Interview of Richard Ebeling By Anthony Wile at The Daily Bell
Anthony Wile: Congratulations on the publication of your new book, Monetary Central Planning and the State. Let's talk about that. Why did you decide to write this book?
Richard Ebeling: The themes in the book are ones that I have been interested in for decades. And I consider them crucial to the long-run stability, prosperity, and freedom of American and, indeed, global society.
Throughout the last hundred years the core issue that has confronted the world has been freedom versus tyranny. Shall governments be servants who protect and secure the rights of individuals to their life, liberty, and honestly acquired property, or shall governments be masters extending their controls, commands and prohibitions over more of human society with the individual an obedient sacrificial lamb meant to serve the interests of some political, social or economic collective?
For all of human history tyrants, dictators, kings and princes or democratic majorities have asserted and presumed the authority and power to make others obey them under the threat or use of force.
But through most of these hundreds, indeed, thousands of years the purpose was fairly straightforward: to make some the plundered slaves, serfs or subjects to provide those in power with wealth and social position.
This changed with the modern collectivisms – nationalism, socialism, and "democracy" – of the nineteenth and twentieth centuries. Now the goal of power was not simply to command and control for purpose of plunder. Another "vision" was added to this use of political power: to redesign, reconstruct and centrally plan the remaking of society and the human beings in it.
We see here the work and influence of another type of collectivist: the social engineer. It represents what the German free-market economist, Wilhelm Röpke, long ago referred to as "the hubris of the intellectual."
These are the ideological idea-makers, who arrogantly, if only implicitly, assert that they have the knowledge, wisdom and ability to make society and man over into a new type and form to reflect some idealized notion of how men and society should be reordered to have a "better world" fitting an imaginary conception of a heaven on earth.
The extreme forms over the last century have been Soviet communism, Italian fascism and German national socialism (Nazism). The ideal may have been a utopia designed for a "social class" (the "proletariat," as the Marxists envisaged) or the triumph of a militarily powerful nation-state (as Mussolini desired for Italy) or a "master race" cleansing and ruling over "inferior" groups (as Hitler wanted to achieve for his "chosen people," the Germans).
The premise remained the same within all these variations on the collectivist theme: the superiority of the group or collective to whose will and purpose the individual was to be made subservient.
The economic complement to political collectivism is economic collectivism. If society is to be redesigned and remade, there must be a "central plan" to which all in society are expected to conform for the "greater good" and betterment of the collective to which the individual is assigned membership.
All these extreme forms of collectivism imposed comprehensive government central planning on the economic activities of those reduced to being the expendable pawns on the societal chessboard under state control.
This planning ideal took on many forms, even in non-totalitarian societies with formally democratic political institutions. One of these has been monetary central planning, as manifested in the form of modern central banks.
In the nineteenth century, with the development of industrial societies, there periodically occurred the ups and downs of what came to be called the "business cycle" – inflationary booms followed by recessionary, and sometimes deflationary, busts.
There emerged the idea of economic and policy-making "experts" taking on oversight and/or control of the monetary and banking institutions of society and micro-managing money, interest rates and banking practices. The goal was to, if not eliminate, at least mitigate the frequency, amplitude and duration of the booms and busts of the business cycle.
But as with all other forms of implemented government central planning the outcome from monetary central planning through central banking has been a failure and has brought about the very booms and busts their proponents said would be reduced if not done away with.
What I attempt to do in Monetary Central Planning and the State is to question and challenge the theoretical premises and policy practices behind the monetary central planners in at least two of their leading forms in the twentieth century: Keynesianism and Monetarism.
And to show their weaknesses and short-comings in comparison to the alternative monetary and banking ideas and approach of the Austrian School of Economics, especially, though not exclusively, as found in the writings of Ludwig von Mises and Friedrich A. Hayek.
We have been going through another severe economic boom-bust cycle in the handful of years since the start of the twenty-first century. Once again, central banking has been the culprit behind rather than the cure for the business cycle.
If this is not to be repeated again and again for the remainder of our new century, then the premises and rationales for central banking must not only be challenged but a case must be made for a free enterprise alternative, a workable system of private, competitive free banking.
This the purpose of the second part of Monetary Central Planning and the State, in which I analyze and demonstrate the inherent and inescapable political and economic weakness of central banking and explain how a competitive free-banking system would operate much more effectively in serving the market demanders of monetary and banking services.
Anthony Wile: You worked with Jacob Hornberger, founder and president of The Future of Freedom Foundation, to publish the book. Tell our readers a little about Jacob Hornberger and the FFF.
