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There are many things about the world that we take for granted.
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In fact, one could say we take the world itself for granted.
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We live a particular way, we engage with others according to time-honoured conventions, society
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is like this, money and banking are like that, men and women always seem to be at cross-purposes,
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the state is all-powerful.
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We hold all these truths to be the self-evident way in which the world was bound to have formed,
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as if it was always meant to be this way and no alternative makes sense.
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And thus, we normalise things that we need to think deeply about.
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One of them is the relationship between state and society.
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The state has a monopoly on violence.
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The state also has a monopoly on money.
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We take these for granted and we don't question them.
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We live in one universe but there are a million other parallel worlds and a multitude of possibilities.
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Welcome to the Scene and the Unseen, our weekly podcast on economics, politics and
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Please welcome your host, Amit Verma.
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Welcome to the Scene and the Unseen.
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My guest today is a great economist and writer, Lawrence H. White.
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Frequent listeners of the Scene and the Unseen would have heard me talk about Larry's masterful
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book, The Clash of Economic Ideas.
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He's also an expert on money, especially on free banking, a subject on which he is a pioneer.
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His Twitter bio says that he was quote, studying private currencies before it was school, stop
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And as you'll discover during this conversation, that is so true.
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To my great dismay though, he insists he is not Satoshi Nakamoto, but he's still an intellectual
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When I went to Washington DC in July, I thought I'd take the chance and ask him for an episode.
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I'd actually met him a few years ago in Mumbai.
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His wife is Indian, he loves Bollywood and he is the best kind of damad of India.
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Larry called me over to his office at the George Mason University where we sat for
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a few hours and recorded this on July 16th.
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My friend Shruti Rajgopalan had studied under Larry at JMU and she had raved about how Larry
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could speak for hours in class in complete sentences and lucid narratives.
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So you, gentle listener, are in for a treat.
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The first 90 minutes of this is really me and Larry talking about his life and his influences
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and it's incredibly fascinating.
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And then I asked him to explain money and banking and crypto and his specialized field
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of free banking to me from scratch as if I knew nothing about economics at all.
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It is such a masterclass and I know you'll love it.
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But before we get to it, let's take a quick commercial break.
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Do you want to read more?
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I've put in a lot of work in recent years in building a reading habit.
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This means that I read more books, but I also read more long form articles and essays.
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There's a world of knowledge available through the internet.
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But the problem we all face is how do we navigate this knowledge?
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How do we know what to read?
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How do we put the right incentives in place?
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Well, I discovered one way.
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A couple of friends of mine run this awesome company called CTQ Compounds at CTQCompounds.com,
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which aims to help people up level themselves by reading more.
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A few months ago, I signed up for one of their programs called The Daily Reader.
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Every day for six months, they sent me a long form article to read.
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The subjects covered went from machine learning to mythology to mental models and marmalade.
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This helped me build a habit of reading.
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At the end of every day, I understood the world a little better than I did before.
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So if you want to build your reading habit, head on over to CTQCompounds and check out
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New batches start every month.
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They also have a great program called Future Stack, which helps you stay up to date with
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ideas, skills, and mental models that will help you stay relevant in the future.
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Future Stack batches start every Saturday.
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What's more, you get a discount of a whopping 2,500 rupees, 2,500 if you use the discount
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So head on over to CTQCompounds at CTQCompounds.com and use the code Unseen.
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Larry, welcome to The Scene in the Unseen.
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Pleasure to have you here.
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I've been waiting to sort of have this chat for a long time.
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I thought I'd invite you before, but online conversations can be awkward.
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And now that I'm kind of here, it's a good time.
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I've been recommending your book, The Clash of Economic Ideas, for a long time, and especially
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for the India chapter, which I think holds a lot of enlightenment for Indian readers
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But I want to start our conversation first by sort of talking about something else.
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Like when I just look at the arc of my life, you know, and I think of the passing of time.
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I was chatting with one of our mutual friends, Kumar Anand, the other day before I came here.
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And we were just chatting, almost lamenting that so much time has passed since we knew
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each other, more than 20 years.
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But the world of ideas hasn't changed.
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There was a time where we were really enthusiastic and we thought that you get the ideas out
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and you fight in the marketplace of ideas and people will begin to see what should be
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obvious all around them.
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And that kind of hasn't happened.
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When you go in, you know, that youthful optimism is all about the arc of progress going in
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a, the arc of history going in a particular direction.
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In our case, we'd have argued the direction of freedom.
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And it hasn't turned out that way.
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And when I was rereading your book again before I came today morning, I came across what Hayek
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said after World War I, where he said we did not realize how fragile our civilization was.
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So I want to ask you about sort of your journey between hope and despair in all of this time.
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Like I think Shruti was mentioning, you published your first paper when you were 17 or something.
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In a few months, you'll turn 70.
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So are you as hopeful as you were?
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Are there things which disillusion you or worry you?
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I'm not sure I was ever starry eyed and thinking that there's going to be a great libertarian
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revolution or, you know, big sea change in public opinion.
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But oddly enough, in the field of money and banking, which is what I've been working in,
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apart from the History of Economic Thought book that you mentioned, things have changed
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a bit with the advent of cryptocurrencies.
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So that, as I like to say, when I came out of grad school, if you wanted to give advice
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about monetary policy, you could only talk to the central bank.
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They were the only ones who were doing monetary policy.
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But now my students and I and my colleagues are consulting with private entrepreneurs
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who are trying to establish their own currencies and who want advice about monetary policy.
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Now, whether any of these will actually take off remains to be seen.
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But at least in the area of monetary systems, there has been some progress and some hope
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Central banks haven't changed.
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That's the same as it always was.
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And trying to change their minds is one of those cases where, as the cliché has it,
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somebody is not going to understand your argument when it's in their interest not to understand
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Here's a thought experiment I sometimes inflict on my guests, which is that assume that civilization
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How does the world evolve?
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Because a lot of the ways in which the world evolves are ways that it would happen anyway.
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It's almost inevitable given human nature and the way we deal with each other.
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But a lot of them are historical accidents.
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They don't have to be that way.
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And I look at different sort of fields and wonder about how they would have evolved.
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For example, the first time I thought of this was in the context of sport, where I thought
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if you reboot civilization, you will always get football.
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Because it is so primal.
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There's a round ball and you're kicking it around and you'll probably get basketball
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and you're throwing it around, but you will not get cricket.
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Because it is just such a weird counterintuitive game that it's, you know, historical accidents
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of circumstance that bring it about.
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And I want to ask you, what would banking look like?
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What would the economic system look like?
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Because you know, what my intuition is that, of course, we'd need prices because prices
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are how society talks to each other and you would have currencies and all of those you
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But would you necessarily have banking look the way it does?
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Is it something inherent or is it, are there a series of historical accidents that bring
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about a part dependence?
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Like you know, a lot of your early work, for example, was in the Scottish banking system.
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We'll talk much more about that later, 18th, 19th centuries, which was completely different.
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It isn't inevitable, I feel, that we ended up here.
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So what is your sense of what the world could have looked like in a counterfactual?
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Well, I think the evolution of money is something that's going to be robust to restarting civilization
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because we see it emerge many times, many places for the basic reason that it facilitates
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trade and thereby enables people to transform the stuff they produce into the stuff they
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actually want to consume.
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But banking is very much, at least the details of banking, is a matter of contracts and the
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form that contracts take depends very much on the legal system.
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So under different legal rules, you get different banking institutions and if you do the comparative
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law of banking across countries.
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So Scotland, which you mentioned, had a different banking law than England.
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It was Scottish law, which was based on Roman law and it wasn't a common law system.
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And so certain kinds of contracts could be enforced more easily under that system.
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How different were the banks than the banks in England?
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Well, the balance sheets were factually fairly similar.
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Some of the contracts were different and some of the enforcement mechanisms were different.
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But of course, the English banking system was changed by legal restrictions passed by
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the parliament, by the English parliament.
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The Scottish parliament did not pass.
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After the union of the parliaments, they actually continued to allow Scotland to have separate
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banking institutions and separate banking laws, but eventually the forces of consolidation
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So I guess I would say in the evolution of banking, of course, it's been severed from
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When it evolved initially, it was on silver standards and gold standards, but those were
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overthrown by, I guess you would say, the growth of government.
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So as governments grew, it became almost inevitable that they would look to the banking
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system to lend them money and therefore create monopoly privileges and legal restrictions.
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And this movement, of course, came to a head in the First World War, which you've already
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mentioned, where all the combatant nations went off the gold standard in order to print
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money to pay for the war.
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That's going to be a perennial struggle, even if you reboot civilization, the growth of
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government is, if there's growth of government, there's going to be pressure on the banking
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system to serve the government.
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And the economist Leland Yeager, when he was once asked, do you think we should abolish
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He said, yes, provided that we can also abolish the First World War, because it's during and
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after the First World War that they really began to act in the modern way of trying to
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manage the macroeconomy.
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I really need to do more study of systems that had other banking systems that were based
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on other legal systems to give a better answer, because my knowledge is pretty much limited
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to systems where English was the common language.
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Maybe I need to find some co-authors who can speak a wider range of languages.
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I had done an episode with Timur Kurran, and he was talking about the Middle East and what
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went wrong in economic terms.
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I have his book on the floor behind you.
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So you're familiar with the thesis, but for the sake of my listeners, essentially contrary
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to what people might expect, Islamic laws in the Middle East were on some margins more
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progressive than the West at the time.
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For example, when it came to inheritance, the property would be divvied out between
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the family and between others at large, and daughters would actually inherit something
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only half of the sons would, which was unusual.
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But there was a problem in that.
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The problem was that large parts of Europe had primogenitors, so the eldest son got the
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And therefore, you knew if you started a business, there was a stability there, you know, who's
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If you and I start a partnership, there's a stability, you know, the title is not going
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to be under dispute at any point.
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That not being the case in the Middle East meant that the scale of companies was necessarily
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restricted because people would not do long-term contracts, they would do short-term contracts
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for each transaction or each deal or whatever.
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And that meant that the joint stock company never evolved from there, and complicated
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financial systems never evolved from there.
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And a lot of the financial innovations that, you know, fueled the progress of the West
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And when I think of that sort of part dependence from one sort of historical accident, you
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know, which itself was, you know, caused by other accidents, is kind of staggering.
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But is your broad case then that the state was bound to evolve, and once you had states,
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they were bound to always, in their self-interest, grow and covet power and seek to sort of sustain
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And for that reason, they would always have a monopoly on money, as it were.
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And whether the First World War happens or not, at some level, fiat currencies are therefore
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inevitable and, you know, if there is a state and the state being what it is, there's no
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And therefore, you know, the fight of liberals everywhere has to be to sort of limit the
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power of the state and one of the margins on which that battle takes place is money.
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Is that a broad summation of?
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That's a very good broad summation.
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But yes, I mean, if you go back to the very origins of classical liberalism, which you
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can find, I think, in some of the scholastics and pre-scholastics who complained about kings
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debasing the coinage, and they're defending the rights of the people not to have their
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money fraudulently reduced in silver content.
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This is one of the issues on which people begin to form the ideas of individual rights
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that are not just granted by the king, or not granted by God, but that, well, maybe
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by God, but not by the king, not by the state.
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They're natural, whether that's theological or not.
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To avoid the state dominating the monetary system, the state has to be limited.
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And so it's a perennial battle because the benefits from consolidating power are concentrated
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and the costs are diffused.
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So there's a collective action problem for the rest of us to limit the scope of the state.
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And you use the term accidents history as a series of accidents whereby in some crisis,
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people let down their guard and gave the state power that they didn't take back later.
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I don't know that the growth of the state is, to its current size, is inevitable, but
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it has happened and shrinking it is a challenge.
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Just holding it, keeping it from getting even bigger is a challenge.
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But I think in the area of money and banking and other industries where location is not
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so fixed, if you have a fixed location, then it's hard to avoid the state noticing you
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But in an industry like banking where it's all immaterial, and in now publishing, music
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publishing, anything digital, it's immaterial, then there's a better chance of escaping the
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grasp of any geographic state.
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So people can move their banking offshore, they can use a currency not issued by their
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local state if they can either convince the state to allow them or if they can hide it
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So I think there's some hope of keeping the state on the defensive.
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But the battle right now in money, to make it more specific, is over central banks taking
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over retail payments in what's called central bank digital currency.
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So that's the forefront now.
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Central banks want to get into, or some of them, it's not yet inevitable.
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And I think the fight is actually going pretty well.
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The central bank digital currency projects that have been launched, say in the Bahamas
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or Nigeria, are not succeeding, they're not attracting lots of users.
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And in other countries, officials or central bank officials even are saying,
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we're not sure we want to get into this business.
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We don't really see the rationale for it.
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Although at the top, you get people like Christine Lagarde who have this fear of missing out.
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The central bank should do it because otherwise they become irrelevant.
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But so far, it hasn't happened.
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And I think there's some optimism.
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Now, as far as making payments more private than they are now, that's difficult.
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The idea that our regulators need to be able to inspect everybody's financial records in
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order to fight money laundering and terrorism and whatever horrible crime you can imagine,
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it's an argument that persuades a lot of people.
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Even though if you look at the numbers, the anti-money laundering regulations
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have a terrible benefit-cost ratio.
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Hardly anybody is caught and enormous costs are incurred by the people who have to file
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And occasionally, innocent people get caught up in it for technical violations.
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So that's where the battle is right now.
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But as you mentioned, states have already established fiat monies.
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They've ended the gold standard, which was a money whose value was not dependent on the
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good graces of your local central banker.
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The other place where there is a battle going on is over whether people can use
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money issued outside their own country.
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So in some places, this takes the form of, are people allowed to use US dollars?
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And in Argentina, the new president promised in his campaign that he would allow the country
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to dollarize because the Argentine peso is only kept in place by a series of legal restrictions
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that make it mandatory to use pesos for certain kinds of transactions.
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But he hasn't followed through on that promise yet.
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So that's where the debate is.
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You mentioned earlier that you don't think it's necessarily inevitable that the state
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would have grown the way it has and become what it is.
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And I sometimes wonder that has there ever been a state that has grown smaller,
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shorter war or catastrophe, because the way I think about it, in my lifetime,
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I've just seen the state grow massively.
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We were very lucky in India that it got out of the way in some areas, but only some areas.
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And even there, there has been some sliding backwards that has happened.
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But it seems to me that maybe once in a while you have outlier circumstances that
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But I feel like it's not inevitable, though I do share the optimism that the state can
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become less relevant in the lives of people because of technology.
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So digital workers, for example, can use cryptocurrency and whatever.
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Technology can empower people and sort of aid the cause of liberalism more than
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political movements ever could.
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But nevertheless, the state is just a gargantuan beast.
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It keeps fighting back.
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It uses this technology.
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In India, there are great worries about the new digital public infrastructure being used
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for mass surveillance for a penopticon.
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The Aadhaar card and the Aadhaar card is part of an infrastructure which is they're calling
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either digital public goods, which is absurd because they're not public goods, or a digital
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But whatever they call it, while some of the technology is impressive, it is also impressive
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in a sense that it increases what James C. Scott would call state legibility.
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The state can see us better, control us better.
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And also, it has a monopoly on this.
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So right now, you can look at the technology and say, wow, Aadhaar is amazing.
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I don't need to carry my wallet around.
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I don't need to carry cash around.
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Though I think cash is freedom, but others may find it much more convenient just to never
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But in the long run, if the state has a monopoly on anything, it simply can't end well.
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I mean, I don't know if there's a question here, but I'd love examples where civil society
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can actually push back successfully and a state can actually reform itself radically.
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So Argentina is a test case right now because it's a dramatic change in the ruling party.
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But now we'll see whether even with a popular majority, the candidate calling for shrinking
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the state can prevail against the permanent state, the deep state, as public sector employees
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What is your sense of Javier Melia?
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What do you feel about what's going on there?
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I'm optimistic that he can achieve some reforms.
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He's already done some by executive order.
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I am concerned that he's delaying dollarization, but he has a political problem in that his
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party has very few seats in the legislature.
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So he has to rely on a coalition with another center-right party, which is more conservative
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in the sense of not wanting to upset things, and they're going slowly.
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So that's the party that Macri represented five or ten years ago.
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And the Macri administration didn't accomplish much, even though they were anti-paranist.
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They didn't accomplish much.
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So it remains to be seen, but I think Malay himself is certainly sincere.
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The question is whether he can, you know, build a winning coalition.
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One of the arguments...
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I was in Argentina in November to speak at a Bitcoin conference, but I was in Argentina
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in June to speak at a conference that the Cato Institute co-organized, sort of celebrating
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the new government or the prospect of the new government in Argentina and trying to
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encourage them to follow through on their campaign platform.
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So I was on a panel urging rapid dollarization, and Malay was the last speaker at the conference,
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and the audience was there to see him, so he was very warmly received.
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But I was a little disappointed in the speech he gave, in that he was...
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It was like a campaign speech.
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He was trumpeting what he had done in the few months he had been in office and criticizing
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his critics, but not really enunciating principles.
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The way he did magnificently at the Davos conference, if you've listened to the speech
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I mean, you should never put your faith in politicians, and he's become a politician,
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but he did during his campaign, you know, make ruthless fun of his opponents.
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So I don't know if that's an obstacle to his getting a governing coalition together
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that can actually change the laws.
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One of the early themes you address in your book, and you've spoken about it elsewhere
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as well, is on whether ideas and intellectuals matter, you know, where you've cited Hayek
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and Keynes as saying that, you know, ideas and intellectuals do matter.
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Keynes has a famous quote about...
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It's something that intellectuals would like to believe.
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Yeah, and Keynes has this famous quote about how all politicians are slaves of some
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defunct economist and his words, but you also cite Pareto, for example, saying that
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ideas are fig leaves for interests.
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At the end of the day, people have interests and they'll adopt whatever ideology, you know,
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serves as a good window dressing for that.
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Stiegler famously pointed out that, look, everybody's known for a hundred years that
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There's no economic argument on the other side, and yet tariffs continue to persist.
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So it's all about interests and not...
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And so what you just said is also really interesting in the sense that you said that
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he's become a politician.
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And I really wonder because sometimes you find a person like that and you wonder maybe
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he is driven by ideas and principles, but if so, maybe he's an outlier and then he's
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also got to, you know, do his politics, which you can't blame him for because you can't
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let the perfect be the enemy of the good.
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So where do you stand on that?
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Like through your journey, what have you seen that, you know, ideas matter to us who are
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talking about ideas and discussing them.
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Do they matter so much in the real world?
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So I think Keynes and Hayek were right at some level, but they have to struggle against
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the power of vested interests, of course.
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But people perceive their own interests through an ideological framework, and not everybody
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So people do want to do the right thing and want to be able to convince themselves that
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they're doing the right thing.
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In Trump's first term, he managed to find the one economist who was against free trade,
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which was Peter Navarro, to sort of lead his team.
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But you're right, economists, 95 or 98% of economists understand the benefits of trade
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and anything you want to accomplish by tariffs can be accomplished, like raising revenue,
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can be accomplished more efficiently some other way.
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And maybe it was Stigler who said you could, you know, raise enough money to pay off the
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vested interests without continually having a distorted trade that would be cheaper.
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But it's hard to find a fig leaf for that kind of sort of naked transfer program.
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So I've never been interested in party politics, but I've been interested in trying to influence
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public policy indirectly.
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So I've given congressional testimony.
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I guess that's the closest I've come to politics.
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Never worked for a candidate or anything like that.
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So somewhere in the back of my mind, I must believe that it makes a difference,
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that somebody may read something I've written and be inspired or at the margin to do something
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they hadn't done or to avoid some unjustifiable thing that they were thinking about doing.
