Editor’s note: Loyola University professor of economics Walter Block and Doug Casey have been friends for many years. Perhaps that’s because Walter wrote a book called Defending the Undefendable, debunking most so-called victimless crimes, and Doug takes great delight in debunking nonsense wherever he sees it. But Walter says that Doug – dire predictions regarding the Greater Depression notwithstanding – is a “wuss,” so we had to ask Walter to tell us what the score really is, if even Doug is being too optimistic. We spoke to Walter via video conference on Skype, so he was able to show us the photos and books referenced below.
L: Hello Walter, it’s been years – thanks for agreeing to speak with us.
Walter: My pleasure. Where do we begin?
L: Well, you’re an academic – let’s start with that. What’s your academic claim to fame?
Walter: My main claim to fame is that I shook hands with Ludwig von Mises – and have never washed that hand since. So if you shake my hand – it’s purely voluntary – you can channel Mises.
L: [Laughs] Well, it’s been said that libertarianism is best spread through person-to-person contact.
L: Yes… These are excellent credentials for free-market economics junkies.
Walter: Yes, well, ordinarily when you ask an academic for credentials, he’ll tell you where he got his PhD, or what research he’s working on now. But my PhD in economics, from Columbia University, had nothing to do with the Austrian school of thought I’m now a member of. It was mainly mainstream neoclassical… crap.
L: That’s a technical economics term?
Walter: [Chuckles] While I was studying at Columbia, I read Hayek’s Road to Serfdom, and in the introduction Hayek says that he hates to take time away from his important academic work to write such a political book, but that it’s necessary. I asked my professors if I should read Hayek’s important work, and they all said, “No, no, no. It’s nonsense.” So I never read Hayek until years later when I met Murray Rothbard and really got into Austrian economics. That means that the honest answer to your question is that my official academic credentials are worthless, at least in terms of knowing anything about the dismal science. Of course, insofar as getting an academic job, a PhD from Columbia must count as a plus, a very large one.
L: But you’ve written about ocean-steading and other theoretical matters; surely you’ve pushed the boundaries of human knowledge somewhere?
Walter: Well, I think I’ve pushed the envelope on libertarianism more than on economics, but I have made a few small contributions on the theory of interest rates, the business cycle, and the gold standard. More recently, I’ve coauthored a whole series of articles with my colleague Bill Barnett, mainly on Austrian economics and methodology. We’ve come out with a book on this, called Essays in Austrian Economics. [Waves book in front of camera]
L: Wow, that looks quite weighty!
Walter: [Chuckles] Yes, it’s 600 pages long, so you can bash people with it if they don’t see reason.
L: That’s what leftists do with their copies of Das Kapital, so fair is fair.
Walter: The cover depicts our criticism of the Austrian structural production triangle analysis, which was used for a long time, even before Hayek – but getting into that may be more technical than we want for this conversation. Let me just say that we are criticizing some of the ideas of our predecessors, Hayek and Mises and so forth, but from an Austrian perspective – what we hope is a truer Austrian perspective.
L: I once heard Peter Boettke say, “We stand on the shoulders of giants, but we have to kick their heads sometimes.”
Walter: [Laughs long and hard] That’s magnificent! That openness to inquiry is important and welcome. Austrian economics has sometimes been called a cult – I’ve been called a cultist to my face by my former thesis advisor at Columbia, Gary Becker, and also by James Buchanan. Both of them have won Nobel Prizes in economics, which indicates what I think about that award – apart from Hayek’s.
L: Well then, let’s take a step back from the academic world and talk about your work in an area of great interest to our readers: the gold standard. Can you defend the premise that gold is not just a “barbaric relic?”
Walter: That’s a good topic. It was Keynes who called it a “barbaric relic.” It has become a relic, in the sense that it has not been used as official money for many decades. Our man FDR took our gold away in the 1930s, then Nixon severed the last link between it and the dollar in 1971. But the real problem with gold, from the point of view of our friends on the left, is that it functions as a set of fiscal handcuffs on the government.
L: Because gold can’t be printed at whim. To spend it you have to have it, physically.
Walter: Right. Now, there are three – and only three – ways the government can get money. The first is to tax the people. The problem with that from the point of view of our masters is that everyone knows who’s doing it. The politicians can’t blame greedy capitalists or any others for what the tax-man does, and that’s a problem for them. The second source of revenue for the government is borrowing. But again, there’s a limit on how much you can borrow, because everyone knows who’s doing it – and has a good idea of how indebted the government is. The third way is much, much better from their point of view, and that is to create money out of thin air. That may be done via fractional reserve banking, or printing fiat currency, or whatever. This is good from their perspective because not one in 1,000 people, or maybe not one in 10,000, knows who’s doing it and that it is causing inflation. It’s theft on a grand scale, understood by so few, so they can get away with it.
