Current Market Conditions: 28 Oct. 2008

0:00Dr. Selgin. How are you? Okay. It's good of you to call. Oh, you're most welcome. Have you been inundated with interviews? Well, I've had a fair number. I mean, certainly more than usual because there's been both the financial crisis and and there have been a few about it and the book publicity. So combined and coming at the same time I would say it's been a pretty unusual number. I just had one that I turned down from some TV station and wanted to interview me but they sent an email this morning which I only read half an hour ago about getting on the air at 6.30.

0:5330. I guess you never really expected that your book would also have a news hook, huh? Well this interview, honestly, Jeff, I'm not sure what it's about because all they said was it was a discussion of financial history, I think probably in connection with the crisis and talking about the Great Depression rather than anything to do with my book. I see. I've had two radio interviews about the book, one of which was kind of out of the blue, the one you got the link to. That is kind of surprising. It seemed like your interviewer had actually read your book in detail.

1:41He definitely had. He told me he had and not only that but I think he really meant it when he said he was surprised at finding himself kind of swept in by the subject that he expected to be considerably more dry. Right. So that was good. One thing you find as a reader is that the reader gets swept up in the same way that the The author of the book has swept up in it and that's really nice. I mean you do kind of catch some of that fire that you clearly had writing that thing. Yeah I think that's right. You sort of know it when something's exciting and of course convincing publishers or agents about a book like that, that's the hardest thing because you've got to convince them without them actually reading it.

2:41Right. And you're talking about ancient history and nobody needs the time. Yeah, big uphill struggle and all. But you guys, well you have really just helped me so much with the links you've made and the blurb and the republication of the ramble, which has gotten quite a lot of attention. And I've had at least a half dozen emails about it, plus the comments you have elicited on your site. Well, it's just not often a book like this comes along within the framework of the Austrian tradition. And I know you don't say, look, I'm an Austrian economist writing about the history of money.

3:27I mean, you just tell the story as an economist and a good storyteller would tell it. Nonetheless, it does have this penetrating effect on Austrian theory because you are talking about private coinage and the capacity of the market to deal with government failure. I don't think somebody who wasn't familiar with the Austrian research program, in particular Whether someone who had not come across Hayek's works on denationalization of money and Murray's works on what the proper role of government in money should be or rather there is no proper You know, apart from those two and an occasional reference to the topic in Mises, you won't find anyone giving you any reason to inquire about private coinage.

4:33And in fact, would you say that you're really the first one who's made the link between the market demand for money and the capacity of the market to produce money and this really existing history? Well, I can't claim that several people who studied, who wrote about private coinage before me and who I think were doing so with similar motives like Brian Summers, who wrote about the gold coinage in California for the Freeman years ago, and there's another fellow, oh I'm sorry to say, but his name is escaping me, but we just had an exchange of emails and he reminded me of his own articles, also on that subject, but covering some other episodes of Private Coinage as well.

5:26I'm embarrassed to say his name popped out of my head. So there have been a few other writings, mostly rather short. Nobody has really tried to look in great detail at any one episode. And I wouldn't have done it either except for the fact that I discovered how much material there was on this episode, that there was plenty for a book. Right. And what kept your interest alive? Well, let me ask you first of all, how long did you work on the book? I worked on it, I believe from 2000, certainly from the beginning of 2003. Let me say, no, 2000, must have been 2002 until about 2006 or early 2007. At that point, I was done with the writing of the book, the research and writing, but I also spent an exorbitant amount a lot of time trying to arrange a publication. First of all, to find a publisher and then to deal with the publication process. That takes a lot of time. It's one of the big

6:50differences between an article and a book and it's not just a matter of the greater length of the book. Things like getting illustrations together and an index and so on take a lot of time. There is a tremendous visual apparatus in the book that was a bit of a surprise to me. I couldn't believe how many wonderful, beautiful photographs there were and how much detail, and that was all you're doing too then? Yeah, actually gathering the images, getting permission, mocking up the plate arrangement was my work, although of course the final composition of the plates was done by UMP.

