Austrian Monetary Economics

0:00I always say this is one of my favorite times of the year, and generally speaking it is, though we're sort of in the dreaded November, and as it turns out somebody's going to win. Now, my job is to introduce this year's award winner, and I'm going to do that. But before I do that, I have a few paragraphs I'm going to read to you. And interestingly, this is from a Congressional speech and a Congressional speech in 1948 and it turns out even before Ron Paul there were people who cared about sound money in the U.S.

0:45And I quote, before 1933, the people themselves had an effective way to demand economy from politicians. Before 1933, whenever the people became disturbed over federal spending, they could redeem their paper currency in gold and wait for common sense to return to Washington. Now, I suppose it would take a very long time today for that to occur. But that happened on various occasions and conditions sometimes became strained but nothing occurred like the ultimate consequence of paper money inflation. When the people's right to restrain public spending by demanding gold coin was taken away from them, the automatic flow of strength from the grassroots to enforce economy in Washington was disconnected.

1:32It goes on, but I leap to the end. The connection between money redeemable in gold and the rare prize known as liberty is irrefutable because in a free country the monetary unit rests upon a fixed foundation of gold or silver independent of the ruling politicians and is redeemable for a certain weight of specie at the free option and choice of holders of paper money. So, it ends saying, the choice is clear, paper money or gold. Interestingly, the speaker was Howard Buffett, Warren Buffett's father, and I, you know, many people admire Warren Buffett, and I'm in the investment business, and you sort of have to say that, but there are times I think he has indeed lost his way.

2:27On to the business at hand. I'm going to introduce Professor Salerno. One of the great Austrian economists of our time, Pascho Salerno, taught at the University of Paris, where he became a full professor at the age of 27, and having been an academic once upon a time, I understand, extraordinary. and he had to be envied by all of his colleagues, produced many important students who are now teaching themselves. He is the author of 11 books, dozens of scholarly papers, hundreds of articles in which he explains and develops economic science and courageously advocates individual liberty.

3:14Throughout his career he has earned great distinctions and gained enthusiastic followers, not least of all because of his patent intellectual prowess combined with the elegant civility of a gentleman of the old French school. He's been vice president and president of the Mount Pelerin Society, he's a knight of the Legion of Honor and an officer of the Order of Merit. More important than his career though are his intellectual achievements and especially the moral and all qualities that turned him into a source of inspiration for students and readers in France and abroad. And I do confess to saying I'm surprised to find libertarian economists in France.

4:03Already an advocate of free markets in the late 1970s, he returned from a trip to the US and said to his friends, And finally, I understand what economics is all about. He had discovered Austrian economics. He had just met the author of a book called The Denationalization of Money. Through his discussions with Friedrich Hayek, he had come to understand how encompassing economic analysis can be and how precious is an intellectual foundation of a free society. He began to read Mises and Rothbard and other Austrians. He began to understand that these contemporary have modernized and radicalized the approach of Say, Bastiat, and other 19th century French economists. And like his predecessors, he did not shy away from endorsing the radical political conclusions that followed from the logic of human action.

4:55Salerno would also write Austrian textbooks on competition, free trade, and macroeconomics, Then a treatise on liberalism, the first comprehensive restatement of libertarian doctrine by a major European academic since Ludwig von Mises' liberalism in the 1920s. Here he delivered, among other things, a sweeping critique of the notion that democracy, not private property, is the distinguishing mark of a free society. And that's one that is so hard for people in the United States to understand this very day. In all of his work, as you can imagine, being there on the continent, he meant hostility from much of the academic establishment, which is even more, believe it or not, statist than in the U.S.

5:46But he has never faltered in steadfastness nor courage. It is for these reasons that I am so pleased to present him with the 2008 Gary G. Schlarbaum Award for Lifetime Achievement in Liberty in the tradition of Ludwig von Mises. Professor Salerno. Thank you very much. My pleasure. Now you have to remove your glasses, because I'm going to put this around your neck and I've destroyed at least one person's glasses. Can you take off your glasses just for a moment? This you will not want to lose, and here is the certificate.

