Free Markets: An Interview with Joseph T. Salerno

0:00Welcome to Free Markets, I'm Mike Beitler, your host. I believe big government is the problem and a free market is the solution. I'm gonna jump right in here and introduce my special guest today. My guest today is Professor Joseph Salerno. Joe is a professor of economics at Pace University in New York, where he also serves as graduate program chair in the Department of Finance and Economics. Professor Salerno holds an M.A. and a Ph.D. from Rutgers University. Joe is a senior faculty member at the Mises Institute in Auburn, Alabama. Joe serves as editor of the Quarterly Journal of Austrian Economics. And like me, Joe is a fan of Ayn Rand. He discovered her book Atlas Shrugged while still in high school. Joe, welcome to the show.

0:55Thanks Mike, it's great to be here. It's a real pleasure to have you. Joe, I wanted to start off by asking you, as you know I missed the Austrian Scholars Conference this year, I'm going to make sure I get there next year, but how did the conference go this year? Oh, it went very well. We had over 250 attendees. We had between 30 and 35 panels and sessions in which people presented papers and talked about current issues. And we had many, maybe 70 students or so that came and viewed the event. That's exciting. So it's growing. The interest is growing. Absolutely. It's very good to see the young people becoming more interested in this.

1:41Oh, it really is, because we as the baby boomers are burdening them with all kinds of things they're going to have to deal with, and hopefully from an Austrian perspective. I was going to ask you, Joe, I should probably tell my listeners too, a lot of your work, Joe, as far as audios and videos are on Mises.org, and that's where I'm going to pull several of these questions from today. Okay. Joe, you said on there, and you've actually written about this too, and I think this is a fascinating point that you make. You make the point that socialism is impossible. Not just difficult, but you're saying it's impossible. Will you talk a little bit about that? I sure can. When I say socialism is impossible, I don't mean attempts at setting up a socialist system.

2:30What I mean is that it's really impossible if you have government owning all of the capital goods and land and other resources. It's impossible for them to really figure out what goods and services to produce and what is the lowest cost way to producing those things. Now, it's often said, well, that position was refuted because in history we saw the Soviet Union lasted from 1917 until the 1990s. But that wasn't the point. The whole point that was made was that in a perfect socialist system where the government did own all resources, there would be no way to figure out any cost of anything. The government being the sole owner, the sole monopolist, loans everything. There's no trading of steel. There's no trading of electricity and so on. So the cost of production could never be figured out by the managers of these socialist firms. It would just be shot in the dark.

3:21So why the Soviet Union did last as long as it did, by the way, was because it was set within a capitalist world economy. So the Soviets, in fact, used world prices, they used the price of steel and electricity here in the West to approximate their own prices. Of course, these were wrong. So they were extremely inefficient. And also, by the way, the Soviet Union, especially in its latter days, was run to a great extent by black markets. In other words, at the end, much of the food was being grown outside the social system, Where prices were being paid for underground purchases. American denim jeans were being sold there, rock records and so on. So there's a thriving market in prices that the planners themselves are actually trying to approximate.

4:11Interesting, Joe. I think I heard you talking, too, about in the Soviet Union before it collapsed you were talking about fields of wheat. You just went on all the way to the horizon, but there were tractors and equipment sitting there that didn't have the necessary things to run, so the wheat was just basically rotting in the field. Right, right. There's a massive, or what the economists sometimes call, misallocation of resources. That just simply means a massive misuse of resources. You saw, like you said, the fields of wheat and other sorts of grains there, but they weren't being harvested because the tractors were sitting in the fields rusting because there wasn't enough gasoline, nor were there enough individuals to run them. Because they were building steel in other factories that was, at the end, just being piled up. So it was a mindless machine that was just running.

