{ "episodeId": "SLP51", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "dr_guido_h_lsmann": { "name": "Dr Guido Hülsmann", "role": "guest", "tag": "DR" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.67, "text": "Hi and welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Listen in as I interview some of the best and brightest. Today I have a truly special guest whom my Bitcoin Austrian listeners will greatly appreciate. He is Dr. Guido Hülsmann. Those of you who follow me on Twitter or are regular podcast listeners will know that I often refer to him His work, as he has been quite influential on my own understanding of monetary theory, and as I'm obviously a big fan of his, this was truly a special interview for me. Just some background for those of you not familiar with Dr. Hülsmann or his work. He is a professor of economics at the University of Angers in France, and he is a senior fellow of the Mises Institute. He is author of Mises: The Last Knight of Liberalism, and he is also the author of a phenomenal book, The Ethics of Money Production. In my view, he is one of the great Austrian monetary scholars of our time. Quick note, apologies about the audio not being ideal, I had to record this one through phone call as a backup option. I obviously wanted to make it easy for Dr. Hülsmann to participate and couldn't use my normal higher audio quality recording method, but I promise you the monetary economic discussion and insights are worth it. Dr. Hülsmann, thank you very much for coming on the show today. I'm a big fan of your work, and I've really been influenced very much so by your work in the ethics of money production, deflation and liberty, and the many talks that you've done, on, from the Mises Institute. so it's a great pleasure to welcome you today." }, { "speaker": "dr_guido_h_lsmann", "time": "01:44", "start": 103.71, "text": "Well, I'm happy to be on the show." }, { "speaker": "stephan", "time": "01:46", "start": 105.69, "text": "Thank you, Dr. Hülsmann. I think one, one topic that my listeners would love to hear you elaborate on, and one topic that I love the way you explain in your book, The Ethics of Money Production, is this process of monetary debasement and of how we have a certain quality in money and yet the operation of the market process becomes perverted and we, we see a deteriora-deterioration in the quality of money So could you outline a little bit for the listeners on that process and some of the monetary interventions that led to that?" }, { "speaker": "dr_guido_h_lsmann", "time": "02:21", "start": 141.44, "text": "the, the way quality is preserved on the market is through the competitive process So entrepreneurs have always the, the, the ambition to provide, better products to their, to their clients, because that's for them the, the way to stay in the market and to gain, gain market, shares. what we have in the c-case of money is monopolies, right? So we have public monopolies, and each, territory there's, there's only one, ma-type of money that is, tolerated by the law, And are promoted by the law in the form of legal tender laws, which is, which is typically the case in, in, in France and, and the US, right? If you look at US, banknotes, you have, the, the inscription, this note is legal tender for all debts Public and private, I don't know any Canadian dollars, though I've never had one in my hands, but I suppose you have something similar, written on them. So in that case, the Competitive process can't work or it's not allowed to work, and as a consequence, we get a deterioration of the quality of money. The whole point why, monopoly has been created is to allow the government to issue, sort of money that couldn't withstand the, competitive pressures of, of the market, right? And so in that sense, and this, the, this money is always inferior as compared to the kind of alternative money that, could be proposed if com- The competition were allowed." }, { "speaker": "dr_guido_h_lsmann", "time": "03:55", "start": 235.2, "text": "you see this very clearly if, if you, raise for yourself the question, I mean, if I had the free choice Between, let's say, American dollars or Australian dollars or whatever, and, commodity money or some other money that, the, the, the, the supply of which is limited for, for natural reasons, for example, because production costs are relatively high, well then of course you would, for, for your own, needs as, as the, as a user of my- And you would always opt for a sort of money that, provides these additional guarantees that its purchasing power won't disintegrate, anytime soon or very, very quickly. so you'd rather use gold coins, silver coins, you would use bank accounts that are denominated in gold, in silver and so on, you would use credit cards that are, denominated in silver and gold Gold and so on, rather than, a pure fiat money that has, the, the bigger disadvantages compared to commodity money, that its, supply isn't limited by any natural, limitation Right? So the only way, that the government can bring dollar notes, as, as fiat money, right, into circulation is by outlawing competition, and the consequence of this is, again, that the quality of money deteriorates" }, { "speaker": "stephan", "time": "05:15", "start": 315.27, "text": "Fantastic, Dr. Hülsmann, I also like the way that you outlined some of the different monetary interventions, and perhaps it might be useful to rank them or sort of order them because there are many different ones. So obviously the main one, you know, the, the existence of a central bank, the lender of last resort, and as you point out, legal tender laws, capital gains tax laws, implicit and explicit bailout guarantees for large banks. If you had to rank them in terms of what Which ones are most deleterious or most negative? How would you rank those interventions?" }, { "speaker": "dr_guido_h_lsmann", "time": "05:52", "start": 351.93, "text": "Well, the worst is probably a legal tender law, because the legal tender law, forces you, upon you a certain, priority or ranking of the different types of money. If you have, just a monopoly, of the state And, for the, the state's money somewhere, you're still free to, as, assess it, as, as you feel free, as you, as you see fit. For example, if you have a debt to pay, Let's say in, in, in euros, and the euro didn't, didn't have the legal tender standing, but only enjoyed a monopoly, then you would still be f- free to say, okay, this, the, this debt, that are contracted, whatever, a couple of years ago or so, well, we'll have to pay it now in more euros and/or in less euros, than the initial contract was contracted, but because it's legal tender, well, you are, it-- entitled as, as, a, a debtor to just pay exactly the amount that has been specified initially. Right, so, the monopoly and legal tender are ninety-eight