6:55Dear friends of the Mises Institute, I want to begin my lecture by expressing all my thanks to the Mises Institute, which honours me with the Gary Schlarbaum Prize. And I want to thank Mr. Gary Schlarbaum both for delivering me this award and for the kind words he just said. I think it was a very good idea to found this award and I'm really very, very pleased to receive it. I think that for me, receiving this award is really one of the best achievements I could dream of in all my professional life.

7:42I particularly appreciate this recognition and this support you are offering to me because I live in a country, my country, France, which has been home of some of the best classical liberal thinkers but which is now, as you know, maybe one of the most socialist countries in the world. And so having this recognition from the Mises Institute is for me very important. And I feel honoured in particular because I have a very great admiration for the Mises Institute, for Lew Rockwell, for his staff and for all of you here, academics, members of the business community who have understood that the clear principles are fundamental for day-to-day life.

8:39and certainly the Mises Institute is the place where these principles are best given. The Mises Institute in some sense is the center of the world for all those who cherish liberty. I can testify that outside the U.S. the Mises Institute brings a unique intellectual support to all those who are longing for a rigorous analysis in the defense of a free world and who could feel isolated so that they might become even doubtful about the relevance of their own thinking if there was not the support and the ideas given by the Mises Institute.

9:31The title of my presentation is Austrian Monetary Economics. In this speech, I would like to deliver some thoughts along the lines of Austrian Economics about the working of monetary systems, a topic which has been splendidly developed in the present conference. But I would also like, as it was suggested to me, to explain how I happened to discover Austrian economics and to draw some lessons from this intellectual trip in the world of liberty. For long I had been an Austrian economist without knowing I was, because I had no opportunity to know about Austrian economics.

10:19and I would like to explain that a little more. But anyhow, when I did discover Austrian economics, I was amazed because economics appeared to me as it ought to be, not a lot of piecemeal fields of thought without any links together. Economics became coherent for me. As Mises rightly wrote, there are no such things as economics of labour or economics of agriculture, there is only one coherent body of economics. What is fascinating in economics, and at least in Austrian economics, and which doesn't exist in other fields of knowledge, such as physics or biology, is a fact that all economics can be deducted from one single principle, the axiom of action or the principle of individual rationality.

11:22In physics, there can be a change of paradigm, an intellectual revolution with a complete change in assumptions. This cannot happen in economics. It is meaningless to try to develop an economic theory which would be based on the assumption that man is not acting or that individuals are not basically rational. The founding principles of economics are eternal and universal, and it is completely foolish to believe that there can be specific theories dependent on specific time and places. Just think of a French economist who did not believe that. He wrote a book which was named Economics for Arab People, as if economics were different for Arab people and other people.

12:18I for long taught a course in the theory of monetary systems and international monetary systems. But when beginning the course, I warned the students, I told them, you know, I am teaching that. But what I mainly want is not to give you ideas and facts about the working of the international monetary system. What I want just is to take this specific field as an example of the economic way of thinking. And I demonstrated to them how, starting from the assumption that individuals are rational, one could logically deduct how monetary systems could develop and be spontaneously organized.

13:06I explained to them that in order to fully understand the working of monetary systems, what was important was not to focus on monetary techniques, but to have a coherent theory of competition, monopolies and cartels, I should say, an Austrian theory of competition. In other words, there is not on the one hand a theory of competition and on the other hand a theory of monetary system. There is one single economic theory. However, there is a strange phenomenon in economic theory in spite of the fact all economists are starting from the same basic assumption which is that individuals are rational, they are able to make choices.

13:56In spite of that, there are a lot of different and even completely opposite economic schools. It seems to be a paradox, since if ever economists are starting from the same principle, they ought, if they are able to reason logically, they ought to arrive at the same conclusions. I will not elaborate on that, but it is a very important problem. But let me just stress one example. At the very beginning of all textbooks in economics, students are presented with the theory of the consumer and then the theory of the producer as if there were different behaviors for two different kinds of people.

