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Detlev Schlichter on the Nature of Money and the Evolution of an Inflationary Depression
With Anthony Wile - November 04, 2012
The Daily Bell is pleased to present this exclusive interview with Detlev Schlichter
Introduction: Detlev S. Schlichter is an Austrian School economist and author, frequent media commentator and senior fellow with The Cobden Centre in London. Until 2009, he worked in international finance markets for 19 years. Detlev Schlichter's book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown was published by John Wiley & Sons in September 2011. Paper Money Collapse received the getAbstract 2012 International Book Award at the Frankfurt Book Fair in 2012. Mr. Schlichter holds an economics degree (Diplom-Ökonom) from Ruhr-Universität Bochum, Germany and lives with his family in London. Mr. Schlichter's blog, The Schlichter Files, can be found at his website, detlevschlichter.com.
Daily Bell: Where did you grow up and go to school?
Detlev Schlichter: I was born, raised and educated in Germany. My hometown is Bocholt, in West Germany, near the border to the Netherlands. I studied economics and business administration at the Ruhr-Universität, Bochum.
Daily Bell: What was it like to work in the realm of international financial markets, predominantly in investment management?
Detlev Schlichter: For most of my 19 years in the finance industry I loved it. I worked for some great companies, worked with smart people, had interesting clients and visited many fascinating places. I loved financial markets. I enjoyed trading and investing. But in the end, I became disillusioned and frustrated. Our financial system has less and less to do with free markets. It is unstable and unsustainable in its present form.
Daily Bell: You worked for J.P. Morgan & Co. (1990-98), Merrill Lynch Investment Managers (1998-2001) and Western Asset Management Co. (2001-09). Does Wall Street get a bad rap?
Detlev Schlichter: The public debate is entirely confused. Most people I worked with were hard-working and committed. Sure, they wanted to make money for themselves and their families (so did I) but most of them also wanted to do what's best for their clients. People don't question the system they work in. They take it for what it is and they operate according to the incentives that the system gives them.
Over the past decades the financial industry has been hugely advantaged by the massive expansion in fiat money and the resulting inflation in financial assets. It is what it is: All of us in the industry benefitted from it. But I fear that among many who work in the industry this has created a somewhat inflated view of their own importance and some unrealistic expectations as to compensation.
Even more importantly, our system of lender-of-last-resort central banks, essentially unlimited bank reserves and artificially cheapened credit, systematically encourages aggressive bank lending, the leveraging of balance sheets, the accumulation of debt and excessive risk-taking. This system tends to punish prudence and good business practices, and reward recklessness.
After years and decades, business ethics have deteriorated, not surprisingly. Some of the bad rap is now justified but one should not confuse cause and effect. A truly capitalistic system is one in which people have to live with the consequences of what they do, and that would be a system with much better checks and balances – imposed by the market, not by regulators.
Daily Bell: Why did you leave the industry in 2009 to focus exclusively on your first book, Paper Money Collapse? What inspired you to write it?
Detlev Schlichter: The realization that this system is truly unsustainable and that it is fast approaching its endgame. The explanation for why that is so can be found in the work of the great monetary economists, the Classical British economists of the 19th century and in particular the Austrian School of economics, first and foremost the great Ludwig von Mises. Mises explained, better than anyone before and after him, why 'elastic' money is destabilizing, why the lowering of interest rates through monetary expansion and extra bank lending causes not sustainable growth but boom bust cycles.
I have read the Austrian School economists extensively over the past 20 years, and over the last 10 years of my work in financial markets I realized just how powerful their monetary theories were in explaining the phenomena I observed in my work life. However, their insights were completely ignored in the debate in financial markets. Here, Keynesianism, Monetarism and Neoclassical economics dominated, and in an almost bizarre way, Keynesianism even still ruled – probably another bad habit that we can blame on 40 years of fiat money and central bank 'stimulus.' That a government agency, or government-sponsored agency, the central bank, administratively sets interest rates, determines the quantity of bank reserves, backstops the banks, which necessarily cease to be truly capitalist businesses in the process, and encourages and guides bank lending is now deemed by many to be almost equivalent of the natural order. To call such a system capitalism is simply absurd. But financial markets operate in an intellectual bubble. I wanted to help prick that bubble.