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And this, of course, is I work with the Mercatus Institute here and part of their,
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they have an academic side and they have a policy side where, for example,
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last time I gave congressional testimony, they set up a sort of mock hearing so I could
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sort of practice deflecting questions or, you know, framing the answer the way I wanted it
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framed and not the way the questioner was trying to push things.
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So that's a useful service.
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But I can't, you know, claim any great, any particular piece of legislation that I've
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I think the most I can claim is that some of the people who have been involved in developing
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cryptocurrencies read and cited my work.
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And so that's another way to change the world that I hadn't thought of when I was writing
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about private money back before it was a new reality, back when it was a dusty history
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So that's just been, I don't know, fortunate.
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Let's go back into dusty history.
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In fact, I want to go back to before you were an economist, which, and you've been an
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economist for most of your life, but tell me a bit about your childhood.
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So I grew up in Morristown, New Jersey, which is a suburb of Philadelphia on the southern
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And those of us from southern New Jersey like to distinguish it from northern New Jersey,
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which has a reputation as a crowded, polluted place, which is actually kind of unfair.
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If you get away from the New Jersey turnpike, it's not all oil refineries.
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Anyway, it was a very old town.
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It was founded by Quakers before the American Revolution.
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So there was a lot of history.
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I went to a public high school, but in those days, it was a very well-funded public high
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Morristown was a relatively prosperous suburb, and spending per student was much higher than
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in some other towns next to ours.
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So there's a sorting process that the taboo model explains that people who don't want
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to pay high taxes and are okay with mediocre schools will move to places with low taxes
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and low spending on schools.
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But fortunately for me, our town had high spending on schools.
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So it was a pretty good school system.
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I got interested in ideas maybe around 10th grade, and it's hard to pinpoint exactly
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But the first issue I got interested in was the Vietnam War.
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And so there was still a draft, and there was an outfit in town called the South Jersey
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And I thought, you know, peace was a good thing, and I thought not drafting people, letting
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them live their own lives was a good thing, although I didn't have any really articulated
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But then I discovered that the people at the South Jersey Peace Center, some of them were
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socialists, and that struck me as anomalous.
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I thought, you know, the reason to oppose the war is so people can live freely, and
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the reason to oppose the draft is so people can live their own lives.
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So I went around and tried to find somebody who agreed with that, and I stumbled upon
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the very early stages of the libertarian movement.
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So the first book I read that sort of confirmed my view of the world was called Radical
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Libertarianism by an author named Jerome Tuccioli.
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And I later discovered that almost everything in Tuccioli's book was cribbed from an advanced
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copy of Murray Rothbard's For a New Liberty, which came out in 73, and I think Tuccioli's
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But he quoted Rothbard copiously in the book, but that was my first introduction.
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And then in high school, I was a subscriber to a left liberal magazine called The New
#
Republic, which still exists, but its character has changed a bit.
#
And there appeared, I guess it was just one of those trade ad swaps, an ad for an outfit
#
called Books for Libertarians, which was the forerunner of what became Lazy Fair Books.
#
And so from them, I started ordering Milton Friedman's Capitalism and Freedom,
#
Murray Rothbard's Power and Market, Henry Hazlitt's Economics in One Lesson, the collection
#
of nonfiction essays that Ayn Rand edited, Capitalism, the Unknown Ideal.
#
So those were the first sort of ideological books that I started with.
#
And of course, when you read Rothbard, then Friedman seems like he's kind of a sellout.
#
He's only going halfway.
#
I've come to appreciate Friedman more since then.
#
But that's the kind of thing I was reading.
#
And then the summer before I went to college, I read Rothbard's Man, Economy, and State,
#
which is this long economics treatise, basically setting out in a more user-friendly way the
#
ideas from Ludwig von Mises' treatise Human Action.
#
So I read these thinking, well, I think I want to major in economics when I get to college.
#
My career's ambitions were a little undefined.
#
I thought maybe I would want to become a lawyer, and this was a good pre-law program.
#
I later found out that a lot of what lawyers do is pretty boring.
#
It's not all, you know, dramatically winning a case in a courtroom.
#
And an important role model for me when I was in college was I went to a conference and heard
#
And he was very dignified and spoke very well and was, you know, giving his views of economic issues
#
and people were paying rapt attention to him.
#
And I thought, that looks like a career I could enjoy.
#
And so I began to think about going to graduate school in economics.
#
But that was the preamble to my becoming an economist.
#
And in general, you know, were you an outlier in terms of the books you read or was there a
#
healthy culture of libertarian ideas or classical liberal ideas or whatever around you?
#
Oh, there was nobody around me in my school.
#
Or I took a government course in high school and the woman who taught it was kind of had very,
#
you know, conventional views and was kind of baffled by the arguments I was making.
#
I participated in a program called Youth in Government that the YMCA organized where they
#
had a mock state legislature.
#
I think I did that three years.
#
So you would go and write up legislation and then try to get all the other students who
#
were participating to pass it.
#
And I didn't run into any libertarians there until I went to their national version.
#
And there I ran into a group of Randians who were quoting from Atlas Shrugged,
#
which I had never heard of.
#
And that actually kind of put me off because they were a little bit too gung-ho.
#
It was clear that they had, you know, a set of views that if you didn't accept,
#
then they would, you know, not give you their sanction.
#
So I didn't read Rand's novels until much later because I had this evidence of what it did to
#
But I read her nonfiction essays, some of which were written by Alan Greenspan.
#
So his essay on gold from the 1960s was an influence, I think.
#
So I got to college having read Rothbard's Man-Economy and State and I was actually
#
surprised to learn that they were still teaching Keynesian economics because it had all been
#
Didn't they know that it's all been refuted?
#
No, they didn't know it's all been refuted.
#
So I fortunately, I think, learned not to be a pest in the classroom, but, you know,
#
ask questions politely and try to get inside the models that other people were using in order to
#
understand what was wrong with them.
#
So I remember the first time in class, the instructor introduced Ricardian comparative
#
advantage and gave one of those numerical examples where both countries are better off when
#
And I thought, is this some trick or is this genuine?
#
And I had to sit down and think about it.
#
And before I was convinced that, yeah, this actually works.
#
This actually makes sense.
#
Whereas I was always skeptical of the sort of basic textbook Keynesian model where output is driven
#
by spending and not by production.
#
You just have to have enough demand and you'll get enough output.
#
Tell me about the people you met at Harvard who influenced you.
#
Like, I believe Nozick was there when you were there, Israel Kusner, you know, Mario
#
Rizzo, Leon, I can't pronounce the last name, but you know who I'm talking about.
#
And Rizzo and Kusner were at NYU.
#
But sorry, I don't want to compress that period.
#
So let's go as slow as you want.
#
Yeah, so I went to Harvard because I was told they had the best combination of economics
#
and other fields I might be interested in.
#
And I think that turned out to be true.
#
So I took a lot of course, a number of courses in philosophy, including one from Nozick
#
and one from John Rawls.
#
Nozick was a fascinating figure because he never taught the same course twice.
#
He taught whatever he was working on in his research.
#
So the semester I took him, he was writing a paper that was published under the title
#
On Austrian Methodology, where he was thinking about the methodology of social sciences
#
and looking at the claims that Mises and Hayek and Rothbard were making about the way economics
#
should be done and evaluating them in a fair-minded way.
#
But it was exciting because he would come to class having read something by Mises and
#
say, here's what I think Mises is saying.
#
But there were maybe a dozen of us in class who were all interested in Austrian economics.
#
And then we had read Human Action.
#
And so we were able to say, no, I think he doesn't mean that.
#
And so we felt like we were participating in an academic enterprise, which was fun.
#
Whereas in most other courses, it was the professor gives a lecture and it's all polished
#
and done and no input from the students is necessary other than memorize.
#
There was one other course that Nozick taught that I just audited that was co-taught a course with
#
a biologist named Richard Hernstein, who was very much into the importance of genetics,
#
things you couldn't say on campus now.
#
But he would lecture and Nozick would then respond.
#
And Nozick would lecture and he would respond.
#
So it's fascinating because they didn't agree about some things, but not about everything.
#
I took a course in the history department for Bernard Bailyn, who wrote the famous book,
#
The Ideological Origins of the American Revolution.
#
So that he was an excellent lecturer and it was a very well-structured course.
#
And the idea that the American Revolution was a libertarian event was very persuasive to me,
#
But it gave me a sense of how to do intellectual history.
#
I took a two-semester course on intellectual history of the United States by Donald Fleming,
#
as a name most people don't know, but he was important in his day.
#
But for Fleming, I had to write two term papers, one on pre-Civil War America and the other on
#
post-Civil War America.
#
And this turned out to be important in my life story because I had to write a
#
paper about somebody from the early American Republic.
#
And I didn't know who would be a good paper topic, but I had met Walter Grinder.
#
So Walter Grinder became a vice president of the Institute for Humane Studies,
#
And in fact, when he worked there, it was located in Menlo Park, California, but it
#
has relocated to George Mason University.
#
It's on our Erlington campus.
#
So I had met Walter at the same Libertarian Scholars Conference in New York where I had
#
heard Kersner speaking.
#
So I got in touch with Walter and said, who would be a good subject for this paper?
#
And he said, you should look at the work of William Leggett.
#
So Leggett was a newspaper editor in New York in the 1820s and 30s, about 26 to 37.
#
He was co-editor of the New York Evening Post together with William Cullen Bryan, who's an
#
important editor and poet.
#
He's one of the most celebrated poets of his day.
#
And Bryant Park, sorry, Bryant with a T, behind the New York Public Library is named after him.
#
And he was a classical liberal.
#
And when Leggett joined the newspaper, he was an actor who couldn't get enough acting jobs.
#
So he started writing, you know, reviews of Broadway plays and so on.
#
But he absorbed his ideas from Bryant and went beyond because he thought for himself.
#
And he became, in just a few years, I would say the most consistent and radical Libertarian
#
in the Jacksonian movement.
#
So he was an important voice calling for free banking in America.
#
Ended up being associated with a splinter of the Democratic Party who called themselves
#
It's a long story where they got that name, but I ended up writing a paper about him.
#
And it was a fun project.
#
And I ended up going to the New York Public Library newspaper annex to read copies of
#
the newspaper he edited in 1836 called The Plane Dealer, which was totally written by him.
#
That the essays, the editorials that hadn't ever been reprinted.
#
So a collection of his best essays had been published shortly after his death.
#
But there was a lot of good stuff in The Plane Dealer that hadn't been reprinted.
#
And it was there that I ran across a piece of his, which was not in the collected works,
#
about the free banking system in Scotland.
#
And what a wonderful model this was and how it was very free and yet very orderly,
#
very competitive, no privileges.
#
So as a Jacksonian, he emphasized the need to do away with the privileges by which we
#
in the United States were getting an aristocracy of privilege.
#
So he said, it's not a hereditary aristocracy, but it's an aristocracy of pull.
#
But anyway, so he described this system in Scotland that I had never heard of.
#
Nobody I talked to had heard of it.
#
So I kind of put that in the back of my mind.
#
And when I got to graduate school and took a course in monetary theory,
#
where Axel Landhoof was the instructor, and he just for kind of accidental reasons,
#
he said he was tired of modern monetary theory where money doesn't matter because
#
everything is equilibrium.
#
He had us reading the 19th century literature, the currency school versus the banking school
#
debate and the debates over the foundations of central banks.
#
So I took the opportunity to investigate the Scottish free banking case and wrote
#
a long term paper for him.
#
And he said, I've never heard of this.
#
That makes it interesting.
#
Other economists haven't heard of this.
#
People will find this interesting.
#
Why don't you make this your dissertation?
#
So I made it my dissertation and he became my advisor,
#
even though it wasn't anything he was working on.
#
But he was very open minded about it.
#
Only after I finished did I realize I'd written a dissertation where I never once
#
cited my advisor, which is an unusual thing to do.
#
But he was okay with it.
#
But that's how I got started on free banking by having discovered these claims that Leggett
#
made and wondering, could this really be true?
#
And pretty much it was true.
#
He wasn't exaggerating.
#
Yeah, so I took two courses from Edward Banfield, who is in the government department,
#
but is kind of a, you might say, political sociologist.
#
So his most famous book was called The Unheavenly City.
#
And it's very interesting because it's a very, I would say, clear eyed discussion of
#
problems arising from social groups who have bad values.
#
I guess you could say, who don't save, who don't value family cohesion,
#
who don't respect property rights.
#
So he wrote about the underclass in South Italy in his first book.
#
But in The Unheavenly City, he talked about the United States and urban problems that arise from
#
not just from bad rules and regulations, but from people not having the right work ethic.
#
Anyway, the course I took for him wasn't about that.
#
It was about the way government policy actually gets made.
#
So it was not pie in the sky.
#
It was looking at actual case studies, which I've always found useful because,
#
and this is the case in banking regulation as much as anywhere else,
#
people imagine that regulation is going to be administered in a way that improves things,
#
not taking into account that there's the problem of capture by the industry,
#
people going back and forth between the regulatory agency and the banks or the investment banks,
#
and so not having the interest of the public at heart, but rather the interest of the industry.
#
And we've seen illustrations of that in recent years.
#
There's a famous story of Carmen Sagara, who was a regulator from the Federal Reserve Bank
#
of New York who was embedded in, which bank was it?
#
I think it was Goldman Sachs.
#
And when she discovered that they were doing something illegal and she went to her boss,
#
her boss said, oh, no, no, we can't upset Goldman Sachs.
#
As though they were his client.
#
But I wrote a paper for Banfield, which was one of my first publications on
#
privatizing municipal services, which was an idea Reason magazine was pushing even back then.
#
And Banfield's response was, good luck.
#
But the kind of place Harvard was, if you were lucky, was in this seminar.
#
It was a graduate level course of Banfield's that I took.
#
So that was the second course I took.
#
One of the other participants, one of the other students in the seminar was Barney Frank.
#
And at that point, Barney Frank was a Boston city councilman.
#
And we had a speaker come in and talk about the problem of workers who don't want to do their jobs
#
and are so well protected by the union that they can't be made to do their jobs.
#
And he talked about the problem of getting them to sweep the streets.
#
And they don't sweep the streets because the machines are broken.
#
And Barney Frank said, well, and it's not their problem.
#
The machines are broken.
#
And the speaker said, you don't understand, they broke the machines.
#
So that they wouldn't have to work.
#
So that was entertaining.
#
In the economics department, the most famous faculty didn't teach undergraduates.
#
But I had a course in, I took the international trade and finance sequence.
#
And Rachel McCulloch taught international trade.
#
And she was a University of Chicago product.
#
So she was fairly market oriented.
#
But probably the most important thing she ever did for me was
#
she recommended that I should go to UCLA for graduate school.
#
Because she knew I was, you know, free market oriented.
#
And she said, you'll feel at home there.
#
And so she recommended me to them.
#
And the director of recruitment in the economics department was Michael Darby,
#
who knew her from graduate school.
#
As an important recommendation.
#
But Rachel McCulloch told me, they're a little crazy there.
#
But they're your kind of crazy.
#
Which turned out to be true.
#
And let's see, anybody else?
#
It was a fun place in that some of the students I met later became important people.
#
So Grover Norquist I met as a college student.
#
He was a couple years younger than me.
#
Peter Ferrara I hung out with, who later wrote important studies
#
on social security reform for the Cato Institute.
#
Steve Chapman, who was a columnist for the Chicago Tribune for maybe 30 years.
#
And he's not, you know, a radical libertarian, but a sensible person.
#
There was an outfit off the edge of campus called the Kennedy Institute of Politics.
#
And they had non-credit seminars.
#
And each semester they had one token non-leftist seminar.
#
And often it was led by a man named David Brudnoy,
#
who was a libertarian who did movie reviews for a Boston television station.
#
But he brought in famous speakers.
#
So William F. Buckley came to speak to our seminar.
#
And there are about a dozen of us in it.
#
So that was the kind of opportunity you might not get at another school.
#
So I got to know some of my fellow libertarian students.
#
And we formed a student group.
#
Initially it was called, after the American Revolutionary Group called the Sons of Liberty,
#
we called it the Harvard Sons of Liberty.
#
Then it was pointed out to us, you know, there are women at this college.
#
So we became the Harvard Radcliffe Sons and Daughters of Liberty.
#
And there was, in fact, a Daughters of Liberty group at the same time there was a Sons of Liberty.
#
So the Sons of Liberty was the group that Sam Adams later of
#
So the other two people, important people I met at Harvard were Randy Barnett,
#
who was a student at the law school at the time,
#
and John Hagel, who was in the joint law and business program.
#
And the two of them organized a dinner club that invited well-known people to come speak.
#
So I got an education in the sort of broader range of libertarian issues.
#
And Randy Barnett has just published a memoir.
#
And Pete Betky just told me that I need to read it because I mentioned in a few pages.
#
So I haven't done that yet.
#
But I've kept in touch with them through the years.
#
Actually better than with other people I knew in college.
#
Anyway, so thanks to Rachel McCulloch and thanks to UCLA being the best school that offered me
#
money, I ended up at UCLA, where there's a whole new cast of characters.
#
It was a very unusual economics department.
#
So they weren't, they were distinctive from the rest of the profession.
#
And it was kind of a running joke that it was a
#
You know, in American baseball, the major league teams have feeder systems that are known as farm
#
teams because you're raising up the talent before it is good enough for the major leagues.
#
But the people at UCLA were not just, you know, secondhand Chicago whites.
#
They had a distinctive approach to price theory.
#
Approach to price theory.
#
And Leinhoofit and Clower, Robert Clower co-authored a lot with Axel Leinhoofit,
#
had a distinctive approach to macroeconomics, to monetary theory, I should say.
#
So the UCLA view is that there really isn't a subject of macroeconomics.
#
There's price theory, and there's monetary theory.
#
So if you want to look at the aggregate economy, you want to look at it through the lens of the
#
supply and demand for money, because that's what matters.
#
So although I ended up specializing in money,
#
I wrote a paper some years ago with Don Boudreau, which is about whether it's inefficient
#
to have competing banknotes, given that they don't compete on price.
#
They don't, you don't earn any interest by using the currency issued by a bank when it's a
#
circulating currency. I wrote a different paper on why it makes sense for banks not to pay interest
#
on their currency simply because the transaction costs, there's no easy way to do it.
#
But with Don, I wrote a paper on whether it's inefficient for the banks to compete
#
along non-price dimensions, because the traditional mainstream view is that
#
you should only compete on price. If you compete by differentiating your product,
#
then that's you're just trying to fool consumers. It's some kind of spurious,
#
wasteful competition. And we argued that it's not, but that's very much sort of UCLA price theory
#
applied to currency. At least that's the way I thought of it.
#
Tell me a bit about habits of the mind. For example, you know, I was very intrigued by what
#
you said about Nozick, where he comes in and the way he's teaching something is it is not something
#
that he pretends to be the great authority on. He's reading it himself, he's reading Mises himself,
#
and it's almost like a dialogue with all of you because you also read Mises. And you know,
#
one model of a great mind could be a great mind will possess great knowledge and will, you know,
#
give you that knowledge and you sit down and take it. And another model could be that it is not
#
about what is in the mind, but it is about how you engage with the world. What are your habits
#
of thinking that you're open and you're curious and you're kind of moving forward. And it also
#
strikes me that, and this is a separate question, but also related that as a student there or as a
#
young person, there could be the tendency that you get drawn to a set of principles because they
#
seem to explain the world, you know, and it could be liberty, it could be marks, it could be whatever.
#
There's a set of principles, it's a framework, you look at the world through that. So initially
#
you have that one hammer for every nail and then gradually you get mugged by reality and then you
#
start sort of changing. But what often happens even for people that I have agreed with in the past
#
is that I realized that it is not the principle so much, it is a kind of tribalism that once you have
#
gotten drawn to a particular ideological tribe on campus, for example, or wherever on social media
#
today, you are then part of that tribe and the principles become a window dressing for you. It
#
becomes sort of the entry into that group of people. And a lot of people who espouse these
#
principles therefore don't really care about them. It's cognitive laziness. For example, in America
#
we've seen how many Republicans who really should know better when it comes to economics and trade
#
just went fully Trumpist. And it's to me from the outside, it is completely incoherent
#
because, you know, Trump is anything but a classic Republican. He's almost a repudiation of that in
#
many ways. You know, Trump and Bernie Sanders were so similar on economics in 2016.