I think it was Stalin who said that the best way to destroy an enemy is to debauch that country’s currency. That’s what these guys are: currency debauchers. Ben “the paper hanger” Bernanke is going berserk with his quantitative easing. There’s no more quantitative easing one, two, or three, its quantitative easing forever. Every month, billions of new dollars are pumped into the economy.
So the last thing the government wants is this barbaric relic to limit their spending to what they can actually tax and borrow. And that, of course, is why people like you, me, Doug, and like-minded others, favor the gold standard; we want the government handcuffed, so it can’t go around spending money it doesn’t have on unnecessary wars and other destructive and counterproductive things governments like to do.
L: I agree, but they’ll never admit it.
Walter: Of course. What they say is that gold is bad because it used to cause volatility and instability in the economy. But it’s not true. If you look at the business cycle in the 100-year period before the Fed was established in 1913, and compare it to the 100-year period after that (to the present day), the volatility has been vastly greater in the more recent period of greater government involvement in the economy and the abandonment of the gold standard.
There was volatility before, and some of it was due to imperfections in the gold standard we had then, but the volatility of the business cycle was much lower in the earlier period than in the latter one than what we have now. So I’m a big fan of the gold standard. So is Ron Paul, who’s done yeoman’s work getting the word out. The Keynesian idea is just totally wrong.
L: Okay, but still, most people believe that our modern economy would just not work if we used gold and silver for money. Is there an economic argument to justify this view?
Walter: None that I am aware of. The burden of proof is on them, to show why gold-backed money wouldn’t work.
L: I suppose, if anything, it’s more practical now than ever. It’s already rare for people to shuffle actual little pieces of paper back and forth. It would be no different to transfer ownership of gold back and forth, except that the gold would actually exist and have intrinsic value, whereas most of the so-called money in the world today does not physically exist, and has no intrinsic value even when it does exist.
Walter: I agree. Look, a banker is really just like a tailor. A tailor takes big pieces of cloth and cuts them into smaller pieces to make shirts and pants and things. A tailor also takes smaller pieces of cloth (thread, yarn) and sews them together to make larger items. Bankers do the same thing: they take billions of dollars from large depositors and break it into smaller pieces – a few million here, a few million there – to put to productive use. Bankers also take small deposits – $10 here, $100 there – and aggregate them into larger amounts, also to be put to productive use. This is the essence of the banking system, and what finance is for. For this to work, all you need is a form of money – any form of money – that people trust. You do not need fractional reserve banking or a fiat currency system; all that does is increase the stock of money, which makes each unit worth less.
L: That’s a great metaphor.
Walter: By the way, I don’t say that we have to use gold as money. We could use dollar bills as money – as long as those dollar bills were 100% backed by something of value such as gold or silver. It’s neither necessary nor practical for people to go around with great bulging sacks of gold coins like Scrooge McDuck – you know who Scrooge McDuck is, don’t you?
L: Of course; Scrooge McDuck is Doug Casey’s great hero.
Walter: [Chuckles] So, I would say that it’s not entirely accurate to say that I back the gold standard. I would say that I’m a proponent of free-market money. As it happens, whenever the market has been free to choose, gold has emerged as the most convenient and universally accepted form of money. That does not mean that money can only be backed with gold; it could be silver, platinum, copper, anything people accept as having value for other purposes. The important thing, as regards your question, is that anything you can do with unbacked fiat money, you can also do with money fully backed by something of actual value. The only thing you can’t do with it is create more of it out of thin air.
L: Which is only of concern to spendaholic governments.
Walter: Yes. It’s the same as with the minimum wage, which Obama is trying to raise right now. He wants to raise it to nine or ten dollars, on the grounds that $7.25 is not a livable wage. The idea here is that with the stroke of a pen we can make people richer. Cure poverty. Well, if that’s so, why be so niggardly and stop at $10? Why not make it $100, or $1,000 per hour?
And if that’s a problem, why can’t they see that it’s the same problem trying to make a whole society or economy richer at the stroke of a pen – or a few keystrokes at the Fed? Why isn’t Zimbabwe the richest country in the world? Why weren’t Germans who had to carry wheelbarrows full of deutsche marks to the store to buy a loaf of bread in 1923 rich?