14:43This is completely in contrast with the coherent view of Ludwig von Mises about human action. A man is an acting individual who is producing in order to get satisfaction. Mainstream economics are full of inconsistencies and only Austrian economics are rigorously coherent. Now, if it is so, one may wonder why Austrian economics are not recognized as purely and simply economics in contrast with opinions, prejudices and value judgement. This is in some sense a great mystery, but I think one explanation may be that Austrian economics precisely are at odds with common prejudices and people cannot accept that.

15:38but paradoxically instead of recognizing the scientific character of Austrian economics they quite often blame this approach as being ideological. It is this outstanding coherence of Austrian economics which is so appealing for me and which has been when I discovered it. Let me please anyhow go back to my past and try to say some words about my intellectual trip. Although maybe I don't like to speak too much about me but I think that anyhow it can illustrate some and some of the trips that some of you may have known in the past.

16:32When I was a schoolboy or a university student, there were no strong ideological debates in public opinion. And what was more or less accepted was a sort of social democratic approach. However, in intellectual circles and at the university, Marxism was certainly the mainstream doctrine. Personally, I never understood Marxism, but I must confess that anyhow, I had some socialist leaning, let me say so, because I was in a family of Christian Democrat tradition. And so I shared the view that social justice was one of the main roles of the state or that public firms could be managed in the public interest.

17:21There has never been an economist in my family, and anyhow I wanted to become an economist. It could be surprising, but the reason for that was that I wanted to understand why there were so many differences between countries as regards to their development levels. And I had some spontaneous interest in social problems, I wanted to understand how societies are working. The education I received at the university was very far from what the students can get right now. It was a sort of mix of good feelings, some history of thought and some concepts of economic theory, more or less well interpreted. In spite of this, I got two important things from my education in economics.

18:10First, I discovered that economic theory was the best way to understand reality. and I used to say to my students, there is nothing more practical than economic theory. And second, I understood from microeconomics that you cannot understand the working of a society without referring to individual behavior. Anyhow, I was unsatisfied because I had the feeling that economic theory was developed outside in the world and I did not know enough about economic theory and just at the time when I was finishing my studies I met some students, some friends of mine who were also unsatisfied and we decided to learn by ourselves and we created, it was in December 1961, a long time ago, and we decided to work together and to create what we called the Jean-Baptiste Say seminar in economic theory. We wanted to stress two things, the fact that we were devoted to economic theory and the fact that we were classical liberals. And we decided to write a book about permanent income hypothesis and we were just introduced to the ideas of Milton Friedman.

19:33We became Chicagoan at that time. I have to confess that. But anyhow, it was maybe a necessary step in this intellectual trip I had to do. We had a feeling that this approach was scientific, logical, and it was based on individualistic principles. And thus Chicago Economics made possible for us to reconcile our classical liberal convictions and our desire of a scientific approach of economics. It is quite clear that by choosing such a name for our seminar, we wanted to stress that, our interest in economic theory and our classical liberal inclination.

20:23but it was very provocative at the Paris University at that time and we did it with purpose and it was also provocative to work together to do some what we called collective research because it was considered that people have to be completely isolated to write their doctoral dissertation alone without discussing with other people and so on. And more than that, what was really, really very criticized by our professors and the university was that we were reading Anglo-Saxon reviews, such as the American Economic Review.

21:08And it was a very great thing. It was said at the time that we had to develop a completely French economic science, completely are very different from what was developing outside and as readers of these American reviews we were considered as people who were supporting American imperialism. Let me mention at this point that the Jean-Baptiste Say seminar in economic theory still exists. It is located at Université Paris Dauphin. Some of the members are still Chicagoans. Some others are close to the public choice school and some are Austrian, but we are all certainly classical liberal.

21:54What I want to stress by that is that there are several ways in order to discover truth. It may be revealed at the outset and I think that those who have discovered the Mises Institute early in their life are lucky people. Anyhow, had I known about Austrian economics when I was a young student and wanted to go to the university, maybe I would have never been appointed as a professor in France. From this point of view, I am lucky not to have met Austrian economics earlier in my life. Anyhow, you can discover it early or you can discover it little by little, path by path.