#
Well, so it's an indication of that, that the Republicans just had a spokesman from the
#
Teamsters Union speak at their convention. And I read some comment on it where somebody said,
#
well, they're going to have to, you know, face up to the fact that their views are actually very
#
similar to those of the Teamsters Union. I said, face up to it. They are embracing that commonality
#
of being xenophobic and protectionist. So my question is this, and we've seen the
#
same thing in India where people who supported Modi in 2014 because they said, hey, we need
#
free markets, which is a good reason, continued being with him when he showed that he's completely
#
statist and, you know, brought import substitution back. But the question is...
#
Well, the demonetization was a kind of crucial issue on which I was extremely disappointed to see
#
Jagdish Bhagwati and some of his co-authors defending demonetization on the most
#
imaginative grounds. So it's a revenue measure. Oh, it's a anti-corruption measure.
#
That's actually, you know, since exactly what I mean, that people, you would not expect to
#
make such an argument, made that argument. I remember you and Shruti wrote a great piece
#
at the time talking about why demonetization was bad. And, you know, when I wrote a column on it
#
for Times of India, I pointed out that demonetization is something no self-respecting conservative or
#
libertarian would ever do. So it's not right wing. It's actually right out of Mao's playbook.
#
You know, I think of the great sparrows campaign and that's exactly what it was. But the question
#
I was coming at is that I have noticed with some dismay that I think most people, whether they are
#
teachers or academics or professors or students, get drawn into that kind of cognitive laziness
#
where they stop questioning the world. They adopt a package of beliefs,
#
which you or I in a particular moment may or may not agree with. But that package of beliefs,
#
you know, they're not constantly thinking, they're not constantly curious, they're not
#
constantly, you know, brushing up against the real world the way Nozick would have when he's
#
lecturing on a subject on which you guys might know as much as he does. So what is your observation
#
of, you know, those habits of the mind? Like, are the, you know, the great thinkers that you've had
#
the, you know, good fortune to meet, are they all kind of like this? That they are humble, curious,
#
always knocking up against the real world? And are the mediocre minds all people who have just
#
stagnated and, you know? Well, Nozick is an unusual case. I mean, a remarkable ability to
#
think on his feet. And nobody ever wanted to debate him because he could, you know,
#
find counter examples to their claims instantly. But it is refreshing to see someone who's not
#
giving you something packaged and reacting defensively to any questions or criticism of
#
that package. And in Anarchy, State, and Utopia, which he published while I was at Harvard,
#
and I went in and had him sign it, so I have a signed copy, he says, you know,
#
there's room for words on topics other than the last word. So that was very refreshing way to
#
approach things. No, not everybody who's an authority or, you know, who can, who writes
#
a useful book is that flexible, or that curious, I guess. So you have to get what you can out of
#
books that are designed to persuade you of a particular thing. And, you know, pick and choose,
#
because it may not all be, there may be parts that the author has convinced himself that he needs to
#
be committed to, but he doesn't really. So within Austrian economic circles, I became a critic of
#
Murray Rothbard's 100% reserve proposal, because it didn't make sense to me, didn't seem to me
#
consistent with Rothbard's own legal theory where people should be free to make the contracts they
#
want. Saying that banks should be compelled to hold 100% reserves is saying they can't make a
#
contract in which the customer agrees to let them hold fractional reserves. But anyway,
#
we can get into that in more detail if you like. But I thought Man, Economy and State was a great
#
book. I haven't re-read it recently. I hope I wouldn't be disappointed if I did re-read it
#
again. But because it was, you know, architectonic, it sort of built a structure from the ground up,
#
and here's the economic way of thinking, and here's how you can understand social phenomena
#
by reasoning about them from some simple premises about the way people behave. They prefer more to
#
less, they prefer leisure to labor, and so on. That can be very instructive, too, but you have
#
to know where to, you have to approach it critically so that if the author is adding things
#
that don't really fit, you can feel free to discard them. So I don't think I could ever,
#
well, I shouldn't say that, but I never have taught a course the way Nozick taught it,
#
because he could think on his feet well enough to, you know, speak for an hour without having
#
written it all out ahead of time, whereas I like to have it written out ahead of time.
#
Even though, as I've, you know, sort of memorized my own lecture notes,
#
it's become easier to, and actually more enjoyable, to ask the students to interrupt me
#
with questions, because otherwise I'm just reciting something that, especially once I've
#
written it down and published it, they can read it, they don't need to hear it from me. But yeah,
#
that takes a certain talent. The semester after he taught the course on Austrian methodology,
#
he taught a course on the philosophy of Sri Aurobindo, which I did not take, but maybe I
#
should have, because I was recently reading a biography of Sri Aurobindo, and it was quite
#
interesting, and he had some interesting ideas, he had some crazy ideas too, but it's an interesting
#
character. Anarchy, state, and Aurobindo.
#
So I think taking philosophy courses, and history courses, and government courses,
#
I never thought that economics was the one hammer to explain the entire world,
#
and at UCLA, some of the faculty were so steeped in the Chicago economic way of thinking
#
that they made that mistake. They didn't think there was any such thing as ethics.
#
There is only people expressing their wants, and if you say this is moral, all you're saying is,
#
I prefer this. I did a seminar for IHS one summer where one of the other faculty members
#
who was an economist said this out loud, and it's just a stupid thing to say,
#
that there's no discipline of ethics, there's only emotive statements.
#
I remember this anecdote about Einstein once, that when Einstein was teaching,
#
one particular semester he set a bunch of questions for his students, and gave it to them,
#
and the next year he gave the same set. So his teaching assistant asked him that,
#
hey, you've just asked him the same questions you did last year, and Einstein turned to him
#
and said, yes, but the answers have changed. And I loved that story, and I wonder that
#
nothing that dramatic happened in economics, but through your time, would you look at something
#
that you used to think you know well at a particular point in time, and say that the
#
answers have changed, or at least for you in your mind, the answers have changed, that there have
#
been shifts in the way that you think about something, or you know that would have surprised
#
the 25-year-old you. I suppose this is a confession of weakness, but I can't think of anything I've
#
changed my mind, and any big issue I've changed my mind in a big way on. So
#
I have recognized sort of qualifications to assertions I've made, and that some things are
#
more subtle than I used to realize. I've become more skeptical of the feasibility of an anarcho-capitalist
#
system with, you know, completely private law adjudication. Not for business law. Business law
#
is easy. We've got lots of history of arbitration and private courts to settle contractual disputes,
#
but that's because that's repeated dealing, and contracts are cases where you know the other party,
#
and so you're going to write a contract, and then there's going to be a limited range of
#
factual questions about whether the contract was fulfilled.
#
But when you're dealing with criminals who you don't have any contact with beforehand, who just
#
appear out of the blue and hit you and take your stuff, that's a problem. They're not going to go
#
to arbitration with you to settle the dispute. And then I haven't sort of deeply tried to write
#
anything, and it's only by writing down your objections that you really learn how substantial
#
they are and whether the counterarguments are better. But I haven't written anything down
#
as a critique, so this is all kind of fuzzy in my mind. But as I said, I read Power and Market,
#
which is part of Rothbard's book, which was written as part of Man, Economy, and State,
#
but was left off because it was considered too controversial, and which he talks about
#
private law enforcement agencies. And I guess I just sort of accepted that that would all work,
#
but as I said, I'm a little more skeptical now. There's a computer game called Civilization. Are
#
you familiar with it? And it's gone through several editions and become more sophisticated.
#
So I used to play Civilization 3. I don't know what edition it's on now, but you build your own
#
civilization, meaning you get to choose how much to invest in defense and how much to invest in
#
research and development of technologies and where to put things, which gives you something
#
to do as a game player. But of course, it's what Hayek called a fatal conceit to think that one
#
mind can plan a civilization. Anyway, I tried playing that game in a kind of Rothbardian mode
#
where I didn't defend my cities. I let them defend themselves. And they kept getting invaded and
#
taken over by barbarians who just appear from over the hills. So not the other civilizations
#
that you're competing with, but just the barbarians occupy your cities if you don't defend them.
#
Roving bandits, exactly. They are a problem.
#
You know, when you speak about, you know, not changing your mind and I look back and I think
#
once I discover the set of sort of classical liberal ideas that I identify with, what has
#
happened is that I haven't changed my mind when it comes to values, but I have changed my mind
#
often when it comes to facts of the world and nuances and so on and so forth. So my values
#
are always, you know, my core values are about freedom and individual agency and autonomy and
#
all of those things and what the relationship between state and society should be like.
#
But as far as the facts of the world are concerned, obviously they're deeply and
#
endlessly complex and you're always learning new things. But I want to ask you about those
#
values because I'm guessing you, I mean, we obviously share that same set of values,
#
but what makes those values valuable? Like there are two ways in which we can talk about
#
freedom and we can say that, hey, freedom is good because it has good consequences.
#
You want people to be prosperous, especially for someone like me coming from a poor country.
#
I'm like only one thing can get you out of poverty. So freedom is good for the impact it
#
has on the world. And you can also take a step back and you can say that freedom is good for
#
its own sake, right? It's a fundamental, you know, deontology, it's a fundamental human value
#
is good for its own sake. And that's all that really matters. The fact that the consequences
#
are great is like a separate issue and we can go into those weeds, but it is just good for
#
its own sake. So what is your sense of that? How do you grapple with those two ways of articulating
#
your values? Like on the one hand, when you have to convince other people, I'm guessing
#
consequentialism helps more there, but- Well, consequentialism or, you know,
#
tracing out the consequences is the stock and trade of economics as a discipline.
#
That's what economics has to contribute. Personally, I'm asking.
#
And personally, that's, so I've written many things trying to explain to people that
#
competition in money does not lead to chaos. The practical consequences are actually quite good.
#
And you can't sort of in your armchair declare that, well, you see a problem and you don't know
#
how people are going to overcome it. Therefore, it's a bad route to go down, to let them grapple
#
with it. You just don't have that much imagination as to how people might solve problems. So you have
#
to actually study cases where the state wasn't involved and see how it works out.
#
When I was on the job market for the first time coming out of graduate school,
#
and I had this dissertation about free banking in Britain, I had an interview in which somebody who
#
was a smart economist said, okay, doesn't your argument imply that we should also allow private
#
competition in minting in the production of coins? And I said, all I could say was, well,
#
I haven't thought about that. But it was a sort of question that on the back burner for many decades.
#
And there are few things had been written giving some examples of private mints that worked out
#
well. But a couple of years ago, I finally published a paper about it. After a lot of
#
research through 19th century newspapers describing how things actually worked at
#
a granular level. And it turned out to be a very interesting topic, because not only it worked,
#
but it wasn't that there was never a problem. So some of the early private mint masters
#
were just incompetent. They produced coins that were not a full weight,
#
because they didn't know what they were doing. And then there were other cases where they
#
seemed to be swindlers. So in California, there's a gold rush and lots of private mints set up.
#
And some of them produce coins that are underweight, figuring that they can make
#
a bigger profit that way. The interesting part of the story is how it didn't last,
#
they couldn't stay in business if that was their strategy, because the word got out.
#
People would test, there were other people who were assayers, who would test their coins and say,
#
this coin is not pure enough. It doesn't have as much gold in it as it's supposed to to be
#
a $20 coin. Those people went out of business. So I had to dig into these business histories,
#
what happened to these mints. The ones that cheated or were incompetent, none of them lasted
#
more than a few months, and they never got many coins into circulation. The mint masters who were
#
competent and honest, stayed in business. And so they dominated, but not immediately. It took a
#
year or two before it became clear that honesty was the best policy. And that was a more interesting
#
story actually than either it won't work, or it's never been a problem. It's just a myth to think
#
that it was ever a problem. No, there was a problem. But the information necessary to get
#
people to avoid bad coins was not that hard to come by. And so it was not a market where bad
#
quality was a chronic problem. But I discovered reading what economists had said about why we
#
need government mints. I mean, mostly they just take it for granted. But some have tried to
#
articulate the argument. They all articulated this argument according to which you would make
#
a bigger profit if you cheated your customers. And it's not in the interest of any of your customers
#
to go to the trouble of having the coins tested. So nobody will get them tested so
#
you can stay in business. The economist who was also a utilitarian philosopher who spelled this
#
out in the most sophisticated detail was Siddwick, who was kind of a precursor of Marshall.
#
Marshall took a lot of his ideas from Siddwick. But Siddwick had never looked at a single
#
historical case. This was all from his armchair. Arguing against him was Herbert Spencer,
#
who said, it's a private industry. It'll discipline itself. But Spencer didn't look
#
at any historical cases either. So it was all an armchair debate. And the actual history of the
#
enterprises is interesting for resolving this. There were some people who tried to cheat, but
#
they didn't get away with it for long enough, for very long. And in the long run, the honest mints
#
won out. I forget why I started telling that story. But we were discussing the values in
#
terms of the consequences and for their own sake. Yeah. So anyway, because I think partly because
#
I studied philosophy and history and political science, I never thought that economics was the
#
way to approach every question or that there's no value in jurisprudence or ethics. Those are
#
important disciplines. I actually wrote a couple of papers about the limits of economics as a
#
prescriptive discipline. So a lot of economists think that if you can look at historical
#
institutions and decide whether they're efficient or not, and therefore whether they
#
should be adopted or not. And I argued in one of these papers that efficiency just
#
isn't that powerful an idea, whether something is efficient. So it can't settle all important
#
cases. And in fact, it can't settle the most important cases, because efficiency means are
#
all potential gains from trade being exploited. But to identify potential gains from trade,
#
you have to first assume who owns what and who is willing to pay how much for what.
#
You can't define what's efficient independent of assuming the assignment of ownership titles.
#
And so you can't say, I argued in this paper, because efficiency is too weak a standard,
#
you can't say that slavery is inefficient, which is not, I emphasize in the paper,
#
not a defense of slavery. But it means that to condemn slavery, you need ethical standards.
#
You can think of slavery as a case of a property rights system, where it just happens that some
#
people own others. And if some people own others, then the fact that under slavery, the preferences
#
of the owned people are not taken into account, is not a shortcoming from the point of view of
#
that legal system, any more than some people own horses and the preferences of the horses are not
#
taken into account in deciding how the horses will be used. That's just the way it is.
#
If you want to argue against that, you need to say horses should be self-owners,
#
which most people would not say, but most people would say, or they should say, that humans should
#
be self-owners. But you need that kind of ethical standard if you're going to say that the preferences
#
of the enslaved people count. So within a slave system, you can have an efficient allocation of
#
resources, meaning that slaves go to their highest valued uses in that system. And slave owners,
#
of course, did sell slaves, buy slaves, reallocate slaves. Not all slaves work on plantations.
#
Some were leased out as skilled tradesmen. So you read the biography of Frederick Douglass.
#
His master sort of lent him out and just took a share of his earnings. And that's what made it
#
possible for Douglass to have enough autonomy to escape, whereas people enslaved on plantations
#
were not so lucky. So just efficiency or economic principles can't settle that question.
#
So I've always accepted the—I don't know about always, but I accept the view that you need some
#
concept of rights to sort these things out, and utilitarianism is not going to give you that.
#
Yeah. So the course I took from John Rawls was—the part of it I liked was his critique
#
of utilitarianism. I didn't like what he wanted to put in its place, which was, let's imagine
#
that we live behind a veil of ignorance. And because he's—I wrote a paper about this
#
when I was a student. Actually, I wrote it for his course. He's assuming that the people
#
behind the veil of ignorance have a certain conception about how the world works, and it's
#
conception where they don't know public choice theory. They think that if they will that the
#
state do a certain thing, it will do that thing without any slips. Whereas in this article on
#
Rawls and redistribution, I quote Leggett, coming back to Leggett, because he wrote as though he had
#
read Rawls 100 years in advance. He said, nobody would—no people with their eyes open would ever
#
delegate to their government the power of redistributing income, because we see that
#
governments get captured by special interests who redistribute in their own favor. So it's not going
#
to be redistributed to the common people. And that's a great point that you make about,
#
needing to have a framework that goes beyond just the economic framework alone. The horrors of
#
slavery, we can refer to them as horrors because we are looking at it through an ethical framework.
#
And bad economists don't take it into account. I remember even when demonetization happened,
#
there were people who were making arguments like, we need to wait and see, and there are costs and
#
there are benefits. And to me, that was an abomination, because number one, the costs
#
are on one group of people, which is a very large group. And the notional benefits which
#
never materialized are somewhere else entirely. And that's just an unethical way to think about
#
that, where I mean, I called it at that time, the greatest assault on property rights in human
#
history, where if you just look at the number of people who were assaulted, which is all 1.4
#
billion, it was sort of absurd. I'm going to ask you now to sort of give me a mini class,
#
if I may, on free banking, because what strikes me is really interesting about it is that,
#
A, it's completely novel, it's just in terms of conception and where you went with it. And
#
you went back into history, into early 18th century Scotland, and you looked at the system there.
#
And with that, you came up with a framework and a theory and subsequent work, which is now influenced,
#
you could say, the next frontier of where money is going, in terms of, you know, I think you're
#
an advisor of saga coin or something of that sort. And you've written on Bitcoin, and I've been told
#
that once upon a time, students used to gift you bitcoins, I hope you still have them.
#
So I'm fascinated about this entire story about, you've already mentioned how you got into the
#
subject, reading like its articles, which were, you know, not collected in its collected essays,
#
and then you got interested and went into it. But assume that I know nothing or my listeners know
#
nothing at all, even, you know, what is banking? How is banking organized? What are the traditional
#
ways? Assume that we know absolutely nothing about it. And just give me a sense of the lay of the
#
land and what interested you and the directions that you went into.
#
So we live in a world in which governments dominate money. And it's sort of natural to
#
take that for granted that it's hard to imagine how things could be any other way. If the government
#
didn't issue the paper money, who would it come from? It's only after you understand the history
#
and how it worked and how it worked well that you might notice that, you know, actually there
#
still is private paper money in Scotland. The commercial banks issue paper pounds in Northern
#
Ireland. They do that in Hong Kong and Macau. There's still some remnants of the 19th century
#
around. And so that's most people implicitly and even most economists just operate with this,
#
take it for granted that money won't manage itself. It's one of the things that government
#
has to do for us. And so in a way, what I'm arguing is you can think of the evolution of money
#
as a product of the market, not as part of the legal framework or the
#
set of public utilities within which the market operates.
#
So if we, when I teach monetary theory, I spend a week on the evolution of money out of barter.
#
And in my more recent book, Better Money, the first chapter is arguing against those who have
#
what's called the state theory of money. Sometimes they call themselves chartalists.
#
But the idea is that even in its origin, money couldn't have emerged without wise kings
#
deciding to institute it, against which there is the theory of Carl Menger, who was the founder
#
of the Austrian school incidentally. But in addition to reformulating price theory, Menger
#
talked about the evolution of institutions and in particular money and provided an account of how
#
money emerges as if by an invisible hand. And the story is pretty simple. If you live in an economy
#
where you don't have money, so you have to go to market with what you've produced and try to swap
#
it directly for the things you want to go home and consume, you're going to have trouble in any
#
economy where production isn't all specialized. So the example I use in class is if you come to
#
market with asparagus, you're an asparagus farmer, and you want to go home with a plaid shirt,
#
and you want to go home with a plaid shirt,
#
you have to find somebody who not only is selling plaid shirts, but who is willing to be paid in
#
asparagus. And they may not like asparagus, or they may not have as much asparagus as
#
they would charge for a plaid shirt. So people hit upon indirect exchange. That is,
#
if the shirt seller says, I don't accept asparagus, you ask, well, what would you agree
#
to be paid in? And if he says salt, then if you can trade your asparagus for salt, now you can
#
trade the salt for your shirt. So that's indirect exchange. It takes two steps. But when it's really
#
hard to find a direct match, taking two steps can be the easier way to do it. And when people
#
discover that indirect exchange sometimes works, they begin to look for opportunities to use it.
