Austrian Economics Newsletter Fall 1996

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Economics Newslet ter

J o se ph T . S al er no

Why We're Winning: An Interview

withJ oseph T.Salerno

Joseph Salerno, professor of economics at Pace lInivcrsity, is

a feading figure in today's growing Austrian School. Hc has

been a pioneer in many fields, including monetary theory,

comparative systems, th e history of thought, an d the eco-

nomics of war. After t.hc death of Murray N. Rothbard in

1995, Salerno assumed the editorsh ip of the ReFjew of ill/SIrjan

Economics, together with Hans-Hermann Hoppe and Walter

Block. He was interviewed by the AEN staff at the 1996 Miscs

University, the Miscs Institute's summer instructional con-

ference at Auburn University.

AEN: What's your take on the present state of Aus-trian economics?

SALERNO: How could anyone be at the Mises Uni-

versity and not be elated? This is my eighth. The stu-

dents are more passionate and well read than ever,

We've got all levels, all fields, and many different coun-

tries represented. Many students have come on the rec-

ommendation of their professors, who had attended in

the past. So we're now working with the second and

sometimes third generation of alumni.

AEN: What does the program contribute to the

movement?

SALERNO: These kids put up with a lot of baloney

in school, and the tedium of their regular classes tends

to strip economics of its essential content. They go in

thinking they will learn about how societies materially

advance, how civilization comes about and is preserved.

Instead, they end up slogging through years of pointless

mathematical exercises.

I'm all for paying dues, but at some point students

need to have their imaginations sparked. You can see

that happening here. It reminds them why they liked eco-

nomics in the first place. Teaching and formal training

is the key to advancing any school, whether Austrian or

Marxian .. It is precisely what has been missing from Aus-

trian economi.cs.

AEN: Is that why most of your classes here focus on

technical issues?

SALERNO: There is a myth that all Austrians are

generalists. General instincts are fine, but they are not

enough to sustain a schooL A body of thought stands or

falls on its practitioners' ability to master the technical is-sues in particular fields. It's what distinguishes dilet-

tantes, hobbyists, and amateur philosophers from

engaged economists. I have little patience for people

who want to reconstruct Austrian economics from the

ground up, but then can't explain, in praxeological

terms, the law of demand much less give an account of

the regression theorem.

Until we have a full-time faculty somewhere, this

conference fills the gap. It provides the formal training,

in a wide variety of fields, that would otherwise be un-

available. The students and faculty love it.

AEN: Is there more evidence of the healthy state ofthe Austrian School?

SALERNO:. It's all around us. The print run of The

Review of Austrian. Economics gets larger every issue.

The articles are sophisticated and make real contribu-

tions ..They also show that we have fierce debates among

Austrians, a SUre sign of health. All back issues are in

constant demand, from libraries, students, and others.

We also now have our own full-blown history of

thought, Murray Rothbard's last gift to the world of ideas.

We no longer have to think of Austrian economics as a

late-19th-century idea carried forward by a handful of





It i s t h e v e r y r a d ic a l i s m

o f t h e A u s t r i a n S ch e e l

But i f we conceive the Austrian revival in broader

terms-as being the movement of a body of ideas instead

of a handful of people-we gain a more realistic under-

standing of the present state of the school. The current

Austrian boom is massive and international, and encom-

passes literally thousands of students, faculty, and profes-

sors the world over. Thanks to this, we are experiencing

another explosive burst of creative en-

ergy.

AEN: Yet Rothbard himself never

took credit for the Austrian revival.

SALERNO: He was too busy

crediting past Austrians for their con-

tributions and, at the same time, en-

couraging younger students to go

beyond his own work. He made the

tradition and the school the focus,

and not his work personally. Today,

it's fashionable in academia not to ac-

knowledge intellectual debts unless

it's to your advantage, but neither

Murray nor Mises had this view. At

the same time, whenever we younger

economists tried to beef up Austrian theory, even if it

meant disagreeing with him, he was delighted.

AEN: Describe how you got involved in the Aus-

trian School.

Keynesians-and Lachmann to the Lachmannians for

that matter. In my paper, Iattempted (:0 show that

Keynes moved from Marshallianisrn to classic millennari-

anism, In the end, he was attempting to use the state to

bring about a world that appealed to his personal intui-

tion, but does not and cannot exist,

In Keynes's dreamland, the interest rate would fall

to zero because there would nolonger be scarcity of capital That

achieved, we would see the disap-

pearance of "avarice, usury, and

precaution." Moreover, his attack

on orthodoxy wasn't Limited to eco-

nomics. He opposed bourgeois eth-

ics, follcways, and institutions, and

longed for a new order designed by

the intellectual elites.

AEN: You have encouraged

Austrians to rediscover the writings

ofW.H.

Hutt.

t h a t a t t r a c t s t o d a y 's

b e s t s t u d e n t s . T h e m a i n -

s t r e a m d o e s n o t i n s p i r e

t h e m . T h a t i s o n e r e a s o n

w e c a n w i n .

SALERNO: M y ideological awareness first came

when I was in fifth grade ..My mother had a cousin visit

from Italy. During dinner, the visitor revealed he was a

communist. My father, who was somewhat of iii New

Deal. Democrat, nearly threw him out of the house. Thatsparked my curiosity. Then, in 1963, I read an article by

Barry Goldwater in Life Magazine-he favored the free

market in those days-and I was deeply impressed. One

thing led to another, I went through the inevitable Rand

phase, and by my senior year at Boston College, I was

fairly well read in Mises, Hayek, and Rothbard. In gradu-

ate school at Rutgers, I met Murray.

AEN: It was your dissertation that first established

you as a historian of thought. Rothbard said your study

was the starting point for understanding British bank-

ing debates.