Richard Ebeling: I first met Jacob Hornberger in the mid-1980s, shortly after I accepted a teaching position at the University of Dallas in Texas. Hornberger was a practicing lawyer at that time in Dallas and I was recommended to him to serve as a tutor to go through Ludwig von Mises's major work, Human Action.
I soon learned that our tutorial sessions, for which he was paying me a handsome fee, usually digressed into a discussion on more general libertarian and free-market themes. Plus, after our sessions Hornberger usually treated me to very nice lunches at local restaurants.
A couple of years later, Jacob accepted a position as program director at the Foundation for Economic Education (FEE) and moved to New York where FEE's headquarters was then located.
You cannot imagine how depressed I was when Hornberger left Dallas. As his "tutor" I was receiving good pay for very little work with a free lunch thrown in, as well. What a great deal – and it was gone, gone!
After a while Jacob decided to leave FEE to found and head his own free-market oriented organization, which he did with the establishment of the Future of Freedom Foundation (FFF) in 1989.
I served from 1989 to 2003 as the vice president for academic affairs at FFF. I stepped down at that time, and also left my full-time position as the Ludwig von Mises Professor of Economics at Hillsdale College in Michigan, when I was appointed president of the Foundation for Economic Education, an appointment I held from 2003 to 2008.
After accepting a new position at Northwood University in Midland, Michigan in 2009, I began writing again for FFF. And I continue to regularly contribute articles to FFF while in my new full-time position as the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina, a position I've held, now, since 2014.
The idea that Hornberger and I had for FFF starting in 1989 was to offer a classical liberal/libertarian perspective that would be as logically consistent and politically uncompromising as we could present it in defense of individual liberty, free markets, and constitutionally limited government. FFF has never wavered from that purpose and ideal.
That was also the idea behind FFF's monthly publication, Freedom Daily, which has been renamed, The Future of Freedom. My weekly column on political and economic policy issues appears on FFF's website, and I participate with Hornberger in FFF's weekly webinar, The Libertarian Angle.
Anthony Wile: Why did you decide to publish it as a digital book?
Richard Ebeling: The primary idea behind this decision is to make the volume available in an easily accessed and downloadable format – worldwide – that could be offered at a very low, reasonable price compared to the traditional printed and published book.
I have authored printed books before, Austrian Economics and the Political Economy of Freedom (Edward Elgar, 2003) and Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010). The publishers are professional and highly respected in academic circles. And I have nothing but praising and appreciative words for their quality of work in preparing and marketing my books.
But . . . both books were offered to the reading public at relatively high retail prices that made their availability to a wider audience rather restricted to the truly interested who could afford to buy them.
My hope and that of FFF is that in this digital format and with its low price tag, it may have the chance of reaching a much wider, interested audience, for anyone anywhere in the world who merely has to click the "mouse" on their computer or "swipe" their finger on their smartphone.
Anthony Wile: What's the response been like so far?
Richard Ebeling: It's been very gratifying. It is in its second week, now, at being in the top ten in one of Amazon's ranking categories, and among the top twenty in two other categories. I'm very pleased.
Anthony Wile: In Monetary Central Planning and the State, you explain the "Austrian" theory of money and the business cycle in contrast to both Keynesian economics and monetarism. Tell us a bit about how you've explained this in the book. How is it organized? And how does it differ from other books written about this topic?
Richard Ebeling: As I've mentioned already, the first part of Monetary Central Planning and the State explains the Austrian theory of money and the business cycle from Carl Menger (the founder of the Austrian School) to Ludwig von Mises and Friedrich A. Hayek, who developed it during the period between the two World Wars in the 1920s and 1930s. I show how the Austrians analyzed the causes behind and the cures for the Great Depression of the early 1930s.
I then turn to a through exposition and critical analysis of the ideas of John Maynard Keynes and his "new economics" that became Keynesian Economics. Many critics of Keynes focus on the misdirection of his policy prescriptions – government deficit spending, growth of government and so on.
All of these criticisms are relevant and rightly made. But what I offer – in a clear and readable style – is a detailed explanation of the unrealistic and upside-down premises and starting ideas that underlay the entire Keynesian edifice as found in Keynes's work, The General Theory of Employment, Interest, and Money (1936).
And why this artificial and economically fallacious framework not only was wrong about the causes of and cures for the Great Depression, but also misdirects any real and useful understanding of what is behind the boom and bust of the business cycle in general.
I also discuss Keynes's philosophical premises that are the underpinnings of his arrogant attitude and belief that "wise men" such as himself can claim to know enough to guide the monetary and fiscal affairs of a country, or assert their right to do so.