7:38But the funny thing is that, Jeff, you say you were surprised, I was surprised too to some extent. I was told I'd have a plate insert, but I swear my editor said it would be black and white. And it wasn't until I read your review of my book, which I hadn't set eyes on myself Then I learned that I had color plates and then I finally got a copy and I said, well, I sure do. What about that? Yeah. I don't know how they could afford to print that darn thing with full color photographs. I mean, it really, you're holding the book, you think this is a great value. Yeah. It's a pretty good deal, but I think the only reason that they could do it was because the The Mises Institute and some other groups had placed hefty pre-publication orders because otherwise this book would have been printed in a typical academic run of maybe 500 copies and it would have been sold even without the plates for anywhere from 75 to 150 bucks a

8:47Copy, and they would have been lucky at that to sell all 500. That's right. I mean, that's one of the great tragedies, and when we first talked about this book, I mean, I was overwhelmed with a sense of fear that the book would just end up in the stacks in state universities somewhere and not into the mainstream. So I'm just thrilled that the margins make it possible to sell it to real people. Yeah, exactly. Exactly, yes, which had been my concern all along because I knew that it was too good of a story to end up being treated just like a dry academic monograph. But it was a very, very tough thing to get that through and even with all the pre-publication sale arrangements. My sense is that Michigan was not taking any chances. They may have printed a few hundred more than those they expected to sell or were guaranteed to sell. They perhaps printed 4,000 of which close to 3,000 had been spoken for.

10:01Well, you remember that Mises almost didn't get his Human Action published. It took about a year and some desperate effort. So, you know, you're in good company. Yeah, I know I am. And I hear stories all the time. My brother is a writer and he certainly had to take his lumps. But part of the problem in academic publishing is that the university University Presses, which used to be the mainstay of this sort of publication process and which also used to be, you know, rather generously subsidized so that they could afford to publish quite a few books every year that they didn't expect to earn money on, sell them at prices that amounted to implicit subsidies. Well, that's almost completely a passe.

10:53University Presses now are no longer distinct from trade presses. They look to the bottom line for every title they publish and so monographs that used to be published by them and published at reasonable prices are now being rejected or published in very limited quantities. And if you can't get a book published by university press, then you have to go to so-called commercial academic press and then you really are looking at a tiny print run and an exorbitant price. Yeah. And the other option, of course, is the regular commercial press where you don't get to say what you want to say.

11:40You've got to appeal to the mass market. You do. And if it doesn't look popular enough, they're not going to touch it. Those presses are looking to be convinced that you can sell 10,000, even 5,000 might not impress them. And in the case of a book like this, you're talking about, well, if I sell 5,000, I'll be very pleased. I am, incidentally, I think I'm about halfway there, but it isn't a book that's going to, you know, it's not Harry Potter or anything like that, and it's got a defined audience.

12:28Fortunately, it's not so small because you've got the economics interest, you've got the libertarian interest, and you have the numismatic or coin collector interest. combined, those groups add up to a fair number of people, but they're all specific groups. And you've got the oddly fortuitous coincidence of the book coming out at a time when people see failures of money all around them. So here you have a case in history where the government had monopolized the mint and was not producing the kinds of coins that a rapidly changing economy needed, and so the private Market Swung into Action, is that the fair summary of the thesis? Yeah, the book is actually a little bit of a Trojan horse, and so to the extent that people see its relevance to the current financial crisis, that's a good thing.

13:26But I didn't try to make that too evident, I wanted the story to speak for itself. But the truth is that although it's a story about a particular episode, it goes to the so-called coinage prerogative. The coinage prerogative is this ancient notion, it's really ancient, it goes back to ancient times, that one of the things the king or the prince or the state has to have as a defining Finding power is the power to coin money, and that's the prerogative that's at the basis of the government control of money today. If you look in the Constitution for the Fed's authority to regulate the money supply, what you will find is that Congress has the power to coin money, that's it.