In 2009, I felt that the crisis we had entered could be The Big One, the one crisis that was too big to paper over (no pun intended!) with yet more money printing and debt accumulation. The system was approaching its inevitable endgame. This is the sort of crisis that is completely inconceivable outside a system of fully elastic fiat money. Only a system of elastic money can over time accumulate imbalances on this scale. It is a fiat money crisis. I felt that what was needed was a fundamental analysis of paper money systems that goes back to first principles: What is money? Why do we use it? What is money demand and how can it be met in a free market? What makes good money? I wanted to argue as logically rigorously as I could and make the conclusions as inescapable as possible so that the reader would either have to spot any logical flaws in the argument – I believe there are none – or accept the conclusion, which is that our paper money system is unnecessary, suboptimal, unstable and unsustainable.
The argument is Misesian but was not targeted predominantly at those already familiar with the Austrian School but at the people who I used to work with: financial market professionals and mainstream economists, who in general believe in the sustainability and even superiority of the present system. I apply Mises's work to the current unconstrained fiat money system and use it to challenge common misperceptions on money and central banking. But with all due modesty, I do believe that Paper Money Collapse is more than just a restatement of Austrian monetary theory. There are new insights in it.
Daily Bell: You are a senior fellow at the Cobden Centre, London, a free-market think tank devoted to issues of money and banking. Tell us what you do.
Detlev Schlichter: The Cobden Centre is an educational charity that promotes honest money, free trade and peace. We want to contribute to the debate on money and banking, in particular, and change the parameters of that debate. The Cobden Centre has supported me by raising awareness of my work and helping me spread my views. I have spoken at various events arranged by the Cobden Centre but I do not have a specific role or formal position. For me it functions mainly as a fairly loose network of like-minded people. There are, quite naturally, differences of opinion among us but we share certain principles. Not all people connected with the Cobden Centre are adherents of the Austrian School but there is a strong Austrian bias within the group – probably stronger than at any other free-market think tank in Britain. There is no political agenda or political affiliation, which I like.
Daily Bell: As you now live in London, please tell us what you think of Britain these days and the financial City.
Detlev Schlichter: I have lived in Britain for 16 years and it has become my home and that of my family. London is a fantastic city and we are very happy here. On the country's overall prospects I am very bearish but that is also the case for most other European countries and also the United States of America. All mature welfare-democracies are heading for bankruptcy. Now that the fiat money boom has come to an end and debt levels are clearly unsustainable, the inherent inconsistencies of the modern welfare state can no longer be covered up. Large sections of the population have become net recipients of state handouts and are thus inclined to vote for the continuation and even extension of government programs. This is the case almost everywhere. In Britain you can add a high level of personal indebtedness to the mix.
I think that as the crisis intensifies we will see more government intervention in markets and in our lives around the world. Liberty is already under attack everywhere. The state is going bust but, somewhat ironically, asserting itself more via regulation and legislation.
Should I move? Maybe. Switzerland has less of these problems and could stay on a different course for some time. On the other hand, going back to Germany is not really an option, in my view. Despite the good press the country gets of late, Germany has massive structural problems, and there is a deep-rooted tendency to ask for state action when things get bad.
My hope is that in Britain some of the old classical liberal tradition and a tendency to be tolerant are still alive among the general population. These traits will be needed in the coming crisis. Maybe that is naïve – but for the time being I am staying put. We are facing a global mess and there are no easy escape routes.
In my scenario the City of London is going to struggle.
Daily Bell: Are you a believer in conspiratorial history? Do you believe powerful central banking families control the BIS out of London?
Detlev Schlichter: I do not believe that powerful families in London control the BIS, and as an economist I stay away from "conspiracy theories" completely. Why, I will explain below. But from this does, of course, not follow that there are no conspiracies at all.
You cannot answer the question with a simple yes or no. If I were to say that all strategies and motivations behind any policy measure or business deal were always in the open, that the official announcements were always correct and complete, that there were never secret agendas or backroom deals, or even more sinister motivations in play, and that you could take anything at face value, just as reported in the media, you would call me naïve. Everyone who has the slightest idea of history, or indeed human nature, knows that this is not how the world works. But at the other extreme, to assume that nothing can ever be taken at face value, that behind every policy and every official announcement there is a secret plan or a hidden agenda, or some master plan, would be equally delusional.