5:02I mean, the steel wasn't being used for anything. So they were producing capital goods and heavy goods that never became the ultimate goal, which was the consumer goods that satisfied human wants. So in a very deep sense, socialism was anti-human. It wasn't producing things for human consumption. Interesting. And I think you told a story too, Joseph, that I thought was just fascinating and illustrated this point so well. I think you were talking about there were houses that weren't finished. They couldn't put the roof on the house because they didn't have roofing nails. And weren't you saying, I think this was the example you gave, was they were, instead of using prices, they were trying to figure out production of nails by weight.

6:19The Theory of Money and Credit

6:49that just accumulated under socialism and resulted ultimately in its collapse. I mean, at the end, of course, no one believed in Marxism except the academics in Western universities. Even the commissars themselves were cynical about the whole thing. Interesting. You know, I think something related to that too, Joe. In an interview I saw you doing with Jeffrey Tucker, you were talking about the function of profits. So we're not just talking about cost, but you're saying that it's essential that we have profits as well, right? That's right, Mike. The reason why you need to calculate your cost, and we do do that in the U.S., is because it's important to see whether or not what you're using, that is the cost of the inputs that you're using, are more valuable than the good that you're producing.

7:40So for example, the U.S. auto industry knows that it's producing automobiles that just use more valuable resources than they are worth to consumers. In other words, that steel and so on, the manpower, can be better used to produce small automobiles or produce bicycles or whatever else. So under capitalism, though mistakes are made by entrepreneurs, there is this profit and by the way, loss mechanism, which pushes entrepreneurs away from making products that are less valuable and more wasting resources and towards making those products where there's a great scarcity of them and consumers put a high value on them. So you have a continual movement. It's a dynamic process. Whereas in the Soviet Union and other sort of centrally planned economies, it's basically someone who's lost in a desert with no compass. They're doing things but they don't know what they're doing and what they're doing right and what they're doing wrong. At least there's an important feedback mechanism under capitalism in which you That is a great point, Joe. I guess I'm sitting here thinking, too. A similar thing happens with interest rates, right? If the government is artificially setting interest rates too low, which I would think would be the case now, they're too low, that's also sending false signals to the economy.

9:08Yeah, the interest rate is the one price in the economy that pervades the entire economy. So, for example, if interest rates are too low, we know that consumers are induced to borrow and to buy appliances and houses that they really cannot afford when those interest rates return to levels that are consistent with the amount of savings that people want to do. The Federal Reserve System, the Fed, is able to manipulate those interest rates. Now, they don't directly control interest rates. What they control is the power to create money, and they create money through the banks. So when they create additional funds for the banks to loan out, the only way the banks can loan those funds out, induce people to take those funds, is to lower interest rates. And when they do that, that's when people begin to miscalculate.

9:56the price of houses go up people believe that they're much more wealthy than they really are so what we saw happening by the way was that people looking at the growing wealth in their houses began to consume more out of their current income and even to use their houses as ATM machines that could take the equity out so thinking that they had enough stored up for the future and for their children's tuition and so on they began to over consume so we had a vast overconsumption boom here in the United States and we're a lot poorer for it and let me just say that businessmen also make mistakes when interest rates are too low things that would not look profitable at seven or eight percent various project expanding their factories, finding new sources of supply that may now look profitable if the interest rate pushed down to three percent or four percent but once again you have some sort of a a rise in prices and in stocks and houses and the Fed

10:56becomes worried about it and stops printing as much money, the interest rates shoot up again, and the businesses find that they have to lay off the workers they've hired to undertake those projects. So we have what we have now, a recession. And they're giving us more of the same. They're trying to push these interest rates down to zero. On overnight funds, they're around zero. And other interest rates are much lower than they should be. So we are not getting the correction that higher interest rates would allow the economy Interesting. I think what we'll do here, Joe, is we only have about a minute to the first break, but maybe we ought to come back after the break and we'll talk a little bit about the Fed's role in this. I had Bob Murphy on my show a couple weeks ago, and Bob and I agreed we ought to abolish the Fed. We'll find out if you're as radical in that as we are. And then we probably ought to talk a little bit about the gold standard as well.