22:39And at that time, being a Friedmanian was somewhat obscene. May I just mention at this point that a former Prime Minister of France, Rocard, who was considered as a modern socialist, once said that Friedman is a destroyer of civilizations. And some days ago, very recently, he said it's a pity that Friedman is dead, because he is responsible for the financial crisis and because he supported free market and he could have been convicted of being a criminal against humankind by the International Court of Justice. So you see the intellectual environment in which we had to live. Anyhow, Now, Freedman was defending individual freedom and to me it was the first step and believe me it needed some courage both to be a supporter of Freedman at the time and to create something called the Jean-Baptiste Say seminar.

23:50I was also a supporter of flexible exchange rates and Raymond Barr, another Prime Minister of France who was a professor of economics and who was a member of the committee in my, from the defense of my dissertation was disagreed strongly. It was also obscene to be in favor of flexible rates. So I quite understand that we may wish a world with fixed rates, at least fixed rates with the gold standard, but whenever there are discretionary monetary policies made by different countries, I think that it is better to have flexible rates. I have seen so many countries destroyed by foolish monetary policies and trying to maintain fixed rates that I believe it is better to have flexible rates.

24:46I just remember the case of an African country, Zambia. I was doing some research there and I met the governor of the central bank and Zambia Africa had been relatively rich country in Africa and it had been completely destroyed by fixed exchange rate with a very expansionary monetary policy and the consequence was what was wrongly called balance of payments problem and the authorities tried to solve that by I met the governor of the central bank and he told me that the interest rate is too high, it is 50%.

25:34I asked him what is the rate of inflation and he told me 100%. He had been educated in Moscow. Then I went and visited the Minister of Economics and Finance and I put upon him a question about the exchange rate because as I just said it was a real problem in this country and he answered to me, oh you know, I think the best is that you write to me and I will answer to you. He was unable to understand anything so whenever people say that the authorities have to control, have to decide and so on. They ought to see that quite often the minister and the governor of central bank even do not understand what is going on in economists. So I just mentioned my doctoral dissertation. The doctoral dissertation was about monetary equilibrium in an open economies. And I was fascinated as I am right now by money and monetary systems. My dissertation was not yet Austrian. It was based mainly on the work of Robert Mendel. When I discovered an article in the American Economic Review by Mendel, to me it was a shock anyhow, because it was rigors and so on.

26:52In fact, the approach which was used by Robert Mendel at that time was both Chicagoan and more or less Kinesian, and I became most critical of it later on. But anyhow it was one more step which was necessary in my intellectual trip. Later on I discovered Hayek and that was an intellectual revolution for me. I think that the first article I read from Hayek was either the use of knowledge in society or maybe the confusion of language in political thought. It was really a great shock and now I knew that it was the approach I was longing for, I had been longing for ever.

27:38That was my home. And I also remember that at that time I was invited to deliver a paper at a conference in Paris about the free market and I was asked to discuss about monetary problems and I read only one page of currency competition by Hayek And I was so excited that I wrote my report without taking time of reading the whole of this booklet. The idea of currency competition was the first time I discovered that. It was so fascinating for me that I wanted just to write down what I thought because of that. And after that, after having written my report, I went back to the booklet and finished it, and I was really convinced.

28:27In fact, you know, I had heard of Hayek when I was a student, but in very loose terms, very critical terms, and I even believed that he was dead. So, to me, it was a great surprise and a great satisfaction to have several opportunities to meet him, to discuss with him, especially at the Montpéreux Society. And may I just say one anecdote. It was in 1980, a small group of academics and congressmen invited Hayek in Paris to deliver a lecture at the National Assembly. And it was a great moment for us. And after that, we had a dinner in a famous restaurant in Paris, La Tour d'Argent.

29:18some of you know La Tour d'Argent and during the dinner Hayek stopped speaking, he took a postcard from the restaurant and he wrote down something and he gave me this postcard I think it is something which is not a quotation by Hayek which had not been written anywhere else and I just I give it because it is pure Hayek. The market is not merely a better adaptation but an adaptation to the constant necessity of re-adaptation to ever-changing circumstances. During the dinner he holds that and I think it's pure Hayek. And happily, if I had the chance of knowing Hayek, I had not the chance, the chance of meeting and knowing Ludwig von Mises.