I think most reasonable people will be somewhere in the middle. One should be skeptical and not take everything that is reported in the media at face value. One should be alert and keep an independent mind. I do not think that our 'history' is organized and guided by secret clubs. A lot of things – even big things – do indeed happen by accident. There is not a plan behind everything. The world is more chaotic than people believe. Equally, not everything is always what it seems to be.
But as an economist I have to stay away from conspiratorial theories altogether. There is a whole body of fully elaborated theory, shared by many very intelligent and well-meaning economists, that explains why fiat money can work and why it is superior to 'hard' money, such as gold. I believe that these theories are wrong and their conclusions incorrect but I have to argue entirely at the level of theory, and not try and discredit, for example, the central bankers by suggesting that they are in the pockets of the bankers, and even if someone gave me proof that they were I couldn't use it for my work as an economist.
My critique of central banking is not political, and it is never a critique of the individuals involved. I criticize the theories and ideas behind these institutions. Even if the central bank was run by the wisest, most intelligent, most impartial and apolitical person, we could find central banking would still not work. My criticism of our financial system is not that the wrong people run it, or that greedy bankers misuse it, or that dark forces in the shadows manipulate it. My criticism is that even on its own terms it doesn't work.
This is the right approach for the economist, although I suspect that, outside of intellectual debate and in real life, it sometimes makes me too gullible and not suspicious enough of any hidden agendas.
Daily Bell: Tell us more about your book, Paper Money Collapse. It provides a fundamental economic analysis of paper money systems in general and our present system in particular. How so?
Detlev Schlichter: As I said above, the book goes back to first principles. What is money, what is its purpose, why do we use it? From there we can define the often used but mostly misunderstood term 'money demand.' Money is simply the most fungible good in the economy, the one that can facilitate any number of transactions and that is readily accepted not because it fulfils any needs directly or offers any return, but because it can quickly and flexibly be exchanged again.
Ask yourself, why do I hold some of my wealth in the form of money? The answer is, because you like the unique flexibility that only money can give you. If you have demand for money, it means that you have demand for purchasing power in the form of money. It is not a specific number of paper notes or weight of gold that you desire to hold – neither, by itself, does anything for you – but it is the spending flexibility that the monetary asset gives you, its exchange value, that you demand.
From this, some powerful conclusions already follow. A growing economy does not need a growing supply of money. If people have more demand for money, they sell non-money goods (or reduce their money-spending on non-money goods) and accumulate money balances. In the process, the 'price' of money (its exchange value) goes up. The same physical quantity of money now gives everybody more spending flexibility. This process – a natural market process – has satisfied the rising money demand automatically.
Money is a medium of exchange, and it is in the very nature of a medium of exchange that any quantity of it – within reasonable limits – is sufficient and even optimal to facilitate any number of transactions and meet any demand for a medium of exchange. The buying and selling of money will change its exchange value and thus bring demand and supply in line naturally. There is no need for ongoing money production and no need for elastic forms of money, such as paper money. A growing economy that uses an unchanging quantity of a monetary asset (let's say a fixed supply of gold) as money will probably experience moderate secular deflation, that's all, and it is no problem. We do not need money producers.
At this stage it is clear that advocates of paper money cannot claim that their system is necessary. They must now argue that it is or can be made superior, that the ongoing expansion of the money supply has beneficial effects for the economy. Paper Money Collapse starts with some very simple models of money injections that then become, step-by-step, more complex and more realistic, until we arrive at our modern system, in which money is injected by central banks via the banking system and financial markets.
The conclusions are, in my view, inescapable: Money injections have no lasting benefit for the economy; they always distort relative prices and reallocate resources and thus change the distribution of income and wealth. Money injections always create winners and losers. In our modern system they cause near-term booms followed by busts later, although complete busts are usually avoided for some time through accelerated money creation (monetary 'stimulus') from the central bank during recessions. As a result, the economy accumulates substantial misallocations of capital and other distortions over time that require ever more money-printing to stop from unraveling. The end is currency disaster.
