Exchange with an Austrian
Jude Wanniski
January 4, 2002


Memo To: SSU Students
From: Jude Wanniski
Re: Exchange with an Austrian

In our six years at SSU, I’ve never run this kind of exchange, but decided it would be helpful to illustrate how many differences there are in economic schools. This is an exchange with Gary North, an economist of the “Austrian” school whose commentaries appear frequently at Lew Rockwell’s website,, which provides a platform for Austrian views of all varieties and also links to this website with some frequency. We are friendly because the Austrians are from a branch of the classical, supply-side school that dates back to the 18th century, with a focus on the economics of production, not consumption. Regular SSU students will know I consider the late Ludwig von Mises one of the most important economists of all time. The late Murray Rothbard is also of the Austrian school, but I think he allowed too much demand-side monetarism to creep into his work. Both North and Rockwell have been disagreeing with my contention that the U.S. has been in the grip of a monetary deflation for the past five years, insisting a deflation does not occur until price indices are in negative territory. And like the monetarists, they point out that the monetary aggregates have been growing, which to them is a sign of inflation, not deflation. As you will note if you make it through this exchange, I think one of the major barriers to a return to a gold standard is the insistence among the Austrians that it be “the right kind of gold standard,” of a kind I believe to be impractical.

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WANNISKI (12/26): I've read over your piece about Moore's Law, etc. I see why Rockwell likes you so much, as you are a Rothbardian, not a Misean. I think if von Mises were around today, he would recognize the deflation immediately, while Rothbard would think we are already in an inflation because the money supply is growing. To me, there is an ideal value to a fiat dollar, when it is equal to a weight of gold at an optimum exchange rate. When the dollar price of gold rises from that point, it begins a PROCESS that leads to a rise in the general price level, so the galaxy of prices are again in equilibrium. When the dollar price of gold falls, i.e. the dollar becoming scarcer than gold, it begins the deflation process, even if government statistics show that prices are still rising in order to catch up with the earlier inflation process. My model has more variables than your model, but I think it is more useful in understanding the dynamics of the economy. There were little deflations in 1974 and in 1981-82 and in 1984-85 but they took place amidst the continued adjustment to the broader inflation that had been put afoot in 1971. The term "disinflation" was invented to capture the dynamic. Von Mises would not have bought it, as it obscured the important of gold as a pure signal of money demand.

NORTH (12/27):There was this difference between Rothbard and Mises on banking. Mises believed in free banking. Rothbard believed in 100% reserves. I sided with Rothbard 35 years ago on this point. So, on this point, you're correct: Rothbard, not Mises. Mises was no advocate of central banking or government-guaranteed deposits. Without gold coin redeemability by the general public, the system is not the gold standard of the Austrian School, Mises or Rothbard. Everything since 1914 has been an imitation of what prevailed prior to WWI. The suspension of convertibility is always the sign that the printing presses have begun to roll. After 1914, the suspension was permanent.

WANNISKI: [Sent North an earlier exchange I had with former Fed Gov. Wayne Angell that is parenthetical to this exchange.]

NORTH (12/27):In a world in which gold has been demonetized (except for central banks), the money we citizens use is fiat money. Most important, I think, is the money we pay our debts with. If governments, through central banks, continue to increase the money supply, we will assume that added debt is no big threat. We will be able to repay. This addicts us. With a gold coin standard, we know better. The price level stays fairly stable (1815-1914). We limit our debts. But when Greenspan stands ready to increase the monetary base, we don't worry too much. So, the size of the total debt in relation to output grows. We can't get off the treadmill because of our existing obligations. It makes a return to the gold standard that much more unlikely, short of a systemic crisis: "I can't pay you until I get paid."