#
So they become alert toward what other people are accepting. And when they see that other people
#
are using, let's say, salt again, and they say, well, if I have salt, I can trade with all those
#
people, well, then I will agree to be paid in salt because I know where I can spend it.
#
That reinforces or enlarges the community of people who accept salt by one person.
#
And so the thing grows because there are what we now call network effects. Using a particular
#
commodity as a medium of exchange, that is, acquiring it in order to trade it away later,
#
is more effective the more other people there are who will take it in payment.
#
So that's what's meant by a network good. The more other people are plugged in,
#
the more useful it is for you. So money has that property. And so there's convergence on a commonly
#
accepted medium of exchange. And in different historical settings, depending on what commodities
#
were available, you find different things being used as money shells in one place and barley in
#
another place and silver in a third place. Eventually, the world converges on silver.
#
Now, so imagine yourself in a world where silver has become the commonly accepted medium of
#
exchange. There's a problem with silver, which is in its natural state. It's not very uniform.
#
So you might be reluctant to take silver from somebody you don't trust. You don't know how
#
pure it is. You want pieces of silver that are certified. And that's what mints do. So people
#
develop gradually the technology, but this is now a technological development,
#
not a social convention being formed. The technology of producing uniform pieces of silver
#
and marking them so that you know what their worth, so you know what their weight and purity is,
#
and making them tamper evident. That was an important breakthrough because some of the
#
early proto coins, a lot of it was blank and people would shave away the blank parts.
#
So imagine you live in an economy where silver coins have developed, and they're the commonly
#
accepted medium of exchange. They have their limitations. They're actually pretty bulky
#
if you're making a large purchase or if you're making a long distance purchase.
#
And in the actual European Middle Ages, it was a problem that local governments had
#
monopolized the minting business because it was a way to make a profit.
#
And so the coins were variously debased in different places. They weren't, even though
#
they were coined, they weren't of uniform quality. And in that context, a business arose of
#
a business arose of coin exchange, right? So you got coin dealers who would buy,
#
if you came to a town to trade and you had coins from your home city, they wouldn't be accepted.
#
So you came from Milan to Genoa. They wouldn't accept your coins in Genoa, but you could go
#
to a money changer who would say, I'll buy your out of town coins and here's the local coins.
#
In medieval Italy, those people became bankers. And it's kind of a just so story, but merchants
#
or traders would say to the coin changer, well, look, here's the local coin, but I don't want to
#
carry around the coin from my home city with me. So I'll just leave it with you and I'll come back
#
at the end of the week and collect what you owe me. Well, now you've got a deposit. Now you've
#
got a claim on somebody who has a vault full of coins. And so in medieval Italy, the coin changers
#
became deposit bankers. And so, you know, if you were made the regular practice of going between
#
the two cities, you might leave an account open. You don't have to close it when you leave and go
#
back home. But those were the first banking houses. In London, the first bankers were goldsmiths,
#
that is people who made things out of gold, but they had vaults.
#
Other people who had gold coins and didn't want to keep them at home would come to the
#
goldsmiths and say, could I, you know, store my coins in your vault? And the goldsmiths would
#
charge them a fee for that. But the coin changers and the goldsmiths noticed that
#
people weren't coming to claim their coins every day. The coins were just sitting there. And so
#
there was another option they could offer their customers, which is, if you let me lend out the
#
coins, as long as I promise to pay you back whenever you want, I'll pay you interest on your
#
account. And so people who didn't just want storage of unique coins, because they weren't
#
coin collectors, they were businessmen who wanted access to the payment system, a convenient method
#
of payment, they would agree to this. And so the business of providing a payment service through
#
transferable bank deposits, and the business of finding creditworthy borrowers became combined.
#
There's a kind of synergy between those two businesses. And so bankers not only took deposits,
#
but also made loans. When medieval traders would go from, say, their home city to some big trade
#
fair, instead of carrying along bags of coins, in case they found something to buy before they
#
sold anything, their bankers would go along. And the bankers would settle up at the end of the day
#
without having to carry around anybody having to carry around a lot of silver coins. So
#
that's an example of how it's more economical. But it did two things. It reduced transportation costs,
#
and it reduced the problem of non-uniformity of the actual physical coins.
#
So the bankers actually started keeping account balances not in names of coins, because the
#
content of the of the docket kept changing, kept being debased, but in the name of some weight unit
#
or some historic coin that was not debased. And then current coin could be evaluated against that
#
standard by the relative ratio of silver in the new coin to the old coin. And so these units that
#
the bankers used on their books became known as ghost money. But there's nothing spooky about it.
#
It's just a pure silver unit, whereas actual coins in circulation were all debased.
#
So they weren't these ghost money units represented a mass of silver that was not
#
actually embodied. In that sense, it was a ghost, some previous coin or of some abstract weight unit.
#
So that was the origin of modern banking.
#
I don't know much about the history of banking in India, but I know that they had private silver
#
coins in India about the same time they did in ancient Greece. And the pictures I've seen show
#
that they used somewhat different devices. Instead of making round coins, they made square coins,
#
square coins, and they put punch marks on them to certify who had produced it and
#
its purity. But when banking came to India, I don't know.
#
So from this system where you have banks, where you have coins of different towns,
#
how do we make that journey to fiat money and central banks?
#
So in a system where banks are issuing deposit balances, they came up. So we know that there
#
are transferable deposits as early as 1200 AD. Banknotes come along later. And the first examples
#
of banknotes are actually kind of, there isn't any clear first case, but banks would sometimes
#
issue a receipt for the deposit. And if they allowed the customer to sign the receipt,
#
which is a claim to silver, over to another person, then you have something that's starting
#
to function like a circulating paper currency. A circulating paper currency or a banknote
#
is simply a claim on the banker that has taken, you no longer have to sign it over because now
#
on the face of it, it doesn't say, we'll pay to John Smith or whoever he signs it over to.
#
It just says, we'll pay to the bearer. Whoever brings it in, we will pay. And they began issuing
#
them in round denominations instead of customized like checks. So that was a system. And when the
#
banks are competing in the issue of not just deposits, but also banknotes, that's what we call
#
historically a free banking system. And my first book, Free Banking in Britain, talks about how the
#
Scottish free banking system worked, what the bank balance sheets looked like, how people made
#
payments. And most importantly, I guess, what limited the banks from just issuing
#
too many claims to silver more than they could fulfill? And the answer is they were bound by
#
the contractual nature of the banknote to actually pay. And if they didn't pay,
#
there were legal penalties. And in Scotland, they were pretty swift about enforcing the rules.
#
And so bankers were aware that they couldn't issue more claims against themselves than their
#
clients were prepared to hold on to. And so they had to, you know, keep track of how much silver
#
is actually leaving the vault and how much is coming in. And how much do we have to pay to other
#
banks when other banks collect our notes and come and ask for redemption? The banks formed
#
just in their own convenience, regular clearing operations where instead of waiting for somebody
#
from another bank to come and dump a bunch of notes on their counter and ask for redemption,
#
they would meet the representatives of all the banks in one place and they would all exchange
#
claims on each other. That's clearing. And then whichever bank had a deficit to the other banks
#
would pay up. So that's called settlement. So you had sophisticated clearing and settlement
#
systems before you had central banks, just run by clearinghouse associations, which were member
#
organizations of the banks that were involved. So central banks can be thought of as
#
nationalizing the clearinghouse system and monopolizing the issue of banknotes.
#
And it happens in different ways and at different times in different countries.
#
But in the sort of premier central bank of the world was the Bank of England,
#
which was chartered in 1694. And the main motivation for creating it was
#
for the government to have a bank that it could borrow money from, because it had defaulted on
#
previous generations of bankers and people were reluctant to lend it money.
#
So government bonds were not risk-free when they had to be paid back in gold or silver,
#
which was something the government could not just conjure up. So they create the Bank of England
#
as a kind of association of investors in government debt, because early on the Bank of England's
#
assets were mostly bonds issued by the government. But being united as a company
#
gave them sort of more legal status to make sure the repayment wasn't enforced.
#
And the Bank of England also did commercial banking.
#
And eventually that became the more important part of their business.
#
The Bank of England secured a monopoly, not because they wanted to be a central bank,
#
but because they wanted monopoly profits, on the issue of banknotes in the vicinity of London.
#
And that became kind of the pretext for getting more privileges. So there were banks outside of
#
London, in other places in England, but they were weak because the Bank of England's monopoly was
#
secured by a very peculiar rule, which said no other bank that issues notes is allowed to have
#
more than six partners. It's as known as the six-partner rule, which meant the other banks
#
were, in places like Birmingham and Manchester, were under-capitalized and poorly diversified,
#
and poorly diversified because they didn't have the capital to set up branches.
#
The Bank of England didn't care about setting up branches outside the city,
#
so they kind of left the field to these other banks. But because the other banks were
#
under-capitalized, and that was because of this legal restriction, they weren't very safe.
#
And there were occasions where droves of small banks would fail. And the Bank of England used
#
that as a reason to give them even more power, even a greater monopoly. And the famous Bank
#
Charter Act of 1844 is the one that really cements the Bank of England's status by saying that
#
no other bank is allowed to issue any more notes than they are currently issuing.
#
But if they want to, they can sell their right-of-note issue to the Bank of England. Or
#
if they fail, it's absorbed by the Bank of England. Or if they merge, the lesser of the two
#
note issues of the two banks that are merging, that goes to the Bank of England. So over time,
#
the Bank of England's share of the circulation rose. The other banks disappeared
#
or gave up or lost their right-of-note issue. And the Bank of England became the only
#
note-issuing bank. And nowadays, I wouldn't say note issue is all that important compared to
#
monetary policy, but it was the path by which they acquired the power to conduct monetary policy.
#
Other banks in England began to hold Bank of England notes as a reserve because if their
#
customers were going to go to London, that's what they wanted to carry with them. They didn't want
#
local bank notes. They wouldn't be accepted in London. Even today, Scottish bank notes are not
#
accepted in London. And so the other banks in the system outside of London stopped holding gold
#
reserves. And then a law was passed in 1833 which said, that's fine. Bank of England notes are legal
#
tender for the purpose of repaying other banks' notes. They're legal tender everywhere except at
#
the counter of the Bank of England. You still had the right to go to the Bank of England's counter
#
and demand redemption in coin. And that continued to be true up until the First World War with the
#
exception of the suspension period during the Napoleonic Wars. So the Bank of England got bigger
#
and bigger, got a bigger and bigger share of the note issue and was seen rightly as the kind of
#
fulcrum of the entire financial system. And people like Walter Badgett who said, you know,
#
if I had my druthers, a free banking system would be better. It would be more competitive and more
#
stable. Look at Scotland. But given that the Bank of England has gotten all these privileges,
#
it has some responsibility to help out the other banks, the non-issuing banks in London if they
#
get in trouble, if they have problems of bank runs, because they don't have any gold anymore.
#
They have to go to the Bank of England if they want to pay people gold. And so the Bank of England
#
should give up their gold to stop what was called the internal drain of gold in the system.
#
And so Badgett ironically today is regarded as kind of the godfather of the lender of last
#
resort policy. And therefore people think he's an advocate of central banking.
#
But in his famous book Lombard Street, he actually says, no, the better system would be each bank
#
holds its own reserves. But we've gone down this other path where there's only one bank that people
#
ultimately trust and that has all the gold. And so it should behave responsibly, should give us
#
something back in exchange for those privileges. And going back to the question of can we reform
#
the system, there's this fascinating passage in Badgett where he says, I've talked about how
#
the Scottish system works quite well without a central bank, without a lender of last resort.
#
And so you might ask me, am I proposing to introduce Scottish banking principles into
#
London? And he says, oh, of course not. I'd be laughed at. I might as well propose that
#
we abolish the monarchy. So we have to, you know, do the best we can given,
#
but he was very pessimistic about taking away the monopoly privileges of the Bank of England.
#
And this is in the late 19th century. And I guess he's been vindicated in the sense that
#
they never did take away the privileges. I talk in my first book about there was a threat.
#
There was a Chancellor of the Exchequer named Lord Liverpool who sent a memo,
#
quite exciting to discover in the archives, to the Bank of England saying, like 1821, I think it was,
#
look, we've all read Adam Smith. We know monopolies are bad. Why are we giving you a monopoly?
#
Don't expect us to renew it the next time it comes up for renewal because they had a
#
series of charter, 20 year charters that had to be renewed.
#
But when the Bank of England got this memo, they started gathering support in parliament and they
#
ensured that their monopoly privilege wasn't taken away. But they were willing. I mean,
#
they're quite explicit. They said, look, the chairman of the Bank of England goes to
#
parliament and testifies to a committee. Look, you can tell us how we should manage
#
our portfolio. We'll do whatever you say. Just don't take away our monopoly.
#
But our current practice is we try to keep one third reserves in normal times and then
#
reduce our circulation when we see gold flowing out. So we practice tight money when we see gold
#
flowing out and we only expand by the amount of gold that's flowing in. But if you want some other
#
rule, tell us and we'll do that. Just don't take away our monopoly. And basically that's what they
#
got. And it used to be thought that the Peel's Act of 1844, which I said a minute ago sort of
#
cemented their status. It used to be thought that this was sort of fastened on a reluctant
#
Bank of England because it did restrict their expansion by saying beyond 14 million pounds,
#
any additional pound you issue has to be backed by a pound's worth of gold.
#
It turns out the Bank of England wrote the act
#
because they saw it as a way to protect their monopoly by saying, look, you can't criticize
#
our monetary policy now because we're doing what the legislation says we should do.
#
Anyway, that's how England gets a central bank. For a while, the Bank of England, after 1844,
#
refused any responsibility toward the system as a whole, but Badgett tried to talk them into it and
#
the Bering Crisis in 1890 seemed to persuade them to play a more active role. And it got to the point
#
where even though it was a privately owned bank, it was basically a government bureau. It wasn't
#
officially nationalized until World War II. It wasn't until Clement Attlee came into office
#
that they nationalized, that the state became the owner of the Bank of England's shares,
#
but it had been doing whatever the Chancellor of the Exchequer wanted before that.
#
Other countries, the path to a central bank was a little more direct. So Napoleon creates the Bank
#
of France and tells them they should paint on the wall. It is the duty of the Bank of
#
France to lend to the government at 2%. So it was pretty directly he wanted a source of funding,
#
which is what the Bank of England wanted too, but they hadn't thought about having a monopoly
#
of note issue or any of that other stuff, having responsibility for the clearing system or the
#
other banks. The Bank of Italy, it's another fiscal story. In the United States, it's a little
#
complicated in that there was no central bank in 1913, even though most of Europe had central banks
#
now. The US didn't have a central bank, Canada didn't, Australia didn't, Switzerland didn't get
#
one until 1907. Anyway, the US was operating with a system of decentralized note issue, although
#
the banks that were allowed to issue notes were being regulated by the federal government
#
pretty strictly, so it wasn't a free banking system. And banks were not allowed to branch
#
across state lines, which was an incredible restriction given the size of the United States
#
that we didn't have any nationwide banks. And I'm old enough to remember when
#
I lived in New York and went to California for the summer, it's a completely different set of banks.
#
So I couldn't write a check in California, even on Citibank, wasn't accepted by any of the
#
California banks. My options were either take a pile of cash or take travelers checks. People
#
actually use travelers checks to go from one side of the US to the other. For those of you
#
who don't remember travelers checks. I remember travelers checks, but many of my listeners may
#
not. Yeah, they were currency like claims on banks that are kind of like certified checks are today,
#
but they were not made out in some customized amount. They were made out in round numbers. So
#
you got a book of travelers checks that were in 50s, 20s, 10s, and so on. And they would be widely
#
accepted because the company that issued them, American Express being the most famous,
#
they had offices everywhere. They were allowed to have offices everywhere because they weren't a
#
bank. That's how weird the system was. Yeah, so people use them. I used them for interstate
#
commerce. But getting back to the US case, there is a problem with this national banking system,
#
which is the restrictions on note issue and the restrictions on branching mean that
#
if say farmers want to pay their farmhands and they go to the local banks and say,
#
give us some currency that we can pay the farmhands with because the farmhands don't have
#
bank accounts. We want to pay them with banknotes. The bank would say, I'm up to my limit. I'm not
#
allowed to issue any more notes. And the farmer would say, well, give me something else then. Give
#
me silver coins if you have to or give me treasury notes because the US treasury had issued gold
#
backed and silver backed certificates that served as currency. And the banker says, but if you take
#
those, you're draining me of reserves because those are my reserves. They're not liabilities
#
the way banknotes are. And the farmer would say, that's your problem. So there were a series of
#
money panics that originated during crop moving season in the fall, originated in the countryside,
#
but the country banks, when the farmers started pulling out their reserves, would pull the banks
#
reserves out of the big city banks. And the big city banks, say Chicago, St. Louis, would start
#
pulling money out of New York. And now New York had a problem. And the problem could have been
#
solved easily if they had just let the local banks issue more notes. And we know that because if you
#
look in Canada, north of the border, very similar agricultural economy, a lot of wheat farms.
#
But in Canada, there was no such restriction on note issue. The banks could switch between deposit
#
liabilities and note liabilities without losing any reserves. And they would do that. And you would
#
see a seasonal movement in the amount of notes in circulation, matched by deposits declining.
#
And then it would go back again as the farmhands spent their incomes and it filtered back into the
#
banking system. So Canada had this fluctuation in the volume of notes and no crisis because that
#
doesn't cause any problems. Whereas the U.S. had fluctuation in interest rates. In the fall,
#
money got tight. And in the worst cases, the New York banks were running out of reserves
#
because people were scrambling to get currency and the system wasn't allowed to issue anymore.
#
So the worst of these panics was the panic of 1907. And that convinced the New York bankers
#
finally that they should support a federal banking institution that would solve this problem.
#
They hoped, of course, to have a lot of influence over this institution. So they were in favor of
#
something like a central bank that they would have control over. And they didn't exactly get
#
what they wanted. I mean, so this is a popular conspiracy theory that the way we got the Federal
#
Reserve Act was the New York bankers met on Jekyll Island and drew up the plans for it.
#
And that's true. They did meet on Jekyll Island and draw up plans. However, those weren't exactly
#
the plans that were enacted because there were other interests who didn't want a bank controlled
#
by the New York bankers who could see what they were up to. There were the farmers who were still
#
represented by William Jennings Bryan, the anti-gold standard guy who ran for president three times,
#
lost every time, but still had a following. And there was a third interest which were the
#
progressives led by Woodrow Wilson, who was the president, who wanted an institution that
#
the federal government would control. And so the Federal Reserve Act created a central bank,
#
was in large part driven by people who wanted a European-style central bank, but in some part by
#
the populists and in some part by the progressives who had different interests.
#
And in the long run, you have to say the progressives got what they wanted because
#
although the New York Fed is still important and they have a permanent seat on the monetary
#
policy committee and they called the shots during the financial crisis of 2007 to 2010,
#
still it's now a federal agency and it's run by political appointees.
#
In the very early days, the claim by some supporters of the Federal Reserve Act was
#
it's not creating a central bank, it's creating a reserve system that's decentralized and each of
#
the 12 regional reserve banks will have a great deal of autonomy. And for a while, they did.
#
It was the Banking Act of 1935 under Roosevelt that really consolidated the power of the board
#
of governors and turned the reserve banks into just branches of the board of governors.