The money of a functioning market economy is inelastic, hard and apolitical.
Daily Bell: Do you believe in full-reserve banking? Would you place bankers in jail if they tried to create fractional-reserve systems?
Detlev Schlichter: I believe in the free market and spontaneous order. I don't want to ban anything, including fractional-reserve banking. I believe in free banking. I want the state out of money completely.
If the market is left free to choose its own money it will most probably choose something that is fairly inelastic in its supply so nobody can simply create more money at will: gold, silver, Bitcoin, who knows? Let's assume it is gold. The supply of gold is relatively inelastic, largely outside political control (or anybody else's control), and gold has a long global tradition as money. But again, I would leave that to the market. It cannot be excluded, and is indeed very likely, that banks will manage to occasionally issue fiduciary media – near-monies such as banknotes or deposits or whatever − and have the public use them in the same way the public uses money proper (gold).
Is this a problem? Sure. Whenever that happens, money has become more elastic. The banks have become money producers and their money injections will cause economic disruption, as explained above. But in a free market and a free society it should be tolerated. I do not believe that fractional-reserve banking is fraud or that all financial assets that become so liquid that they circulate as near-monies have to necessarily originate from fraudulent behavior. In a monetary economy, the distinction between what is money and what is not money will be fluid. The problems this creates are marginal, in my view. Remember that there is no central bank that functions as a lender of last resort, and if the banks set up their own central bank, it could not produce gold (=reserves) out of thin air. Fractional-reserve banking would be very dangerous for the banks, and on the scale it has been practiced in recent decades it would be entirely inconceivable. I am not saying that we would have complete stability – but complete stability is an unobtainable goal in a monetary economy anyway.
The problem is not fractional-reserve banking as such but the systematic and large-scale subsidization of fractional-reserve banking through fiat-money central banks.
Daily Bell: What is a proper gold standard? Would the state run such a system?
Detlev Schlichter: One in which money is gold, very simple. Any so-called gold standard that involves active management by the state, such as a gold-exchange standard, is not a proper gold standard, in my view.
Daily Bell: Why are paper money systems unstable?
Detlev Schlichter: Paper money systems are elastic money systems, in which the supply of money is constantly expanded. Injections of new money are always disruptive. The new money does not raise all prices simultaneously and to the same degree. Some prices rise more than others and sooner than others. Relative prices change and this leads to a reallocation of resources, a redirection of economic activity and a redistribution of income and wealth. These consequences are inescapable. None of this leads to the economy serving the public better – quite to the contrary.
In a modern fiat money economy like ours, money injections occur via the central bank and the banking sector (central bank-sponsored fractional-reserve banking). These money injections tend to suppress interest rates and encourage extra borrowing and investing. That sounds good at first but it isn't. Interest rates are important (relative) market prices. They coordinate saving with investment. Money injections disrupt this process and lead to de-coordination. The Austrian School has explained this best, and Roger Garrison has summed it up well (I paraphrase): Lower interest rates and additional investment as a result of additional savings lead to sustainable growth and prosperity; lower interest rates and additional investment as a result of newly printed money lead to boom and bust.
In our complete fiat money system, we have turned the Austrian boom-bust cycle into a credit-mega cycle: During recessions, which would normally cleanse the economy of the imbalances of the previous cheap-money boom, the central banks now lower interest rates and inject extra bank reserves so that the recession is shortened and the credit boom can continue. The result is that the economy becomes progressively more unhinged. Forty years of this policy mean that we now face the mother of all corrections.
Detlev Schlichter: I would rather not comment but see question on origin of money below.
Daily Bell: How about Silvio Gesell and Major Douglas? They were famous in the 1930s and their theories are experiencing a revival.
Detlev Schlichter: I would rather not comment.
Detlev Schlichter: This is another form of elastic fiat money, of course. It comes with all the problems that systems of elastic money have. I am concerned that when the present system collapses we do not return to some form of hard market money that is outside of political control but that efforts will be made to introduce a new global form of fiat money. It would be a disaster.