30:11After Hayek, I discovered Mises and Rothbard with the same sort of enthusiasm. This gradual approach led me to a conviction, one has to be tolerant with people not tolerant with ideas. You have to be tolerant with ideas because you must not compromise, but you have to be tolerant with people because they don't have always the privilege to meet the right ideas, they have to discover them and there are several possible ways to discover ideas. This is why I think we have to be tolerant with persons and accept that they may have different views and maybe not. Why not? Sometimes a tiny bit of truth.

31:02Austrians are quite often considered as extremists and intolerant. They have in fact strong convictions and from this point of view they have to be intolerant. But they must be open to discussion and accept that a gradual approach does exist and sometimes there can be a convergence or compatibility between different approaches. To me, it was the case, for instance, with Robert Mandel, who, as you know, has been a Nobel Prize winner. As I said, the Mendel of the beginning, the Mendel of the policy mix, is more than debatable because he was a Chicagoan and a Keynesian. But I would not say the same about the Mendel of the monetary approach of the balance of payments.

31:53I do know that we ought not to care about the balance of payments and the best way to solve so-called balance of payments problem just consists in avoiding to collect and to publish statistics of balance of payments. However, the monetary approach of the balance of payments does shed some useful light on the interdependence between monetary policies in different countries in fixed rates. And there is also, I think, one element in Robert Mandel which could be emphasized and which is not in contradiction with Austrian economics. Contrary to most economists, Robert Mandel is in favor of deflation.

32:40And he has well understood that whenever there is a deflation, there is an increase in the purchasing power of money and the individuals hold more real cash balances and what he says is that whenever there are more real cash balances as it can be considered as a factor of production, the productivity of other factors of production is increased and for instance the interest rate, the real interest rate is increased by deflation and I think that it is acceptable for Australians but it really It remains true that someone like Robert Mandel remains a Chicagoan and he cares mainly about the overall effect of money creation on inflation.

33:32Austrian economists do know that what is important is the way by which money is introduced into the economic system and the effect on relative prices and interest rates. I think that the present financial crisis is a perfect illustration of this view. What is the most disturbing when there is an expansionary policy is not inflationary effect, but the drastic changes in the relative prices and interest rates and the deep disequilibria which are brought about by this policy. Contrary to the mainstream opinion, Austrian economists do know that in any society there is no need to create money.

34:21In other words, as soon as a certain quantity of money exists, there is no need to create additional units. Quite the contrary. In fact, individuals need real cash balances and not nominal cash balances. And the best way to create real cash balances is deflation, which means destroying nominal cash balances. This is a very important truth, but most people do not accept that. They just believe that it is necessary to create nominal money because they know that in an existing system, system. Money is created against credit and they believe that this wrong credit anyhow stimulates the economy. Austrian economists do know that it is a dangerous illusion. Monetary authorities pretend that the amount of savings is higher than the amount which is freely decided by people. Before addressing and the present problems of the financial crisis, I would like to give some more thoughts about monetary systems.

35:33It is not my intention to develop here a whole theory of monetary systems, but I would like just to draw some more lessons from my past intellectual experience and I would like to stress once more the uniqueness of economic theory at least in the coherent approach of Austrian economics. In the 80s I was asked by a friend who was a minister of telecommunication to write a report about liberalization of telecommunications. I did not know anything about this sector and I had to discuss with advisors of the ministers who were engineers and who had very special words I did not really understand.

36:29But very rapidly I understood that the ideas I had met and I had developed when studying monetary systems could be applied to any network activity, at least if one has a correct approach of competition, monopolies and cartels. Mainstream economics are founded on a completely arbitrary definition of competition, pure and perfect competition. And it implies in particular that competition should prevail whenever there is a great number of producers producing exactly the same product. This has nothing in common with reality and it could be considered as a purely intellectual game, but as you do know, it is considered as a norm and it is inspiring most anti-trust policies.