percent, similar, but I, I still think the legal tender laws are a little bit more pernicious than the monopoly laws, and then all the rest is Is comparatively, secondary. Of course, what the government always, tries to do in the, in the ideal world, right? The government would have a fiat money, which, which they have today but they would also like to have a money without, that they can produce without any limitations. Now we're close to this, we're not quite there, right? Because there are a few limitations of the juridical-" }, { "speaker": "dr_guido_h_lsmann", "time": "07:30", "start": 449.95, "text": "And ideally also they would be able to use and to control all units that have been issued, in the past Which is also not the case. For example, if you think of the fact that we have, still a significant amount of money in the form of cash, so we have, bank notes, so these are in the pockets of, individuals or firms, they're not directly controlled by the government. In, in an, in a world that would be ideal from the government's point of view, they would be able to control all units that have been issued in the past. So, and that technically that could be done if all money existed only in the form of accounting money or scriptural money. So if all the money that existed were only on bank accounts, then It would be technically relatively easy for the government to crack down on each, individual account." }, { "speaker": "stephan", "time": "08:20", "start": 499.88, "text": "Fantastic. And Dr. Hülsmann, just wondering if you could comment on the operation also of capital gains tax laws. Perhaps these laws also stop private individuals from using other things as money because then they become ensnared within the net for taxation revenue." }, { "speaker": "dr_guido_h_lsmann", "time": "08:38", "start": 517.93, "text": "Yeah, that's correct. For example, let's say if, if you have, gold denominated accounts and, gold increases in value relative to your national, government money. So then that, that would, in most jurisdictions, this would be Represent, a capital gain, so you would have, w-would be taxed, right? And as a consequence, your incentive to hold that kind of money would diminish and your incentive to save, holdings in that, kind of money would, would be discouraged." }, { "speaker": "stephan", "time": "09:09", "start": 548.73, "text": "Right, right. And I think another concept that might be interesting to bring to this discussion around government monetary intervention is, so obviously there is the reserve requirement, so that is, you know, the typical explanation from looking at a textbook, but there is also the capital requirements that are in place. So for example, the Basel two and Basel three capital requirement rules. Could you comment a little bit on which reserve, which- requirement you believe actually constrains the banks, is it that they effectively go past, you know, it's not the reserve requirement that constrains them, but perhaps the capital ones?" }, { "speaker": "dr_guido_h_lsmann", "time": "09:50", "start": 590.18, "text": "It's, yeah, so there's the so-called liquidity, reserve and the capital reserve. So the liquidity reserve is the, the amount of money that you would have to hold in, in base money, so that would be the, the national fiat money, right? For the, for a bank, it would mean it would have, to hold a certain amount of, money on its account with the cen-central bank, right? To back up all the money that is, It creates in the, in the business with its own clients, right? So, let's say it creates, whatever a hundred billion dollars and the reserve requirement, in cash, right, the liquidity requirement would be two percent, then it would have to hold two, two billion in, in, in, on the account with, with the central bank. So that is then a limitation of the amount of money, that it could create, in the business with its own clients. The other, reserve is the capital reserve, so in that case, the government tells, you, you need to hold, so and so much, percent or you need to finance so and so much percent of all your," }, { "speaker": "dr_guido_h_lsmann", "time": "11:00", "start": 660.38, "text": "assets out of your own money, right? You can't fully finance everything by taking out credits with the central bank or with other market participants And otherwise, so that, the, the bank would, say, okay, all the money that I, I lend out, that I, so that I invest, I just," }, { "speaker": "dr_guido_h_lsmann", "time": "11:21", "start": 681.15, "text": "obtain this by creating money out of thin air, so you could just, have an indefinite amount of money just, by, created by a stroke of a pen And lend this out and earn interest on this, right? Or take out credits with, with the central bank and then hand them on to other market participants, which might be very interesting if- Interest rates are very low, right? So by, obliging the, the banks to hold a certain amount, or to finance a part of their investments, by their own money, by equity, they limit The, the amount of leverage that they, into which they can go. Now, without the limitation of the, of, of sort of course, you could imagine that any bank, right, could just have an un-virtually unlimited bank, balance sheet, right? It could just- create money out of thin air or take out, credits with the central bank at very low interest rates and then as, as soon as, as long as it finds customers who would be paying marginally more so that, let's say, the central bank, ends at one percent and it would find customers, who would be, be ready, to pay, two percent on, or three percent on a, on a, on a loan, right? The bank might, go on and on lending and lending, ever more, so there'll be no limitation of this sort in the business. Now, it's, it's, these, all these, capital requirements are somewhat artificial, if we compare them to, to any other business, right? We wouldn't ask of any other business that they respect liquidity See ratios or, capital ratios. And the, the reason we do this in the case of, of banks is, that, banks are, their existence is sort of saying guaranteed by the constant support coming from the central bank. And because the banks know this, well, they," }, { "speaker": "dr_guido_h_lsmann", "time": "13:19", "start": 799.48, "text": "they, they don't respect themselves those limitations as they would in other banks Let me, let me still put this in other words, right? if you, if you look at any other business, let's say a shoe business or you have a gardening company or, or whatever, really any other business. Entrepreneurs voluntarily, spontaneously, might have a certain amount of their assets in the form of cash, and so they, they don't need to be obliged by the law to do this And they finance their activity to a, quite large extent out of their own money, rather than just taking all, money