Daily Bell: Systems of elastic money inevitably accumulate imbalances, you write, that lead to economic disintegration and chaos. They are fundamentally incompatible with capitalism. That's a strong statement! Your comment?
Detlev Schlichter: I think there is absolutely no way around that conclusion. I derive it through a very rigorous logical process in my book, Paper Money Collapse. This conclusion is supported, I believe, by the work of eminent monetary economists, from the Classical British economists to the Austrian School, in particular Ludwig von Mises. History also supports it.
Functioning capitalism requires the free formation of prices. Elastic forms of money systematically distort relative prices. Eighty years ago no leading economist would have called a system like ours a capitalist monetary system.
Daily Bell: You write that all paper money systems have ended in failure. Examples?
Detlev Schlichter: China's Southern Song Dynasty (1127-1279), China's Jin Dynasty (1115-1234), China's Yuan Dynasty (1271-1368) and the early period of the Ming Dynasty (1368-1644, voluntary return to commodity money), Massachusetts and then other British colonies in the early 18th century, France (1716-1720), North America (1775-1781), France (1790-1803), Britain (1797-1821, voluntary return to gold), the United States (1861-1879, voluntary return to gold), Germany (1914-1923). In addition, the 20th century, which was the century most hostile to gold money and most under the spell of big state ideologies, saw 29 hyperinflations!
Detlev Schlichter: No comment.
Detlev Schlichter: Yes. China was the first to experiment with paper money and after a number of failures the Ming dynasty returned to commodity money. China did not use paper money again for almost 500 years. Britain and the United States returned to gold in 1821 and 1879, respectively, after inflationary fiat money episodes.
Today the challenges are enormous: After 40 years of fiat money expansion the dislocations are massive (excess levels of debt, overstretched banks, inflated asset markets). Returning to hard money would cause considerable pain, as the market would certainly liquidate the imbalances and a lot of the debt would be defaulted on (first and foremost government debt). It would be painful but it wouldn't have to last long. If the market were allowed to operate freely, the economy would bottom out soon. But still, politicians do not want to allow this to happen. "Not on my watch" is the guiding principle.
The result of an end to cheap money would certainly be a smaller banking and financial sector and a much smaller state. That is a political challenge in our age of welfare democracy, outsized government spending and unrealistic expectations as to what the state can deliver. But the game is soon up anyway. The political fallout will be meaningful.
Daily Bell: What do you think of a private gold/silver standard? Isn't that the natural default?
Detlev Schlichter: 'Private' always sounds good to me. I want the market, i.e., the trading public, to decide what is money. Gold and silver would be my prime candidates but who knows? I am, in fact, quite intrigued by the Bitcoin experiment. Some of its aspects are fascinating. It can be thought of as a cryptographic commodity with no central issuer and no legal domain – and ultimately inelastic supply. Fascinating.
Daily Bell: Give us a sense of where you stand regarding Selgin and White. They had a big fight with Murray Rothbard over free banking.
Detlev Schlichter: I am more familiar with Rothbard 's work than with Selgin and White so I have to be careful. It is also a tough question as I risk offending all sides of the debate. I will say this much, and this is my personal impression:
Rothbard is correct to state that fractional-reserve banking (FRB) is unnecessary and always disruptive. He was wrong to label it fraud and thus wrong to assume that it would not occur in a private law society with no state and strict adherence to private property principles. My suspicion is that, as a private-property anarchist, he didn't really want to account for it in an anarcho-capitalist world.
Selgin and White are correct to point out that FRB is not fraudulent (or that it does not have to be fraudulent) and that it arose spontaneously in the market place. They are wrong to assume that it is (therefore?) not disruptive or that it can even help meet money demand. How money demand is being met I explained above. Banks are not even in the business of meeting money demand but in the business of meeting loan demand, and if they are FRBs, they can even stimulate that loan demand. The money (or fiduciary media) they create in the process is a by-product of their credit business. The factor that constrains them in their FRB activity is not the public's demand for money, or lack thereof, but the public's confidence in the banks' solvency.
Again, I am in favor of free banking but not because I believe that no FRB would occur or that it would be somehow non-disruptive. I simply believe the problems would be minor in a state-free monetary system with hard market money at its core.