I then turn to the Chicago School and the Monetarist approach as especially developed by Milton Friedman. I want to make clear that Friedman was an especially often eloquent and persuasive advocate of the free market, in general.
But, in my view, on monetary matters Friedman's was only an alternative variation on the Keynesian-type macroeconomic theme. He believed for much of his professional career that rightly designed government monetary and fiscal policies could macro-manage the stability of a complex market economy. And I, again, try to explain the limits and shortcomings of his approach, as well.
The remainder of the book offers, again, a detailed critical analysis of the political and economic limits and unworkability of central banking, and the nature and workings of an alternative private, competitive free-banking system.
I explain the possibilities for a commodity-based free-banking system in the context of an analysis of the proposals for such a system as found in the writings of Ludwig von Mises, Friedrich A. Hayek, Murray N. Rothbard and the more recent free-banking proponents, Lawrence H. White, George Selgin and Kevin Dowd.
I conclude the volume with the outline of the types of changes and reforms that are necessary to move towards and bring about the establishment of a fully privatized and denationalized monetary and banking system separate and independent from the state.
Anthony Wile: Do people generally understand monetary inflation and the basics of how money operates, in your opinion?
Richard Ebeling: Unfortunately, too many people do not. First, as a number of economists have pointed out, through a linguistic sleight-of-hand, one of the effects of inflation is defined as inflation, itself.
For a long time economists defined "inflation" as an increase in the money supply in excess of any matching increase in the demand for money, resulting in a tendency for a general rise in the scale of prices in an economy.
But now "inflation" is often defined simply as that general rise in prices separate from any link to an increase in the money supply, which is the cause behind any observed increase in the scale of prices.
An "effect" without a "cause," the "grin" without the "cat."
Also, very few people have a reasonable understanding of the actual institutional manner and mechanism by which and through which the Federal Reserve – America's central bank – brings about an increase in the money supply and the amount of loanable funds in the banking system.
Yet, it is this mechanism of monetary expansion through the banking system by the Federal Reserve that is the institutional method through which the central bank sets in motion the process known as the boom-bust of the business cycle.
Anthony Wile: Do you note any differences in people's general understanding of how inflation comes about across various regions of the world, or does that hold true everywhere?
Richard Ebeling: This is not easy to answer. Central banks in different countries run by different rules and mechanisms that make the money creation process more or less transparent.
For instance, many years ago I taught in the Republic of Ireland for a while. At that time, if the Irish government was running a budget deficit, it merely sent a messenger over to the Irish Central Bank in Dublin with instructions to credit so many punts (the Irish currency) to the government's account, with the credit being made with new money out of thin air.
In the U.S. the Federal Reserve is restricted from directly buying U.S. Treasury securities. The Treasury first has to sell securities to fund the government's budget deficit to the "private sector" – individuals, banks and other financial institutions. Then the Federal Reserve can enter the "secondary market" for U.S. Treasuries that are being held by individuals or institutions and then purchase them there.
This indirection and how it leads to greater bank reserves, as the basis for greater bank lending, is less transparent and less understood by the average American.
But, in general, I would say that many people have a vague idea that printing money is linked to a resulting rise in prices. But few understand the actual, detailed process of how it generates, over time, a rise in prices.
Anthony Wile: Can you summarize the Austrian analysis of the business cycle for our readers?
Richard Ebeling: The Austrians emphasize that market interest rates are like prices in general. They are supposed to bring the two sides of the market into balance; in this case the willingness of some on the supply-side to lend their savings to others and those on the demand-side who wish to borrow that savings for various investment and other purposes.
The business cycle is set in motion when the central bank increases the money supply through the banking system as additional lending reserves. To attract additional borrowers to take these additional loanable funds off the market, banks lower their interest rates.
This "stimulates" additional investment borrowing and spending in excess of the real and actual amount of savings that income-earners in the society have chosen to set aside and not use for more immediate consumption demands and purchases.
Thus, an imbalance is brought about between the use of scarce resources, capital, and labor for immediate consumption production purposes versus longer-term investment projects that will not come to fruition until a more distant time in the future.
It is this inconsistency in demands for resource, capital and labor uses between more present rather than more future-oriented uses that sets the stage for an eventual "break" in the economy.
The downturn, the recession, phase of the business cycle follows the artificial investment boom fed by monetary expansion and manipulated interest rates. The recession is the period during which these mistakes are found out and a "rebalancing" of supply and demand must occur, and resources, capital and labor uses must be reshuffled among different uses and employments in the post-boom era.