out in, in the form of debt and then investing Why is this so? Well, because, liquidity and, capital, so equity capital, are the natural buffers in an economic system It's what keeps companies alive, what pro-pro-protects them. It's, it's a nat-uh, natural, safety valve, if you wish. if a company makes losses, well, the, the, the losses impair the ability of the company to pay back its debt. So this is why you have, equity, right? So it's the, the, the economic function of equity is to absorb the losses in bad, in bad years, and the economic function of liquidity is of- Cash on the bank or cash in your, cash drawer and, and, and so on, in your wallet is to, allow you to with, withstand unforeseen, payments that you have to make Right? There's, some, machine that has, fallen out of service, you need to buy a replacement machine and so on. You need to have, cash right away in order to, to make the stay, but also something else, right? so in most businesses and also in private life, right, you always, make sure that you have enough cash on hand and you, make sure that you aren't over-indebted because, this, increases the probability, actually, Makes quite sure that you will go out of business if any adverse circumstance arises. So the question then is, if a normal business operates, let's say, with five percent liquidity We've had some businesses with more than ten, fifteen percent liquidity and so on, and the, normal business would operate with, at least fifty percent equity, right? Small and medium-sized company, typically they have at least fifty percent equity, and even large companies, which is already a little different, but even large companies, industrial companies, they would have thirty, twenty, thirty 40% of equity. How come that a bank can operate with, just five percent of equity? And in, in 2007, most of them, most of the large banks actually operated only with one percent equity. Or, or, or two. Now, if you translate this into, into the terms that, that I just discussed, namely that," }, { "speaker": "dr_guido_h_lsmann", "time": "16:17", "start": 976.92, "text": "equity capital is some sort of a safety Buffer, right, that absorbs losses. If you have a two percent equity, financing, it means that actually your buffer, as compared to all of your investments, is only two percent That is, you are operating as a matter of fact on a two percent error margin. Now, Mr. Livera, this, this- A, a two percent error margin isn't not, normal, right? So this is, this is not human actually. It's not part of the human economy. No human being operates in, in practical life On a two percent error margin, it's just completely out of the question, right? So I mean, we have this kind of precision only in mathematical operations, purely intellectual games and, and so on. There we have, this kind of error margin. Engineering, right? So if we construct an environment and we have all the materials, we control all the factors, then we s- can sometimes bring it down to two percent error. But in business, this is completely out of the question because we are constantly interacting with- with, with people who make choices that we cannot control, so the amount of money that our customers will pay is, we cannot control this. then there are lots of things that, lots of- factors, lots of parameters that we cannot control, so lots of things that can go wrong, from the production side, supply lines, people fall ill There, there is a, a flu that affects half of your employees and, and so on. There are lots of things that, that happen in, in, in a firm's life that you can't control and which makes that, well, the error margin is actually rather in the area of, whatever, twenty, thirty percent, sometimes it's more. businesses, they're, they're more, they're very cyclical, so business might go down fifty percent, eighty percent in any one year, and it goes up, again and so on. So this, this is human, human business, and that's why most companies have very substantial equity buffers that allows them to get over tough times. So the question is How come that banks, right, that, after all are connected in many ways with the real economy, so are also exposed to, whatever adverse events might, that might affect the real economy, can afford to operate on one or two or maybe today? Let's say five percent, let's be generous, error margin. and the answer is, well, I mean, in really they can't, right? So they themselves aren't that good. I mean, they're very smart guys and so on, they have great diplomas, and they're very good in math. The world in which they're operating isn't a two percent or five percent error margin world. So the, this implies then, of course, that they're making losses somewhere. And somebody is paying for these losses, but it's, obviously not them, because they are staying in business and they don't have the means to stay in business out of their own, of their own money. So the, the short answer then is that they stay in business at these low, equity margins because they're constantly subsidized by the central bank out of the central, bank's printing press, which means, on the, the bottom line is that, ex- Actually, it's all the users of money that subsidize these, these commercial banks, because if the central bank opens, or, brings into motion the, the printing press, right? It creates money out of nothing in order to bail out commercial banks, well, it dilutes the purchasing power of each dollar, and, this, this is ultimately paid by all other people who use that money." }, { "speaker": "stephan", "time": "19:56", "start": 1195.97, "text": "Fantastic explanation, Dr. Hülsmann. I, I think essentially what you're getting at there is that these commercial banks in a fractional reserve banking fiat money system are able to benefit from the implicit sort of, bailout guarantee or the, that sort of, the kn- the knowledge that they will receive if they- They need it, that funding from the central bank that allows them to take kind of an unnecessary level of risk. Have I understood you correctly?" }, { "speaker": "dr_guido_h_lsmann", "time": "20:23", "start": 1223.3, "text": "Yeah, I mean, we, we shouldn't- stress too much the, the word unnecessary, right? I mean, given the, the institutional context in which they're operating, right? Given the presence of the central bank, I mean, what they're doing isn't unnecessary, it's, it's just great business for them, right? But it- They, they take on more risks than they, they would and than they could if the central bank weren't there. And right. So as a consequence, we get" }, { "speaker": "stephan", "time": "20:52", "start": 1251.75, "text": "Right, right. And I think that touches on the, the explanation you were discussing there, Dr. Hülsmann, was around how, you know, even small businesses in, you know, would have to hold-- Well, generally