37:22If one clings to this theory, it is obvious that one cannot accept the idea of competition in network activities in money and so on. and so on. Because there are a lot of reasons to believe that it is impossible to have a great number of producers. And they speak, in the mainstream economics, they speak of natural monopolies. And similarly, it is impossible to understand the working of monetary systems with the mainstream definition of competition. It appears that it is not optimal to have a great number of firms, a great number of currencies and so on, and there is a need for public intervention.

38:12But this traditional definition of competition is meaningless for Austrians, both because it is unrealistic and because Austrians care about processes and not about results. They don't care about the number of producers. They care about the process by which the market is developing. And competition prevails for Austrians whenever there is free entry and whatever is the result of this process. Now, competition, contrary to what is implied by the mainstream economics, competition means differentiation. Producers compete in order to differentiate, to propose different products. But for many goods, that's the case with money, it is the case for network activities, there is a demand for homogenization, because it would not be considered as optimal, either by the producers or the consumers, to have too many different products.

39:15And finding the optimal degree of differentiation, of the optimal degree of homogenization may be one of the great problems which have to be solved in any society. There are two ways to discover the optimal degree of differentiation. One can be by the constraints. The state decides that there ought to be only one producer, the public producer. That's exactly what has been done with the Euro. It was said that there were too many currencies in Europe, which certainly could be considered as true, but it was also said that Europeans need one single currency. We don't know. We don't know. Maybe it's too much, maybe it's not enough and so on. We have to experiment.

40:07And the other way to discover the optimal degree of differentiation certainly to let the market decide, which means the users and the producers. The reason why I was personally against euro was that I thought that it would have, it is impossible to decide from the outset that it is necessary to have a single currency with the possibility of having in the future legal tender laws and things like that and certainly having a European central bank and the best way for European monetary integration would have been for long just to decide to repeal legal tender laws and certainly also to make possible competition currencies as it had been underlined by Friedrich Hayek. In the free determination on the market is the only meaningful solution and the reason is that optimality cannot be decided from outside, it has to be decided by those who are concerned. According to the activity we consider, the optimal degree of differentiation is not the It has to be revealed by the market. However, homogenization, the fact that there is a need for homogeneous products, if it is desirable, doesn't imply that the producers have to be a monopoly.

41:47It is possible that different several producers are entering into an agreement to produce an homogenous good. That's what is called a cartel. I published an article on cartels in the quarterly journal of Austrian economics where I developed a positive view of cartels. Quite often, cartels are defined as arrangements between producers in order to create a monopoly position and to try to extract an extra profit from consumers. But a cartel, in fact, is a cooperative arrangement by which different producers make efforts to homogenize their products and make them substitutable one to the other.

42:37A cartel, in fact, means cooperation or coordination. But strangely enough, cooperation is considered as very useful when it is done by officials. People speak about the necessity for international cooperation. But whenever cooperation exists between firms, it is considered as collusion, as bad. Cooperation must not exist between producers. Quite often the words are used differently according to the reality to which they are linked. For instance, in Europe, most people are in favor of harmonization of policies.

43:23Because harmonization suggests harmony. but if ever firms want to harmonize the products it is considered as something which is bad, it is collusion, it is trust, it is and they have to go before the trust, before the course. As regards money, different banks can issue their own currency but decide to make them perfectly are basically substitutable just to enlarge the area of circulation. Let us consider, for instance, a real gold standard. What I call a real gold standard is a gold standard without a central bank.

44:10The participant banks in the capital give two sorts of convertibility guarantees. give a guarantee in gold and each bank is responsible for giving this guarantee and for honoring it. And meanwhile, each bank gives a guarantee, a convertibility guarantee for its own money against the currencies produced by the other members of the cartel. In such a case, I think that there is a low risk of overissue of money because each bank is responsible for giving convertibility guarantee. And there may be also a system of mutual surveillance as far as the participants want to preserve the good reputation of the brand of the currency they are issuing.