WANNISKI: Having learned about money and banking for the first time with Nixon's breaking of the dollar/gold link in 1971, I've come to think of why the link was broken and how it could be restored. I concluded the link was broken because economists blamed gold for the Great Depression, or blamed the Fed for mismanagement of the banking system, or blamed the government for abandoning free banking or for the absence of 100% reserves, etcetera. When I hit upon Smoot-Hawley, everything else became bullcrap. I realized there was nothing wrong with the Federal Reserve Act and central banking, and that it was probably an improvement on the earlier system, but wound up getting blamed for the fiscal errors of the political establishment. I have spent 20 years defending that thesis and cannot find a flaw in it. The reason I like von Mises so much is that he forthrightly defended gold as having nothing to do with the Great Depression, while implicit in everything Rothbard has written is a damnation of gold. I was telling my staff today about a dispute I've been having with Wayne Angell, who continues to insist that the Fed caused the Crash and Depression. I said none of these fellows understands that if you are in San Francisco and want to go to New York, you can go through Dallas, Chicago, Philadelphia or Boston and at the end of the day it does not make a difference. If gold has to be $20.67 per ounce in New York, it will be, no matter what route you take during the course of the day. If you can explain to me what is wrong with that logic, you will have succeeded where Angell -- and [Robert] Mundell -- have not. Over the years I've challenged my staff to prove me wrong, because I do not want to overlook an argument, but they always wind up spending weeks or months doing the research and conclude I am right. You don't have to agree with me, Gary. You don't have to answer me. You can go your merry way and be wrong for the rest of your life, and I will not chastise you for it. Milton Friedman of course will go to his grave with MV=PT on his gravestone.

NORTH (12:27): You say: "If gold has to be $20.67 per ounce in New York, it will be, no matter what route you take during the course of the day. If you can explain to me what is wrong with that logic, you will have succeeded where Angell -- and Mundell -- have not."

I would hardly argue with that! But. . . . the question is: "What will the price be when I get off the plane?" If speculators think there will be a suspension of payments or a devaluation of the dollar, they will make a run on the banks and demand gold. Maybe it will be $35 tomorrow -- especially if the government has called in the gold and gets to internalize the profit. You have made a strong case for political democracy. What I'm trying to do here is to democratize the gold standard. I want Joe Lunchbucket to become a speculator, too. I want a hundred million of them to have the right to go down to the bank and demand payment in small gold coins, which they can afford to buy. The academically correct gold standard alternatives -- rare as they are -- are always aimed at getting Joe out of the picture. I trust Joe on what is best for Joe's money. He's a specialist on Joe's needs. Genoa in 1922 was the first big attempt to get Joe out of the picture. The gold-exchange standard was a house of central bank cards that rested on the honesty of the Bank of England. I say, "Never trust a government-created monopoly to abide by rules that threaten its short-run interests." That's why I want a gold coin standard with full redeemability. I trust Joe. I don't trust Eddie or Alan.

NORTH: Tell [Nathan] Lewis that the book of books on the history of American monentary policy -- written by a gold standard Misesian lawyer -- is about to come out. The author is Ed Viera. I include a link to one of his law review articles.

WANNISKI: Thanks.... This will be helpful. I just read the first page and agree completely with von Mises' definition of inflation and not with Rothbard's. The von Mises definition would automatically lead to a definition of deflation that is a mirror image of the inflation definition. Rothbard ties his definition to a volume of gold. Viera calls this a "refinement" of von Mises, but I call it a departure, down a blind alley. I have sent the link to Nathan Lewis. If you are a Rothbardian, there really is no practical way to get back to a gold standard. It is just something to sit around and talk about. If you are a Misean, you are also a Hamiltonian and a Ricardian when it comes to these definitions. Gold is just the best error signal for eliminating inflation or deflation from the monetary order. Of course there can be a return to gold. It will just take the collapse of the derivatives market and the central banks to return to it.

NORTH: Rome had a gold coin standard in A.D. 70. Then came centuries of debasement. Finally Rome fell. Western Europe had no gold coins until the 13th century. But as trade recovered, so did gold. The fundamental philosophical issue of gold is the issue of political sovereignty. Either it is sovereign over the price system or else central banks are. That's why central banks will not voluntarily return to gold. The bankers understand sovereignty. Gold is their supreme enemy. It represents the people. The modern nation-state demands sovereignty: the divine right of the State.

Sovereignty means no higher court of public appeal. But a free market can appeal to gold: dump the fiat monetary unit and buy. As yet, it has not done so. I will wait. I don't need to reform anything. Besides, the modern State does not want any reform that denies its sovereignty. A gold coin standard denies its sovereignty. I do not tilt at windmills. I wait for them to collapse.

Mises's recommendation was open monetary standards. Let the market decide. He hated central banking. That's my position, too, with this exception: no fractional reserves, which are fraudulent, issuing receipts for items not held in reserve. All I want is honest labeling! The rest is up to the free market. If some market wants silver, fine. Parallel monetary standards are fine. Just don't let the government set price controls. No more Gresham's law. No more artificially enforced price between money units. Just get government out of the money business. That's all I want.