they hold a little bit more capital compared to banks, let's say. And one of the points that you make in your book is that- Essentially, the existence of fractional reserve banking changes the whole game, such that many businesses now go into debt, where in the past, or in a, under, you know, a non-fractional reserve banking fiat money system, they might have been more equity based. Can you comment a little bit on that?" }, { "speaker": "dr_guido_h_lsmann", "time": "21:31", "start": 1291.41, "text": "If, if you had a world without money creation or without artificial money creation, you would have just natural money production, right? You, you, let's say you had a, a world that was based on On precious metal money, so you have silver coins, gold coins, and then you have silver and gold based banking and so on, but which would be a hundred percent banking. So for each, ounce of gold credited on your account, there would be an ounce of gold somewhere in the vault of the banks. So in such a world, the, the money supply would be limited and money production would be constrained by, well, the natural production costs, right? And as a consequence, the, the, production of money would Usually lag behind, somewhat the production of all other goods, goods and, and services that are being created in the, in the economy. Now, and, that implies that in such a world, the, the price level would tend to be either stable or to shrink. Probably it would shrink Right? A natural, economy is an economy, which price deflationary tendencies would prevail. So this is a very important thing to, to realize. And actually, we have, such a world, during many decades of, of the nineteenth century and actually up to World War Two, right? During peacetimes We always had price deflationary, tendencies in, in the Western world. Now, in, in such a world, credit plays a very," }, { "speaker": "dr_guido_h_lsmann", "time": "23:03", "start": 1382.8, "text": "subordinate role, right? of course, you- There would be credit and, and so on, but, actually it would be very strongly discouraged. Clearly, I mean, for example, think of a household, right? You wouldn't buy a house by taking out a credit. let's say you buy the house today for a hundred, so you take out a credit for a hundred, and then, because of the price inflationary tendencies in, in- twenty years and thirty years, your house will be worth only what about ninety-five or, or ninety-seven, right? So you would actually lose money because you would have to pay back the hundred, but the, the house itself would be worth less than it was before. So you wouldn't finance the purchase of, of the house this way. What you would do is exactly what our ancestors did, that is our grandmother's, great-grandfathers and, and so on, right? They save Cash until they had enough of it, the, the, the hundred to buy the house, and that was it. It was an outright purchase, no credit involved. Now for firms, it's somewhat different companies, for companies, there are sometimes good business opportunities, so they might need some extra capital, and they wouldn't always want to take in another partner or, Increase the, the shareholder base and so on, so that would be the right occasion then to take out a credit. And so, if, the, the opportunity arises to take a- The credit, you make your, your investment. Now for a firm, I need to, to realize this right, for a firm, the, the diminishing price level in, in the national economy isn't a big thing because what counts for a firm isn't the price level, but the difference between its revenue and its cost, in other words, the difference between, selling prices and buying prices. All right? So if, there are price deflationary tendencies, well, then, the revenue of a firm might tend to diminish in the course of time, but, its cost base would also diminish So as a consequence, it might very well stay, profitable in a price deflationary environment, which was the case. So for such a firm, then if it takes out a credit, that might not be a big deal because it would still earn money thanks to the credit and then be able, well, to, to, to pay it back out of the profits and so on. So credit would play some role, but it would be a subordinate role. Things change completely once you have, money creation through fractional reserve banks. Right? Because then the principle of money creation is of course, based on, credit creation, right? Of the, the, the bank brings the new money into circulation by, granting additional credits, right? That, that's, that's what they do. So for this reason alone, then, the, the credit market, is artificial Boosted. And, things get even, worse once money creation is pushed to such a level that you have constantly rising, price inflation rates, right? So whereas in, let's say in the nineteenth century, we typically had declining price, levels for each year, whatever some price inflation, zero point five, one percent, maybe sometimes two percent, price inflation Now, after World War II, we suddenly had constantly rising price level. And if you have a constantly rising price level, then getting into debt to finance, your, purchases, make, make long, long-term investments When buying a house, extending, the size of your firm and so on, actually is very b- or becomes then very, interesting, right? Because, think again of a household, which is the situation that most p- people are, familiar with. If you buy a family home, in a, in a context of a rising price level, well, then you take out a hundred now and you have to pay back eventually the hundred But in the rising, if the price of is rising, then all, prices rise, then it's also the price of labor rises, that the household income is, susceptible to rise So, paying the debt out of a rising income is of course, very convenient. It becomes easier, right? The debt service becomes easier in the, in the course of time. So therefore households have an incentive to go into debt and buy the house, whereas they didn't have so in the, in the, in the nineteenth century, which is why today everybody takes out, a loan from the bank to purchase a house An apartment, a house, etcetera, and then pays it back because, if you have ten years, twenty years, thirty years to pay back your, your credit, well, then the sum that you have To pay back on a fixed interest, rate loan is always the same, whereas your, your revenue, continues to rise, so it's a good deal. So, and of course, the same thing holds true for, for governments and the same thing holds true for firms, right? So in a price inflationary environment, the environment in which we are today operating and have been operating for the past, two or three generations debt is actually, is the rational strategy, right? You don't just build up equity and then make a purchase, you buy first, financed by debt and eventually you pay back. So this is the, the, the really the, the, the reason why, the financial culture has changed so much within a century and is really due to completely monetary, causes" }, { "speaker": "stephan", "time": "28:32", "start": 1711.53, "text": "Fantastic explanation again, Dr. Hülsmann. A-and I think one, one concept from your book that came up as you were explaining that is some people might think, \"Oh, but in a world with less credit, how might all these projects get done?