11:54Welcome back to the second segment of Free Markets. I'm Mike Vitler, your host. My guest today is Professor Joe Salerno. And just before the break, we were talking about interest rates being held artificially low, and I made a comment to Joe about some of my listeners probably remember Bob Murphy was on my show a few weeks ago, and we talked about abolishing the Fed. Joe, what do you think? Are we being too radical there, or does the Fed need to Now, the Fed absolutely needs to go. I agree with Bob on that point. If you look at the current crisis, you can see the fingerprints of the Fed all over it. From 2001 to 2005, believe it or not, the Fed created $2 trillion of additional money out of thin air.

12:44Now, that's a rate of about $8 billion new dollars being pumped into the economy every week for those five years from the beginning of 2001 to the end of 2005. That people do not see this, that establishment economists think that there's some failure in the market and ignore this massive increase in the money supply is mind-boggling. So the Fed, in doing this, forced interest rates down to artificially low levels to low The levels that could not be sustained without causing a bubble in real estate, a bubble in the stock market. And when they finally began to allow interest rates to rise after 2005, we began to get the crisis and so on. And let me just add, by the way, that the crisis is really the adjustment period, and it can be hastened along if you allowed interest rates to stay at their natural levels without tampering with them again and trying to force them down as they're doing now.

13:43What you just said too is interesting, Joe, because you said basically the Fed started going insane back under Alan Greenspan and I remember a few weeks ago Walter Block was on my show and Walter and I were talking about Alan Greenspan and Greenspan was part of Ayn Rand's inner circle. Do you feel the same way that Walter and I do that it's almost unimaginable that somebody Part of Ayn Rand's inner circle would go on to become a central planner and inflate the currency. Is that as disturbing to you as it is to me? Yeah, it's very disturbing. I've read a number of biographies on Alan Greenspan.

14:31The only thing that comes to mind is that somehow he separated in his own mind Ayn Rand's philosophy sort of an ideal that was really not applicable in the everyday world, when in fact if you read Rand's books, she set all her stories and so on in the real world, and her comments and so on were always about real world events. So for Alan Greenspan to depart from the Randian vision in that way, and still I think even I don't know, it just doesn't compute with me. I don't see how he can justify it in his own mind. It's really bizarre, Joe, because I look at Alan Greenspan and I'm thinking, which character in that Le Shrug would he be? It must be a combination of a few of them.

15:26There's no... Once again, you know, the insight into his character is he seems to want power. I mean, he was so happy when he was seated between, if you recall, Hillary Clinton and, I forget who else it was, it was at the Clinton inauguration. Yeah, I remember that. I don't recall, but to suck up that power. Now, you may think that he's using the power to do good, and he did pay lip service to markets, so even that has gone by the board in the last month. You know, he's come out and said, well, he's overestimated the power of markets to adjust and so on, and that maybe they shouldn't have been deregulated.

16:13So instead of realizing that he himself had made a mistake in playing this power game, he's turned on markets now. So, yeah, I'm extremely disappointed and shocked. Yeah, it's very disturbing to say the least. I want to change the topic here just a little bit, Joe. I want to go back to something on Mises.org. You may be able to give me the title of this audio that you did, but I heard you say you were speaking about a one-world currency and my first thought was, oh my God, not Joe Salerno of all people, but then I was glad to find out that you were not advocating a one-world fiat paper currency, but gold. Can you tell Can you tell us a little bit about your thoughts about going back to a gold standard?

17:05Yes, let me talk about the gold standard. The most important virtue of the gold standard is that it serves as what used to be called golden handcuffs. That is, it handcuffs the government in the following sense, that when you're on a gold standard, it is very difficult for a government to run big deficits because the only way they can finance those deficits is by borrowing money today which will be paid back by higher taxes tomorrow. There is no way around that. They have to raise taxes because they can't print money under gold. So you tend to not have deficits under a gold standard. When we did have deficits by the way during the gold standard period, it occurred during wars when all governments went off the gold standard. So in tying the government's hands and not allowing it to print money without having gold backing, and by the way the gold is expensive, the gold the gold out of the ground, and gold is scarce, and that's its virtue. In doing that, having those qualities, you get much less, even no deficit spending, and of course, you get a break on inflation.

