Dr Guido Hülsmann, Senior Fellow of the Mises Institute, and Economics Professor at the University of Anger, France, joins me in this very special episode. We talk about government monetary intervention compared with a free market in money. We discuss many topics:

  • The process of government monetary intervention and deterioration in quality of money
  • Which kind of monetary intervention is worst?
  • Interaction of reserve requirements with capital requirements
  • How businesses and banking differ in a free market economy versus our fiat money economy
  • The tendency towards one most saleable good or money, even within the cryptocurrency world
  • Comments on ‘stock to flow’ ratio and hard money
  • Dr Hülsmann’s economics book recommendations for listeners

Dr Guido Hülsmann links:

Podcast Transcript (sponsored by GiveBitcoin.io):

Stephan Livera: Hi, and welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Listen in as I interview some of the best and brightest. Today I have a truly special guest who my Bitcoin Austrian listeners will greatly appreciate. He is Dr. Guido Hülsmann. Those of you who follow me on Twitter or are regular podcast listeners will know that I often refer to his work as he has been quite influential on my own understanding of monetary theory, and as I’m obviously a big fan of his, this was truly a special interview for me.

Stephan Livera: Just some background for those of you not familiar with Doctor Hülsmann, or his work. He is a professor of economics at the university of Angers in France, and he is a senior fellow of the Mises Institute. He is author of Mises, The Last Knight of Liberalism, and he is also the author of a phenomenal book, The Ethics of Money Production. In my view, he is one of the great Austrian monetary scholars of our time. Quick note, apologies about the audio not being ideal. I had to record this one through a phone call as a backup option. I obviously wanted to make it easy for Dr. Hülsmann to participate, and couldn’t use my normal higher audio quality recording method.

Stephan Livera: But I promise you, the monetary economic discussion and insights are worth it.

Stephan Livera: Dr. Hülsmann, thank you very much for coming on the show today. I’m a big fan of your work, and I’ve really been influenced very much so by your work in The Ethics of Money Production, Deflation and Liberty, and the many talks that you’ve done from the Mises Institute. So it’s a great pleasure to welcome you today.

Guido Hülsmann: Well, I’m happy to be on the show.

Stephan Livera: Thank you Dr. Hülsmann. I think one topic that my listeners would love to hear you elaborate on, and one topic that I love the way you explain in your book, The Ethics of Money Production, is this process of monetary debasement, and how we have a certain quality in money, and yet the operation of the market process becomes perverted, and we see a deterioration in the quality of money. So could you outline a little bit for the listeners on that process and some of the monetary interventions that lead to that?

Guido Hülsmann: The way quality is preserved on the market is through the competitive process. So entrepreneurs have always the ambition to provide better products to their clients, because that’s for them the way to stay in the market, and to gain market share. What we have in the case of money is monopolies, right? So we have public monopolies. In each territory, there’s only one type of money that is tolerated by the law, and, or promoted by the law in the form of legal tender laws, which is typically the case in France, in the US, right? If you look at US bank notes, you have the inscription “This note is legal tender for all that’s public and private.”

Guido Hülsmann: I don’t know any Canadian dollars. No, I’ve never had one in my hands, but I suppose you have something similar written on them. So in that case, the competitive process cannot work. It’s not allowed to work, and as a consequence, we get a deterioration of the quality of money. The whole point why monopoly has been created is to allow the government to issue a sort of money that could not withstand the competitive pressures of the market, right? So in that sense, this money is always inferior as compared to the kind of alternative money that could be proposed if competition were allowed.

Guido Hülsmann: You see this very clearly if you raise for yourself the question. I mean, if I had the free choice between let’s say American dollars or Australian dollars, or whatever, and a commodity money or some other money that the supply of which is limited for natural reasons, for example because protection costs are relatively high, well then of course you would for your own needs as a user of money, you would always opt for a sort of money that provides these additional guarantees, that its purchasing power will not disintegrate anytime soon or very very quickly.

Guido Hülsmann: So you would rather use gold coins, silver coins. You would use bank accounts that are denominated in gold and silver, and so on. You use credit cards that are denominated in silver and gold and so on, rather than a pure fiat money that has the big disadvantages as compared to commodity money, that its supply is not limited by any natural limitation, right? So the only way that the government can bring dollar notes, a fiat money, into circulation is by outlawing competition. And the consequence of this is again, that the quality of money deteriorates.

Stephan Livera: Fantastic. Dr. Hülsmann, I also like the way that you outlined some of the different monetary interventions. And perhaps it might be useful to rank them or sort of order them, because there are many different ones. So obviously, the main one, the existence of a central bank, the lender of last resort, and as you point out, legal tender laws, capital gains tax laws, implicit and explicit bailout guarantees for large banks. If you had to rank them in terms of which ones are most deleterious or most negative, how would you rank those interventions?