#
So it is now a full-blown central bank and it does all the things that central banks do,
#
including being the sole issuer of currency, which it wasn't at the beginning. At the beginning,
#
it was just one issuer within many commercial banks issuing currency.
#
And it runs a monetary policy, which initially it was not charged to do. It was initially going to,
#
the gold standard was supposed to govern the quantity of money in the system.
#
So that's how we got a central bank. But if we had stayed on the gold standard,
#
we wouldn't have needed one. And Canada didn't get a central bank until much later, 1935,
#
because they got through the Great Depression without any bank failures,
#
which is pretty remarkable. They didn't have the restrictions on note issue and the banks were
#
branched nationwide, so they were much better diversified. Whereas in the U.S., the unit banks,
#
the small banks, the banks in the farm belt were failing in droves. So a lot of the
#
concern about money not regulating itself stemming from the view that banking is inherently unstable
#
is not based on observing free banking or free market banking or unregulated banking.
#
It's based on observing systems that were regulated in ways that
#
perversely made them weak. So the U.S. banking system was weak compared to the Canadian system.
#
The English system with the six-partner rule was weak compared to the Scottish system,
#
which had no such rule. And so people take it for granted that banks are weak without support from
#
the center. They think that's the lesson of history. Even Milton Friedman believed that
#
early in his career, if you read his framework for monetary stability and
#
the passages about banking in Capitalism and Freedom, he is quite interesting. He says,
#
look, I'm a classical liberal, and so I don't think the government should
#
by default regulate everything. So why do I think they should regulate money and banking? Well,
#
we've learned from American history that free banking means wildcat banking. It's just too
#
easy to commit fraud when you're issuing bank notes. People don't know better, they accept them,
#
and then you abscond with the loot after you've gotten real goods and services in exchange for
#
your money. Later in his career, when he read accounts of how free banking actually worked
#
in the US and Scotland and elsewhere, where fraud was not a common problem
#
and the problems that the system in the US had were due to perverse legal restrictions,
#
he changed his mind. So there's an example of somebody who was open-minded enough to say,
#
yeah, what I thought was true based on my limited reading in 1963, I now acknowledge is not true.
#
So Freeman and Schwartz in 1986 wrote a paper entitled Does Government Have Any Role in Money,
#
which is kind of ambiguous as to the positive normative distinction. But he sort of
#
reeled back what he had said about the inherent instability of banking.
#
It's been so normalized right now, the state monopoly on money, that for most people it would,
#
you know, seem utterly daft, that there is no state monopoly on money, you would think exactly
#
in intuitive terms of the way Freeman first expressed it, that it will be a wild west out
#
there, there'll be frauds, who's going to protect the poor grandmother who's put her savings in some
#
random bank issuing its own currency, etc. But what your work showed through Scotland
#
and you earlier pointed out that there was free banking elsewhere, I think Canada for a while,
#
New England, that that's not really the case. So how did free banking actually work in those
#
places? Like, what do the critics of free banking say will go wrong? And did they go wrong? What
#
happened? What were the mechanisms? So it's pretty widely understood by economists that
#
just from the textbook accounts of how a banking system works, that when a bank creates more
#
deposits, and so when a bank makes a loan, they typically give the borrower a bank account balance.
#
So here's a checking account and now go spend it on whatever it is you want to
#
buy with the money we loaned you. So they understand that those checks will clear against the bank,
#
and so the bank has to have enough reserves to settle the adverse clearings that come in.
#
And so there's a limit to how many deposits a bank can create
#
given the amount of reserves it starts with. But they haven't extended that to banknotes
#
because they seem to think that banknotes stay in circulation forever. Whereas in fact,
#
and Scottish bankers testified to this in Parliament in the 1830s, banknotes stayed in
#
circulation only a week or two because they would come into the hands of somebody, some business
#
who at the end of the day would take all their receipts and deposit them in the bank.
#
And now whatever bank they use has a claim on the bank that issued the note.
#
So they return that to the clearinghouse. And when you have all the bank's members of the clearinghouse,
#
directly or indirectly, a bank that's too small may hire one of the banks that's a clearing bank
#
to do the clearing for it. Anyway, when the banks are participating in the clearing system,
#
then they see pretty quickly that if they issued either notes or deposits that
#
exceeded the amount their customers wanted to hold at the end of the week,
#
they would come back for redemption. And so the obligation to redeem in gold or silver
#
limits the amount a bank can issue of banknotes just as it limits the amount of
#
checkable deposits a bank can issue in our current system.
#
And so as I mentioned, the Scottish bankers testified that if we issue too many notes,
#
they come back within a week or two and we have to redeem them. And we know that we can't just
#
reissue them because then we'll keep losing reserves. So there's a discipline and there's
#
a feedback mechanism. And the bank, by looking at what's happening to its gold reserves,
#
are they flowing in? Are they flowing out? There's some random fluctuation in them. But
#
if they're chronically flowing out, then the bank has to tighten up. It can't let that go on forever
#
without its reserves falling too low, a point where there's too big a risk of running out of
#
reserves. So that's the mechanism that keeps any one bank in line with the demand of its customers
#
given the surrounding banks and people using other banks as well. A claim that's sometimes
#
made by critics of free banking, for example, in a paper by Anna Schwartz and Michael Bordeaux,
#
although I think Schwartz later recanted, says, okay, that's fine.
#
The clearing system disciplines any one bank from expanding disproportionate to the other banks.
#
But if all the banks in the system expand together, then there isn't any systematic
#
loss of reserves to other banks. And so they can all expand together and they will only be disciplined
#
much more slowly by the loss of gold to the rest of the world. And then if all the banks in the world
#
expanded together, there would be nothing to discipline. So that's been a common
#
counter-argument even among economists who have acknowledged that any one bank is disciplined.
#
And so the answer to that is that the loss of reserves to the rest of the world
#
will affect the individual bank that overexpands more than it will affect other banks
#
that haven't overexpanded because there will still be the adverse clearings against other banks
#
within the country. So that the disciplinary mechanism still works. It's not that the whole
#
system is free to expand. And then there's a second answer, which is
#
that the scenario of all the banks either implicitly or explicitly agreeing to expand
#
in unison is not what banks would want to do if they could agree. Any industry, if they can agree
#
to act as a cartel, wants to get higher profits. And the way to get higher profits is to act like
#
a joint monopolist, which means restrict output in order to get a higher price for output,
#
move up the demand curve. So if all the banks could conspire, they wouldn't say,
#
let's all expand and make more loans. They would say, let's all agree to charge more for loans and
#
pay less on deposits. That's going to mean we make fewer loans and we gather fewer deposits,
#
but that's okay because we got such a much bigger spread between the loan rate and the deposit rate
#
that we're going to make more profits. So that's what they would do if they were acting as a cartel.
#
Rothbard has made this argument that although Mises favored free banking,
#
he Mises underestimated the capacity of the banking system to conspire together and expand in unison,
#
which they're always trying to do. And Rothbard seems to think that if the banking system makes
#
more loans, then the banking system makes more profits. But in fact, they want the bigger spread,
#
so they actually want to make fewer loans at higher interest rates and gather fewer deposits
#
by paying lower interest rates. That's where they would conspire and make bigger joint profits.
#
They wouldn't all agree to expand together just so they wouldn't have adverse clearings.
#
So that's been a common criticism. What are other criticisms?
#
Well, the view that there's a problem for the public to know the quality of whether they can
#
trust a particular kind of banknotes. And so it's very similar to the argument by Siddwick and others
#
that people can't trust private coins because they don't know what quality they are. They
#
have no expertise. Fortunately, you don't need to be an expert on coins to recognize one brand from
#
another and to know which coins your bank will accept at face value or to read in the newspaper
#
which coins are being discounted or refused. And likewise, you can read in the newspaper
#
which banknotes are accepted at face value and which ones are being discounted or refused.
#
And so it's not that high an informational burden. And just as the mints that cheated
#
got weeded out, banks that don't hold enough reserves, as long as the law that is enforced,
#
they've contractually agreed to pay on demand. And if they don't, there needs to be some penalty,
#
the last resort being to shut down the bank and liquidate it. But note holders are entitled to
#
what in Scotland they call diligence, the bank paying them on demand. Otherwise, the bank is
#
in violation of its contracts. So because we don't today worry about scrutinizing different
#
types of currency, people think it can't be done. But, you know, businesses have to scrutinize,
#
or they did when checks were more popular, they had to scrutinize many kinds of checks.
#
And the rule usually was, if my bank will take this check from me, I'll take it from you.
#
And so it's not that hard to deal with multiple brands of a standardized product, because when
#
all the banknotes are accepted at face value, it's pretty much a standardized product. There
#
aren't many multiple features on which banknotes differ. So I have taught some courses in Northern
#
Ireland. I used to go to Queen's University Belfast for a week and teach a course in monetary money
#
and banking to masters in finance students. And so I got some firsthand experience in a system
#
where there were four brands of banknotes, four local brands plus the Bank of England notes.
#
And all the shops and restaurants treat them as interchangeable, because they are interchangeable.
#
You can deposit any of them in your own bank and get full credit for it. And that actually
#
made me rethink exactly what it is that disciplines a bank from over issuing.
#
Because a simple way to explain it is to say, let's suppose people have
#
definite brand preferences, and when they get the notes of a different bank,
#
they immediately redeem them. And that will give you a mechanism, but that's not the way people
#
behave. They're pretty indifferent to which kinds of notes are mixed in their wallet. So it has to
#
be more subtle than that. And the theory that Selgen and I developed was that
#
businesses will deposit their excess currency at the end of the day into their own bank,
#
and their own bank won't reissue notes of other banks. It will send them for redemption at the
#
clearinghouse, but it will only issue its own notes. So the banks that people put their
#
currency into, make deposits into, act as a kind of filtering mechanism. And so it's still true
#
that a bank that issues more currency than people want will be disproportionately called upon for
#
redemption because the other banks will be collecting more claims on it than that bank
#
will be collecting on the other banks in the system. So there is still a disciplinary mechanism,
#
even if people don't have specific preferences among brands of bank notes, nearly everybody
#
does have preferences among where they keep their bank deposit. You don't have an account in every
#
bank, and so you just stop at whatever the nearest bank is to make a deposit. That has the
#
implication that the shares of the circulation of bank notes should match the shares of the deposit
#
business, and they do. So that result is born out. I just had a student visit me the other day,
#
who's a grad student at Stanford who's working on a paper on the clearing mechanism as a disciplinary
#
device in the Australian banking industry in the 1840s, because he's got a data set that hadn't
#
been seen before where he's got bank balance sheets. And he says the theory still works.
#
I mean, the data match the theory that the clearing mechanism, the clearing system is
#
disciplining the banks from over issuing and banks that lose reserves have to reduce their loan volume.
#
There's a, you know, a lovely quote that you've used in one of your talks where you quoted Dave
#
Barry as saying, over the years, all the governments in the world, having discovered that gold is rare,
#
decided that it would be more convenient to back their money with something that is easier to come
#
by, namely nothing, stop good. And what happens in this world, and it's not just with regard to
#
money, but with regard to everything is- I should mention that that's a much better historical
#
account than most money and banking textbooks give, because they often go into a song and dance about
#
why it's efficient to have to banish gold from your system because you no longer have to spend
#
the resources to dig it out of the ground. As though that had something to do with why we actually
#
left the gold standard, that governments were trying to maximize the efficiency of the monetary
#
system. But of course, it had nothing to do with why they went off the gold standard. Tell me a bit
#
about all the shit that we've normalized. Like what happens is that when something goes wrong in
#
the world, too often if it keeps going wrong, repeatedly we normalize it, it's a state of the
#
world, we don't even think about it. It's like David Foster Wallace's story about one fish
#
asks another fish, how's the water today? And this fish says, what's water? It's all around you,
#
it's normalized, you don't even think about it. Similarly, we've normalized the monetary system
#
the way it is, the government having a monopoly on money. We've normalized inflation. Even in
#
poor countries like mine, it doesn't outrage us anymore, even though inflation is fundamentally
#
attacks on the poor. So tell me about all the things that you'd like denormalized with regard
#
to where the system of money works. In other words, what are the consequences of a government
#
monopoly on money? So in the broad sweep of banking history, it used to be that the countries with
#
weak banks were the countries where government restricted the banks in perverse ways. So
#
restricted branch banking, restricted capitalization. That's not the problem
#
anymore. And the problem now is that in countries with weak banks, it's because the government has
#
given them so many privileges. Namely, it's told them, if you get into trouble, we'll make the
#
trouble go away. So we now sort of coddle the banks. And the original mission of the Federal
#
Reserve System was to remedy panics. So you can't say it's the Fed going beyond its original
#
mission, but they have gone beyond the means and the methods that were legally authorized for them
#
to use. So in the original Federal Reserve Act, the Federal Reserve Banks were allowed to make
#
loans and discount, meaning buy bonds, commercial paper from the banks that were holding them as
#
assets. And so there was a difference between so-called eligible securities, eligible for
#
discount, meaning the Fed would either buy them or lend to the bank using those as collateral.
#
And so there was still some discipline. There's a moral hazard problem created by
#
the assurance that a bank can get bailed out or get cheaper loans than the market would give it
#
if it gets into trouble. So that's already a moral hazard problem. But if the lender of last resort
#
says, well, you've got to be solvent before we'll help you. If you're insolvent, we'll
#
just let you go. And you've got to have good collateral. Otherwise, we won't lend to you.
#
That's all gone by the boards. That was what Badgett recommended as a way to avoid moral hazard
#
on the part of the banks. That is taking more risks, knowing that somebody else will bail you
#
out. Over the years, that's gone by the boards. And the Federal Reserve has an act, has a section
#
called Section 13.3, which authorizes the Fed to lend not only to banks, but even to non-banks
#
under exigent circumstances. But they've gone beyond even that by lending to non-banks,
#
not sorry, not lending to them, but buying bad assets and injecting capital into bad banks,
#
which is not consistent with the letter of the law. But nobody who has standing,
#
namely other banks, wants to sue the Fed to stop this, because they may be the beneficiary
#
someday. So I would like to do away with too big to fail. That's kind of the first priority.
#
And have a robust banking system where banks can be allowed to fail, in which case the job of the
#
central bank is not to rescue insolvent institutions ever. It's to provide enough
#
liquidity to the market that solvent institutions can borrow the liquidity they need. But
#
even that is something that can be turned back to the market, because if a bank is solvent,
#
then somebody will be willing to lend to it. I mean, if it's worth lending to, there's a profit
#
to be made from lending to it. It does mean that the borrower is going to have to divulge
#
as much information as necessary to persuade the lender that they are in a position to pay them
#
back. And there is a sort of timeliness problem. And that's a reason that the private clearinghouse
#
associations got into making last resort loans or arranging last resort loans, because they had the
#
timely information about which banks were solvent. So that might be a way to handle it. That might be
#
the best way to handle it. I'm not sure. But the moral hazard goes very deeply into our banking
#
system. And in a system where banks are adequately capitalized, you don't need deposit insurance.
#
And deposit insurance has made banks less well-capitalized, because now you don't need
#
to persuade your customers that you're solid. You just need to have the sticker in the window
#
that says if we don't pay you, the FDIC will pay you. And that means that the public is no longer
#
shopping around for a safe bank. Well, there's a qualification to that, namely, uninsured depositors
#
do shop around for a safe bank. Who are the uninsured depositors? In the US, it's people who have
#
more than $250,000 in a single account. And some corporate treasurers have that much in a single
#
account in order to pay their payroll. And so they do shop around for a safe bank. And that provides
#
some discipline. But after the last round of bank failures, meaning now Silicon Valley Bank
#
and Republic Bank, there have been people calling for, because it was the uninsured depositors who
#
ran on Silicon Valley Bank for rational reasons, there have been some people calling for, well,
#
let's just make deposit insurance unlimited. They seem to not realize that the only thing
#
disciplining banks now are the uninsured depositors because the regulators
#
are at a disadvantage when banks have an incentive to hide the risks they are taking.
#
The regulators are always a step behind what the banks are up to.
#
So, for example, Silicon Valley Bank failed because it invested in a portfolio of
#
20- and 30-year treasury bonds. So they had no default risk. And the regulators, at least
#
some regulators, seem to think that made them safe. But they were 20- and 30-year bonds,
#
which meant that when interest rates went up last year, two years ago, as the Fed began raising
#
rates, the market value of those bonds fell. And on a mark-to-market basis, those banks,
#
Silicon Valley Bank, was insolvent before the run took place. The run was a response
#
to the word getting out that they were insolvent and so they wouldn't have enough to pay everybody.
#
And the uninsured depositors were uninsured. They couldn't count on somebody else paying.
#
So they decided to pull their money out. So it was people who want to do away with the
#
discipline provided by uninsured deposits. I don't think I've thought it through what
#
the consequences are going to be because that means that you're putting all your
#
eggs in the basket of the regulators, keeping on top of what risks the banks are taking.
#
And it's difficult for them to do that because, you know, when they close down one avenue for
#
taking risks, the banks are going to find another one. They are incentivized to take risks
#
because of the safety net, especially banks that are considered too big to fail.
#
And there's a game played between the regulated institutions and the regulators where the
#
regulators try to shut down one avenue for taking risks. The banks find a new one. The regulators
#
try to shut that down. So the history of the Basel capital requirements is we're trying to
#
find a way to limit moral hazard. And so all the banks have to have a certain minimum capital so
#
the shareholders have something to lose. And so they'll restrain the bank from taking risks.
#
But they assigned risk weights, which were off, for example, zero risk weight on sovereign debt.
#
As though it had no default risk. So banks piled into that. And guess what? It's not risk free.
#
So French and German banks got into trouble when Greece defaulted. So they try to come up with
#
a more sophisticated way of evaluating the risks that banks are taking. But they're always one
#
step behind what the banks with their financial engineers are doing. But we've perversely given
#
the banking system incentives to take on risks by saying that, you know, you're too big to fail.
#
So right now, the banks that are considered too big to fail, or the official term is
#
GSIBs, globally systemically important banks, they're supposed to hold more capital.
#
But they've got every incentive to practice a kind of bookkeeping where the capital is
#
exaggerated. So that's where we need to start returning the banking system to a healthy condition
#
or a robust system, or to use Nicholas Taleb's term, an anti-fragile banking system.
#
When you regulate all the banks and tell them here's what you must do, you get a monoculture.
#
You get banks that all have the same exposure. And so we got a lot of banks heavily exposed to
#
real estate in 2007 and it all exploded. What you want is a diverse ecosystem of banks that
#
don't all do the same thing. Some are big and some are small. Some are invested in real estate and
#
others are not. And the whole system doesn't get into trouble at once.
#
Whenever someone argues with me about markets and capitalism, you know, it's fashionable in
#
certain circles to bring up the 2008 financial crisis and say, oh, Capitalist greed did that.
#
Our bankers did that. And that surely shows that markets don't work. And I always point them to
#
this great essay you wrote in December 2008 for K2 Unbound called What Really Happened, which was
#
an eye-opener for me. And I'd like you to talk a little bit about that across two dimensions.
#
And one dimension is what really happened, the stuff you've spoken about in your essay,
#
that why blaming markets is incredibly stupid because every element of that really came from
#
some aspect of state action or the other, whether it is, you know, the easy money that came from
#
low interest rates, whether it is a community reinvestment act and the amendments to that,
#
which, you know, changed the incentives for banks and often coerced them into
#
particular directions almost, you know. So that's the first dimension about what
#
really caused 2008. And I'd also be curious on knowing how you would have sorted that problem
#
out. How would you have liked the government to sort that problem out? Because my instinct
#
always is that I recoil at the term too big to fail. You know, creative destruction is at the
#
heart of capitalism. No one should be too big to fail. And the moral hazard is incredible.