18:15So that is the primary virtue of gold. The second virtue, of course, of gold is that it is a market money. The value of gold is determined by supply and demand on the market. And the supply of gold increases very slowly over time, whereas the demand for gold, which is really the amount of goods and services that people produce and want to exchange for money, so they can in turn use that money to exchange for good that they themselves want, the demand for gold increases rapidly under a capitalist system. Right? We have a tremendous increase, for example, just take the high-tech industries, in personal computers. So what tends to happen under a gold standard is that the price of all goods, not just personal computers, would fall over time.

19:00Now there was no problem, none of us had a problem with the price of computers coming down from something like $20,000 for a personal computer in 1980 to a less than $500 today for a higher quality computer. But under a gold standard, you would actually get prices of all goods falling, which is what we got when we went back to the gold standard for the Civil War in 1880. Prices fell 2 or 3 percent every year, overall prices, through 1896 when there were more gold discoveries and then prices started to rise slightly. But I guess the point I want to make is that deflation under a gold standard is very slow is beneficial to everyone because it raises their real incomes. All of us can buy more computers today, all of us can buy more hand calculators today, and more high-deficit televisions, with our same salaries and wages, because their prices are lower than they were, let's say, five years ago.

20:01I think what you just said, if I can go back to something there, Joe, you were talking about the gold standard would handcuff the government so they couldn't create currency out of thin air. I think what's interesting about that too, Joe, I came out of banking, I was a CFO in banking and I can remember borrowing money from the Fed and I think you've indicated The government is not even limited now to printing the currency. They can just put an electronic credit on a bank's account somewhere. They can go completely wild just creating currency. You're absolutely right. It's just a keystroke on a computer keyboard. It can create hundreds of millions of dollars.

20:49In fact, three blocks from where I work in New York City at Pace University is the New York Federal Reserve Bank, and it's at that bank that the money creation actually does occur. And it can run to hundreds of millions of dollars each morning. So between 9 and 12 o'clock, there's an auction in which the Fed will bid for various, or let's turn it around a little bit, various banks and owners of government bonds, bond Bank dealers will offer prices to the Fed to buy their bonds. Where does the Fed get the money to buy those bonds? It's simply printing a check on themselves. That is, you pointed out they don't write newspaper checks anymore. They simply enter a credit into the bank's account.

21:35And so within a few seconds, when they buy, say, a $10 million bundle of bonds, $10 million new dollars is created for that bank to loan out beginning on that day. And because it's a fractional reserve bank, that can be multiplied up to ten times over the next few weeks. So the Fed can create just oodles of money in a single morning. And by the way, now they're permitted to buy almost anything. They're not limited to buying just government securities. They can buy foreign government securities. They can buy private equity now, it seems, equity in private firms and so on. That's true, Joe. I said on my show last week, I was reading in some, you know, back of the newspaper, you know, announcement that the Fed was basically increasing their balance sheet to $4 trillion. And like you said, they're buying up all kinds of stuff and creating money out of thin air to buy it. Very disturbing.

22:44Yeah, they're buying bad assets, too, now. I mean, that's what the bailout means. It means buying loans that have gone bad, that are not performing, in which people are not paying back, or have defaulted, and putting that on their books, taking them off the bank's books, and giving them money in exchange, so that they can continue to make loans. Right. As we're coming up on this next break here, we've got about a minute and a half, Joe. I think you said something that really helped to sum this whole thing up pretty well. When you were talking about the gold standard, you said, we really don't need a stable money, we need a sound money. Just talk a little bit about that, because I think that is a very insightful point.