14:23So what the Fed is doing is in that clause and that clause is based on this ancient idea. So when you attack that idea by showing that governments in fact are less fit than private enterprise can be to coin money, you're really attacking the foundation for the modern apparatus of central monetary control. That's the lesson of the book or the moral, if you like, whereas the story has its own merit on its face. But there's a larger lesson that's implicit that I hope people will get. And it takes something of an intellectual leap to come to understand this, although once you do understand it, you wonder why it had never occurred to you that money is is after all a commodity in many respects like any other, capable of being regulated by the same rules of supply and demand and entrepreneurship and competition.

15:26I think you're right. I think it perhaps has been a mistake that economists interested in making this point haven't focused on coins earlier because it's harder to make people see the point with respect to Paper Money and especially digital entries, which is what a lot of money consists of today, where there's something more abstract about it and further removed from what we normally think of as productive enterprise. But a coin is a metal object that you make in a factory. Well, okay, wait a minute, factories, we know what those are. We know whether we make other metal objects in factories that are competitively run, what's going on here?

16:13I think rhetorically, or maybe I should say heuristically, it's easier to make people see the incongruity of governments being in charge of coining than it is to make the same case for paper money. So once you see it with respect to coins and have an example of private coinage to put forward to people, then to take the next step to talking about paper money and ultimately digital money, any kind of money, as something that could be a product of competitive markets is a little easier. One of the first objections that I think comes to mind is people are concerned about the quality of the money.

16:59Isn't that interesting that when it comes to private coinage, one of the first things that people think of is, well, how can we assure that it's real, that it's of good quality and yet if there's anything that's been a ghastly failure on the part of government monopolies, it's the quality of the money. Yeah, right. People who say that would hesitate to argue that if we had government monopoly producers of cars, which of course some countries did have not long ago, then we would see better quality cars as a result. Nobody believes that, of course, and the evidence is out that it's not true. But you're right, they tend to think that with coins, somehow having the government run the factory and not having anyone compete with the government running the factory is going to give you better coins.

17:57Well, whatever the implicit theory is that's driving this, it's probably just a simple knee-jerk appeal to what people think is Gresham's law. The facts speak otherwise. is in fact like cars. Coins are like cars. Now concerning Gresham's Law, you do have something of a theoretical clarification in the book about the application of Gresham's Law. Can you run over that real quickly? Yeah, so Gresham's Law is usually summarized as just a bad coin or bad money tends to to drive good money out of circulation. And that's fine as far as it goes, but if you look at the actual historical context for the recognition or discovery of this law, a law that was discovered in ancient times, it always is a context of a government monopoly of coinage, right, where some king or prince has decided we're going to put a little less gold or silver in our coins, we're going to come up with new coins that are worth less, they're debased, and we're going to tell the

19:16public that they have to accept them at the same official value as the old coins even though there's less metal in them. Well, when governments do that, the intended consequence of their actions is to get people will treat the new coins and the old coins as if they're all equal. The unintended consequence has always been for people to stop using the old heavier coins, the more intrinsically valuable ones, to hoard them, to melt them into silver or gold bullion, to export them, to do anything but trade with them at their face values because they can can use the lousy coins for that and command the same amount of goods and services.

20:03In the meantime, the sellers, of course, price goods in terms of the inferior coins, so you'd be crazy to use the better ones in trade. And so the bad money drives the good money out. So that's what happens, even though it's not what governments intend. If you don't have the clout of government forcing merchants to treat old and new coins as equal when they're offered new coins that are inferior, you don't get the Gresham's Law phenomenon. You get the opposite. You get good money driving up bad, which is what happens in the story in my book. More useful money by good money, more useful, more reliable? More reliable, more trustworthy, less likely to be fraudulent and so on.

20:56That's right. The good money in this case was not always made of the same material as the bad money. No, though it tended to be. So the coins in my story are mostly copper and silver. At first copper alone, then silver comes into the story. And the copper coins are pennies and happenies, whereas the official coins are mostly happenies and some farthings. So they're very similar. It happens that the private copper coins, at first at least, are actually heavier on average than the official coins that they replace, even when those are in good shape. But the real superiority is in the engraving, and it's superior not just because it's prettier, which it is, but because it's harder to fake those coins.