The Austrians argue that if you don't want the "bust" you must avoid setting in motion the "boom." But if the boom occurs there is no way to avoid the bust, since the latter is the corrective stage during which the economy has to reorder itself into a more balanced pattern to assure longer-term stability and sustainable growth.
Anthony Wile: How did Keynes describe the business cycle?
Richard Ebeling: Keynes argued that the instability of markets in the form of booms and busts was caused by the "animal spirits" of businessmen and investors, by which he meant that businessmen and investors suffer from a sort of irrational herd instinct. Business enterprisers are susceptible to waves of "optimism" and "pessimism" that are greatly influenced by highly sensitive fears about an uncertain future.
Since the future is uncertain, every businessman and investor looks for comfort and confidence in what he thinks is common opinion among others in the market. Thus, if everyone else seems optimistic or pessimistic, then he better be, also.
This sets in motion the unpredictable and irrational fluctuations in investment activity that results in waves of rising and falling output and employment in general in the economy.
Why markets cannot be trusted to readily and reasonably adjust to restore balance and "full employment" has to do with other irrationalities on the part of workers concerning their wages, and by income-earners concerning their "psychological propensity" to spend certain amounts of whatever their income may be on consumption demand.
The economy gets stuck in a state of stagnant less-than-full employment and idle industry that can only be overcome by government undertaking an "activist" set of monetary and fiscal policies in the form of budget deficits, public works projects and artificial stimulus of business.
Anthony Wile: How about Friedman?
Richard Ebeling: Friedman's is also a "monetary" version of the business cycle, but in his case the focus is on unanticipated changes in the money supply. Like Keynes, Friedman's framework is a "macroeconomic" approach. That is, the impact that changes in the money supply may have on aggregate employment and output in general, and changes in the general average level of prices.
Introduce a steady and predictable rate of monetary expansion into the economy, and all market participants will adapt and adjust their wage, price and production decisions to this anticipated increase in the money supply and its matching general and predictable effect on the general price level.
Only unpredictable and erratic changes in the rate of monetary expansion are damaging in bringing about economy-wide and temporary fluctuations in aggregate employment and output.
Anthony Wile: How does Austrian economics suggest the business cycle be calmed?
Richard Ebeling: Now, in contrast to both the Keynesians and the Monetarists, the Austrians emphasize that any observed and measured fluctuations in aggregate or "total" employment and output in the economy is only the cumulative result of the microeconomic impact that changes in the money supply can bring about in the various and distinct sectors of the market.
This is what the Austrians mean by the "non-neutrality of money." Any and all changes in the money supply are introduced or "injected" at some particular point in the market. It may be new money spent directly by the government on, say, military expenditures, or welfare payments to "the poor," or increases in loanable reserves in the banking system.
The money enters the economy through some particular individuals' hands, who proceed to spend that new money in the particular ways that reflect their preferred uses and desires. This increases the demands for some products before others, tends to put upward pressure on some prices before others, stimulates profit opportunities for certain types of production activities before others.
The new money, now spent, passes into the hands of those who have satisfied the demands for the particular goods wanted by the first recipients of that newly created money. And the process continues through round after round of spending impacting on one group of demands and prices, and then another group of demands and prices, and then another and another . . . until all prices, wages, and productions in the market have been affected in the particular time-sequential manner in which the new money has worked its ways through the economy.
It is money's dynamic impact on the structures of relative prices and wages, on the relative profitability of produced different products and goods in and through time that represents the real substance of an inflationary monetary expansion, the cumulative result of which is, all other things the same, to bring about a general rise in the scale of prices.
The only way to prevent or diminish these consequences that, when the new money is injected through the banking system, generates the business cycle, is to refrain from monetary expansion on the part of a nation's central bank.
Anthony Wile: How about Keynes and Friedman? What do they suggest?
Richard Ebeling: Keynes considered a market economy inherently unstable due to those "animal spirits." There was no answer other than government having the needed and necessary discretionary monetary and fiscal policy power to constantly and continuously intervene into the economy to maintain full employment and normal industrial capacity use.
Friedman's answer was a steady and constant "monetary rule" of, say, an annual expansion of the money supply of three percent, with "automatic" fiscal stabilizers (government deficits and surpluses) to maintain a desired level of spending in the economy in the face of any business cycle-like fluctuations in employment and output.
I should point out, and I discuss in detail at one point in Monetary Central Planning and the State, that Friedman, in later life after winning the Nobel Prize in Economics in 1976, recanted his argument for a monetary "rule." He said that he had come to the conclusion that it will never be in the interest of politicians and bureaucrats to keep their hands off the handle of the monetary printing press to serve their own narrow short-run political interests.