23:29Yeah, what we mean by stability is a money that doesn't change in value, but that's not a money in the real world. Money is a commodity like any other commodity. Its value changes as people's demands for a change, as the supply of it changes. A sound money is a money like gold in which the value does fluctuate, but it doesn't do so in a way and the way that is volatile. You don't have one government, a monopoly, creating it and printing it and causing wild swings. It fluctuates, and since gold is such a stable commodity, it fluctuates very mildly over time, and entrepreneurs, the people who calculate profit and losses, can easily use gold money and have used gold money over the centuries to calculate their profit and losses and to allocate resources according to what consumers want the most. That's a sound money.

24:26The government is not in the picture manipulating the quantity of money. That is a great point. Sound money, not a stable money. My guest today is Professor Joe Salerno. We were talking about the gold standard before the break. Joe, I want to revisit that for just one more question, just to get your insights on this. There's not a lot of talk from China and Russia about returning to the gold standard, maybe even Russia more than China. Where do you think that's going to go? Is there any possibility that a country like Russia would go back to the gold standard and we'd be sitting here with fiat money? Yeah, that's a very good point, Mike. What's happened is that, to give you a little bit of background, the U.S. has been printing so much money and has been running such big deficits.

25:20Deficits, that our debt is held in huge quantities, especially by China, Japan, Russia to some extent, and many other countries. For example, just to give you, China holds over $700 billion of U.S. Treasury debt. And some people say it's near a trillion now. In any case, what they're worried about is a continual increase in the money supply in in the U.S. will eventually result in a drop in its value on foreign exchange markets in relation to their own currencies. So they don't want to be stuck holding all these dollar securities. So what they want to do, as China suggested, is to go back to some sort of kind of crazy paper gold standard that we had or tried to have in the 1960s.

26:05They're called SDRs and they were called paper gold. Russia has said, well, you know, we not only want to have a basket of currencies, that, you know, besides the dollar, but we also want to add gold to it. So what Russia is advocating is sort of a return to sort of partial gold standard, in which sort of the world currency unit would be based on a number of currencies, but also include gold as a commodity. I don't see this happening, but I think it's a good development. It's a good development in that a major country is talking about gold. And when that happens, no matter how much the establishment media tries to suppress those references to gold, people begin to think about it. And people still have this sort of collective memory that we did have a gold standard.

26:54By the way, my MBA students, when I asked them what backed US money, many of them still say, oh, well, the gold stock in Fort Knox. I say no, and it's not in Fort Knox, it's in the New York Fed, and we don't know how much there is. There is no backing of the U.S. currency, but in any case, what we would need to go back to a gold standard is for the U.S. dollar to drop tremendously in value and for these foreign countries to begin to sell off their securities, that is, to sell off U.S. debt, get dollars in exchange, then sell the dollars for their own currencies. That would drive the value of our dollar down. It would drive interest rates sky-high in the United States. and it would cause a lot of popular unrest and as a result you might see the powers that be, the establishment, economists and so on, casting around for another alternative and here is where people like myself and others who are associated with the Mises Institute and other people like yourself and the media can begin to really create a campaign for going back to gold.

28:05So it will be a long and arduous process, but I think we're taking the first steps towards it now, and Russia's call for gold, I think, is a good thing. That's very interesting. So you're feeling optimistic about that. Yes. I guess long term. Long term, I'm optimistic. I'm not optimistic that it's going to happen tomorrow. I think we're going to go through a lot more pain, especially with this G8 stimulus program. What the U.S. is doing, by the way, and I don't know if you're familiar with the G20, the 20 largest economies in the world have gathered in London and are talking about getting the world economy out of this crisis, but they're talking about doing it through more liquidity.