21:52And so if you have a commercial coin, you're more confident that it's legit and that the issuer will take it back, which they were willing to do, redeem them for gold and silver In today's context, can you imagine anything like a similar competitive money situation coming along? After all, we do have plenty of bad money floating around. Well, it's important to realize that most of the money we use is competitive and private.

22:42Every time you use a debit card or write a check, you're using private bank money, privately issued IOUs. Could you have coins supplied the same way? Sure, you could. In principle, the same banks that issue these paper and digital IOUs could issue the small denomination coins that we need for small change, like the Bank of England did during the episode my book describes and like so many other private firms did, not just banks. But I don't see banks getting into the business simply because the Mint is so keen on guarding its monopoly.

23:35After all, it's a powerful special interest group, and if other firms can issue their own change, there would be no business for the U.S. Mint. The U.S. Mint is already desperately churning out all kinds of kitschy collectible coins to try to make a profit, which government mints are very bad at, they tend to lose money. The last thing it's going to do is to give up its bread and butter coin business, including Now in the last several months, I'm sure you've heard about this, there seems to be a shortage It's similar, yeah, the U.S. Mint has really blown it on a number of occasions in producing collectible gold and silver coins, the only kinds of gold and silver coins it's in the the business of making today, of course, and yeah, they have shown themselves utterly incapable of gauging market demand.

25:16Now, in the case of these collectible coins, it's not so serious because the only people disappointed are collectors, although that's serious enough. But the point is the mint isn't any better at gauging demand for ordinary coins it makes for Average Citizens and when it screws that up and mints all around the world do it all the time. You get the same change shortages that Great Britain experienced in the 18th century. So mints really haven't gotten that much better. They suffer from the same inherent flaws of essentially central planning that their 18th Every counterpart suffered from the reason people don't suffer as much from it is simply that we have moved away considerably from reliance on coins to reliance upon other kinds of money and especially private forms where the supply is adequately governed by demand.

26:18What happened to the private men in Britain? They were forced out of business by so-called acts of suppression, first affecting those producing silver coins, which put them all out of business by, I believe, it's 1815. It may have been 1814, Jeff, I can't quite remember. And then those acts were followed up by acts of suppression dealing with copper coins. And I say plural acts in each case, because when the acts were first passed, it became obvious to all concerned that if they were allowed to take effect as planned, the government would be in no position to make up for the serious shortages of adequate change that would ensue.

27:07So in each case, they kept getting postponed. New acts had to be passed as the old ones were allowed to lapse. But when they did finally go through, the government still wasn't ready. So there were serious shortages and a lot of suffering resulted. Why did the government do this? It did it because it did not want to see its prerogative of coinage challenged. It didn't want to see it go on being challenged. As long as there were only private mints producing copper coins, the government turned a blind eye or put up with that copper coinage because for a number of reasons the royal mint was never that interested in copper coinage and it was never really part of the official coinage policies, believe it or not.

28:04Copper coinage was handled in what were essentially side contracts between the king and the mint, not official coinage contracts approved by the parliament. Anyway, when private producers started doing silver and then even gold coin in one case, the government said that's enough, this is our ancient prerogative and we're not going to suffer it being encroached upon anymore and then they cracked down on gold and silver and finally moved against copper coinage. It wasn't because these coins were no good. After all, they were better than nothing and nothing was exactly what the government was supplying at the time of the crackdown.

28:52It had all but ceased producing coins of denominations needed for smaller payments. No, they did it because of the symbolic threat and the threat to the special interests that were the so-called mint organization. So it wasn't really a revenue issue, there was no income tax? know and they didn't make any seniorage on the gold and silver coins, they did earn profits on the copper coinage, and that was of course why the moneyers were in favor of having their monopoly restored, but parliament didn't get much from the coinage at this time.