L: How important in your analysis is the backing, or convertibility into something of value? I ask because today we have the phenomenon of bitcoin, which has been created in such a way as to resist inflation. It’s not backed by anything, and yet seems to be gaining wide acceptance as money.
Walter: My answer to questions about bitcoin starts with an economics joke. An economist is asked: “How is your wife?” And he answers: “Compared to what?” [Pauses] That was a joke.
L: I get it… I get it.
Walter: So if you ask me if I like bitcoin, I ask: “Compared to what?” If the comparison is with a gold coin system, I’d rather have the gold coin. If the comparison is with the US dollar, which is going the Zimbabwe route, I’d rather have the bitcoin. Now, other monetary authorities around the world seem to be debauching their currencies faster than the US is destroying the value of the US dollar, so the dollar appears strong in foreign exchange. But that doesn’t change the fact that each dollar in existence is made worth a little less with each new dollar created. So compared to that, I’d still prefer the bitcoin.
L: You touch on so many interesting things. This phenomenon of currencies all around the world being debased, and people focusing on the exchange rate between them – rather than what they can buy in the real world – is what we call “the race to the bottom.” As an economist, can you see a way out of that death spiral, or is Doug’s Greater Depression inevitable?
Walter: Well, if Americans had elected Ron Paul, and Ron had put Doug in charge of the Fed and told him to get rid of it within a week, Doug would’ve gotten rid of it within two days. That would’ve stopped it. Unfortunately, that’s not what happened.
Did you know that when Alan Greenspan was a younger man, he was influenced by Ayn Rand, and wrote articles in defense of the gold standard? I remember reading about it in the newspaper when he was appointed Fed chairman, and I thought he’d get rid of it in a few weeks. That shows how naïve I was! But I would trust Doug.
I have to say that I think Doug is absolutely right. It’s basic Austrian business-cycle theory. When you create money, you artificially lower rates of interest. There are certain goods that are very interest-rate sensitive, particularly long-term investments, like houses, cars, mines, and things like that. So lowering interest rates increases investment in these kinds of heavy, long-term things in a way that is incompatible with the saving-consumption decisions of the populace, which haven’t changed. This results in a bubble that must burst – Doug is absolutely right about that. I can’t predict when that will happen, but it will.
Trying to cure an economy that has seen massive amounts of malinvestment by stimulating more of the same is like trying to cure a drunk by giving him more alcohol. It’s not going to work. The cases of Zimbabwe and Germany in the 1920s show that it doesn’t work.
L: And the real cure – cutting spending and living within our means – is not politically viable. So Doug is right and there’s no way to avoid going through the wringer?
Walter: The economy would crash even if we put Ron and Doug in charge now; there are too many investments that never should have been made in the first place. Those mistakes must be liquidated. The movement of capital out of areas where it should not have been invested in the first place and into areas where it should have gone will help some people, but it will also hurt huge numbers of others. But really, the correction doesn’t create the pain; it uncovers pain caused by incorrect investment caused by previous government intervention.
Instead of this, the government is trying to paper the problem over. But even all the money the government has created is not working as they’d hoped. Unemployment remains high, at seven or eight percent officially, but more than twice as high if you look at the shadow stats. It would be even higher if you counted the so-called discouraged workers who are no longer looking for jobs. And it’s even higher if you break it down and look at segments of the population like young, black males. Their unemployment rate is over 40%.
So the government is trying to paper the problem over, but it’s not working. We don’t see soup-kitchen lines like back in the 1930s because the government gives poor people food stamps that look like ordinary credit cards – they’ve tripled the amount of handouts in recent years.
People say this is a strange recovery. Well, the obvious answer is that this is no recovery at all. It’s going to get worse, just as Doug says.
L: Okay then. You’re a professor, not an investor like Doug, but from your point of view, is there any investment class that’s safe, or even some investments that might do well during this sort of crisis?
Walter: Well, I’m tempted to say gold – but what did FDR do during the last Great Depression? He stole everyone’s gold. So, I can’t even tell people gold and silver are safe, because Obama could wake up one day channeling Roosevelt, and issue a similar executive order, seizing everyone’s bullion.
L: This is why Doug advises people to store their gold in multiple jurisdictions, especially outside the US. But it’s a threat everywhere.
Walter: We could also talk about land; no one is making any more of it, so it resists inflation pretty well. However, governments can double, triple, or raise taxes on it even higher, making it a pretty risky investment as well.