\" And I'll just quote from your book, one section you say is, \"Bank credit doesn't create resources, it channels existing resources into other businesses than those which would have used them if these credits hadn't existed.\" Could you just elaborate on some of the com- And miscon- like the, the confusion that can come and actually a better way to think through that?" }, { "speaker": "dr_guido_h_lsmann", "time": "29:06", "start": 1746.37, "text": "Yeah. If, if you, go to the bank and you take out a loan to buy the studio that you're interested in or the, the apartment or the house and so on, so it's, it's true then the, the loan allows you to own that," }, { "speaker": "dr_guido_h_lsmann", "time": "29:22", "start": 1761.92, "text": "that, that apartment or the, or that house, but of course- You, you buy only something that, the house that, that has existed independent of the credit, right? If you hadn't, which means that if you hadn't bought it Then it would have had some other owner. Either the, the person who sold it to you would, remain the owner because he, he doesn't find anybody else who's, who pays him. Enough, so he would just keep it for himself and f-for, for ever good reason, or somebody else would have obtained it and it would have bought it at a lower price, because you become the owner because thanks to the loan you are able to pay the highest price. That's the whole, point of, of, of the thing. And the same thing holds true for a firm, right? If, if you, thanks to a bank credit, you can hire additional people, you can, build a larger factory building, and so on, right? Then, What, what, what this means is that thanks to the additional credit, you come to possess all these resources, right? You are able to attract additional employees who would have worked Either for somebody else or who would have pursued their own interest at, at home would not have worked for anybody, would have just been a homemaker or, I don't know, would have pursued some other activity that, that would not have been paid You are able to, to buy additional raw materials, intermediate products in order to increase your production. You are able to, to, build a, a larger factory building. But of course, the same resources that you buy, the raw materials or the intermediate products, right? The, the oil, the, the, the electricity, whatever steel and so on that you transform, all of this would have been sold to somebody else, right? And also the, the fa- the materials that you use to, enlarge your factory building, right? The same materials could have been used for other building for, purposes And so on. So what, what credit does is not to enrich the economy as a whole, it channels the available resources into, employments that It would have not existed without, that, loan or without that credit, but of course, which precisely for, for the reason I'm not inherently some sort of superior Prior to those other re- employments to which they, would have been dedicated in the absence of the credit." }, { "speaker": "stephan", "time": "31:42", "start": 1902.1, "text": "Fantastic, it's such a clear explanation. Dr. Hülsmann, another topic I'd love to, for you to touch on, and now this is more for- Let's say people who are detractors of, say, Austrian economics, they might come out and say, \"Oh, look, you know,\" they might say things like, \"We gave up the gold standard because it didn't work,\" or that, \"You know, you guys are all crank conspiracy theorists, you oppose empirical testing.\" A, another common one, I think, is this idea that, \"Okay, so these Austrians, they are considering a totally free market when actually a truly free market, absent government monetary intervention, has never existed, right?\" Now, obviously- I understand some of this comes to, you know, the Austrian economic methodology where we must assess the seen versus the unseen. So what is the way to respond to people who, who give that challenge of saying, \"Well, look, a totally free market in money has never existed\"?" }, { "speaker": "dr_guido_h_lsmann", "time": "32:38", "start": 1958.45, "text": "let me first, make a little statement on, on general. I, I mean, I would say, I would always start off, saying that, of course, Austrians don't have a monopoly on the truth, right? So and Austrians might be wrong, okay? It's not because you, you, have read Mises and even studied Mises, Rothbard and, and Hayek and whoever, very thoroughly and then, Pursue your own research based on these rights and so on, that somehow you become error-prone, right? So this is or, or, or, or immune to errors, you become immune to errors. So this is of course not the case. So Austrians should take, criticism Sadly, because that's the, well, it's actually the only way to improve, right? And to always double-check, your premises, check the facts, and so on, this is the standard scientific procedure. and then of course there are, Better criticisms and, and worse criticisms, right? I mean, the, the arguments they say, well, Austrians are, are recommending, money competition, currency competition, whereas, such a situation has never existed. That's of course, that, that, that's a bad argument, right? I mean, if you said, you could have said the same thing as in the 19th century, there, there have been a couple of Countries, slavery already on the, on North American soil, and you could say, \"Well, I mean, you're recommending to free all the slaves,\" I mean, but we never had anything like a purely, free, s-society in which everybody was free to do whatever you wished and so on. so therefore, does this mean that we should rule this, this out? I mean, you- You see what I'm getting at? Yes. Not because something hasn't existed in the past that that per se a reason, to, to reject it. Of course, certain things haven't existed in the past because they are bad or because they're impossible, but clearly, currency competition isn't something that is, im-impossible. And if the Austrian arguments are worth anything, then clearly it's not all that So I would say on, on, on these grounds, yeah, I wouldn't, I wouldn't accept this kind of criticism." }, { "speaker": "stephan", "time": "34:36", "start": 2076.21, "text": "Right, right. And so then, how about in the case of, say, specifically the gold standard? so I understand, ob-obviously, as you ex-explain in your book, there was the classical gold standard. So this is like sort of 1870s through till I think kind of early 1900s. Now, obviously that w- that itself wasn't a, you know, free market in money, and yet- That was a time period where sort of most Austrians would say, \"Well, at least the money was, it was a little bit better than, it was better than before.