And furthermore, Friedman stated that looking over the history of the twentieth century, all things considered, the costs and disadvantages of a gold standard would have been far less a price to incur than the all the costs and disruption that central bank-generated inflation and booms and busts had imposed on the American economy.
Anthony Wile: What does history tell us about these various theories? Which one seems to be the most convincing?
Richard Ebeling: Well, as I've just tried to summarize in my preceding answers, I think that the "Austrian" theory stands up far better than either the Keynesian or Monetarist theories in term of both logical persuasiveness and historical understanding of the causes and cures for experienced boom and bust cycles over the decades.
Anthony Wile: In the book's introduction you write:
Central banks around the world have all gravitated to the idea that the "ideal" rate of price inflation that assures economic stability and sustainability is around 2 percent a year. Fixated on averages and aggregates, the central bankers continue to give little or no attention to the really important influence their monetary policies have on economic affairs: the distortion of the structures of relative prices, profit margins, resource uses, and capital investments.
Is it possible to have a normal economy in a central bank era?
Richard Ebeling: If by a "normal economy" we mean one that is dynamically adaptable and adjustable to the inescapable changes that occur in social and market circumstances, but is fully free of the boom and bust cycle that is superimposed on the market due to central bank monetary policies, then I fear the answer to your question is, "No."
Central banking is a form of monetary central planning, as I said earlier. And the monetary central planners, in my view, can never determine the "optimal" quantity of money, the appropriate general value or purchasing power of money, or what the structure of interest rates to coordinate savings and investment should be better than allowing these things to be determined by the competitive free market, itself.
Anthony Wile: Has the U.S. economy ever recovered from the downturn of 2008-2009? Is the US in a recovery at the moment?
Richard Ebeling: The short answer is, "No, the U.S. economy has not fully recovered since 2008-2009." The appearance of "normalcy" in terms of the official government estimated level of unemployment is illusionary. The labor participation rate has fallen significantly since the downturn began in 2008; there are many people who have stopped looking for work but who would have been interested in a job if they could have found one earlier, and there are people who are working part-time rather than full-time because that's the only employment they've been able to find.
If you add in these groups to the official classification of being unemployed (out of a job and actively looking for work during the past four weeks), the unemployment rate is not the 5.1 percent touted by the government, but 10 percent. That is not a normal post-recession level of employment for any economy.
In addition, and again just using the government's own statistical benchmarks, the recovery in Gross Domestic Product (GDP) is lagging far behind previous post-recession periods. Annual rates of growth in GDP after previous recessions have often been in the range of four to even six percent for a period of time. During the entire period since 2009, GDP growth has barely been in the two to three percent range at an annual rate. This, too, is not a healthy return to a normal economy.
Anthony Wile: What caused that downturn? Bad regulation, as some have suggested – or reckless lending? Was it Wall Street's fault, as Ben Bernanke now seems to suggest? He states Wall Streeters should have been punished for reckless lending.
Richard Ebeling: In his recently released book, The Courage to Act, former Federal Reserve chairman, Ben Bernanke, insists that it was his hand at the throttle of the monetary and financial system that assured that America avoided another Great Depression of the type experienced in the early 1930s. And he further goes on to argue that more individuals in the financial sector should have been held criminally accountable for actions that caused or exacerbated the intensity of the downturn.
With all due respect for a fellow economist, in my humble opinion, the responsibility for a great deal of the unsustainable boom of 2003-2008, and then the financial crisis and economy-wide recession that followed in 2008-2009, as well as the far below par recovery since then, may be laid at the door of one man: Ben Bernanke.
If anyone should be in the dock of public opinion and held accountable for what the U.S economy and the American citizenry have experienced during the first decade and half of the twenty-first century it is Ben Bernanke.
Not that all the guilt is singularly on his shoulders. The boom began around 2003 when Alan Greenspan was Fed chairman, and Bernanke was vice-chair of the Federal Reserve.
Fearful of an imagined danger of "deflation," Greenspan and Bernanke directed a huge monetary expansion of about fifty percent between 2003 and 2008. When Bernanke became Fed chairman in 2006 following Greenspan's stepping down, responsibility, then, fell basically on his own shoulders for what followed.
Not only had there been a huge run-up in the stock market that was fed by the Federal Reserve's easy money policy, but it also stimulated "bubbles" in the investment sectors and the housing markets.