Guido Hülsmann: Well, the worst is probably legal tender law, because legal tender law forces upon you a certain priority or ranking of the different types of money. If you have just a monopoly of the state, of the state’s money, somewhere you are still free to assess it as you see fit. For example, if you have a debt to pay in euros, and the euro didn’t have the legal tender standing, but only enjoyed a monopoly, then you would still be free to say, “Okay, this debt that I contracted whatever, a couple of years ago, so well, we’ll have to pay it now in more euros, or in less euros than the initial contract was contracted, but because it’s legal tender,” well you are entitled as a debtor to just pay exactly the amount that has been specified initially, right?

Guido Hülsmann: So monopoly and legal tender are 98% similar, but I still think the legal tender laws are a little bit more pernicious than monopoly laws. And then all the rest is comparatively secondary. Of course, what the government always tries to do… In the ideal world, right? The government would have a fiat money, which they have today, but they would also like to have a money that they can produce without any limitations. Now, we’re close to this. We’re not quite there, right? Because there are a few limitations of a juridical nature left, and ideally also they would be able to use it to control all units that have been issued in the past, which is also not the case.

Guido Hülsmann: For example, if you think of the fact that we have still a significant amount of money in the form of cash, so we have a bank notes, so these are the pockets of individuals or firms. They are not directly controlled by the government. In the world that would be ideal from the government’s point of view, they would be able to control all units that have been issued in the past, and technically, that could be done if all money existed only in the form of accounting money or scriptural money.

Guido Hülsmann: So if all the money that existed were only on bank accounts, then it would be technically relatively easy for the government to crack down on each individual account.

Stephan Livera: Fantastic. And Dr. Hülsmann, just wondering if you could comment on the operation also of capital gains tax laws. Perhaps these laws also stop private individuals from using other things as money, because then they become ensnared within the net for taxation revenue.

Guido Hülsmann: Yeah, that’s correct. For example, let’s say if you have a gold denominated account, and gold increases in value relative to your national government money, so then that would in most jurisdictions, this would represent capital gains, so it would be taxed, right. And as a consequence, your incentive to hold that kind of money would diminish, and your incentive to save holdings in that kind of money would be discouraged.

Stephan Livera: Right. Right. And I think another concept that might be interesting to bring to this discussion around government monetary intervention is, so obviously there is the reserve requirement. So that is the typical explanation from looking at a textbook. But there is also the capital requirements that are in place. So for example, the Basel II and Basel III capital requirement rules. Could you comment a little bit on which requirement you believe actually constrains the banks? Is it that they effectively go past… It’s not the reserve requirement that constrains them, but perhaps the capital ones?

Guido Hülsmann: Yeah, so that’s a so called liquidity reserve, the capital reserve. So the liquidity reserve is the amount of money that you would have to hold in base money. So that would be the national fiat money, right? For a bank it would mean it would have to hold a certain amount of money on its account with the central bank, right? To back up all the money it creates in the business with its own clients, right? So let’s say it creates whatever, 100 billion dollars, and the reserve requirement in cash, the liquidity requirement would be two percent, and it would have to hold two billion on the account with the central bank.

Guido Hülsmann: So that is then a limitation of the amount of money that it could create in the business with its own clients. The other reserve is the capital reserve. So in that case, the government tells “Well you need to hold so and so much percent, or you need to finance so and so much percent of all your assets out of your own money,” right? You cannot fully finance everything by taking out credits with the central bank or with other market participants. Otherwise, the bank would say, “Okay, all the money that I lend out or that I invest, I just obtain this by creating money out of thin air.”

Guido Hülsmann: So it could just have an indefinite amount of money just created by a stroke of a pen, and lend this out and earn interest on this, right? Or take out credit with a central bank and then hand them on to the market participants, which might be very interesting if interest rates are very low, right? So by obliging the banks to hold a certain amount, or to finance a part of their investments, by their own money, by equity, they limit the amount of leverage into which they can go.

Guido Hülsmann: Now, without the limitation of this sort of cost, you could imagine that any bank could just have a virtually unlimited balance sheet, right? It could just create money out of thin air, or take out credit with the central bank at very low interest rates, and as long as it finds customers who would be paying marginally more than the… Let’s say the central bank lends at one percent, and it would find customers who would be ready to pay two percent or three percent on a loan, the bank might go on and on lending ever more. So there’d be no limitation of this sort in the business.

Guido Hülsmann: All these capital requirements are somewhat artificial. If we compare them to any other business, right? We wouldn’t ask of any other business that they respect liquidity ratios or capital ratios. And the reason we do this in the case of banks, is that banks are… Their existence is guaranteed by the constant support coming from the central bank. Because the banks know this, they don’t respect themselves, those limitations, as they would in other businesses.