\"" }, { "speaker": "dr_guido_h_lsmann", "time": "35:11", "start": 2111.24, "text": "Yeah, that's right, because, we, we still had a monetary system based on commodity money, and therefore you had the inherent break that comes from cost of production. Right, so in, in, in that respect, it was cer-certainly incomparably superior to the, the current system, right? The, the, the, the, the ironic thing is that precisely for the, for the reasons That are currently praised in the current, monetary system, namely that we have a money, a type of money that can be, multiplied at, at will. So it's a purely political question whether we, double the money supply or we increase it by five percent or whatever. precisely this is the, is the biggest- Disadvantage, right? But, okay, so at the time, right, we had the, this, still the advantage that we had a, commodity money system which was limited, was removed from pure human, human arbitrariness. So it was therefore part of the overall market economy in which all, productive activities are in competition with one another and related to one another in some ways. but of course, as you, as you mentioned, right, it was already a deterioration as compared to the previous, monetary system. be-before 1872, most of the world was actually on a silver standard And only, the UK and, Australia and, and the US, and the US only, not for a very long time, have been on a gold standard. Now, Silver, as compared to gold, has this big advantage that the purchasing power is, such that it can be used in most daily transactions, right, in most daily exchanges. So actually most of the, the silver that is being used for monetary purposes, that is for the purpose of being exchanged against other goods, is in the hands of the people And of, of, of really, of, of common people and so on. Now, if you have a gold money, this, this is no longer the case because gold coins have such a high purchasing power, not only today, but also, i-in those days, that you can actually use them in the exchanges only for very limited purposes. If you buy a house, you buy a nice suit, you- Buy some, some very con-expensive consumer items, or maybe if you have a very large, family, you can do, whatever the, the weekly groceries, with, with a gold coin, with a small gold coin. But for most other things, they're, they're completely useless. So the, the only way to use them is actually to have gold on your account, and then you, use, checks, or whatever banknotes, backed by gold and so on to, to, to make purchases. That is, having a gold money, quasi, automatically, boosts the importance of financial intermediaries You need banks, under, under a gold standard, whereas you don't need banks under a silver standard. And so even though, right, the, the gold standard period was incomparably superior in many respects to what we have today, it was already a deterioration as compared to the situation that we had before." }, { "speaker": "stephan", "time": "38:21", "start": 2301.44, "text": "Fantastic. And I think that also comes to this concept of divisibility as well. So in obviously the kind of like the, the amount of value to weight ratio of silver compared to gold, right, is kind of what was driving what you were explaining there. And so perhaps in, you know, the modern day, would there be an increasing- Tendency then towards one best overall money where we can have computers that can subdivide more finely?" }, { "speaker": "dr_guido_h_lsmann", "time": "38:50", "start": 2330.2, "text": "Yeah, of course. I mean, the, the, to the extent that w-we, we're u-we today we are used to using b-uh, accounts, right? Monetary accounts. So the, as soon as you have an account, then of course you're, you can subdivide very easily, right? and this is, for example, one, brings us to, to one argument that has been sometimes leveled against money, such as, as Bitcoin, right? Because people are saying, well, your Bitcoin suffers already from the problem that the, the quantity cannot be" }, { "speaker": "dr_guido_h_lsmann", "time": "39:22", "start": 2362.0, "text": "small units that you have to exchange, but that of course, per se is completely irrelevant, right? Because you can subdivide as you will up to the tenth or twentieth or hundredth, decimo after, after, after" }, { "speaker": "stephan", "time": "39:36", "start": 2375.51, "text": "Fantastic. Yeah, and I think it's, it's great, you bring that up because, one topic that comes up in online, you know, cryptocurrency discussion and some of us who believe that there is a tendency then towards one best money, and so I was curious to actually ask you that in your book, you, you are, you, you say, for there are good reasons to assume that a free si-- society would harbor a variety of different monies, which would all be natural monies in our sense. Do you? I guess my question then is, do you believe that was more for historical reasons and per- perhaps in an increasingly digital and internet commerce or e-commerce world, that there might be a tendency then towards one sort of best overall money?" }, { "speaker": "dr_guido_h_lsmann", "time": "40:19", "start": 2419.23, "text": "Yeah, I, I mean, my, my mind isn't fully," }, { "speaker": "dr_guido_h_lsmann", "time": "40:25", "start": 2425.28, "text": "I, I, I don't have come to a very firm conclusion as, as far as these things are concerned. I still, think that if, if we had a natural, economy in which, we had currency competition and so on, so in such an economy, the role of intermediaries of banks and so on wouldn't be as big as it is today No, how small would it be? I have no clue. So here we are, so I don't have a glass ball, I can't tell you this. I, all, all I know is that, because we have this monetary system which creates constantly money out of nothing, which creates price inflationary tendencies and so on, in such an environment, inter-intermediaries play a big role. So therefore, in such an environment, people use accounts and, and so on. I think they would less If, there were price deflationary tendencies, in that case, people would simply hold more of their media of exchange in cash. And in that case, I think, yeah, there would be, parallel holdings of, of gold and silver for certain things you would rather use gold, for example, if you travel abroad and so on, right? I mean, you, you jump into the plane, you, you wouldn't take, five kilos of, of silver with you, I mean, it's just ridiculous. So you would, but you might take a few gold coins with you. Right. So for such