Now, in fairness, while Bernanke's monetary policy provided the monetary wherewithal to feed the boom, it was intensified in the housing market because of the loan subsidies and guarantees for the issuance of mortgage loans by the federal government agencies, Fannie Mae and Freddie Mac.
Since the investment, housing and consumer credit bubbles of the boom burst in 2008-2009 the Federal Reserve has continued with its monetary mischief.
Interest rates have been kept at nearly zero for much of this time, and when adjusted for price inflation (as measured by the Consumer Price Index), certain key real interest rates have been negative for this entire period.
The financial markets have been functioning for over six years without anything near a market-based price system in the form of an interest rate structure reflecting, as I said earlier, the real supply of savings (and the real resources that savings is meant to represent) and the actual market-based investment demands for that use of those saved resources, capital and labor.
Federal Reserve interest rate policy has worked like a price control that keeps the price of a good below its market-established level, resulting in a demand out of balance with available supply. That is precisely what Bernanke's (and now Janet Yellen's) zero interest rates policy has done in the financial markets.
As the Austrian economist, Ludwig von Mises, once entitled one of his books criticizing socialism, this has brought about "planned chaos" in the financial and investment markets, in my view. If this analysis and interpretation is correct, I don't see how we can avoid another financial and economic crisis down the road when it is once more discovered that the economy is out of balance due to misdirected investment and resource use decision-making once again caused by monetary and interest rate manipulation.
Anthony Wile: Can regulation ameliorate the business cycle?
Richard Ebeling: Contrary to the left-of-center criticisms of the financial markets being too unregulated and that therefore we have suffered from the consequences of a wild "free market," the financial and banking sectors are among the most heavily regulated markets in America.
Rather than too little regulation, the banking sector suffers from too much heavy-handed government regulation and control. Beside any of the other reasons why this has been detrimental to the health and prosperity of the economy, the close relationship between banking and government precisely due to the federal government's regulatory process has resulted in a corrupted and corrupting connection between bankers, politicians and regulators.
Plunder, fraud and abuse in too much that goes on in the financial sector is due to the fact that it has a "partner in crime" – the federal government – that makes it possible and mutually beneficial for both at the expense of numerous others in society.
Anthony Wile: How important do you feel it is for people to obtain "lifestyle insurance," that is, to secure secondary residence options outside one's home country and/or outside of the general economy? Would you agree that just as gold and silver can provide portfolio insurance it is equally important for people with means to consider lifestyle insurance?
Richard Ebeling: it is always useful to have a safe shelter to repair to under the threat or reality of a severe storm. That a record number of Americans have renounced their U.S. citizenship in recent years and taken up permanent residency under other political jurisdictions shows that there is a growing concern about how stable, secure and safe it is to live, work and preserve one's wealth within the borders of the United States.
A home away from home can be useful and desirable during troubling and uncertain economic times due to the actions of Uncle Sam.
Anthony Wile: Let's talk about money. What is it?
Richard Ebeling: Money is simply the medium of exchange that efficiently and effectively facilitates transactions in an increasingly complex system of division of labor in what is now, increasingly, a global economy.
It is useful to remember and keep in mind that originally money was not the creation or the creature of the state, that is, the political authority. Money emerged out of the search by market participants, themselves, to find ways to overcome the difficulties of barter exchange – that is, the direct trading of goods one for another.
Historically, the market participants found gold and silver to be the most useful to serve as media of exchange over a long period of time. They did not need government to tell them what to use as money or for what purposes.
Money emerged as one of those "spontaneous" institutions resulting from multitudes of human interactions without anyone intentionally planning, designing or guiding the process. In this, the emergence and use of a commodity as money is similar to other spontaneously generated human institutions such as language, custom, tradition, manners, etiquette, morals and ethics and much of the system of law.
It has been the intervention of government in monetary and banking matters that has introduced the instabilities and disruptions experienced in the forms of booms and busts, and inflations and depressions.
Anthony Wile: Many in the free-market community believe that money is anything a group decides to accept. What's your take?
Richard Ebeling: We need to be careful in how we use the phrase, "anything a group decides to accept." As I just explained, money in the historical forms of gold and silver emerged out of the interactions of multitudes of market participants over various periods of time.
But there was no organized version of a town meeting where everyone got up, said their piece, and then voted to implement gold or silver as money. But if we mean this in the way I've just expressed the process, then it is true that anything that a group of people find useful and advantageous to use as a medium of exchange can, over time, become a consensus-based and institutionally reinforced (through continued practice and habit) money-good.