Guido Hülsmann: Let me still put this in other words, right? If you look at any other business, let’s say a food business, or you have a gardening company or whatever, really any other business, entrepreneurs voluntarily, spontaneously have a certain amount of their assets in the form of cash, right? So they don’t need to be obliged by the law to do this. And they finance their activity to a quite large extent out of their own money, rather than just taking money out in the form of debt and then invest it. Why is this so? Well, because liquidity and capital, so equity capital, are the natural buffers in an economic system. It’s what keeps companies alive, what protects them.

Guido Hülsmann: It’s a natural safety valve if you wish. If a company makes losses, well the losses impair the ability of the company to pay back its debt. So this is why you have equity, right? So the economic function of equity is to absorb the losses in bad years. And the economic function of liquidities of cash on the bank or cash in your cash drawer and so on, in your wallet, is to allow you to withstand unforeseen payments that you have to make, right? If there’s some machine that has fallen out of service, you need to buy a placement machine and so on, you need to have cash right away in order to make this payment, or something else, right?

Guido Hülsmann: So in most businesses, and also in private life, you always need to make sure that you have enough cash on hand, and you make sure that you’re not over indebted, because this increases the probability, and actually makes quite sure that you will go out of business if any adverse circumstance arises. So the question is then, if a normal business operates let’s say with five percent liquidity, some businesses with more or less, 10%, 15% liquidity and so on. And a normal business would operate with at least 50% equity, right? It’s a small and medium sized company, typically they have at least 50% equity.

Guido Hülsmann: And even large companies, which is already a little different, but even large companies, industrial companies, they would have 20%, 30%, 40% of equity. How come that a bank can operate with just five percent of equity? And in 2007, most of the large banks actually operated only with one percent equity or two. Now if you translate this into the terms that I just discussed mainly, that equity capital is some sort of a safety buffer, right? That absorbs losses, if you have a two percent equity financing, it means that actually your buffer as compared to all of your investments, only two percent.

Guido Hülsmann: That is, you are operating as a matter of fact, on a two percent error margin. Now, [inaudible 00:16:39] this two percent error margin is not normal, right? So this is not human actually. It’s not part of the human economy. No human operates in practical life on a two percent error margin. It’s just completely out of the question, right?

Stephan Livera: Yes.

Guido Hülsmann: So I mean, we have this kind of precision only in mathematical operations, purely intellectual games, and so on. There we have this kind of error margin. Engineering, right? So if we construe an environment, and we have all the materials, we control all the factors, then we can sometimes bring it down to two percent error. But in business, this is completely out of the question, because we are constantly interacting with people who make choices that we cannot control. So the amount of money that our customers will pay, we cannot control this.

Guido Hülsmann: Then there are lots of factors, lots of parameters that we cannot control. So there are lots of things that can go wrong, from the production side, supply lines. People fall ill. There is a flu that affects half of your employees and so on. Lots of things that happen in a firm’s life that you cannot control, and which makes that while the error margin is actually rather in area of whatever, 20%, 30%. Sometimes it’s more. Businesses, they are more. They are very cyclical, so business might go down 50%, 80% in any one year, and it goes up again and so on.

Guido Hülsmann: So this is human business, and that’s why most companies have very substantial equity buffers that allows them to get over tough times. So the question is, how come that banks, right? That after all are connected in many ways with the real economy, so are also exposed to whatever adverse events that might affect the real economy, can afford to operate on one or two or maybe today let’s say five percent, let’s be generous, error margin. And the answer is, well really they can’t, right?

Guido Hülsmann: So they themselves are not that good. I mean, they’re very smart guys and so on. They have great diplomas, and they’re very good at math. But the world in which they’re operating is not a two percent or five percent error margin world. So this implies then of course that they’re making losses somewhere, and somebody’s paying for these losses, but it’s obviously not them, because they’re staying in business and they don’t have the means to stay in business out of their own money.

Guido Hülsmann: So the short answer then is that they stay in business at these low equity margins, because they’re constantly subsidized by the central bank, and out of the central bank’s printing press, which means on the bottom line is that actually, it’s all the users of money that subsidize these commercial banks. Because if the central bank brings into motion the printing press, right? It creates money out of nothing in order to bail out commercial banks, well it dilutes the purchasing power of each dollar, and this is ultimately paid by all other people who use that money.

Stephan Livera: Fantastic explanation Dr. Hülsmann, and I think essentially what you’re getting at there is that these commercial banks, in a fractional reserve banking fiat money system, are able to benefit from the implicit sort of bailout guarantee, or that sort of the knowledge that they will receive if they need it that funding from the central bank, that allows them to take kind of an unnecessary level of risk. Have I understood you correctly?

Guido Hülsmann: Yeah. I mean, we shouldn’t stress too much the word unnecessary. I mean, given the institutional context in which they’re operating, right? Given the presence of the central bank, I mean what they’re doing is not unnecessary. It’s just great business for them, right? But they take on more risks than they would and that they could if the central bank weren’t there, right? And so as a consequence we get these problems.