Daily Bell: Where do you stand on free banking in general? What about US, pre-Civil War "wildcat" banking? Was wildcat banking truly horrible?
Detlev Schlichter: I am all for free banking. I am not an expert on that period and I would rather not comment. History can only help us so much. The discussion on money and banking has to be guided by proper economic theory in the end – and by common sense.
Daily Bell: Will a metals standard cause ruinous deflation?
Detlev Schlichter: This is one of the widespread misconceptions about 'hard' money. No. There is neither any theoretical foundation for this belief nor historical evidence. Interestingly, to my knowledge no paper money system was ever introduced because the public had tired of the 'ruinous deflation' of the preceding metal standard.
Theoretical analysis would suggest that moderate secular deflation is likely but even that is hardly discernible in the historical record. Prices would exhibit a slight tendency to fall over time, which has never been a problem. The idea that the person who expects things to get cheaper would not buy today but wait until prices are lower tomorrow, and by that logic wait tomorrow for the day after tomorrow is nonsense. This person would, in a deflationary environment, allegedly never buy anything. This idea completely ignores the concept of time preference, which does not represent an element of psychology but constitutes a necessary ingredient of any form of human action. To want something means, all else being equal, wanting it sooner rather than later.
Daily Bell: How much government involvement need there be in the monetary economy? Some? None? What kind?
Detlev Schlichter: None, whatsoever. Of course, as in any other walk of life, contracts must be honored and private property protected. In our society, this is supposed to be a key function of the state. But beyond that, I see no specific role for the government. Indeed, I would propose the complete separation of money and state. There is certainly no place for anything like 'monetary policy.' Such a policy must always be counterproductive.
Daily Bell: Are banks necessary?
Detlev Schlichter: Let the market decide. There is certainly a need for financial intermediation, that is, the channeling of savings into investments. Something like banks can play a role in it. But I see no need for fractional-reserve banking and neither do I see a need to ban it.
Daily Bell: How did money begin? In the temple or was it privately circulated?
Detlev Schlichter:Does it matter? Listen, the whole idea that we should now ask anthropologists and certain monetary historians to tell us what money is and what is wrong with our monetary system is preposterous. We all use money every day. We know why we use money and what it does for us. And besides, economics may be a fairly young science but it is 300 years old, and some very smart people have produced some really good work in it. History can only help us so far. Without proper theory we cannot even understand and interpret history. This whole excitement about the anthropologist David Graeber and the idea that he dethroned Adam Smith and, one assumes, by extension all of modern monetary theory is not only nonsense, it provides a classic example of how, without proper theory you misinterpret historical facts. I may not be an anthropologist but David Graeber is certainly no economist.
Let's start again with a couple of rather uncontroversial statements. There are two ways in which trade can be conducted: via direct exchange or indirect exchange. In direct exchange you trade goods and services for other goods and services. In indirect exchange you exchange goods and services for a medium of exchange (the most fungible good that is money), and then the medium of exchange again for other goods and services. It is self-evident that under indirect exchange a much more extensive network of trading relationships is feasible, and that our modern economy, which crucially relies on extensive division of labor, is inconceivable without money. I am sure you agree with the logic here even if you have not spent any time with the tribes of Papua, New Guinea or studied the iron disc money system of ancient Sparta. Why can you instantly understand this? Simple − because you yourself are part of this modern money economy. Again, you are a money user yourself. You know why you use money and why it is of value to you. That is a better starting point for any theory on money than digging up the evidence for why somebody supposedly used something like money two thousand years ago.
What some of the new anthropologists and 'historians' now claim is that there was no or very little barter in the early days of civilization but instead, right off the bat, an elaborate credit system. You help me build my hut and I repay you in wheat in a few months' time when the harvest comes in. So what? That is barter, too. It is direct exchange. There is simply a time gap between the two components of the transaction. If you take the wheat later and consume it, this was a barter transaction; if you take the wheat because you can exchange it again for something else that you really want, it is an indirect exchange and potentially the beginning of a monetary economy – depending on whether the use of wheat as a medium of exchange spreads in your community. And if we agreed on an amount of wheat but at time of delivery you rather take the wheat-equivalent of milk, then this, too, was a direct exchange, barter. Building works for milk or wheat.