L: They could basically confiscate the value while leaving you the title; and you can’t hide your land, nor pick it up and take it somewhere else. But Doug likes to point out that there are jurisdictions around the world that are famous for not doing such things – and real estate abroad can never be forcefully repatriated to your home jurisdiction. Anything else?
Walter: I’m very reluctant to tell anyone to invest in anything at all – even bitcoins. Even if the bitcoin system itself were to prove unhackable, governments could still arrest people who use them and put them in jail, call them terrorists or something. They are capable of anything.
L: They’ve already done that, jailing Bernard von Nothaus, calling him a terrorist for circulating warehouse receipts for gold and silver bullion.
Walter: That’s right – the Liberty Dollar. That’s a truly disturbing and disgusting bit of recent history.
So, I admire Doug – and all of you – because you step into this morass, where professors like me fear to tread, because we can’t be sure of any investments. You guys are more entrepreneurial, and I’m more theoretical. So I’m never wrong! [Chuckles]
L: And never long. Okay, I won’t push you on what’s not your field. But putting investments aside, theoretically, what is a person to do in such an environment? Nothing is safe, but one can’t see the crisis coming and do… nothing?
Walter: Well, what would Scrooge McDuck do? He didn’t keep his money in other people’s banks; he kept it in his own vaults, some right at hand – stuffed in the mattress, as it were – and more scattered around other places. It’s not perfect, but then they can’t pull a Cyprus on you: close the banks, take your savings, and only let you withdraw $100 a week or so of your own money.
We do need to use banks for some things, and the FDIC guarantees deposits up to $250,000 – even with fractional reserve banking, deposits up to that limit are likely to be honored, because the government can just print up more money – but I wouldn’t want to leave any more than that in any bank. And I’d always know that after all the money-printing the government would do to avert a major bank run would mean that while I might get the same number of dollars back, they would not buy as much as when I put them in.
L: It’s quite striking to hear an academic agree with so much of Doug’s more dire views and predictions. Much food for thought. Anything else you’d like to tell our readers?
Walter: Well, we spoke of being free to choose earlier; that’s of course the title of a famous book by Milton Friedman, an economist highly regarded by most free-market type people. I must say a word or two about Milton Friedman.
L: Okay, shoot. Metaphorically; no sectarian violence allowed.
Walter: Murray Rothbard used to say that mainstream economists specialize in what they are bad in. If you look at Milton Friedman’s work, you can see that he’s very good on free trade, minimum wage, rent control, occupational licensure, and other topics…
L: But he was a monetary interventionist.
Walter: Yes, he was a monetary interventionist – and that was his main thing, apart from educational vouchers, which are also a horrible idea. If someone says “monetarist,” who will most people come up with by association? Milton Friedman. He was just horrible on this; he favored fractional reserve banking, he favored the Fed, all sorts of government monetary and tax intervention, and he had the audacity to name his book Free to Choose. But when people were free to choose, what did they choose? Gold. He’s a disgrace!
L: Don’t hold back, Walter – tell us what you really think.
Walter: [Chuckles] Well, I don’t mind disagreement. We have to have Krugmans and Keyneses – but the problem is that everyone thinks Friedman was a champion of free enterprise, and people will come to you, and me, and Doug, and tell us were wrong because “even Milton Friedman concedes…”
L: It’s like the problem arising from Ronald Regan using libertarian rhetoric to get elected, and then overseeing the biggest acceleration of growth in government ever seen until that time. That had typical results of too much regulation and government spending, and people think that the Reagan years showed that free enterprise doesn’t work. Just as people are taught that the Great Depression proves that “unbridled laissez-faire capitalism” doesn’t work – when, in fact, the Depression was the result of government intervention into the economy.
L: Well, this has been fun, in a horror novel sort of way. I fear our conversation will have people thinking that the “dismal science” deserves its name. Your message seems to be: be afraid – be very afraid. Is that right?
Walter: Be afraid, be very afraid – of government. It’s a criminal gang. They steal from us – just try not paying what the IRS calls a “voluntary” tax this April 15. They kill people all around the world – despite its highly public outrage regarding weapons of mass destruction, the US has the only government that has used nuclear weapons, and on civilian populations. They intervene in the economy with all sorts of chicanery that causes great harm – and then use that as an excuse for more intervention. Doug is right in all his criticisms of the government – he just doesn’t go far enough. [Big smile]
L: Well… we could start five new conversations on each of those topics, so let’s call it a wrap for this time. Thanks for your time and insights.
Walter: You’re very welcome. It is an honor to do this interview with you.
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