Stephan Livera: Right. Right. And I think that touches on… The explanation you were discussing there Dr. Hülsmann, was around how even small businesses would have to hold… Generally they hold a little bit more capital compared to banks, let’s say. And one of the points that you make in your book is that essentially the existence of fractional reserve banking, changes the whole game such that many businesses now go into debt, where in the past or under a non fractional reserve banking fiat money system, they might have been more equity based. Can you comment a little bit on that?

Guido Hülsmann: Yeah. If you had a world without money creation, or without artificial money creation, you would have just natural money production, right? Let’s say you had a world that was based on precious metal moneys, or you have silver coins, gold coins, and then you have silver and gold based banking and so on, that would be 100% banking. So for each ounce of gold credited on your account, there would be an ounce of gold somewhere in the vault of the banks. So in such a world, the money supply would be limited, and money production would be constrained by the natural production costs, right?

Guido Hülsmann: And as a consequence, the production of money would usually lag behind somewhat the production of all other goods and services that are being created in the economy. Now that implies that in such a world, the price level would tend to be either stable or to shrink. Probably it would shrink, right? A natural economy is an economy in which price deflationary tendencies would prevail. So this is a very important thing to realize, and actually we had such a world during many decades of the 19th century, and actually up to World War II, right?

Guido Hülsmann: During peace times, we always had price deflationary tendencies in the western world. Now, in such a world, credit plays a very subordinate role, right? Of course, there would be credit and so on, but actually it would be very strongly discouraged. Clearly, I mean for example, think of a household, right? You wouldn’t buy a house by taking out a credit. Let’s say you buy the house today for 100, so you take out a credit for 100, and then because of the price deflationary tendencies, in 20 years or in 30 years, your house will be worth only whatever, 95 or 97. So you would actually lose money, because you would have to pay back the 100, but the house itself would be worth less than it was before.

Guido Hülsmann: So you wouldn’t finance the purchase of the house this way. What you would do is exactly what our ancestors did. That is our grandmothers, great grandfathers and so on, right? They saved cash until they had enough of it. This is the 100, to buy the house. And that was it. It was an outright purchase, no credit involved. Now for firms, it’s somewhat different. For companies, there are sometimes good business opportunities, so they might need some extra capital, and they would not always want to take in another partner or increase their shareholder base and so on.

Guido Hülsmann: So that would be the right occasion then to take out a credit, right? So if the opportunity arises, you take out the credit, you make your investment. Now for a firm to realize this, right? For a firm, the diminishing price level in a natural economy is not a big thing, because what counts for a firms is not the price level, but the difference between its revenue and its cost. In other words, the difference between selling prices and buying prices, right?

Guido Hülsmann: So if there are price deflationary tendencies, well then the revenue of a firm might tend to diminish in the course of time, but its cost base would also diminish, so as a consequence it might very well stay profitable in a price deflationary environment, which was the case. So for such a firm then, if it takes out a credit, that might not be a big deal, because it would still earn money thanks to the credit, and then be able to pay it back out of the profits and so on. So credit would play some role, but it would be a subordinate role.

Guido Hülsmann: Things change completely once you have money creation through fractional reserve banks, right? Because then the principal of money creation is of course based on credit creation, right? [inaudible 00:25:31] The bank brings the new money into circulation by granting additional credits, right? That’s what they do. So for this reason alone then, the credit market is artificially boosted. And things get even worse once money creation is pushed to such a level that you have constantly rising price inflation rates, right?

Guido Hülsmann: So whereas let’s say in the 19th century, we typically had declining price levels. So each year whatever, some price deflation, 0.5, one percent, maybe sometimes two percent price deflation, now after World War II, we suddenly had constantly rising price level. And if you have a constantly rising price level, then getting into debt to finance your purchases, make long term investment, buying a house, extending the size of your firm and so on, becomes then very interesting, right?

Guido Hülsmann: Because think again of a household, which is the situation that most people are familiar with. If you buy a family home, in the context of a rising price level, well then you take out 100 now, and you have to pay back eventually the 100, but in the rising… If the price level’s rising, then all prices rise. That is also the price of labor. This is that the household income is susceptible to rise. So paying the debt out of a rising income is of course very convenient. It becomes easier, right? The debt service becomes easier in the course of time.

Guido Hülsmann: So therefore, household have an incentive to go into debt and buy the house, whereas they didn’t have so in the 19th century, which is why today everybody takes out a loan from the bank to purchase an apartment, a house, et cetera, and then pays it back, because if you have 10 years, 20 years, 30 years to pay back your credit, well then the sum that you have to pay back on a fixed interest rate loan is always the same, whereas your revenue continues to rise. So it’s a good deal.