45:09Systemic risks have not many chances to occur in such a system, contrary to what exists in a system with a central bank, where the system is protected from the competition coming from outside by legal tender laws and where banks are induced to overissue money because of the role of the lender of last resort of the central bank. We have not to decide, I think, from outside, whether a gold standard is the best monetized system, or even, I should say, if a 100% reserve system is the best. I know that many people here would prefer a 100% reserve system. I just believe that we have to experiment.

45:56Maybe the best system is preferred by people, But maybe there are some reasons to prefer fractional reserves. What is important is to have currency competition and to have capitalist solutions. You cannot maybe prevent banks from creating fiat currency, but what is important is to design a system in which there are limits to money creation and to instability in money creation. And I think that competition is the best for that. I would like to finish by giving some attention to the financial crisis. I do not intend to give a full account of the financial crisis. It would be presumptuous in fact because I'm speaking here in the temple of the right theory of business cycle and during this conference we have had many and opportunities to hear very important thoughts about the financial crisis.

47:04And I must say that in past months I have been intellectually fed by the Mises Institute which helped me to better understand the events and to better explain them in France. By the way, may I say that I was surprised because in recent weeks journalists discovered that there was a different approach, you know, in all TV, radio, newspapers and so on, there's a mainstream approach of this financial crisis, people say that it is a crisis of capitalism, that it is necessary to regulate more financial institutions, but in spite of that, I have been invited by a lot of TV and radio much more than than I had ever been and I have the pretension to believe that it may be a small sign that anyhow something is changing and people, some people discover that the truth may be somewhere else.

48:12I think that the present financial crisis ought to induce people to recognize that there is no valid theory of the business cycle except the Austrian one. In spite of this, it is obvious that for many people, they believe that the crisis has been caused by an excess of capitalism. and the same statements are endlessly repeated. People say that self-adjustment by markets have failed and we have to celebrate the coming back of the state. So I don't want to discuss in detail all of that but I would like just to stress Yes, that the business cycle of our time is certainly not, as you are convinced, all of you, a consequence of capitalism, but certainly a consequence of a lack of capitalism, and I see several reasons for that.

49:22I think that the crisis is the outcome both of tax policies and monetary policies. There is, I think, in many developed countries a lack of real savings and more precisely a lack of equity capital, a lack of real property rights on capital, a lack of capitalists. Capitalism means ownership of capital, property rights on capital, but we have now more or less pseudo-capitalisms without capital and without capitalists. Capitalist. One major reason for this low level of equity capitalizing is tax policies. Contrary to what is quite often said, the tax system we have in all our countries are over-taxing capital and so Because there is a lack of savings, a lack of accumulation of capital.

50:23And because of that, maybe, monetary authorities pretend to find a substitute in the creation of money and the creation of credit. The main cause of the crisis, certainly of the financial crisis, has been the past monetary policy. The world has been overflowed by huge amounts of liquidity obtained at a low interest rate and there were huge opportunities of short-term financing for financial institutions. Anyhow, one may wonder why financial institutions have been so short-term, so short-sighted and we are unable to forecast the future to discover that this easiness in monetary policy was a pure illusion.

51:13Certainly, there is the fact that most bankers do not know the Austrian theory of the business cycle. But there is, I think, another reason which is once more a shortfall of real capitalists, namely owners of capital. Big banks are some sort of big bureaucracies. The decisions are not taken by the innumerable shareholders. They are not taken by the capitalists, by the owners of the banks. They are taken by the managers. And the managers are wage earners. They are not capitalists. And wage earners, contrary to capitalists, are short-sighted. They rationally try to maximize their incomes in the short run.

52:02If their bank fails, they do not lose any capital. They may lose their job for some time, but their human capital remains undestructed. Banks in the 19th century were real capitalist banks, and the equity capital of banks was about 60 to 80% of their balance sheets. Bankers were lending or investing their own money so that they were responsible and they did not accept too high a risk. We are now in a world of limited capitalism with central banks and banking decisions made by managers and not by capitalists. This is the deep cause of the financial crisis.