#
And yet people talk about systemic risk and et cetera, et cetera. And we had to do what we
#
had to do. And, you know, the people in the Fed and the New York Fed who kind of stepped in are
#
considered heroes, Bernanke and Geithner and so on. So that's the second dimension. What would
#
you have done with the first dimension that, you know, take me down to the root causes of what
#
really went wrong with the system there? Okay. And I should say the too big to fail
#
problem has gotten worse in the sense that the size of Silicon Valley Bank was pretty small
#
compared to other banks that were rescued in the financial crisis. But it was thought that they
#
were too well connected or something that it would lead to runs on other banks if they were allowed
#
if depositors were allowed to take losses even on their uninsured deposits. Yeah. So
#
I recommend to people as a summary of the 2008 crisis, Russ Roberts monograph gambling with
#
other people's money. I think he does a good job of laying out the incentives of the managers of
#
financial institutions that were created by the regulations they were operating under.
#
So what happened is that we had a financial crisis that started with real estate. There was a
#
problem in hedge funds and investment banks that were too heavily exposed to mortgage backed
#
securities. And so you have to ask yourself, well, they don't want to fail. So why would they do that?
#
Why would they get so heavily invested in that industry? It was a combination of regulation and
#
bad regulation and bad monetary policy. So, as you mentioned, financial institutions, not just banks,
#
but also investment banks, and Fannie Mae and Freddie Mac were incentivized to expand home
#
ownership. This has for some reason been a goal of both parties in the United States. And
#
Fannie Mae and Freddie Mac were given mandates. So Fannie Mae and Freddie Mac are the mortgage
#
intermediaries where they buy mortgages that banks or other mortgage originators write
#
as long as they sort of meet their template for what a mortgage should look like.
#
So certain loan to value ratio, monthly payments, monthly payments not in excess
#
of a certain percentage of the borrower's income and so on. They buy mortgages that meet these
#
criteria and then bundle them together as securities, mortgage backed securities,
#
which means if you buy one of their bonds, you're buying the right to the mortgage payments
#
that the homeowners are paying. And they were given mandates by Congress to make sure a certain
#
percentage of the mortgages they bought went to low income borrowers. And that percentage was
#
actually growing. So they were increasingly incentivized to make loans to people who
#
were closer to the margin of being able to repay their loan comfortably.
#
So less credit worthy borrowers were getting mortgages that they didn't used to get.
#
And this was fed by Federal Reserve policy, which coming out of the recession of 2001,
#
so called dot com bubble, decided, Alan Greenspan decided, well with Ben Bernanke whispering in his
#
ear as a member of the Federal Reserve Board, to keep interest rates low for an extended period.
#
So usually interest rates would come right back up as the economy recovered. But they kept interest
#
rates at the unprecedentedly low rate of 1% from about 2002 to late 2004. And they started rising
#
slowly, but they didn't really start moving interest rates back to a normal level until
#
2006. And that sort of triggered the cascade that brought down the housing industry.
#
But because of low interest rates, mortgages were cheap. And so people could buy more house than they
#
could have afforded at high interest rates. And that bids up house prices.
#
People of certain income could now bid for a more expensive house. Mortgage originators who could
#
sell the mortgage to somebody else weren't as diligent about making sure it was a quality
#
mortgage. There was supposed to be somebody making sure it was a quality mortgage before
#
Fannie Mae and Freddie Mac bought it. But they ended up buying bad mortgages. And they issued
#
mortgage-backed securities. There were also private-label mortgage-backed securities. But
#
today there are no private mortgage-backed securities, almost none, because it turns out
#
to be a dangerous business. So the first sign of trouble comes when the Fed starts to raise interest
#
rates and now house prices are not rising at the same rate. And people who are borrowing money
#
to buy second and third houses or houses to flip or fixer-uppers to flip no longer are making money,
#
they start defaulting on their mortgage loans. The mortgage-backed securities had this
#
system of tranching where there were supposed to be A-rated mortgage-backed securities
#
that had the first claim on the mortgage payments. And so it was thought that they
#
would never default because the first people to lose money would be the tranche C, which
#
the originators held on to. But the defaults eventually reached the B tranche and the A tranche.
#
So Fannie Mae and Freddie Mac lost money and they were so thinly capitalized
#
that they went bankrupt. And maybe I should say what their business was, their business was
#
buying mortgages and issuing mortgage-backed securities or selling mortgage-backed securities
#
with guarantees that they would pay if the mortgages didn't pay. So they were on the hook
#
for mortgages even that they didn't own outright. They were private institutions in a sense. They
#
were created by, they were called government-sponsored enterprises because the government had sort of
#
given them the go-ahead to operate in a way that banks were not allowed to operate
#
and investment banks were not allowed to operate, this sort of one line of product
#
originating and selling. Because it was thought that this was encouraging home ownership,
#
having them private made it possible for them to make campaign contributions that they could
#
not have made if they were publicly owned entities. So everybody liked this arrangement
#
and they were one of the biggest donors on Capitol Hill.
#
But when their mortgages started to go bad, then house prices, partly as a symptom and partly it
#
contributed to the slowdown and then reversal in house prices, banks that were heavily exposed
#
to real estate got into trouble. In a healthy banking system where you have better diversification,
#
this wouldn't have been such a large crisis. But partly because of these regulatory mandates to make
#
questionable mortgages, you mentioned the Community to Reinvestment Act,
#
which worked in the same direction. There's some question about how
#
empirically important that was. I think the loan mandates to Fannie Mae and Freddie Mac were
#
probably more important. So a combination of these encouragements to expand the pool of mortgages
#
beyond the limits of the creditworthy and the low interest rates that led to rising house prices,
#
because house prices are especially sensitive to interest rates. And the implicit guarantees
#
or the too big to fail guarantees that made Fannie Mae and Freddie Mac think that they were
#
protected. Fortunately, they weren't. Fortunately, they were allowed to go bankrupt. However,
#
they didn't shut down. They went into receivership and the U.S. Treasury took ownership and still
#
owns them. Even through four years of the Trump administration, although they tried and one of my
#
former colleagues at Cato, well I didn't work there but he did, Mark Calabria was appointed to
#
resolve the problem, the politics of it was such that they weren't able to resolve the problem.
#
They're still under federal receivership. So they haven't been re-privatized. They haven't
#
been sold back to the market. Anyway, the regulations created moral hazard. The cheap money
#
provided the means to take a lot of gambles on real estate. And in response, the banks that
#
were the most imprudent, as long as they were too big to fail, they got all kinds of new
#
lending programs directed their way by the Federal Reserve. So Ben Bernanke supported the trouble
#
asset relief program. He and Hank Paulson went to this special meeting of administration and
#
congressional officials and told them, if you don't pass TARP, then we may not have a banking
#
system in the morning. Some words to that effect. Was that true? I think it's a big exaggeration
#
because if you recall, Congress, there are enough people in Congress who were skeptical that they
#
didn't pass it the first time it was called for and everything didn't fall apart. But they
#
eventually passed it. And the first idea, it was called troubled asset relief program,
#
because the idea was to buy bad assets, troubled assets. But they couldn't figure out a mechanism
#
that wasn't corrupt, where you overpay for assets. So they wanted to have some kind of
#
auction mechanism where the banks would sell off their bad assets. But if you sell them at a price
#
that reveals that they're underwater, then the bank has to record a loss on its balance sheet,
#
then you have to take account of that. Whereas if they keep hold of the bad assets, you can
#
continue to account for them at their historical price, not at what they're currently worth.
#
So they gave up on buying the troubled assets, and it turned into a capital injection program.
#
So instead, the Fed bought shares, non-voting shares. And the first round, it was in like 12
#
big banks. John Allison, who was the CEO of one of those banks, BB&T, didn't want to take the money.
#
So he tells this story in his book. But they told him, you don't have a choice.
#
If you don't take the money, it'll make the other banks look bad, like we're singling them out.
#
So everybody has to take the money. He says, we don't need the money. He says, you don't
#
understand. You have to take the money. If you don't take the, if you announce publicly,
#
you don't want to take the money. We're going to send more regulators in and find that you
#
have inadequate capital. And then you have to take the money. So save yourself the embarrassment.
#
The embarrassment, just take the money. It sounds more like a mafia than a state.
#
And of course, the excuse is we don't want to stigmatize the banks that actually need the money.
#
But of course, that means everybody gets rescued. And you've got a too big to fail problem where
#
nobody has to worry. And if you're big enough about not being rescued, and so you don't have
#
to be prudent. You don't have to be prudent enough to convince lenders other than the
#
federal government that you're worth rescuing. So that's what it turned out to be. And when
#
COVID came along, they dusted off all the same special lending programs, even though it wasn't
#
a financial crisis. But the Fed got involved for the first time in lending to non-financial
#
companies. So in the financial crisis, 2008, 2009, the Fed was lending to banks,
#
investment banks, insurance companies, but at least they were financial companies, mutual funds,
#
some credit companies like General Motors Acceptance Corporation.
#
But they didn't want to lend to any local governments. They didn't want to lend to any
#
industrial enterprises. In the pandemic, they did that. Well, the Treasury lent to the New York
#
subway system and to the state of Illinois transit system. And the so-called Main Street
#
lending program made loans available to non-financial businesses. So this is kind of a
#
process that keeps expanding because I think the costs are hidden from the public. They're
#
certainly hidden from Congress. The costs of expanding guarantees to the point where
#
the taxpayers are ultimately on the hook for risks taken everywhere.
#
This reminds me of that phrase, privatizing profits, socializing losses, and it's just
#
terrible. It's not free markets at all. It's a terrible kind of state capitalism.
#
What would you have done? How would you have tackled that crisis?
#
Well, I like to think that if I was in charge, I wouldn't want to be in charge, but
#
I like to think that if I was in charge, I would try to perform a serious triage operation where
#
the insolvent operators don't get bailed out. Rather, they get resolved. They get liquidated.
#
And if you can clarify quickly who's insolvent and who's not, close the ones who are insolvent
#
and the ones who are open, then there shouldn't be a panic whereby they can't
#
borrow because in a way they've been certified. But longer term, the problem is to diffuse
#
moral hazard by rolling back too big to fail. And of course, you can always say,
#
we're not going to rescue everybody. That's what Barney Frank said before the financial crisis.
#
Fannie Mae and Freddie Mac are not too big to fail. But they, of course, were treated as too
#
big to fail. None of their bondholders took any losses. Only their shareholders took losses.
#
But when push comes to shove, that's when you need to say, look,
#
it's going to cause some pain to people who are hoping to get bailed out, but
#
we don't bail out insolvent firms. So you have to do that early and you have to do it consistently.
#
An example of the danger from not doing it consistently is when Bear Stearns got into
#
trouble because they were borrowing money actually from Freddie Mac and they were
#
investing in mortgage-backed securities. They became insolvent and they were financing their
#
portfolio with overnight loans. And their lenders said, some of their lenders said,
#
we don't think you're solvent. It's too risky to lend to you even though it's just overnight.
#
So we're not going to roll over what we've been lending to you.
#
It's the equivalent of a bank run. So Bear Stearns goes to the New York Fed and says,
#
we have this funding problem. You need to help us out. And the New York Fed says, well,
#
we don't want to lend to you either, but we'll find somebody to rescue you. And they found
#
J.P. Morgan Chase to buy Bear Stearns, but J.P. Morgan Chase demanded a sweetener.
#
And since they were pretty much the only bidder, they had some bargaining power here.
#
They said, we want the Fed to take the worst $30 billion worth of assets off the balance sheet
#
for us. So you buy them. And the Fed said, well, the Federal Reserve Act doesn't really
#
give us the authority to buy bad assets. We can make loans and we can lend against collateral,
#
but we can't just overpay for assets. So here's what we'll do. And I still don't know who came
#
up with this idea, but they said, we'll create a special investment vehicle off our balance sheet
#
called Maiden Lane, LLC. And Maiden Lane will buy the $30 billion in bad assets.
#
And how can they afford them? We will lend Maiden Lane $30 billion. See, that's a loan. We're
#
allowed to make loans. And then default and we'll have to. Well, as it turned out,
#
the Maiden Lane did lose money in the short run, but eventually they got enough of the
#
things they bought to pay off that were able to pay off the loan. But it was touch and go.
#
So this is the legal dodge they used. We can't make you the loan, but we can create our own
#
special purpose vehicle by lending it money and having it buy the bad assets.
#
Like I say, if somebody who had standing had sued, not clear that the courts would have
#
allowed that. I mean, presumably they could see through what was actually happening. It wasn't
#
that mysterious. They used the same device when AIG got into trouble. They created Maiden Lane
#
2 and Maiden Lane 3 to buy bad assets from an insurance company whose the rest of the insurance
#
company was fine, but the part that had been speculating and mortgage backed securities,
#
they were in trouble. So I would not have gone down those roads. I think that was clearly
#
breaking with precedent, quite possibly breaking the law.
#
But after they rescued Bear Stearns, people who had been lending money to Bear Stearns were now
#
all paid back. They were made whole, even though Bear Stearns was insolvent. The response in the
#
bond market was, oh, well then it's not so dangerous to lend to an investment bank
#
that's heavily into mortgage backed securities. And Lehman Brothers now found it actually easier
#
to lend, sorry, to borrow. They were actually able to borrow more and they leveraged up even more than
#
they had been, figuring they were too big to fail. If Bear Stearns got rescued, they're bigger than
#
Bear Stearns, so clearly they're going to be rescued. And that was the point at which Hank Paulson drew
#
the line. So the same thing happened to Lehman Brothers. Their creditors said, don't think
#
you're solvent. And they had to go to the New York Fed and say, look, we need money to get it
#
reopened on Monday. And when the New York Fed went to look for a buyer, the only buyer they could
#
find was a British bank who demanded similar guarantees of the bad assets. And they didn't want
#
to do that. And it's still debated why they chose not to do that. On our campus at GMU,
#
the president of the New York Fed, Timothy Geithner, at that point he was treasury secretary,
#
but at the time he gave the talk, but he came to give a talk on our campus, which he said, well,
#
when I was president of the New York Fed, by rescuing Bear Stearns creditors, we did the
#
right thing and the legal thing. But when it came to Lehman Brothers, that would not have been the
#
right thing to do and would not have been legal. And nobody asked him, since this was one of those
#
kind of softball interviews on stage, what's the difference between the two cases, other than that
#
the terms of rescue would have been a little harsher for Lehman Brothers, that is, the buyer
#
needed a bigger subsidy to agree to do it, and it was a foreign bank, so he didn't...
#
So I don't know what Geithner thought was the difference between the two cases,
#
but a common explanation is that Hank Paulson didn't like Lehman Brothers,
#
didn't like the guy who ran Lehman Brothers, so it was sort of personal peak. But
#
if they had drawn the line at Bear Stearns and not rescued them,
#
and if that had been their policy all along, let's go back even another step,
#
if nobody expected Bear Stearns to get rescued, then Bear Stearns failing would not have caused
#
such fits. It wouldn't have changed people's view about who's going to get rescued and who isn't.
#
But it did change their view in the direction of more people are going to get rescued,
#
and so that caused more risky lending. But when Lehman Brothers was allowed to collapse,
#
that caused the panic because that really changed people's views about who was going to get rescued
#
and who wasn't. But if it had been a consistent policy all along, we don't rescue insolvent firms,
#
and Bear Stearns and Lehman Brothers were both insolvent at the time they were resolved.
#
It wouldn't have caused the upset. It would have been the policy everybody understood.
#
So here's my question. What is the thinking behind this? Like I totally get the thinking
#
behind why the state would want to have a monopoly on money, etc. etc. Why would it not want to let
#
bad banks fail? Like what is a conceptual error that is being made by the likes of Paulson and
#
Bernanke and Gaetano? We don't want the Great Depression to happen again and the fear that
#
we don't know what's going to happen if we let them fail. That's what they say. Maybe it'll
#
work out, but we don't want to find out. So nobody wants to be the regulator on whose watch
#
things collapsed. So better to rescue these folks even if we understand that it's going to create
#
moral hazard and it's going to sow the seeds of a bigger crisis later on. That's going to be
#
somebody else's problem. They probably don't even admit that part to themselves, but even if they
#
did, they would think that's somebody else's problem. So this time is special. We get through
#
this, then we can talk about reforms that will settle moral hazard. So Larry Summers during the
#
financial crisis famously or infamously said, this is not the time to worry about moral hazard,
#
but of course the crisis in which your commitment to let insolvent institutions fail is being tested.
#
That's exactly the time to worry about moral hazard. That's the test case as to whether
#
you're serious about letting businesses that take too many risks bear the cost themselves
#
rather than socializing the cost. What are the consequences down the line?
#
Because we still have moral hazard too big to fail if anything is expanded.
#
Exactly, and it's expanded beyond finance into local governments and
#
industries that are presumably businesses that employ a lot of people. It's very short-term
#
thinking. In one of my pieces, I quote David Hume as observing that sometimes it's inconvenient
#
to follow the rule of law, to honor the precedents because somebody is going to suffer.
#
In the present day, but we should be thankful to our ancestors who established these rules
#
because we're better off because of it. And we're impoverishing future generations
#
by making a financial system that's more fragile.
#
And with greater fragility comes greater regulation of what firms are allowed to do.
#
And that means less innovation and less risk-taking of the kind that will improve
#
people's lives. Everybody has to keep doing what we know how to regulate or think we know how to
#
regulate. We don't want to allow them to take new kinds of risks, but that means it's difficult to
#
get new financial products into the marketplace. So it's a recipe for financial stagnation.
#
Let's talk about the implications of all of this for cryptocurrency. You've described the way the
#
system is and the problems with the government having the monopoly on money and so on and so
#
forth where the state for its own purposes, as you pointed out, part of the reason 2008 happened is
#
the interest of politicians will always be to keep interest rates low. So there appears to
#
be buoyancy in the markets, the stock market is going up, etc. Everything looks great until it
#
doesn't. And given that the system is what it is and is very difficult to just move away from this
#
to another paradigm, it's interesting that another paradigm just came up in a parallel kind of way
#
with Bitcoin and then other cryptocurrencies and all that. And you've written this great book,
#
Better Money, which is about gold and Bitcoin and comparing them and talking about the pros
#
and the cons of each and how even Bitcoin in many ways can lag this volatility in its design.
#
The supply doesn't adjust. So take me through your thinking on all of this. When did
#
cryptocurrencies first come into your consciousness? Were you excited? Were you worried?
#
What has been your journey of thinking about cryptocurrencies over the last 15 years and
#
you know how bullish are you in them? So on X, formerly Twitter, I identify myself with the tagline
#
studying private currency since before it was cool. So cryptocurrency actually in some way or shape,
#
in some nascent way entered my consciousness before there was Bitcoin.
#
There was a group of libertarian futurists in the 1990s who called themselves extropians.
#
So extropy is the inverse of entropy. So it's a universe in which things are getting better.
#
So they're optimists about future technology liberating us.
#
And one of the people in that group was Hal Finney. And Hal Finney wrote a piece about private
#
currency in a magazine called Extropy. And somebody who knew that I was interested in private
#
currency asked me to write a comment on it. And Finney was talking about electronic money in its
#
in the form then known as DigiCash. So this cryptographer named David Chaum had invented
#
this kind of electronic currency that was different from electronic deposit transfer
#
because it could change hands and then be re-spent again. It could circulate, in other words,
#
outside of the banking institutions, unlike a deposit account where when you transfer it
#
to somebody else, it immediately goes into their account. And so the banks have to know about this
#
transfer and it goes through the clearing system. So historically, we had paper bank notes that
#
would go from hand to hand without the bank knowing about it, which was okay. They didn't
#
need to keep track of who had it. They just kept track of how many notes they had in the bank.
#
They just kept track of how many notes they had in circulation.