Guido Hülsmann: And of course, the same thing holds true for governments, and the same thing holds true for firms, right? So in a price inflationary environment, the environment in which we are today operating and have been operating for the past two or three generations, debt is actually the rational strategy, right? You don’t just build up equity and then make a purchase. You buy first, finance by debt, and eventually you pay it back. So this is the reason why financial culture has changed so much within a century. And it’s really due to completely monetary causes.

Stephan Livera: Fantastic explanation again Dr. Hülsmann, and I think one concept from your book that came up as you were explaining that is, some people might think oh, but in a world with less credit, how might all these projects get done? And I’ll just quote from your book, one section you say is, bank credit does not create resources. It channels existing resources into other businesses than those which would have used them if these credits had not existed. Could you just elaborate on the confusion that can come, and actually a better way to think through that?

Guido Hülsmann: Yeah. If you go to the bank, if you take out a loan to buy the studio that you’re interested in, or the apartment or the house, and so on, so it’s through then… The loan allows you to own that apartment or that house. But of course, you buy only something, the house that has existed independent of the credit, right? Which means that if you hadn’t bought it, then it would have had some other owner. Either the person who sold it to you would remain the owner, because he doesn’t find anybody else who pays him enough, so he would just keep it for himself, and for every good reason.

Guido Hülsmann: Or somebody else would have obtained it, and they would have bought it at a lower price. Because you become the owner because thanks to the loan, you are able to pay the highest price. That’s the whole point of the thing. And the same thing holds true for a firm, right? Thanks to a bank credit, you can hire additional people, you can build a larger factory building and so on, right? Then what this means is that thanks to the additional credit, you’ve come to possess all these resources, right? You are able to attract additional employees who would have worked either for somebody else, or who would have pursued their own interests at home, would not have worked for anybody, would have just have been a homemaker, or I don’t know. Would have pursued some other activity that would not have been paid.

Guido Hülsmann: You are able to buy additional raw materials, intermediate products, and in order to increase your production, you are able to build a larger factory building, but of course the same resources that you buy, the raw materials or the intermediate products, right? The oil, the electricity, whatever, steel and so on that you transform, all of this would have been sold to somebody else, right? And also the materials that you use to enlarge your factory building, right? The same materials could have been used for other building purposes and so on.

Guido Hülsmann: So what credit does is not to enrich the economy as a whole. It channels the available resources into employments that would have not existed without that loan or without that credit, but of course which precisely for that reason, are not inherently more superior to those other employments, to which they would have been dedicated in the absence of the credit.

Stephan Livera: Fantastic. It’s such a clear explanation. Dr. Hülsmann, another topic I’d love for you to touch on… And now this is more for let’s say, people who are detractors of say Austrian economics. They might come out and say… They might say things like, “We gave up the gold standard because it didn’t work.” Or that, “You guys, you’re all crank conspiracy theorists, and you oppose empirical testing.” Another common one I think is this idea that okay, these Austrians, they are considering a totally free market, when actually a truly free market, absent government monetary intervention, has never existed, right?

Stephan Livera: Now obviously, I understand some of this comes to the Austrian economic methodology, where we must assess the seen versus the unseen. So what is the way to respond to people who give that challenge of saying, “Well look, a totally free market and money has never existed?”

Guido Hülsmann: Let me first make a little statement in general. I mean, I would always start off saying that of course, Austrians don’t have a monopoly on the truth, right? And Austrians might be wrong. It’s not because you have read Mises and studied Mises, Rothbard, and Hayek and whoever very thoroughly, and pursue your own research based on these, right? And then somehow you become error prone, right? Or immune to errors.

Stephan Livera: Yeah.

Guido Hülsmann: You become immune to errors. So this is of course not the case. So Austrians should take criticism gladly, because well, that’s actually the only way to improve, right? And to always double check your premises, check the facts and so on. It’s a standard scientific procedure. And then of course, there are better criticisms and worse criticisms, right? I mean, the arguments, they say well Austrians are recommending money competition, currency competition, whereas such a situation has never existed. That’s of course… That’s a bad argument, right? I mean, if you said… You could have said the same thing.

Guido Hülsmann: Let’s say in the 19th century, there had been a couple of centuries of slavery already on the North American soil. And you could say, “Well, I mean, you’re recommending to free all the slaves. We’ve never had anything like a purely free society in which everybody was free to do whatever they wished,” and so on. So therefore, does this mean that we should rule this out? You see what I’m getting at?

Stephan Livera: Yes. Yes.

Guido Hülsmann: Not because something has not existed in the past, that that’s per se a reason to reject it. Of course, certain things have not existed in the past because they are bad or they impossible, but clearly currency competition is not something that is impossible. And if the Austrian arguments are worth anything, then clearly it’s not all bad. So I would say on these grounds, yeah, I wouldn’t accept this kind of criticism.

Stephan Livera: Right. Right. And so then, how about in the case of say specifically the gold standard? So I understand, obviously as you explained in your book, there was the classical gold standard. So this is like sort of 1870s through to I think early 1900s. Now obviously, that itself was not a free market in money, and yet that was a time period where most Austrians would say well, at least the money was a little bit better than… It was better than before.