29:46So it's purely a status issue. It was a status issue. You had here these private agents chipping away at one of the defining functions of the state. It was as if the government said, wait a minute, you keep this sort of thing up, pretty soon you'll have the private sector managing courts or the police or defense. They saw this as a symbol of the crown and the state and its authority and did not want I want to put up with the implicit threat to sovereignty that private coinage posed. I think it really was, it boiled down to that because if they'd had the least, if concern to provide better money for the citizens had been what the government was about, then logically they would have put their own coinage system in order and then they would have phased out The private coins that were supplying a big chunk of the change needed for trade prior to this time, but the government showed that it was concerned with its own authority rather

31:04than with the well-being of the public by squelching private coinage, by stomping it out before it had even figured out what alternative money it was going to provide people with. It's remarkable to think about the times, and we had a time of tremendous economic change, dramatically new demands for new types of coinage, which gave rise to these private markets. You had the private markets outracing the government in providing for the needs of trade in this case. And, you know, I guess we've seen some of that in our own time. So technologically, I mean, no doubt the state would like to monopolize things like, you know, the internet or email or something like that, but you have the private markets just racing ahead and providing it in a way that the bureaucrats can't and won't.

31:56Right. And with coinage, on the other hand, the state got its grip on that industry very early in history and has kept it tight ever since. So the private market has hardly ever been able to assert itself when it came to coinage. That's why these instances where it managed to do so, where it was allowed to run free for a little while at least, are so important because they give us these natural experiments. We say, well, okay, what happens if government doesn't handle coinage and the market does?

32:46Is it really the case that you get inferior coin as the government authorities would have have it or does something different than that actually happen? Yeah, the whole episode was something like a revelation to me. I mean, it really was and I hope it comes that way to most readers, I suspect it will because it was totally news to me and I felt like I had known something about the history of the Industrial Revolution. Well, you know, Jeff, I think that it's really something I know that people who are familiar Here with Murray's writings and with Hayek's, many of them will say to themselves, yeah, yeah, I think private coinage could work. And they may believe it and they may have a rough idea of how it worked.

33:32But I agree with you, I think they ought to themselves to see how it really works. It turns out that even if what you find out reaffirms your prior beliefs, it's fascinating to see how the thing really happens. You need these episodes and real history to kind of put flesh on the bones of theory. I think that's absolutely true and I think ultimately it's true even for really making Having your own convictions well grounded. So you could have the theory absolutely right and it could be logically airtight and I think you can make a good logical case for the advantages of private coinage using just standard theory of industrial organization.

34:22But it doesn't quite drive things down firmly. Well, it must be tremendously satisfying to you to know that you've made a contribution that say 10, 20, 50 years, 100 years from now will still be a contribution. I mean, it's a timeless episode of history that you alone have brought out and you've done a work that wasn't just an article, you know, gathering a few scraps, but really what seems like the definitive thing Well, the archives are there and believe me, there's a lot more where the items I made use of came from, I certainly expect that if anyone else were to delve into them, there would be some revision of this record and that we could still learn a lot more about this episode.

35:35But what I would most like to see is people being inspired to look into other episodes of private coinage in history. There have been quite a few in American history, for example, there have been several other than the gold coinage in California, which I mentioned. But this topic needs more work because you never want to rely on one historical example to draw conclusions from. One can never feel perfectly confident that that experience provides an adequate foundation for drawing general conclusions about the advantages of private coinage.

36:21We need to study French cases, we need to study the American ones and episodes elsewhere in the world before we really can come up with a solid understanding of what the necessary and proper role of government versus the private sector is in this realm. Well, your tenacity and your humility are both an inspiration and I'm grateful to you for everything you've done. I know all economists and anybody concerned about sound money should feel similarly grateful and we'll keep pushing your book and I hope that it continues to be a success. I want to thank you for your time. I hope to talk about the credit crisis. Maybe we can do that some other time. For now, people can go to your wonderful talk that you gave at West Virginia University that is online, linked to on the blog, and see your thoughts on that, which were very, very interesting, almost as interesting as this great historical tale.

37:21Well, thanks, Jeff. I'm going to keep working on this credit crisis stuff. I need to catch up to the 21st century, so I've got a stack of papers in front of me here, and I hope to write something on it. Thank you very much, Professor Salerno. You're most welcome. Thank you for everything, Jeff.