things, you would use gold. yeah, I think that, therefore that in such a, such a case, there would be a greater variety, of, of media of exchange, whereas in the current system it's- Too, there are very strong, unifying, tendencies, right? Because you have to go through an account anyway, or it's the most convenient way to go about this And then from that respect, then all monies are, compared to the same criteria, right? So there's only one dimension that comes into play, play and, so this might turn out to- To create one single, money that is, that dominates than, than all exchanges." }, { "speaker": "stephan", "time": "42:30", "start": 2550.1, "text": "Right, right, I see. And I think another point that, you know, I might like to get your comments on, Dr. Hülsmann, there's this book, The Economics and Ethics of Private Property by the great Hans-Hermann Hoppe, and one area that he points out is he, he actually s- he suggests that competition in monies is more like a system of partial barter, and that- Competitive monies aren't the outcome of free market actions, but are invariably the result of coercion of government-imposed obstacles placed in the path of rational economic conduct. Do you have any comments on that?" }, { "speaker": "dr_guido_h_lsmann", "time": "43:03", "start": 2583.0, "text": "I don't remember this, the special, the passage very well. So he says that if you have currency-- you have competition between monies, that that's the outgrowth of, government intervention. Is this" }, { "speaker": "stephan", "time": "43:13", "start": 2592.73, "text": "the point? Yes. So I think he's, he's trying to say that that's government-imposed obstacles that have been placed in-- I think perhaps he, You know, just gold standard or just gold use. I'm just curious if you, if you have any thoughts on that." }, { "speaker": "dr_guido_h_lsmann", "time": "43:28", "start": 2607.66, "text": "Yeah, yeah, well, Hopper, I know that, Han-- Yeah, yeah, Hans Hopper, and his, his general, argument is right that you have these cumu-cumulative effects that come, with," }, { "speaker": "dr_guido_h_lsmann", "time": "43:40", "start": 2620.0, "text": "The, the, the spreading of a, of a exchange network, right? Let's say if, if gold has, is being, used in a larger set of exchanges than, than silver, then of course, The, the, the opportunity cost of holding silver increases and the opportunity cost of holding gold, diminishes. So for, for, for this reason, right, there are, snowballing effects, so to say, right, that, that makes that once the money has become, even just slightly, more widespread in use than, some other money, that money will eventually come To steam, steamroll all other monies, so we'll crowd out all other monies out of, the market. and the argument we see is, is correct, but I, I don't think it applies in all cases, precisely because for certain exchanges you wouldn't use silver, right? Or you would, or excuse me, you wouldn't, yeah, you wouldn't use silver, and for other things you wouldn't, use, gold. The only exception being if anyway all exchanges are based on- On, purely, accounting exchanges, right? You have only scriptural money, only you have, wire from one, bank account to another. In that, case, yes, the- argument becomes, becomes relevant. Right. So I, I would agree with him, right, in the, in the, in the, in the price inflationary context, yeah, there are such tendencies, and the argument would all true, but, outside of that, not necessarily." }, { "speaker": "stephan", "time": "45:03", "start": 2703.1, "text": "Right, I see, I see. okay, so one topic that m-many of my listeners might be interested to hear your thoughts, obviously, this is a Bitcoin and Austrian economics sort of podcast, and one concept that we consider is just that perhaps gold has more of a centralizing tendency and that it's politically vulnerable and that in some ways Bitcoin can present a way that's more resistant to that government co-opting. Do you have any, thoughts on that?" }, { "speaker": "dr_guido_h_lsmann", "time": "45:35", "start": 2735.48, "text": "Yeah, I, I tend to agree with this argument, right? I mean, definitely gold is, is a very political, money as we see today, right? I mean, look who, who is holding the, the, the greatest, gold reserves in the world is not, well, I mean, of course, private players as well, but central banks have huge holdings, and, and central banks do everything to prevent that The gold ever be used as a medium of exchange, right? So they, they do precisely what sometimes critics of the free market say the capitalists would be doing, namely, they withhold all the good stuff from the market so that people are forced to use the bad That stuff. That's what they are doing. And it, it has always been this way and it will never change, right? So, gold is a very political metal, it's- A very political market, just as, for example, the oil market is, is also a very political, market. So you always have very large, government interventions, there. So you- Yeah. so you can sidestep this by decentralization, and b- and Bitcoin might, might be a, a way to- To, to bring this about, yeah. So because in Bitcoin per se, you have this, this decentralization, at least for the moment." }, { "speaker": "stephan", "time": "46:49", "start": 2808.61, "text": "Right, right. And one other concept that I think my listeners, you know, they, they definitely will want to hear the, your answer to this. So I, I'm not sure if you've read the book The Bitcoin Standard by Saf Dean Amos, and he, in, in that book, no, I didn't. Yeah. Oh, okay. well, I'll just outline the basics. One of the basic arguments" }, { "speaker": "stephan", "time": "47:11", "start": 2830.93, "text": "He, he, he suggests that Bitcoin may, from a stock to flow ratio point of view, actually because of the algorithm of Bitcoin versus gold, which the supply of which expands at roughly one and a half percent per year, one argument that safety advances in that book is that Bitcoin may, you know, decades from now, become even, quote unquote, harder than gold. And from that point of view, it, you know, let's- Let's say someday people go and find ways to go and do asteroid mining, and mine gold, but they'll never find a way to create more Bitcoin. So, do you have any comments on that sort of stock to flow ratio argument?" }, { "speaker": "dr_guido_h_lsmann", "time": "47:53", "start": 2873.19, "text": "Yeah, I mean, if the- again, I'm not an information scientist, right? So don't ask me about the solidity, viability of the, the Bitcoin code and, and, and so on. But if the code is, and does what it's been announced and what's been advertised, yeah, then indeed, right? That, that's, of course, Would be something that, that would put Bitcoin, on a superior competitive footing as compared to gold, because, right, the, you