28:53And you should be aware that whenever governments use the term liquidity, all they mean is money creation. There's nothing magical that they can do to get us out of this. So they have no ideas, modern economists, macro-economists are bankrupt intellectually, so they're just going back to what they had learned back in the 1930s, that, well, let's just print more money, okay? It's the old message of John Maynard Keynes, and so that is what liquidity is, so it's a liquidity program, or a stimulus program, that's another word that simply means printing I think an interesting thing to talk about too, Joe, is I know it's frustrating for people like me, who believe in Austrian economics, to watch all this Keynesianism going on, and again, I think what is so frustrating for me is because Austrian economists like you and the other You've made the statement that Keynesianism is dead from the neck up, but it's still the theory of the powerful. Can we get rid of Keynesianism or are we just going to be stuck with it?

30:17I think this is the final test of Keynesianism. I think everyone now, all the sophisticated mathematical models that the government advisors have been talking about, that the people associated with the Fed have been saying that they can control the money supply with these models and fine-tune the economy, that's all dead now. They're all scrambling, they're all saying that the way out is to spend, and if that doesn't work, spend some more. So all we have is government spending like drunken sailors. And that goes back to the original Keynesianism. So there is nothing left of Keynesianism except spend, spend, spend. So when I said that it's dead from the neck up, I mean there is no intellectual justification for it anymore, except that there's nothing else to do. What else can we do?

31:03So, I think Keynesianism will die, but what I'm fearful of is that what we're going to get is a move towards socialism as a replacement. That is getting the government directly involved in running financial organizations, even directly involved at least temporarily in running manufacturing organizations. So this is the big fear. At least Keynesianism kept the government out of any particular area, so if Keynesism fails we're going to have a movement towards greater government control as we did in the 1930s, but that of course will not solve the problem, so that's why I'm saying in the short run I'm not optimistic, I think we're going to have to go through a lot of setbacks as a result of these increasingly socialistic policies that are going to follow.

32:01So, I guess what you're saying is, if you look at it from the politicians' point of view, there's more power moving toward socialism for them. A pure, capitalistic, free market society really puts them in their place as being not very important, right? Right, right. I mean, you really don't need... Look, capitalism is self-regulating, it's self-adjusting. Capitalism isn't a thing, it isn't a mechanism. It's you and me and your listeners just trading goods and services with one another. Ultimately, that's all capitalism is. And people, if they make mistakes when they make those exchanges, those mistakes can be easily corrected. If they make mistakes when they form businesses and invest in certain areas, they lose money and they readjust.

32:55So there is a continual profit and loss mechanism pushing people toward producing those things that consumers want. But when government begins to step in, it completely distorts those signals and it creates problems in the economy. And particularly, as you pointed out earlier and we talked about, with the interest rate. So the bottom line in all this is that we have to stop the Fed as the first step. The Fed has to be stopped from printing any more money. We have to allow this adjustment process to take place and then we have to seriously think about abolishing the Fed and reinstituting a gold standard, a market commodity as our basic money. Yes, so I guess in the last two minutes we have here, Joe, I'm assuming you have concerns This is like I do too about the protectionism that we're hearing about. But we're talking about the same issues here again, right? I mean, we need a free market, not just within the United States, but internationally as well.

34:00What happened in the 1930s, unfortunately, was that because there was a depression that affected many countries, the countries tried to push off their unemployment onto other countries by keeping out the foreign countries' products and therefore increasing the domestic demand for their own products. But of course, the foreign countries can simply retaliate against your products, and therefore you get what's called the trade war. And trade wars often, as they did in the 1930s, lead to shooting wars. So we don't want to move away from free markets internationally. We want to keep low-priced goods coming in from various areas in the world economy, for which we exchange our own products. If we don't do that, we're going to be even worse off.

34:47Our real incomes are going to fall even more if we suddenly see prices in Walmart going in China, the World Bank of China, the World Bank of China, the World Bank of China, the

35:21Again, Mises.org, Joe Salerno has a bunch of videos and audios there that are just absolutely excellent. So I recommend that. So Joe, many thanks for being with me today. I really appreciate this. Thank you, Mike. My pleasure. Oh yeah. I hope to get you back on again soon. I look forward to it. Thanks, Joe. Bye-bye. A pleasure.