But historically the commodities that have emerged and persisted as market-selected media of exchange have tended to have a particular set of qualities, features and characteristics that have combined to make them most useful as the money-good.
Anthony Wile: If banks want to issue fiat currency is there something wrong with that so long as it is within a free-market context? We're speaking of free banking, obviously. What's your perspective?
Richard Ebeling: Again, historically, the commodities that have come to be used as money-goods originally had a non-monetary use that made them attractive and of value. That is, before they began to be used as money, these commodities had a demand and a market value or price.
This is what made them, at first, useful as a medium of exchange. If one had a quantity of it, there were others who would readily accept them in trade because of their qualities and uses for non-monetary purposes.
The money-use began as a secondary use piggybacking on that commodity's value and uses as an ordinary desired good in the market. Over time, the money-use became the primary or higher profile use, and its value and use as an ordinary commodity became the secondary one.
"Paper money" developed out of the use of money-substitutes; that is, people would deposit their gold and silver in depository facilities for safekeeping, facilities that in many instances evolved into our modern ideas of banks and financial institutions.
These depositories would issue claims or "notes" representing title to a sum of actual gold and silver commodity money left with that institution for safekeeping. If the depository institution developed brand-name recognition and respectability within a commercial community, these "notes" or claims to gold and silver were, themselves, accepted in transactions in lieu of the quantities of gold and silver they represented.
But the value and market acceptability and use of these money-substitutes were reflections of the value of the commodities they were claims against and the trustworthiness of the institutions issuing those claims or notes in the minds of other participants accepting them in trade.
Eventually, government not only took over the issuing of such money-substitutes through the institution of central banking, but ended any link between them and gold and silver in the form of legally binding convertibility and redemption of those notes for actual gold and silver now concentrated in the hands of and controlled by those central banks.
At this point, the money-substitutes were converted into fiat money, that is, paper money no longer connected to an actual commodity. From that day, the value and acceptability of the fiat or paper money depended and depends solely on market participants' judgments and valuations on their usefulness and worth as a purely "paper" medium of exchange to continue to use in the market.
But the starting point for deciding on the usefulness and continuing value of such a fiat money was from the point just before when it was still formally linked to and redeemable in the commodity money and its market value and purchasing power over goods offered on the market.
After that point on, the value and use of the fiat currency each and every day was the determined by people's demand for it as money and its supply as influenced by the central bank's issuance of new and larger quantities.
If a private bank in a post-central banking world were to issue its own paper or fiat money the first questions would be: On what basis should potential bank customers want to hold and use this new paper money and on what basis should its value be estimated and determined in terms of its marketable usefulness as a medium of exchange?
Thus, it is most likely that any such bank would have to first link its new paper or fiat money to some already existing and used medium of exchange that would generate a basis and benchmark for a demand and value for it in people's minds.
And in this sense, this bank's paper money would have to start out implicitly as a money-substitute that could be evaluated in terms of and convertible into this other commodity or existing money with market value and exchange potential in the marketplace.
This is, for instance, how the euro was introduced. Its initial exchange value was linked to its convertibility rate into the previously existing national currencies – the German mark, the French franc, the Italian lira, etc. – which served as a basis for people to judge its worth over goods and services in the marketplace.
Since then, of course, its value has been based purely on the demand and supply of it in those parts of the European Union in which it is the official medium of exchange. In using this example, I wish to emphasize that I am not endorsing or approving the decision by EU governments to impose the introduction of a single legal currency in their countries. I'm merely using it to show how a new fiat or paper currency started with an initial value or purchasing power linked to an already existing medium of exchange.
Anthony Wile: What's going to happen next with the markets and money? Are we headed for a crash or can central banks sustain the current situation and even drive market averages up?
Richard Ebeling: From what I've said earlier, it is clear that the current situation is unsustainable, and will eventually become the basis for another economic downturn. But each historical episode has its own unique and distinct qualities and characteristics in terms of how it plays out, and that includes when and how the "break" will come that will turn the boom into the bust.
Anthony Wile: Is the Fed trapped? Are all banks increasingly trapped in the zero bound?
Richard Ebeling: Banks, many investors, and much of the housing market have once again, in my view, become "trapped," as you put it, in unsustainable, overextended and imbalanced patterns due to the monetary expansion and the false interest rate signals that have distorted market decision-making.
And, as I've said, it will result in a new economic downturn and recession.
Anthony Wile: The Western financial situation generally seems dire. How did it come to this? Didn't Keynes understand he was recommending solutions that would only aggravate what was already wrong with Western finance?