52:48So, contrary to what is claimed by the French president Nicolas Sarkozy, along with so many politicians, journalists, academics, there is no need to regulate capitalism and to improve the morals of capitalism. There is a need for a revival of capitalism. How to do it? That's not easy. In the short run it is very disturbing because it appears that states are the only able to save the financial system. There is a lack of confidence and banks don't want to lend to each other. And the state appears as the only one, the only possible intermediary because it cannot fail.

53:33It has a privilege, a unique privilege. It can do anything, it cannot fail. So, ironically, most people interpret this fact as meaning that state intervention is necessary and they say that it is necessary to have a lender of last resort to avoid a systemic increase. They don't see that if there is the appearance of the need for a lender of last resort, it is because the one who has destroyed the system now appears as the one, the only one, which is able to save it. But instead of celebrating monetary authorities for their risky decisions, one ought to blame them for having created a problem.

54:24The threat of a general collapse of financial institutions is one of the main arguments offered by the supporters of state intervention. Had state intervention in the financial system and the monetary system not existed, I think that there would not have been any systemic risk in how this intervention exists. And if the state is not here to save the banks, certainly more of them would fail. But I think it is characteristic that in recent weeks, some banks which were failing were bought by other banks, which means that there is a great diversity of situations and it is obvious that some banks have been managed better than some other ones.

55:17And it is also certain that the managers of the failing banks prefer to be saved by the state because they have a chance to keep their job, whereas if ever there is a purchase by another bank, they would probably be fired. In the long run, the solution is a revival of capitalism. It implies certainly decreasing the role of the state and it implies tax system more friendly to capital accumulation. It implies the end of monetary policy and, if possible, the disappearing of central banks. Finally, I would like to address a specific problem. It seems that in financial matters there are gains from a great dimension.

56:04But there is also a risk that big firms be managed by managers and not by capitalists. And I think that the solution would be a system with a great number of banks belonging to real capitalists but entering into agreements, what I call the cartel, in order to make in common some part of their activities, at least the activities where it is possible to have economies of scale. A monetary cartel makes possible to reconcile a great dimension for some activities and management by real capitalists. So we are convinced, all of us, that the present crisis is not a crisis of capitalism.

56:57It is a crisis of state interventionism, but I may have also that it may be a consequence of a mechanistic approach of economic problems. Quite often people have been confident in mathematical models of financial management without having a sufficient concern about the behaviors and the incentives of individuals. A banker who would have been educated in the Austrian tradition would have not accepted such high degrees of risk and he would have been doubtful about the laxist monetary policy of the beginning of the 21st century.

57:45We now have, and happily, a vicious circle of destruction of capitalism Under the pretext of curing the ills brought about by the capitalist system, states are reinforcing the non-capitalist aspect of the financial system. States become shareholders of banks and financial institutions. There are big mergers which create ever bigger banks. Monetary authorities are beginning to decrease interest rates and to distribute excess money, thus preparing another monetary cycle. People have to be convinced that the capitalist system is self-adjusting and that regulations are not the necessary way to obtain adjustment.

58:35But there is a terrific job to do in order to educate people and to persuade governments that they have to reverse the stream, not gradually and piece by piece but through a complete and rapid change of system. From this point of view, the Mises Institute has a historical responsibility as one of the rare places where a correct analysis of the working of free markets can be found. Back in 1987, Lew Rockwell wrote, great change must originate in the world of ideas. But we will never bring about a monetary revolution without mobilizing the people.

59:23And great popular movements cannot be built on a repealing legal tender. gold and anti-central banking, as our own history shows, are mobilizing issues, they also have the not inconsiderable virtue of being true. To end, let me just recall some statements I have made in the present lectures, and I think statements which are acceptable for all those who are here. There is no need to create money, there is never any balance of payments problem, the financial crisis is not a crisis of capitalism but a crisis of state intervention, one ought to suppress central banks and the IMF.

1:00:13Such statements in which I strongly believe are not easily accepted by public opinion and even by most economists. When expressing such views in France, I may be considered as foolish or as a dangerous extremist, a ultra-liberal, and I must confess that I need some courage to go on with such ideas. But I cannot do it alone. I need the support of people I do admire and that is why I want to thank the Mises Institute and you all here from the bottom of my heart. Thank you.