introduced in 1980, there were $20,000. And now you can get a personal computer with all the accessories for $500 or less. That's a good thing. That increases the purchasing power of our wages and salaries. So falling prices are good things. Falling prices naturally occur as a result of technological progress and saving and investment in a market economy. One of the claims is that it's hard for businesses to make a profit in a deflationary environment. They've already laid out money for the factors of production. They've already spent money on their production process. And now it turns out that the price that they're able to fetch for their finished product, because of deflation and falling prices, the price they can get for their product is lower than they anticipated. And this causes systematic losses. What's wrong with that thinking? The wrong, the finished wrong with that thinking is that when prices fall as a result of economic growth, supply and goods and services is increasing, why they're falling is precisely because businesses have implemented new technological methods that are lower-cost methods. So what when costs fall due to technological progress, businesses expand, new businesses come in because they all see these high profits. And as they increase supplies, prices fall to meet the falling costs. So the price, the profit margin, the difference between the price and the cost doesn't necessarily change. Otherwise, businesses aren't just interested in the price of their output, they're all interested in what's happening to costs. And during a period of progress, as in the 1920s and the 1990s and so on, we have falling costs as well as falling prices. So there is no worry. In fact, I remember statistics. In 1980, it was 500,000 personal computers produced and shipped. In 1999, after prices of personal computers had fallen by 90%, it was 4.5 million computers shipped, 10 times the amount. So the industry expanded tremendously in the face of these falling prices. Joe, what about the objection, though, that people who are in debt, which would be almost everybody, are hurt during deflation, because now they have to pay back those debts in dollars that are worth more than at the time they contracted the debt. Most people have grown accustomed to repaying debt in money with less than it was worth when they contracted the debt. Is there any reason to be concerned about this? Well, in the case of a growth deflation where deflation occurs as a result of an increase in goods and services, those people, the debtors, aren't really hurt because what's happening is their dollars are buying more goods and services. So they're paying the same proportion of their dollars that have higher value. They're left with the same proportion of dollars, and they have a higher value in the good that they can buy. So if all prices fall by 10%, yes, if they're paying a certain amount of money back, they're paying more real dollars. But they're left with the same proportion of their income, and that's buying more. So they're not being hurt. Now there are certain instances in which they could be hurt during a recession when prices fall, not because of technological improvement, but because of a collapse of the banking system or people holding more money. There can be injury to debtors. In that case though, they've gone into debt during an inflation thinking that they could profit from buying a house or something else and having the price go up and selling that thing. But they've speculated wrongly. So the prices have fallen, they were wrong in their anticipation of the future, and now they're paying for that. That's the way the market economy works. Your last topic of your course, because the course has the stuff about the 20s and the 30s, very important, deflation, cash, who or what caused the financial crisis and great recession, the false gold standard issue, and then world currency wars, who will win and who will lose. Can you just explain in layman's terms what a currency war is? Yeah, that's very straightforward. A currency war occurs when companies begin to competitively try to lower the value of their currencies so that they can sell more exports abroad. So the cheaper that your currency is, the easier it is for foreigners to purchase your goods. So the thinking is, if I can make my currency cheaper by inflating the money supply and causing the dollar, for example, the fall in value versus the euro or the end, foreigners will be able to take the same amount of euros and buy more things in the U.S. Because things in the U.S. will be cheaper. And when more things are purchased for export to foreign countries, that means we can put people back to work. So this is a Keynesian notion in the 1920s and 1930s. Other economists held it back then, and that was, look, we can get ahead of the curve by lowering the value of our currency. The only way to do that is inflate. But, of course, that then sets off a war. It's called a beggar-thy-neighbor policy. So you're trying to get ahead by increasing your exports and decreasing his exports. So by making your currency cheaper, people will buy more of your goods and less of his goods. He's not going to stand for that. He's going to come back and inflate his money to buy that is the country that you were at war with, economic war with. And in doing so, he's going to lower the value of his currency in relation to yours. So he's going to try to sell more exports. That is not going to work in the long run because each country is able to engage in that kind of activity, is able to engage in inflation that depreciates their currencies in relation to other currencies. So we had a drawing up of international trade and investment during the 1930s when these currency wars were rampant. And we're going back to that now. The US continually hectoring China to make their currency more expensive so that we can sell more goods to China and purchase fewer goods from China. On the subject of China, what do you say to people who say China is manipulating its currency and this is a bad thing and we've got to stop them from doing it and not operating in good faith in the economic sphere? Yeah, there's an easy answer to that. China may very well be manipulating their currency. Maybe the Chinese currency should be more valuable. That their goods shouldn't be cheaper. But in fact, they are. So let's look at it from the point of view of American citizens. Walmart is filled with Chinese goods. Part of the reason that it's filled with Chinese goods is precisely because they've deliberately undervalued their currency. Americans aren't being heard. American consumers aren't being heard. In fact, China is giving away part of its real income to the US. People that are really being heard are Chinese consumers. But yes, there are reasons for China to stop that, but they are not reasons that should concern the United States. Now, Joe, your course that's coming up on the 15th is taught by you primarily, but apparently you have a couple of guest lecturers. I think they're names that will be familiar to listeners of this program. Yes. One is a Mark Fortin who's done a lot of writing on business cycles and the connection between skyscrapers. That is the building of skyscrapers, believe it or not, is correlated with the onset of recessions. Mark will be teaching a course on the business cycle and on various indicators of when recessions will occur and so on. And Tom Di Lorenzo, who in his former life was a public choice economist, he's going to be talking about the myth of the Fed's independence. And in fact, if you look at it from the point of view of a public choice perspective, and by public choice, all I mean is using economics to analyze government actions as well as the actions in the private market. If you look at it from that point of view, the Fed has really never been independent of politics. In fact, it's a big player in politics. But Tom will give us a deep insight into this myth. Now Joe, I don't want to embarrass you, but I do want to tell people that you have been called the greatest living Austrian monetary economist. So what a wonderful opportunity people have to study with you in this six-week course beginning April 15th. You can check it out at academy.meses.org. I'm sure it'll be a lot of fun and very informative. Thanks for your time today. Thank you, Tom. My pleasure. All right, everybody, that's Joe Salerno of the Mises Institute. Thank you for listening to the Mises Academy podcast. To enroll in online courses, to access other episodes of this podcast, or for more information, visit academy.meses.org.