Guido Hülsmann: Yeah, that’s right because we still had a monetary system based on commodity money, and therefore you had the inherent break that comes from cost of production, right? So in that respect, it was certain incomparably superior to the current system, right? The ironic thing is that precisely for the reasons that are currently praised in the current monetary system, namely that we have a type of money that can be multiplied at will. So it’s a purely political question whether we double the money supply or we increase it by five percent or whatever. Precisely this is the biggest disadvantage, right?

Guido Hülsmann: But okay. So at the time, we had still the advantage that we had a commodity money system, which was limited. It was removed from pure human [inaudible 00:36:03] so it was therefore part of the overall market economy in which all productive activities are in competition with one another and related to one another in some way. But of course, as you mentioned, right? It was already a deterioration as compared to the previous monetary system.

Guido Hülsmann: Before 1872, most of the world was actually on a silver standard, and only the UK and Australia and the US, and the US only not for a very long time, had been on a gold standard. Now silver as compared to gold, has this big advantage that the purchasing power is such that it can be used in most daily transactions, right? In most daily exchanges. So actually most of the silver that is being used for monetary purposes, that is for the purpose of being exchanged against other goods, is in the hands of the people, of really of common people and so on.

Guido Hülsmann: Now if you have a gold money, this is no longer the case, because gold coins have such a high purchasing power, not only today, but also in those days, that you can actually use them in the exchanges only for very limited purposes. If you buy a house, you buy a nice suit, you buy some very expensive consumer items, or maybe if you have a very large family, you can do whatever, the weekly groceries, with a gold coin, with a small gold coin. But for most other things, they’re completely useless. So the only way to use them is actually to have gold on your account, and then you use checks or whatever, bank notes backed by gold and so on, to make purchases.

Guido Hülsmann: That is, having a gold money [inaudible 00:37:53] automatically boosts the importance of financial intermediaries. You need banks under a gold standard, whereas you don’t need banks under a silver standard. And so even though the gold standard period was comparably superior in many respects to what we have today, it was already a deterioration as compared to the situation that we had before.

Stephan Livera: Fantastic. And I think that also comes to this concept of divisibility as well. So in obviously the kind of like the amount of value to weight ratio of silver compared to gold, right? Is kind of what was driving what you were explaining there. And so perhaps in the modern day, would there be an increasing tendency then towards one best overall money, where we can have computers that can subdivide more finely?

Guido Hülsmann: Yeah, of course. I mean, to the extent that we are… Today we are used to using accounts, right? Monetary accounts. So the [inaudible 00:39:03] account, then of course you can subdivide very easily, right? And this is for example, brings us to one argument that has been sometimes leveled against moneys such as bitcoin, right? Because people were saying well, your bitcoin suffers already from the problem that the quantity cannot be increased, and then you get these infinitesimally small units that you have to exchange.

Guido Hülsmann: But that of course per se, is completely irrelevant, right? Because you can subdivide as you will up to the 10th or 20th or 100th decimal after the comma.

Stephan Livera: Fantastic. Yeah, and I think it’s great you’re bringing that up, because one topic that comes up in online cryptocurrency discussion, and some of us who believe that there is a tendency then towards one best money, and so I was curious to actually ask you that in your book, you say “for there are good reasons to assume that a free society would harbor a variety of different moneys, which would all be natural moneys in our sense”. I guess my question then is, do you believe that was more for historical reasons, and perhaps in an increasingly digital and internet commerce or e-commerce world, that there might be a tendency then towards one sort of best overall money?

Guido Hülsmann: Yeah. I mean, my mind isn’t fully… I don’t have come to a very firm conclusion as far as these things are concerned. I still think that if we had a natural economy, in which we had currency competition and so on… So in such an economy, the role of intermediaries, of banks and so on, would not be as big as it is today. Now, how small would it be? I have no clue. So I don’t have a glass ball. I cannot tell you this.

Stephan Livera: Sure. Sure.

Guido Hülsmann: All I know is that because we have this monetary system, which creates constantly money out of nothing, which creates price inflation tendencies and so on, in such an environment, intermediaries play a big role. So therefore, in such an environment, people use accounts and so on. I think they would less, if there were price deflationary tendencies. In that case, people would simply hold more of their media of exchange in cash. And in that case, I think yeah, that would be a parallel holdings of gold and silver. For certain things you would rather use gold.

Guido Hülsmann: For example, if you travel abroad and so on, right? I mean, you jump into the plane, you wouldn’t take five kilos of silver with you. I mean, it’s just ridiculous. So you would… But you might take a few gold coins with you. So for such things, you would use gold. Yeah, I think that therefore that in such a case, there would be a greater variety of media of exchange. Whereas, in the current system, it’s true there are very strong unifying tendencies, right? Because you have to go through an account anyway, or it’s the most convenient way to go about this, and then from that respect then, all moneys are compared to the same criteria, right?