#
And so that provides a kind of an anonymity. And for certain kinds of transactions, it's cheap
#
and convenient. Nobody has to go to the bank or notify the bank. So what Chaum was working on was
#
an electronic way to reproduce those features through a system of, well, a cryptographic
#
signature system, you might call it. They called it blinding in those days. So you could get,
#
if you received one of these electronic files from somebody, you could verify that it was authentic
#
without knowing who it was who handed it to you. Whereas if you get a check, you only know that
#
it's good when it's cleared against the deposit held by the person who signed the check.
#
So these blind signatures were a way of making anonymous electronic transfers of claims.
#
But in Chaum's system, they were claims to dollars. So he was trying to sell his system
#
to banks. And there was a bank in the US that bought it, but then didn't
#
bought the right to implement it, but then didn't do much with it.
#
So that's what Finney was writing about. And my comment was, well, this may be a more convenient
#
way to make transactions in dollars, but there's no reason to expect that this will lead to people
#
adopting a different money. People want to be paid in dollars because that's what they can turn
#
around and spend. So there's a network property or an inertia to a monetary standard. And then
#
Finney replied to me saying, well, it needs some more imagination. It could be that somebody comes
#
up with an electronic currency, which is not a claim to dollars issued by a bank, but which is
#
internet native. I didn't really know what he meant, but which is its own currency.
#
And so he and other cryptographers began thinking about, well, I don't know that Chaum did, but other
#
people were picking up on the idea of an internet native currency that would not be a claim to
#
dollars, but it would be valued for its own sake, like dollars are valued for the sake of their
#
usefulness in making transactions, but without being redeemable for something else.
#
So you can think of the dollar as getting its value from the fact that there's only a certain
#
number of them and they're useful for making transactions. So you've got a demand curve and
#
you've got a supply curve and you've got a determinant value. So can you do that with
#
something that is private and doesn't have any sort of legal privileges behind it, like
#
being the only thing you can pay your taxes in or being the only thing you can pay your court
#
judgments in? So I like to think I had a little bit to do with
#
people thinking about whether there's a way to launch an electronic currency that's not a claim
#
to something else, that's not a claim to dollars, for example. So I didn't hear much about what
#
people were working on until one of my students in 2010
#
is talking to me about Bitcoin. I said, whoa, whoa, whoa, what's Bitcoin?
#
Turns out that Hal Finney is one of the leading suspects for being Satoshi Nakamoto.
#
I was going to ask you if you're Satoshi.
#
I'm not Satoshi. So like I said, I was surprised in 2010 to hear about Bitcoin.
#
That's my story and I'm sticking to it. So it turns out that in conversation with people like
#
Hal Finney and Nick Szabo was another one. And I kind of hope that Nick Szabo is part of
#
Satoshi Nakamoto because he also cited me. And he said, you know, the idea of a private monetary
#
system based on gold has been studied and cites me and cites George Selgin.
#
And Hal Finney at one point said, well, and Finney is probably most famous for being the first person
#
to run the Bitcoin program after Nakamoto. So he tweeted running Bitcoin like the day after
#
Nakamoto released the program for anybody to run.
#
So Finney said in a blog post that, you know, we've studied George Selgin's theory of free
#
banking and we don't need a central bank. We can have a self-regulating banking system
#
built on top of Bitcoin. So Bitcoin can be the settlement layer and banks can issue the common
#
payment media that people use. So anyway, in my own biography, I hadn't heard about
#
what was going on. I wasn't aware of Szabo's proposal for something he called Bitgold.
#
Somebody named Wei Dai proposed something called B Money, which and Hal Finney proposed something
#
called Reusable Proof of Work. But these were all systems where the electronic unit that was
#
supposed to have value was not a claim on something else the way Chom's DigiCash was.
#
It was just supposed to have value the way a fiat money has value by having a use and by having a
#
limited supply. And so the genius of Bitcoin's design is that Nakamoto figured out how to
#
solve what they called the double spending problem, which is usually when you have an
#
electronic file, you can just copy it. And so if this file is supposed to represent a unit of money,
#
well, copy it. And now you've got twice as much money. So they have to keep people from double
#
spending the same unit. How do you do that? Well, the traditional way of doing that
#
is each unit is a claim on the ledger of some bank. You can't double spend your deposit because they
#
deduct it from your account balance the first time you spend it. So you can't spend it again.
#
But if there is no bank ledger, how are they going to keep you from copying it and spending
#
it again? So Bitcoin is based on there being a ledger, but it's a ledger that's decentralized,
#
or it's distributed, you might say, because the same ledger is being kept simultaneously by
#
thousands of Bitcoin node operators or miners, as they're sometimes called.
#
So that solves the double spending problem. And then as far as regulating the quantity of this
#
stuff, Nakamoto kind of took a simple way out, which was, I'm going to pre-specify how many
#
units there will be at every point in the future. So I don't want to make it just a fixed quantity
#
from the first day, because then I'm just dumping it all. And how's it ever going to achieve value?
#
Instead, I'm going to release it gradually. As people run the program, they get rewarded
#
for validating transactions by new coins being released to the person who validates the transactions.
#
So those are mining rewards. And the size of the mining rewards was initially set at 50
#
per block, and then 25, and then 12 and a half, and then six and a quarter. And I forget exactly
#
where we are now, but it's been cut in half at progressive intervals. But that sequence of numbers
#
converges in the limit, and the upper limit on Bitcoin is 21 million units,
#
which won't be reached for another century. But more than 90% of all the Bitcoin has already
#
been mined. So we're at about 19 and a half million units, and only 21 are ever going to be mined.
#
And what that does is very clever. It reassures people who accept Bitcoin
#
that they're not going to have the rug pulled out from under them by a batch of new Bitcoins
#
suddenly appearing, which was a problem with the system Hayek proposed back in the 70s
#
under the rubric of the denationalization of money. They said, well, if we opened the competition
#
to produce money to private enterprises, what would they do? Here's what I think they would do.
#
They would attract customers by promising to keep the purchasing power stable,
#
but they wouldn't make it redeemable for gold or a basket of currencies. That's too cumbersome,
#
and they might want to revise the basket. So they would promise that they would keep the purchasing
#
power constant by manipulating the quantity appropriately. If it starts to fall in value,
#
they'll contract the quantity. If it starts to rise in value, they'll issue more.
#
But you have to trust them under that system. And the genius of Bitcoin is you don't have to trust
#
any single party. There's no single point of failure. The redundancy in the ledger being
#
duplicated is what provides the security that when you're the recipient of the Bitcoin,
#
when you're the recipient of the Bitcoin, you got genuine Bitcoin and now belongs to you,
#
and you're the authorized spender of it. Although the ledger keepers only know your address,
#
they don't know your name and address, physical address. So the quantity limit reassures people
#
that they won't be hoodwinked. But it has an unfortunate side effect, which is it means that
#
the supply of Bitcoin does not respond to changes in the demand for Bitcoin. Instead, the price
#
bears all the brunt of increases and decreases in demand. And that makes the purchasing power
#
of Bitcoin very volatile. So by purchasing power, I mean if you take the dollar price
#
and adjust for the price level, so take inflation out, measure it in dollars of a constant purchasing
#
power as represented by some base year. And that means Bitcoin is not going to fulfill the function
#
that Nakamoto wanted for it of being a popular medium of exchange. And until everything is
#
priced in Bitcoin, you're not going to want to keep your rent money in Bitcoin or your
#
electricity bill money or your grocery money in Bitcoin, because it can fall in value 10%
#
before your bills are due. And now you've got a problem. And people in crypto markets have
#
responded to these facts that the price of Bitcoin is very volatile. It used to be in the early days
#
of altcoins, non-Bitcoin cryptocurrencies like Ether and Ripple and Litecoin and Dogecoin.
#
Those were all bought and sold with Bitcoin. And that was the medium of exchange on crypto exchanges.
#
Not anymore. Now it's US dollar tether is the most popular medium in USDC, I think, a second.
#
People who are selling their coins would rather be paid in something of relatively stable purchasing
#
power until they decide or between the time they sell and buy something else. They don't want to
#
speculate on Bitcoin in the interim, then they want something denominated in dollars more than
#
they want Bitcoin. And so all the crypto exchanges now, the main medium of exchange is tether or USDC.
#
So people who are actually using crypto still don't want to use it as a medium of exchange,
#
because they speculated it. They hodl it. And for people who got in early, of course,
#
it's been a great investment. But hodling is the antithesis of circulating. If everybody's just
#
holding on to their Bitcoin and never selling it, then they're not buying anything with it.
#
And it's not circulating. It's not a commonly accepted medium of exchange,
#
which means it's not going to displace dollars and euros and rupees.
#
Yeah, as you pointed out, it's become an asset category. People will invest in it. They won't
#
buy coffee with it or they won't save it for rent, like you said. And part of that is, of course,
#
the design flaw that the supply doesn't adjust. Like the supply of gold, as you point out,
#
would adjust. If the demand went up, you'd be incentivized to go and mine some. And
#
there would be a lag in the price equalizing again. But so what does a perfect cryptocurrency
#
look like? Because it seems to me that there is a massive sort of hurdle it has to overcome
#
of achieving the kind of network effects that it can go out there in the real world. So in
#
terms of design, if this was one allegedly fatal flaw for Bitcoin, what would a stable cryptocurrency
#
that at least has a possibility of fulfilling all of this or being a medium of exchange and
#
a sort of value, what would it look like? Let me say that Bitcoin is a medium of exchange
#
for some purposes. It's just not a commonly accepted medium of exchange. So Bitcoin is very
#
useful for people who want to make a payment, but not make it through the central bank system.
#
So in particular, and Alex Gladstein in his book, Check Your Financial Privilege, talks about a lot
#
of these use cases. If you want to send money to a classical liberal civil society organization
#
in Belarus that's disfavored by the government, the government won't let them have a bank account.
#
It won't let you wire dollars to them. But you can send them Bitcoin because you send it through
#
channels that don't go through the Belarusian central bank. And then the group in Belarus
#
has to find a way to sell Bitcoins if they want to have local currency in order to hire
#
people or pay their electricity bills or whatever. But there are local markets everywhere. So it does
#
serve that purpose of making payments that would otherwise be censored. And so it has that niche
#
use. Now, you can also use Tether for that purpose. And when the resistance movement
#
in Thailand, since they have an alternative government which is trying to
#
oust the military dictatorship, they have announced that they will accept donations in Tether.
#
Because again, the government can't stop them from receiving Tether over the internet.
#
But Tether or USDC or any of the dollar denominated stable coins has a more stable purchasing power
#
and so it plays the role of a medium of exchange better. But of course, it doesn't achieve what
#
Nakamoto wanted to achieve in terms of freedom or independence from the management of the dollar.
#
Because your Tether goes down in value when the dollar goes down in value. So
#
Tether had 9% inflation when the US dollar Tether. They also have Euro Tether and Gold Tether.
#
US dollar Tether had 9% inflation when the US dollar had 9% inflation.
#
So the next step that some people are experimenting with hasn't gotten very far yet
#
are so-called flat coins where the value isn't pegged directly to a fiat money but is adjusted
#
for inflation. So the number of dollars you get when you redeem isn't constant. It's what it was
#
worth when you acquired it plus enough to compensate you for inflation in the dollar in the meantime.
#
For that kind of coin to work, it needs something that Bitcoin doesn't need
#
and that Tether doesn't need which is they need information on the purchasing power of the dollar.
#
They need an oracle that feeds them information on the CPI or whatever price index they want to use.
#
But there's a second thing that you have to worry about with either a stable coin or a flat coin
#
which is you have to trust the issuer. You have to trust that the issuer,
#
if the way it works is through redemption for assets that the issuer is holding, you have to
#
trust that the issuer actually has the assets. So there's been a lot of question about whether
#
Tether really has safe assets. So they've been suspected of having investments in Chinese real
#
estate companies which are a little dodgy but over the years they claim that they've gotten
#
rid of that stuff and now their portfolio is much safer. USDC has been more transparent about their
#
portfolio but they haven't been quite as popular and USDC had a problem when Silicon Valley Bank
#
failed because one of the assets they were holding was deposits in Silicon Valley Bank
#
and if all the depositors had not been rescued, so USDC would have had to break the buck.
#
So during the weekend between Silicon Valley Bank being closed on Friday and the FDIC deciding on
#
Sunday that we're going to pay everybody back in full, USDC fell to like 75 cents on the dollar.
#
They had a certain number of assets that they would have lost if the uninsured depositors in
#
SVB weren't paid back. So despite that, looking like a very safe asset, we got our money in an
#
insured bank. Yeah, but your deposit was not insured above $250,000. So you have to do your
#
diligence and Tether has not been as forthcoming about exactly, they've sort of reported what the
#
categories are that their assets fall into. We've got this much government bonds and this much
#
commercial paper, but what quality commercial paper is it? They've never been all that forthcoming.
#
With a flat coin that's based on redemption, they have to have assets that will pay them
#
at least the inflation rate if they're going to remain solvent when their obligations are
#
growing in value at the rate of inflation. And I'm not sure how to design that kind of a portfolio.
#
There aren't a lot of assets out there that are indexed for inflation and that you can sell at
#
any time for the present value that's indexed for inflation. We do have inflation indexed bonds,
#
but their value fluctuates. You only know what their value is in real terms when they mature.
#
So the early flat coins, I don't know, I mean, there's one called Spot.
#
I need to really study its design before I'd be sure that it's a viable design,
#
a viable design, but it's a little worrisome that Spot is defined in terms of a second coin,
#
which is called Ampleforth, because the Luna-Terra coin pair, where the value of one coin depended
#
on the other coin and the supply of the other coin depended on the value of the first coin,
#
that turned out not to be a stable combination. So we know Tether and USDC have a viable model
#
depending on them holding a safe asset portfolio. But anybody else, you need to know what their asset
#
portfolio is, or it has to be based, your assurance that the value will be stable has to be based on
#
something other than redemption. And so the project I've been working on as a consultant that you
#
mentioned, Prosaga, it's not instantly redeemable, but the quantity is going to be programmed to
#
respond to the market value so as to stabilize the real value. So it will have an oracle with
#
price indexes being fed into it. And then that'll be the target price for the coin.
#
And then if it's above target, the program will issue more of it. If it's below target,
#
the program will issue less. And that will stabilize its value, not every moment at exactly
#
100 cents, but will stabilize it over time. And the mechanics of it are very much like the mechanics
#
of a gold standard, where, as you mentioned, the supply of gold responds to changes in its real value.
#
When the real value goes up, that incentivizes more mining. That brings the value back down to
#
the normal trend. When the value is low, that discourages mining. That brings the value back up.
#
And the historical record of the classical gold standard is one of mean reversion. The value
#
keeps coming back to a pretty stable trend. With a cryptocurrency, you can adjust faster than that.
#
You don't have to go out prospecting and take, you know, file environmental impact statements
#
and take years to bring a new gold mine online. So at least that's the inspiration, but it hasn't
#
been launched yet, so that's coming. I'm told it'll be tested on a live net
#
first in a matter of months. But of course, it's very difficult to get a toehold
#
in a world dominated by established monies. You have to be better than the established monies.
#
And you have to have somewhere you can spend it. So there's always this chicken and egg problem of
#
getting a critical mass of people who will accept it, even before everybody else accepts it.
#
You were mentioning earlier about how resistant movements or dissident organizations in
#
oppressive countries are, you know, happy to accept Bitcoin or Tether or whatever,
#
because they don't have any choice. And it strikes me that cryptocurrency is not just a
#
means of resistance, but they're also resistance itself, conceptually. So my question...
#
So there's a book that just came out by some guys I know called Resistance Money.
#
And that's the basis of their case for Bitcoin.
#
So here's my question, that it is inevitable that the state will not let it happen. The
#
state will push back. The state does not want its one. It's got two monopolies, right? The
#
monopoly on violence and the monopoly on money. It's not going to let one of them be threatened
#
in any way. It is, in fact, going to use the first of them to defend the second of them. So
#
how big a problem is that? Like, is there a way around this? Does technology empower us
#
anyway so we can bypass the state? Or, you know, how does this play out?
#
It is a problem, of course. And so the price of liberty is eternal vigilance. Once again,
#
and the authorities have to be convinced not to stamp it out. Unfortunately, well,
#
so the technology... When I say to Bitcoin people that I don't think it's going to be
#
very popular as a commonly accepted medium of exchange because the value is so volatile,
#
and that... So fiat monies will survive until they become really unstable. And if that happens,
#
I would think gold would be a more natural candidate because its value is not as unstable.
#
The response I get is, well, look, the authorities shut down the gold standard once and they can do
#
it again because a gold standard requires you to have vaults with gold in them. The authorities
#
can find those vaults and seize them, which is kind of what happened to the gold standard.
#
It's not that they, in the US, that they seized the gold from all the banks. Well,
#
I take it back. That is what they did. So in the depression, you may have seen a picture of it.
#
They issued this public notice that there was an executive order that everybody had to turn in their
#
gold coins, and it was posted in post offices on or before this date, you have to turn in all
#
your gold coins. And so I'm sure not every private citizen turned in their gold coins,
#
but they were on notice that now they couldn't sell them or spend them. Banks who were heavily
#
regulated already, they had to turn in their gold coins. And so the Fed got all the gold coins
#
in the system. So they're now in the hands of a federal agency. So they were seized in a sense,
#
not that soldiers were sent out to take gold coins from people at gunpoint, but they didn't
#
need to do that to get the banks to cooperate. So that's the rejoinder I get. Whereas Bitcoin
#
is censorship proof. Well, I wish it were completely censorship proof. It is censorship resistant.
#
And so if you're sophisticated, and if you're willing to act underground, if you're in the
#
resistance movement in, I don't know, Nigeria or China or Belarus, then you might be willing
#
to deal in Bitcoin. And certainly it provides you with more privacy in China than having a
#
bank account because the government surveils everybody's bank account. But the governments
#
do have the power to drive it underground. So in China, it's not legal to transact in Bitcoin.
#
Some people do, but those people have to be operating underground. It's illegal to put up
#
a sign that says we accept Bitcoin. That at least is legal in the US. And so it's never going to
#
become a commonly accepted medium of exchange if you've got to be a member of the underground
#
to use it. I mean, in some countries, more than half of the workers are in the informal sector.
#
So if they're willing to work off the books, maybe they're willing to have a phone app
#
that's illegal to have that allows them to make transfers that are illegal to make. So
#
in a country like that, maybe Bitcoin could become a commonly accepted medium of exchange.
#
Much more than half of India is in the informal sector, but don't look at me like that. I'm not
#
for minting trouble out there. Okay. Still, they have to keep their cell phones if that's the
#
means they use to access the web out of the hands of authorities. And so
#
it's very concerning that authorities and repressive countries are now demanding
#
people's cell phones at the border so that they can see what's on it. So the governments do have
#
the power to suppress Bitcoin, even if not 100% of its use, they can suppress 90, 95% of its use.
#
And so people who want financial freedom need to fight for it.
#
If people listening to this find all of this interesting, but want to study it further,
#
what are the books and papers you would recommend apart from yours, of course,
#
which are linked from the show notes. But apart from that, what else would you
#
recommend all the way from primers on the subject of understanding banking and cryptocurrencies and
#
free money, or, you know, higher up the chain to more sort of sophisticated work?
#
There are a lot of Bitcoin primers that are unfortunately not nuanced,
#
let's say they're a little too gung-ho. They're trying to sell you on Bitcoin as the greatest
#
thing. But in terms of understanding the beneficial uses of Bitcoin, there's Alex Gladstein's book
#
that I mentioned, Check Your Financial Privilege. There's the book Resistance Money, who those
#
authors, I think there are three authors, and I've met them, but I'm blanking on their names
#
right now. So hopefully you can splice that into the tape.
#
So I'll just, Andrew Bailey, Bradley Rettler and Chris Wormke.
#
Right. So that's Wormker, Rettke. So what?
#
Wormker, Rettler and Bailey.