WANNISKI: Did you know Japan had almost no gold in reserves from 1950 to 1975, when it grew like crazy, with no inflation? It never even thought about gold because it linked the yen to the dollar, which was linked to gold. How can you attach a giant economy like Japan's to the giant US economy with a net decrease in the per capita volume of gold, with no recorded inflation? That's Rothbard's fatal flaw, as he is then forced to say that the 1920s were "inflationary" even though the general price level was lower in 1929 than it was in 1920. If gold is an error signal, you see, it makes no difference whether you have a ton of the stuff or an ounce of it. It simply flashes green or red from moment to moment, and if the central bank responds from moment to moment, there will be no surplus or dearth of money, which will make me and Von Mises happy, but not Rothbard.

NORTH: By starting with no economy at all (1945). Then add increased output based on the introduction of Western management/production techniques (W. Edwards Deming), plus a huge domestic savings rate, coupled with a work ethic that still has no comparison anywhere on earth. These people in 1952 abolished the American-introduced daylight savings time system because in summer, workers would not leave the office in daylight.

WANNISKI: Jibberish.

NORTH: Please, please Jude: it's spelled "gibberish.."

WANNISKI (12/31): You are right about that, Gary. It occurred to me after I sent it that I should have used a "g" not a "j." You do get my meaning, I hope. When you can't answer the question of how Japan could get along so well without any gold reserves, you drag in all the dogs and cats in the neighborhood to explain away the flaw in your theory. This is how the Keynesians always explained how Japan could run bigger deficits than we do, because they "save more." The same Keynesians now say they should "spend more" in order to run bigger deficits to get out of recession.

I'm afraid after this exchange that you are just another "gold bug," who does not want to fix the dollar to gold unless it is done the way you want it to be done. You would rather wait around for a total economic collapse, Armageddon. This seems to be the position of most of the "Austrians" I run into, a state of mind that flows directly from the assumption that "a wrong kind of gold standard" caused the Crash and Depression. Once one accepts the idea that fiscal shocks caused the Crash and Depression -- and von Mises was right to exonerate gold in his Theory of Money and Credit (1934 edition) -- the problem becomes much simpler to solve than you "gold bugs" make it out to be.

NORTH: OK, you're right. I don't think the governments will voluntarily change to gold. I'm Sancho Panza. You're Don Quixote. That's how I see it. I hope I'm wrong. But, so far, I have never seen a politician say, "I agree with Wanniski. We should do what he says." I've never even heard anyone say, "I understand what he says." Keep at it. Your pseudo-gold standard would be better than what we've got.

WANNISKI: Hey.... That is exactly right! Don Quixote!! Of course, I remember Milton Friedman saying in 1970 that he did not expect to see a floating dollar in his lifetime. He was wasting his time, tilting at windmills. What makes it happen? Remember the Mel Brooks' "Ten Thousand Year Old Man"? Carl Reiner asked him what was the principal means of transportation in his youth. "Fear," said Brooks. "A lion would growl and you would run like hell." I've suspected for some time that if Russia or China linked their currencies to gold, we would have to do so. The euro might also be a good candidate for a gold link. So it may come in a roundabout way. Better if we took the lead, though. The superpower should.

NORTH: I don't say that it's impossible apart from a crisis. I just don't think it's likely. So, I'll promote my version, and you promote yours. I guess it's time for me to pull down my underlined copy of THEORY OF MONEY AND CREDIT and get back to work. I'm motivated!

WANNISKI (12/31) Gary... Forgot to send you this comment yesterday from Nathan Lewis of the Poly staff... Nate thinks you are "barbaric." Hey, did you know [German Emporer] Frederick Barbarossa and Murray Rothbard had the same last name: "Redbeard"? Keynes was right to call gold the "barbaric" metal, but only when referring to those who wanted to replace modern central banking with gold coins. When it came to designing the Bretton Woods system in 1944, Keynes was insistent on not having any commodity but gold at its center.

LEWIS: By blaming the 1930s on the Fed, the Rothbardians have barred themselves from any kind of modern (post-1700) gold standard. They instead grasp for an even cruder conception, which can be rightfully labeled barbaric. Basically they want gold coins, and no paper money of any kind. They will allow paper money provisionally, but only with 100% reserves that would allow them to change all their paper to bullion at a moment's notice. Such hard money cranks have been around a long time. In the early days of the United States some states prohibited banking for fear of paper money. Of course gold and silver coins didn't keep the Romans out of hyperinflation.

NORTH (12/31) Tell Nathan I'm not just barbaric. I'm also a relic.