That indirect exchange has advantages over direct exchange is beyond doubt and instantly understandable by anyone who has ever used money. The claim by certain anthropologists and historians that those who did the trading thousands of years ago did supposedly not grasp the advantage of money but that the invention of money and therefore the start of indirect exchange required the state, or the high priests in the temple, is truly surprising but, if indeed correct, does not change the fact that once money circulated the benefit was reaped by the trading public, which now could establish more far-reaching and thereby necessarily prosperity-enhancing trade relationships. So even if the state invented money, the benefits of money accrue directly to everybody who uses it – to this day. This also explains why whenever the state itself collapses or state money dies (hyperinflation), the public instantly uses other commodities as media of exchange (jewelry, cigarettes, gold or silver coins).
It gets completely bizarre when the claim is made that because the high priests in the temple allegedly invented money, therefore their modern successor, the state, should control money, because that is in the nature of money. I am sorry but this is truly ridiculous. This borders on mysticism. Our understanding of money and banking requires reason, analysis and proper economic theory. Money is a social convention and an economic tool. As with any other tools we understand it by using it.
Daily Bell: What happens to the euro? Is the Yuan going to take over?
Detlev Schlichter: As we approach the endgame of the present, mankind's latest and so far most ambitious, experiment with unconstrained fiat money, the choice is the same as always: Either we stop printing money and return to some form of hard money that allows the uninhibited formation of true market prices and the liquidation of the accumulated imbalances, or we fight this necessary and ultimately unavoidable 'cleansing' by further and ever faster fiat money production. Presently, policymakers seem determined to go for the latter option. That includes, on present evidence, policymakers in the US, the Euro Zone, Britain, Japan and China. My outlook is therefore for a massive global currency crisis, a hyperinflationary endgame.
Daily Bell: Is the world headed toward a generalized depression?
Detlev Schlichter: We will see the present muddling-through continue until the point is reached where the public loses confidence. When they start selling bonds and reducing their money balances, the game is up. An inflationary depression is the endgame.
Daily Bell: Is the money issue the most important one of all?
Detlev Schlichter: The most important issue is the ongoing erosion of our individual liberty. But liberty and money are intimately connected. A free economy and a free society are incompatible with state-controlled money. As the crisis intensifies I fear that we will see ever more aggressive state intervention in the economy and in every walk of life. My outlook for freedom is not a good one. Sadly.
Daily Bell: Thanks for your time.
The Daily Bell
Many thanks to Detlev Schlichter for a very interesting interview. What comes across powerfully in this interview is how deeply Schlichter has studied monetary issues and how cautious he is in some of his answers.
His take on Rothbard is especially interesting. We long ago decided that Rothbard's stance regarding the criminalization of fractional-reserve banking was questionable. We're glad to see that someone who has thoroughly studied the issue agrees with this.
Other comments and non-comments were interesting, as well. We've pointed out in various articles that the amount of UN backing and involvement in LETS systems is curious, indeed. As for Bitcoin, we have written several articles pointing out that its usage is perhaps not so secure as its proponents claim.
When it comes to Bitcoin, in particular, the fundamental anonymizer is Tor. But Tor was constructed by the US Naval Research Laboratory. The US government is still a big sponsor of Tor via the US State Department and the Broadcasting Board of Governors and National Science Foundation are major contributors.
Schlichter's caution regarding comments on alternative monetary systems only confirms what we've already concluded (and documented in numerous articles) − that there is much more swirling around beneath the surface of these alternative monetary proposals than many are willing to acknowledge.
Schlichter's comments that the argument over the antecedents of money is not a notable one strikes us as debatable. Those who want to impose a pure, state-run fiat scheme have used historical analysis to buttress their case but this analysis is not necessarily accurate. You can see one of our analyses here: "Now Let Us Celebrate Tally Sticks ... or Not."
Monetary theory is actually the ground zero of the alternative media these days. Schlichter's general wariness regarding certain issues is perhaps just as instructive as his general erudition and profundity regarding others. We do live in interesting times.