#
That's the one. So that's also a sort of motivation for why Bitcoin is not just it's good for you,
#
but it's good for society to have it. There's a very technical, it'll be very technical for
#
most people who aren't trained economists, account of the sort of nuts and bolts of Bitcoin,
#
which is by two Swiss authors, whose names I'm blanking on.
#
But you can send it to me later.
#
I'll put it in the show notes.
#
The title is something like Bitcoin and Blockchain. It's from MIT Press.
#
Yeah, Bitcoin, Blockchain and Cryptoassets by Fabian Schar and Alexander Berenson. Is that the
#
Right. So that's by Berenson and Schar. Berenson and Schar work with the,
#
I think it's called the Center for Financial Innovation at the University of Basel,
#
which is sort of an academic center for studying the usefulness of the potentiality,
#
costs and benefits of Bitcoin and Blockchain innovations.
#
On money more generally, I like Hayek's denationalization of money, even though,
#
I mean, it's a very good discussion of the possibilities of monetary freedom and
#
debunks a lot of myths about why you can't have good money.
#
And makes the point that we have low quality money because we have a monopoly,
#
because we don't have competition where people can choose better money over worse money.
#
So that in particular, he rebuts the idea that, well, but isn't it Gresham's law that says bad
#
money drives out good? And the answer is Gresham's law only predicts that if you have
#
a fixed exchange rate between the two monies enforced by law, that's whereas in the market,
#
bad money will be discounted and good money will go at a premium and people will prefer good money.
#
So it's bad money that will disappear. So Hayek's denationalization of money is good.
#
George Selgin has a couple of good books.
#
The theory of free banking is probably too technical for
#
newcomers, but he has a collection of essays. What's the title of that?
#
Money Free and Unfree, I think it's called.
#
Money Free and Unfree, yes.
#
The history of free banking regimes you can read about in the book edited by Kevin Dowd
#
entitled The Experience of Free Banking, second edition just came out with even more case studies.
#
But it provides lots of evidence that if you let them operate with really nothing else but
#
enforcing laws against fraud, you can have a stable and successful and innovative financial system.
#
The reason we don't have free banking today is not because of internal failure of the system,
#
not because the markets are inherently unstable, but because of legal restrictions that led directly
#
or indirectly to state monopolies led to central banks.
#
So my next question is going to be a broader one. I mean, this has been quite a master class on
#
understanding banks and money. So thank you for that. I thought I'll also go in detail through
#
the clash of economic ideas, but that'll take a few hours more. So I won't hold you up for too
#
long, but some final questions. And one is sort of sparked off by something that you wrote in the
#
clash of economic ideas where you speak about the journey of knowledge and you write, quote,
#
commercial forests produce trees which go to sawmills to be turned into lumber, which factories
#
then embody in furniture for ultimate consumers. Hayek's and Keynes's remarks suggest a similar
#
structure to intellectual production. High level economic researchers produce abstract ideas,
#
which applied economic researchers turn into less abstract policy ideas with journalists and
#
intellectuals and embody in mass market books, op-ed pieces and radio and television commentary
#
for the consumption of policymakers and the public, stop quote. And then you continue to
#
write about, you know, how it eventually gets to the politicians in power. And my question is sort
#
of about the journey of knowledge, that this is a great description in terms of how it used to be,
#
that if we think in terms of the knowledge society, where is knowledge produced? Where is
#
it learned? Where is it disseminated? You would think of the academy as a site of all of that.
#
And today increasingly on the one hand, academia has driven itself, especially in the humanities,
#
I don't know how much in economics, but definitely in the humanities into a state of irrelevance,
#
where there's no connection with the real world, where scholars are more and more driven into
#
silos, where they are slave to fads and fashions and of the day, which may have nothing to do
#
with reality, but they depend on their funding and tenure for the funding and tenure on all
#
those things. And is increasingly has abdicated that role of knowledge production and, you know,
#
moving that forward. And equally with the, not just with the internet, but all the technology
#
around us and the changing incentives within the capitalist system. Now more and more people are
#
empowered to be part of that knowledge machinery themselves. Like Satoshi Nakamoto, for example,
#
as far as we know, he's not an academic somewhere writing a paper and saying, let's do this.
#
He actually goes out and creates it and it kind of changes the world in whatever way it's changing
#
it. And, you know, many of the great thinkers of our day, I think, are not in the academy, but
#
are outside of it. So what is your sense through the decades that you've been part of the academy
#
and you've also in a sense been a public intellectual of sorts in terms of getting
#
these ideas out there? What is your sense of this world of knowledge? I don't know what to
#
call it, knowledge society, knowledge ecosystem. What is your sense of how it has evolved? Like if
#
you were 18 today, would you think of college as the only route to go to be, to do the things you
#
love and to be part of these processes? It's an interesting question where Nakamoto got his
#
inspiration or her inspiration or their inspiration. It may be a committee, we don't know.
#
It might be you. Why are you winking at me?
#
But some of the other innovators in that space with whom are the people that
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Nakamoto cited in the white paper, like Wei Dai, cited sort of libertarian
#
anarcho-capitalist writers as their inspiration for wanting to find a private money that would work
#
outside the established state-dominated banking system. So even there, there's some intellectual
#
inheritance. In economics, I think economists still, I mean PhD economists still go to the Council of
#
Economic Advisers and advise other politicians and have an input into the policy-making process.
#
But I think you're right that since the book was written, we've seen the flourishing of social media
#
and that has disintermediated the gatekeepers in some fields. And even in what the public thinks
#
about economic topics, there are people on Twitter who have no standing in the academy
#
who have hundreds of thousands of followers, for good or for ill, but they have hundreds of
#
but they have hundreds of thousands of followers. So that is another route to influence things.
#
But even though influencers or people with big Twitter followings may not be in the academy
#
themselves, their ideas came from somewhere. But you're right that it's not the case, and I
#
wasn't trying to say in the book that it was the case that if you want to influence policy,
#
you need to get a PhD. Because certainly the influence of people's ideas about
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coming through film and through novels and journalism, those are not people with PhDs
#
that they're reading or watching. So, you know, do it yourself is a way. And you really have to
#
admire people who have not taken, you don't have any credentials as a absolute barrier to
#
having influence. So there are people I follow on Twitter and find very interesting who aren't in
#
academic positions, but who have ideas, are independent thinkers who follow the news and
#
make sense of it more than people with credentials do. So my excuse for paying attention to academic
#
ideas is not my rationale for doing it in the book. It maybe is a little weaker. And in a second
#
edition, maybe I should talk about where the terrible trade ideas of both parties in the US
#
now having where that came from. Where did all this protectionism come from? Because it didn't
#
really come from the academy. Some years ago, I was at a conference on African financial institutions,
#
and I ended up editing the conference volume that came out of that conference.
#
But I met a student from Africa at the conference who was a PhD student. I said, well, what do you
#
want to do with your PhD? Do you want to teach? He said, no, no, I want to get a job with the IMF.
#
I said, why do you want to work for the IMF? And he said, because I want to save my home country
#
and to give advice in my home country. I can't do it because I'm from the wrong tribe. I can't
#
get into politics. But if I'm an IMF official and they have to make a deal with the IMF,
#
then I can tell them what policies they need to have as conditions for getting the support of
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the IMF. And at the time, I remember thinking, that's very sad that that is the only way you
#
can think of influencing policy in your country is to come as an outsider on behalf of a
#
multinational company, sorry, multinational organization. But I mean, maybe today he could
#
be a blogger or have a big following on Twitter and influence opinion in his country. Although,
#
I mean, there are even people who have big followings who remain anonymous
#
because either they don't want people to know that they are uncredentialed or they have an academic
#
job and they don't want to get in trouble for having unpopular opinions. So yes, I would not
#
tell people today that the only way to be influential is to go through the academy and
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fit into a slot like that. Of course, there's a lot of leakage in that system where people who
#
were interested in changing the world become more interested in having a successful career
#
for obvious reasons. They have families and so on. And so the means becomes an end in itself
#
rather than a means to spread good ideas.
#
I want to ask you about the process of change in the world. One of the great thinkers I follow
#
who is not an academia is Paul Graham. And he's got this great essay called The Four Quadrants of
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Conformism, where he talks about how the world is head back by what he calls the aggressively
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conventional minded. He makes a quadrant and there are conventional minded and aggressive
#
and passive and the aggressively conventional minded stand in the way of progress.
#
And I think about this, for example, the tragic examples that always come to my mind are
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in the 19th century, there was Ignace Semmelweis, who was the guy who showed that washing hands
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can just, you know, if surgeons wash their hands before surgery, so many lives will be changed.
#
And he actually did, you know, empirical studies showing that that happened. And he was ignored
#
throughout his lifetime and died in a lunatic asylum. Similarly, there was a guy called John
#
Snow. He was trying to figure out what causes cholera. So in 1849, he wrote about how cholera
#
is caused by dirty water. And he was ignored for more than 40 years, in which time millions of
#
people, including in India, you know, died because his basic insight, which was proved and written
#
about, didn't get out there because of the aggressively conventional minded. And I think
#
about this and think that, you know, we sometimes have an idealistic view that in the marketplace of
#
ideas, the best ideas will win. But it takes time if it happens at all. You know, there's that
#
saying about how paradigms change one funeral at a time. And I wonder how you feel about this,
#
because a lot of what you have been fighting for, for example, or writing about, or even if
#
fighting for is too dramatic a word, a lot of what you believe in is still not part of the
#
mainstream. You know, when you mentioned how you went into college and you're like, what,
#
they're still teaching Keynesianism? Well, guess what? They're still teaching Keynesianism, right?
#
And it's been half a century. I saw this talk of yours on YouTube where at one point you pointed
#
out that the median economist to the, the median economist is to the left of the public on economic
#
views, right? So people who are out there in the real world, the carpenters and plumbers and
#
so on, they get it. But if you're sitting in a little ivory tower, you don't get it and you will
#
be resistant to change and you will fight for your turf. What is your sense of this? Like,
#
does it dishearten you sometimes? Do you feel that, yeah, okay, it happens glacially, but it
#
happens. What's your sense of, you know, how the world changes over time and how hard it is?
#
Oh, that's a big question. In a way, I've been pleasantly surprised that I've been able to have
#
a, what I consider a successful career, jobs I've enjoyed, interesting colleagues, good students,
#
while being outside of the mainstream of opinion in my field. So I've gotten more respect from
#
people in the mainstream of my field than I feared I would get. On the other hand, changing policy is
#
difficult. So I think keep your expectations low and celebrate incremental improvements.
#
Celebrate what you can get is the way to avoid ending up in a lunatic asylum.
#
But I mean, it's frustrating. I never wanted to go into policy making directly. In fact,
#
in fact, when Trump was elected the first time, there was a
#
rumor that he was interested in appointing John Allison as Secretary of the Treasury.
#
And I guess he interviewed him for the job. He interviewed a lot of people for the job. But
#
John Allison is somebody I know, he used to be head of the Cato Institute. And he was a banker
#
before that who has supported academic programs. So I knew him through that.
#
Anyway, when I heard that he was being considered as Secretary of the Treasury,
#
I actually had a nightmare in which Allison was appointed Secretary of the Treasury. And he called
#
me up and said, come work for me. I need good people. No, no, you're not dragging me in.
#
Because I'd be working for the federal government. As a policymaker, I would be responsible
#
for every bad policy that I wasn't able to change. And as you say, it's slow going to change policy.
#
But I guess it wouldn't be a nightmare if I thought I could have some positive influence
#
on some policy and the rest that doesn't change. It's not my fault.
#
But for whatever reason, I wanted to maintain my academic purity by just
#
putting the ideas out there. So the slowness of improvements and in fact, the
#
the devolution of our banking system, increased weakness of our banking system and the
#
lack of innovation is discouraging. But I guess I can think of the
#
even worse proposals that were not adopted. So we still have in the United States, we still have
#
a banking system that's competitive on some margins. And that's why it's important to
#
try to prevent a central bank digital currency. So I mentioned a while ago.
#
But I'm not entirely oriented toward if I can't change policy, my life will have been a waste.
#
I also do academic work where if I can convince other academics to change their mind about
#
something, or if I can show people something that they take on board, even if they're not entirely
#
persuaded, that's an achievement. That's an accomplishment. I didn't just mean policy,
#
actually. I also meant the climate of opinion. And I wonder how that's gone because like one
#
thing that I love about America is that there's always been this, as part of your culture, this
#
basic respect for individual liberty, partly because of the circumstances of your founding
#
and all of that, which is simply not there in India. And that's heartening. But on the other
#
hand, now both your major parties have embraced statism and protectionism. That's not so great.
#
Yes. So this has always been a problem for libertarians in general. Do you try to work
#
through the political system? Or do you kind of stay aloof from it and work through think tanks,
#
but not through political parties? And I've always been on the second tier, second track,
#
I should say. But the climate of opinion has moved in a libertarian direction on some issues,
#
not on trade recently, but for a long time, trade was getting freer and freer.
#
Average tariff rates in the world were coming down.
#
You should talk to Doug Irwin if you want the details on that story.
#
Sorry. But broadening who's allowed to get married, that's become more libertarian.
#
Recreational marijuana use has been legalized or decriminalized, at least at the state level,
#
large parts of the many states in the US, and of course, in other countries.
#
Where else have there been advances? The freedom to homeschool your kids
#
has, it's still a long way from being universal, but has increased in the US. My daughter was
#
homeschooled, but we were lucky to live in a state where it was very minimally regulated.
#
In some states, you basically had to sue the state, not to prosecute you for truancy
#
if your kid didn't show up at school. We were living in Georgia, where you just had to file
#
a paper that said, my daughter will be homeschooled this year. And she had to take a standardized
#
test. I think it was every other year, every third year, to show that she wasn't learning nothing.
#
So that's becoming more widespread. I think the Food and Drug Administration is allowing
#
more people the right to try when they're in desperate circumstances, experimental drugs.
#
So on those margins, there's been some progress toward a freer society. But when Milton Friedman
#
was asked about this at the end of his life, how do you feel the progress has been made? He said,
#
well, look, we finally won the intellectual debate. There really isn't any serious case
#
for socialism anymore. But on the practical level, the size of government keeps growing.
#
It's not shrinking. And at most, there have been some deregulations here and there.
#
So the practical case still needs to be continually argued, even though the worst forms of
#
communism have fallen. We haven't reached the end of history. The intellectual battle continues.
#
And in economics, there used to be more economists who would defend central planning or would defend
#
central control of prices. Hard to find anybody who supports that anymore.
#
You'll find them in India. My final question for you is it takes us to a happier place,
#
where for me and my listeners, I want you to give recommendations of books, films,
#
music that you absolutely love so much you want to share with the world. I know you're a big
#
Bollywood fan, but basically anything and everything, not just one genre or one language.
#
Well, I wish I had drawn up a list because my memory for titles and authors.
#
The Bollywood film that we talked about earlier that off the record is Guru that has the most
#
serious economic freedom message. But for sheer entertainment value, I recommend Sholay to everyone.
#
And if you have a sense of the camp, then I recommend the original Don.
#
In terms of books with intellectual content,
#
Red Plenty is a very entertaining novel about what life was like in the Soviet Union
#
and how the informal market allowed things to actually work when the, if it were all done
#
formally, it would have broken down very quickly. But what life was like under that kind of system.
#
A book that I read a couple of years ago that I found kind of inspiring was a memoir by a German
#
liberal journalist and the title was not I, and I can't remember the author's name,
#
but it was what it was like under the Nazi regime for people who were being prosecuted or
#
suppressed, who had to hide underground because their views were too liberal.
#
For the ruling regime. Don't remember his name.
#
In music, I have very specific tastes that not that many people share. I'm a big fan of surf music,
#
which is instrumental rock and roll in danceable two and a half minute snippets.
#
What's your favorite band or album?
#
So my favorite bands right now would be the Madeira,
#
The Lords of Atlantis, Manor Astro Man, Satan's Pilgrims.
#
There's a big surf music festival in California that I'm going to next week.
#
So it's not that popular, so doesn't always come around this area. There are a few bands that
#
travel, I guess tour is the word, make tours of the U.S., but most of them, you know,
#
they have day jobs and so they just play locally. So you have to look for the local band when you
#
visit some other city. But this event I'm going to, they're bringing bands from all over
#
the country and even from Europe and Latin America.
#
Yeah. I listen to Indian music mostly in the fusion genre. So what at one point was called
#
Asian underground, where it's, you know, drums and bass and sitar loops, that sort of thing.
#
Bands like Badmarsh and Sree and have
#
stopped making new music, but there are still some new music coming out. I like sort of music
#
that incorporates some kind of ethnic element with some kind of connection to rock and roll. So
#
in Peru, there were bands that took cumbia, which is the sort of rhythm
#
that's popular in Colombia and Peru, and added electric guitar to it and they call it chicha.
#
So I've been, that was popular in the 70s and there are still some chicha bands, so
#
I listen to that. But, you know, I don't listen to the radio because there's nothing that interests
#
me on the radio. So I still have an iPod. I've replaced it a couple of times by buying used ones
#
with like 20,000 songs on it. And so I can listen to what I want to wherever I go.
#
Although it used to be the case that you could plug your iPod into the rental car,
#
but rental cars no longer have the software to run iPods. So I have to use the output jack
#
and hope that they have an input jack if I want to listen to the iPod.
#
We need state intervention to solve this. Surely this is a market failure.
#
The other thing I can do is put music on my phone because a lot of cars have Apple Play,
#
which will take music from your phone and play it. So I do that when that's necessary to listen to
#
music in a rental car. But that's one of my main hobbies is
#
finding new music that I like so I'm not stuck listening to the music I listened to in high
#
school. So I spend time on band camp and when I go to music festivals, I go to the band's tables
#
and buy their CDs that I can't get elsewhere. My tastes in movies are fairly conventional. I like
#
Quentin Tarantino and Monster Movies and the most recent Godzilla, Godzilla minus one
#
was really should have gotten more Oscar nominations. It was really very good.
#
Godzilla versus King Kong. That franchise is terrible. Don't recommend that.
#
But I watch a wide array of ordinary popular movies.
#
When I was younger, I made it my mission to see everything made by Fellini.
#
But now I've accomplished that and he's not making any new ones.
#
What's your favorite Fellini film?
#
My favorite is Amarcord.
#
1975. That's beautiful.
#
I also like Roma even though it's kind of disjoint because I saw it in Rome
#
with an Italian audience where they were yelling at the screen. So that was a great experience.
#
My favorite Fellini is Eva Theloni. That's one of his early movies.
#
Well, it's kind of depressing. It's these layabouts.
#
And so I like the music in those films too. So I have a lot of
#
Nino Rota on my iPod as well as Morricone because Spaghetti Westerns are another genre I like, which
#
is obvious. If you like Tarantino, you have to like Spaghetti Westerns.
#
And of course he's recycled a lot of the music from Spaghetti Westerns.
#
Awesome. Larry, thank you so much for your time. You've been extremely generous
#
and thanks a lot. More power to you.
#
Thank you. It's been fun. It's been, well, not even five hours.
#
But it went by quickly.
#
If you enjoyed listening to this episode, check out the show notes, enter rabbit holes at will,
#
go to your nearest bookstore online or offline, and pick up all of Larry's books. The clash
#
of economic ideas, especially the chapter on India, is wonderful. You can follow Larry on
#
Twitter at Lawrence H White One. It's linked from the show notes. You can follow me at Amit
#
Verma, A-M-I-T-V-A-R-M-A. You can browse past episodes of The Scene Unseen at sceneunseen.in
#
and every podcast app of your choice. Thank you for listening.
#
Did you enjoy this episode of The Scene and the Unseen? If so, would you like to support
#
the production of the show? You can go over to sceneunseen.in slash support and contribute
#
any amount you like to keep this podcast alive and kicking. Thank you.