Richard Ebeling: In Monetary Central Planning and the State, I discuss not only Keynes's economics but his implicit philosophy of government, public policy and the role of elites in society, that is, people such as himself.
He believed that free-market capitalism was both unethical and unstable. He believed it was better to turn to a wise and intelligent government guided and managed by intellectuals like himself to keep society and civilization on a right path.
Keynes was a pragmatist in the sense that public policy should not be wedded and restricted to long-run oriented principles about markets and government. Policy was to be open and adaptive to ever-changing circumstances of new social and market conditions.
That was the implication when Keynes said, "In the long run we are all died." We live in the here and now, and governments and their policies should be focused on the problems of the short run. But as Ludwig von Mises said more than once, our problem is that we are living in and suffering from the long-run consequences of Keynes's short-run policies.
Keynes was also a very arrogant man, confident that he personally could turn around public opinion and government policy into any new direction that he considered better than the existing course.
Friedrich Hayek recalled his last meeting with Keynes before Keynes's death in 1946. Hayek asked him if he, Keynes, did not think that some of his followers were taking his ideas "too far." Keynes replied that Hayek needn't worry. If that happened he, Keynes, would soon turn around public opinion, and indicated it by a rapid twirling of his hand in the air. Hayek concluded the story by saying: And three months later Keynes was dead.
Anthony Wile: How about the monetarists with their steady-state central bank ideas. Don't they understand that when you interfere with the marketplace – and competitive money – you are creating a price fix and a market distortion? And that is never good.
Richard Ebeling: Milton Friedman was fond of sometimes saying that the reason Adam Smith advocated capitalism is that he did not trust capitalists. What he meant is that people – including businessmen – are easily tempted to turn to government to obtain favors, privileges, subsidies, monopolies and protections from competition that they could never acquire on an open, free market.
It is precisely because politicians, businesses and other special interest groups cannot be trusted with control or influence over the government that the institutions of the market and of government have to be constructed and enforced in such a way that there is, for all intents and purposes, a separation of the economy from the State.
Friedman was, in general, an eloquent, impressive and influential spokesman for free-market capitalism. No one can watch his appearances on various television talk shows and discussion groups when he was in his prime in the 1960s, 1970s and 1980s and not be impressed with the force and logic of his defenses of the market.
But he had a blind spot for much of his professional life as an economist, and that was about money and the desirable monetary institutional arrangements. Money was the exception that could not be left to the marketplace. It needed to be managed and controlled by central banks.
As I pointed out earlier, Friedman did not advocate monetary and fiscal policy discretion the way that the Keynesians did and still do. He wanted a simple "monetary rule" to restrain the issuance of more money in the economy over time.
As I also said, in his later years, in the 1980s, he had second thoughts about all of this. He became persuaded and convinced that politicians, central bankers and special interest groups would always be too tempted to turn the handle of the monetary printing press for their own short-run purposes.
But those who have followed Friedman in the case for "rules" rather than "discretion" still suffer from the same blind spot. They think that those in government or who want to influence and use government for their own special-interest purposes will abide by and follow any such monetary and fiscal rules.
So they propose certain interest rate rules for the Federal Reserve to follow, or for the Federal Reserve to "target" some macroeconomic magnitude such as Nominal Gross Domestic Product.
Not only are there theoretical and policy implementation problems with such rules or targets, they still suffer from the same shortcoming that Friedman finally admitted: It leaves the handle of the monopoly monetary printing press in the hands of those who are supposed to obey the rules meant to prevent their own misuse of political power.
Anthony Wile: Any other points you want to make?
Richard Ebeling: I would only add that the world has been slowly moving away from the idea and practice of direct government central planning after the disasters and corruption experienced and observed in Soviet-style socialist regimes in the twentieth century.
But one legacy of the central planning mindset that continues today is the belief in central banking. It is time to "give up the ghost" on monetary central planning, as well as all other variations on this collectivist theme.
My humble attempt in Monetary Central Planning and the State is to try to explain how and why central banking can never assure the stability and prosperity promised, while a real and fully implemented private competitive system of free banking most certainly would be far better in achieving these goals, as well as being more consistent with the establishment of a society of liberty.
The Austrian theory of money, banking and the business cycle assists us in having a better understanding and appreciation of why central banking is a failure and how free banking can succeed.
Anthony Wile: Thanks for speaking with us, and for your many weekly offerings at The Daily Bell that have informed so many readers. We truly appreciate your contribution to our understanding of these issues.
Richard Ebeling: Thank you. It has been a pleasure to participate in The Daily Bell's fine work in advancing the ideas of a free society.