Guido Hülsmann: They’re the only one dimension that comes into play, and so this might turn out to create one single money that dominates in all exchanges.

Stephan Livera: Right. Right, I see. And I think another point that I might like to get your comments on Dr. Hülsmann, there’s this book, The Economics and Ethics of Private Property, by the great Hans-Hermann Hoppe. And one area that he points out, is he suggests that competition in moneys is more like a system of partial barter, and that competitive moneys are not the outcome of free market actions, but are invariably the result of coercion, of government imposed obstacles, placed in the path of rational economic conduct. Do you have any comments on that?

Guido Hülsmann: I don’t remember this specific paragraph. So he says that issue of currency… If you have competition between moneys, that that’s the outgrowth of government intervention? Is this the point?

Stephan Livera: Yes. I think he’s trying to say that that’s government imposed obstacles that have been placed in… I think perhaps, he might be referring to this idea of just gold standard, or just gold use. I’m just curious if you have any thoughts on that?

Guido Hülsmann: Yeah, Hans Hoppe, his general argument is, right? That you have these cumulative effects that come with the spreading of an exchange network, right? Let’s say if gold is being used in a larger set of exchanges than silver, then of course the opportunity cost of holding silver increasing, and the opportunity cost of holding gold diminishes. So for this reason, right? There are a snowballing effect so to say, that makes it once the money becomes even just slightly more widespread in use than some other money, that money will eventually come to steamroll all other money, so will crowd all other moneys out of the market.

Guido Hülsmann: And the argument per se is correct, but I don’t think it applies in all cases, precisely because for certain exchanges you wouldn’t use silver, right? Or excuse me, you wouldn’t use silver, and for other things, you wouldn’t use gold. The only exception being if any way, all exchanges are based on purely accounting exchanges, right? You have only scriptural money. Only you have wire from one bank account to another. In that case, yes, the argument becomes relevant.

Stephan Livera: Right.

Guido Hülsmann: So I would agree with him, right? In the price inflationary context, yeah there are such tendencies, and the argument will hold true. But outside of that, not necessarily.

Stephan Livera: Right, I see. I see. Okay. So one topic that many of my listeners might be interested to hear your thoughts obviously… This is a Bitcoin and Austrian economics podcast, and one concept that we consider is just that perhaps gold has more of a centralizing tendency in that it’s politically vulnerable, and that in some ways bitcoin can present a way that’s more resistant to that government co-opting. Do you have any thoughts on that?

Guido Hülsmann: Yeah. I tend to agree with this argument, right? I mean, definitely gold is a very political money, as we see today, right? I mean, look who is holding the greatest gold reserves in the world. It’s not… Well I mean, of course a private person as well, but central banks have huge holdings, and central banks do everything to prevent that the gold ever be used as a medium of exchange, right? So they do precisely what sometimes critics of the free markets say that capitalists would be doing. I mean, they withhold all the good stuff from the market so that people are forced to use the bad stuff.

Guido Hülsmann: In a way that’s what they are doing. And it has always been this way, and it will never change, right? So gold is a very political metal. It’s a very political market, just as for example, the oil market is also a very political market. So you always have very large government interventions there. So yeah. So you can sidestep this by decentralization, and bitcoin might be a way to bring this about. Yeah, so because in bitcoin precisely, you have this decentralization at least for the moment.

Stephan Livera: Right. Right. And one other concept that I think my listeners… They definitely will want to hear your answer to this. So I’m not sure if you’ve read the book The Bitcoin Standard by Saifedean Ammous, and in that book, he-

Guido Hülsmann: No I did not.

Stephan Livera: Yeah. Oh, okay. Well, I’ll just outline the basics. One of the basic arguments that he outlines is, and obviously it’s not certain, it’s just an argument… He suggests that bitcoin may, from a stock to flow ratio point of view, actually because of the algorithm of bitcoin versus gold, which the supply of which expands at roughly one and a half percent per year, one argument that Saifedean advances in that book is that bitcoin may decades from now, become even quote unquote harder than gold.

Stephan Livera: And from that point of view, let’s say someday people go and find ways to go and do asteroid mining, and mine gold. But they’ll never find a way to create more bitcoin. So do you have any comments on that sort of stock to flow ratio argument?

Guido Hülsmann: Yeah. I mean, if the… Again, I’m not an information scientist, right? So don’t ask me about the solidity, viability of the bitcoin code and so on.

Stephan Livera: Sure.

Guido Hülsmann: But if the code is, and does what has been announced and what’s been advertised, yeah, then indeed that’s.. Of course it would be something that would put bitcoin on a superior competitive footing as compared to gold, because you would expect that the purchasing power of gold decline relative to bitcoin in the course of time, right? So definitely then, bitcoin would become, or is already now, right? The harder currency as compared to gold.