would expect that the purchasing power of gold decline relative to Bitcoin in the course of time, right? So definitely then Bitcoin would become, or is already now, right, the, the harder currency as compared to gold." }, { "speaker": "stephan", "time": "48:31", "start": 2910.71, "text": "Fantastic. Okay. Yeah. So, and then another concept that, I'd love to get your thoughts on is even within the cryptocurrency world, one- One concept that many, many of us who consider ourselves students of Austrian economics, we, we consider, you know, Karl Menger's The Origins of Money essay, and in that essay, he speaks about this concept of the most saleable good, you know, the one that has that best preserves your value at through time and space. And so I guess the question then is, would you believe that even within the cryptocurrency world, that there would be strong sort of network effects that would pull towards the one- Most saleable good, the one with the most liquidity?" }, { "speaker": "dr_guido_h_lsmann", "time": "49:14", "start": 2954.12, "text": "w-what do you mean within the Bitcoin world that is," }, { "speaker": "stephan", "time": "49:18", "start": 2957.7, "text": "Oh, I'm referring to how" }, { "speaker": "dr_guido_h_lsmann", "time": "49:19", "start": 2958.76, "text": "Bitcoin cash to Bitcoin and" }, { "speaker": "stephan", "time": "49:20", "start": 2960.26, "text": "yeah, to some of the other, you know, the other cryptocurrencies. Would you believe that there is a tendency then towards the most liquid one?" }, { "speaker": "dr_guido_h_lsmann", "time": "49:27", "start": 2967.47, "text": "Yeah, I mean, this is, this is the, the, the standard argument that, it's the same argument that we discussed before, right? We were talking about Hans Hoppe's ideas. Actually, it's not Hans Hoppe's argument, the argument is very old, right? So you, you find it also, for example, in Jevons and various other economists of the nineteenth century. yeah, the argument is of course valid per se, right? The, so the larger is the, is the exchange network that already exists, the greater are the comparative advantages of using that money, as compared to others that are used only in a smaller, framework." }, { "speaker": "stephan", "time": "50:00", "start": 2999.92, "text": "Right, right. Yeah, no, I think, yeah, that's a fantastic perspective. And look, I think we're just coming up to the end of the time we've got allocated. So Dr. Hülsmann, perhaps just if you've got any closing comments or perhaps if you Recommendation for my listeners who like Austrian economics and they like Austrian monetary theory, have you got any books that or, talks that you might recommend for them to listen to or read?" }, { "speaker": "dr_guido_h_lsmann", "time": "50:26", "start": 3025.54, "text": "I, I think it's always a, a good idea to read books, because that's a way of, really delving more deeply into a subject and really, building, your, your own thoughts. I mean, there's no better way really to learn anything but, to learn from the, the great masters that, that have been written, been writing in any, any field. So I would definitely always go via books, talks, okay, so I know today many people like, like to, to listen to to, to podcast and some people are listening to our podcast today, right? Yeah. and that's a, a great way to raise interest and to, convince you, yeah, it might be really worthwhile to look into this in more detail. So, but then reading books is always the, the, the next step and I think the most important step. Yeah. And then, well, as far as Austrian economics is concerned Austrians have, especially in the, in the, in the, in the field of money, they've made major contributions as compared to the classical economists, so of the nineteenth century. And here, I would always recommend, as, as a first, text A little book by Murray Rothbard that has the, the title What Has Government Done to Our Money? I don't like the, the, this kind of title, I must say. I, I recommend the book despite its title, not because of the title. The book is really, it's, it's an excellent int-introduction to, to monetary thought. And then there are various other books, have been written on the, on the subjects, that are very good, and also, longer articles, for example, Hans, Hopper's article, we mentioned him already, yes, sir, a, a longer piece, it's, it's around fifty page article, how is fiat money possible? A fantastic, piece of analysis, that gives you in a reasonable timeframe a good introduction to the, the main mechanisms that, that come, into play. then if you go further on, you might read Mises' theory of money and credit, you might have a look at my book that you were kind enough to mention, the, the ethics of money production. there are, other authors there, Hans Hanel, he was, a German, or, American economist who died in two thousand and seven, he had Project of Money. There's, Walter de Soto, Jesus, Walter de Soto, he's a Spanish economist, he has published a great text on, money, bank credit and economic cycles, which is available for free on the internet side of the Mises Institute. And, there is, a book of, by, Professor Philippe Bages from the University of Madrid in de-in defense of deflation, which is also a wonderful book, on this subject. And, yeah, there are various other, s- smaller texts and, that, that do not right away come to my mind, but you will have no difficulty finding." }, { "speaker": "stephan", "time": "53:16", "start": 3195.5, "text": "Fantastic. yeah, I've, I've read actually probably four or five of those, I love them. So thank you so much, for that. Dr. Hülsmann, I really appreciate, you taking the time to come and, teach us today. I think my listeners will really, really enjoy this, and I think, y Thought on, you know, learning more about Austrian economics. So thank you so much for all that you do, and look, thank you very much for coming on the show today." }, { "speaker": "dr_guido_h_lsmann", "time": "53:43", "start": 3222.97, "text": "You gave me the best comment, the best compliment that a professor can hope for. So thank you very much. It's been a pleasure, and, I wish, you all the best for, for your side and, and for educating, people on these very important topics." }, { "speaker": "stephan", "time": "53:58", "start": 3238.46, "text": "I hope you enjoyed the insights from Dr. Guido Hülsmann. Check the show notes in the RSS feed or on my website stephanlivera dot com for links to the recommended books and to Dr. Hülsmann's website. If you enjoyed the podcast, please remember that doing these podcasts takes me significant time in researching the guest's work, getting high quality guests on, and audio editing production time. So if you wanna help me out, please do retweet and share it around widely. That's it from me, thanks for listening, and see you next time." } ] }