Stephan Livera: Fantastic. Okay, yeah. So and then another concept that I’d love to get your thoughts on is, even within the cryptocurrency world, one concept that many of us who consider ourselves students of Austrian economics, we consider Carl Menger’s, The Origins of Money essay. And in that essay, he speaks about this concept of the most saleable good, you know? The one that best preserves your value through time and space. And so, I guess the question then is, would you believe that even within the cryptocurrency world, that there would be strong sort of network effects that would pull towards the one most saleable good, the one with the most liquidity?

Guido Hülsmann: What do you mean? Within the bitcoin world-

Stephan Livera: Oh, I’m referring to how-

Guido Hülsmann: Comparing bitcoin cash, to bitcoin, or-

Stephan Livera: Yeah, to some of the other cryptocurrencies. Would you believe that there is a tendency then towards the most liquid one?

Guido Hülsmann: Yeah. I mean, this is the standard argument… It’s the same argument that we discussed before, right? We were talking about Hans Hoppe’s idea of… Actually it’s not Hans Hoppe’s argument. The argument is very old, right? So you find it also for example in Jevons and various other economists of the 19th century. Yeah, the argument is of course valid per se, right? So the larger is the exchange network that already exists, the greater are the comparative advantages of using that money as compared to others that are used only in a smaller framework.

Stephan Livera: Right. Right. Yeah. No, I think… Yeah, that’s a fantastic perspective. And look, I think we’re just coming up to the end of the time we’ve got allocated, so Dr. Hülsmann perhaps just if you’ve got any closing comments, or perhaps if you’ve got a recommendation for my listeners who like Austrian economics, and they like Austrian monetary theory, have you got any books or talks that you might recommend for them to listen to or read?

Guido Hülsmann: I think it’s always a good idea to read books, because that’s a way of really delving more deeply into a subject, and it’s really building your own thoughts. I mean, there’s no better way really to learn anything, but to learn from the great masters who have been writing in any field. So I would definitely always go via books. Talks, okay. So I know today many people like to listen to podcasts, and some people are listening to our podcast today, right?

Stephan Livera: Yeah.

Guido Hülsmann: And that’s a great way to rise interest, and to convince you yeah, it might be really worthwhile to look into this in more detail. So but then reading books is always the next step, and I think the most important step. Yeah, and as far as Austrian economics is concerned, Austrians have… Especially in the field of money, they have made major contributions as compared to the classical economists of the 19th century. And here, I would always recommend as a first text, a little book by Murray Rothbard that has the title What Has Government Done to Our Money?

Guido Hülsmann: I don’t like this kind of title I must say. I recommend the book despite its title, not because of the title. The book is really… It’s an excellent introduction to monetary thought. And then there are various other books, have been written on the subject that are very good, and also longer articles. For example, Hans Hoppe’s article… We mentioned him already. He has a longer piece. It’s around 50 page article, and How is Fiat Money Possible? It’s a fantastic piece of analysis, that gives you in a reasonable timeframe, a good introduction to the main mechanisms that come into play.

Guido Hülsmann: Then, if you go further on, you might read Mises’ Theory of Money and Credit. You might have a look at my book, that you were kind enough to mention, The Ethics of Money Production. There are other authors. There’s Hans Sennholz. He was a German American economist who died in 2007. He had a couple of small books on the subject of money. There’s Jesús Huerta de Soto. He’s a Spanish economist, and has published a great text on Money, Bank Credit and Economic cycles, which is available for free on the internet site of the Mises Institute.

Guido Hülsmann: And there is a book by professor Philip Bagus from the University of Madrid, In Defense of Deflation, which is a wonderful book on this subject. And yeah, we have various other small texts, and they do not right away come to my mind, but you will have no difficulty finding.

Stephan Livera: Fantastic. Yeah. I’ve read actually probably four or five of those. I love them. So thank you so much for that. Dr. Hülsmann, I really appreciate you taking the time to come and teach us today. I think my listeners will really really enjoy this, and I think you have been… Personally, you’ve been so so influential in my own thought on learning more about Austrian economics. So thank you so much for all that you do, and look, thank you very much for coming on the show today.

Guido Hülsmann: You gave me the best compliment that a professor can hope for. So thank you very much. It’s been a pleasure, and I wish you all the best for your site, and for educating people on these very important topics.

Stephan Livera: I hope you enjoyed the insights from Dr. Guido Hülsmann. Check the show notes in the RSS feed or on my website, StephanLivera.com for links to the recommended books, and to Dr. Hülsmann’s website. If you enjoyed the podcasts, please remember that doing these podcasts takes me significant time in researching the guest’s work, getting high quality guests on, and audio editing production time. So if you want to help me out, please do retweet and share it around widely. That’s it from me. Thanks for listening, and see you next time.

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