SALERNO: Actually, a good part of my thesis andargument can be found in Rothbard's Classical Econom-

ics, Volume 2 of his history of thought. My dissertation

was on a slightly more narrow topic: the divisions and de-

bates among the bullionists on the question of exchange-

rate theory.

AEN: Your last major history of thought paper was on

the development of Keynes's thought. Is there anything

Austrian in Keynes, as Ludwig Lachmann used to claim?

SALERNO: A few perfunctory remarks about uncer-

tainty and the chaos of capital markets do not constitute

Austrian insights. I think we should leave Keynes to the

SALERNO: Professor Hutt is

most famous for his work on labor

unions, which is great. But in re-

sponse to Keynes, he developed a wonderful theory of

market price coordination that is consistent with Mis-

esian theory. Iave attempted to rehabilitate his view.

His idea was that in an unhampered market economy, all

actual or realized prices are market-clearing prices and

are coordinated to make the market work smoothly.

Price coordination is an ex post concept, that is, it de-

scribes what actually occurs at every moment on the mar-

ket.

What if a person withholds labor? What i f a capital-

ist withholds investment? Then they have reason to do

so: they are making rational judgments about future con-

sumer demands. When the data change, they may with-

hold even longer or may choose to exchange. At each

stage, they make judgments based on their predictions,

and these influence the prices that emerge at each mo-

ment. Errors are happening in the market all the time,

of course. But at any moment in time, all resources are

priced and allocated to reflect their most highly valued

uses, based on entrepreneurial anticipation of future

market conditions.

AEN: What theoretical issue, besides method, most

separates neoclassicals from Austrians?

SALERNO: No contest: the business cycle theory.

The Austrian theory embodies all the distinctive Aus-

trian traits: the theory of heterogeneous capital, the struc-

ture of production, the passage of time, sequential analysis

of monetary interventionism, the market origins and func-

tion of the interest rate, and more. And it tells a compel-

ling story about an area of history neoclassicals think of

as their turf. The model of applying this theory remains

Rothbard's America's Great Depression.

Fa. ll 1996 AUSTRIAN ECONOMICS NEWSLETTER I 3



AEN: What about the monetarist explanation of the

same event?

SALERNO: Rothbard once told me an interesting

story about attending a Milton Friedman lecture. This

was just after Rothbard's book came out in 1963. Fried-

man was supposed to speak on medical licensure or

some such topic, but swiftly departed from the assigned

topic and launched into a diatribe against Murray'sbook. As far as Murray could tell, Friedman was espe·

cially incensed that Rothbard had cited a 1937 Lin Lin ar·

ticle arguing that savings deposits are part of the money

supply, on a p ri or i or Austrian, not positivist, grounds.

Later, Friedman was peppered with questions from curio

ous students, which further infuriated him.

AEN: Yet both Austrians and Monetarists see the

economic downturn as related to Federal Reserve policy.

SALERNO: But that is where their similarities end.

Rothbard argued that the stock market crash was not a

market failure, but a consequence of inflationary Fed-

eral Reserve Policy during the 19205. Monetary inflationhad caused distortions in the real capital structure, and

the crash and depression were the inevitable correction.

Milton Friedman merely blames the Fed for not rescuing

banks once they started to fail.

For the Austrian theory to apply, Rothbard had to dem-

onstrate 111ata significant inflation had occurred in me

1920s. That's how the debate turned to the definition of

money. Friedman understood how high the stakes were.

AEN: And this is how the accusation began that

Rothbard fudged his numbers?

SALERNO: This is a longstanding Friedrnanite ca-

nard. But it's made the rounds, even among sorne Austri-

ans. The idea is that Rothbard cheated by including the

cash surrender value of life insurance policies in his

money supply. Ironically, this view is perpetuated by posi-

tivists who would include peanut butter in their monetary

aggregates if it helped them "explain" nominal income.

In fact, many Keynesian economists writing after

the Second World War characterized life-insurance re-

serves as highly liquid financial assets that perform

monetary functions. When this subject last came up, I

pulled some older money and banking texts off my shelf

at random. Four out of six treated insurance reserves

this way, on grounds that they can he withdrawn at any

time and are thus readily spendable dollars.

Besides, it turns out not to matter in Rothbard's the-

ory. Including life-insurance policies, the increase in Roth-

bard's money aggregate between mid·19.21 and the end of

1928 totaled about 61%, yielding an annual rate of mone-

tary inflation of 6.5%, compounded annually. Leave

them out, and we get 55% over the period, 01' 6.0% per an-

num. For comparison, in the highly inflationary 19705,

the money stock grew at an average annual rate of

6.35%, including the double-digit Carter years.

In other words, it doesn't matter for Rothbard's theory

whether these are included or excluded. A Hayekian-style

treatment of the same events by Phillips, McManus, and Nel-

son does not include insurance reserves, and concludes that

the Austrian explanation is the correct one. The key point is

not that the banks weren't bailed out in the early thirties,

hut that the Fed inflated in the 1920s, even though it didn't

show up in increased prices.

AEN: The dispute about the Great Depression andthe business cycle goes beyond the numbers, doesn't it?

SALERNO: Itgoes to the core of economic theory.

For most mainstream economists, inflation is not a mat-

ter of money and bank credit expansion; it is essentially

a price phenomenon. If prices don't rise, there is no in-

flation .. It doesn't matter what the monetary data say. In

the 19205, there was no substantia] change in prices,

due to enormous productivity and output increases. But

to them, that is sufficient evidence that they don't need

to look any deeper.

Only Austrians tru.~y believe inflation is a monetary

phenomenon. When you increase the amount of moneyin circulation, it brings many more changes than just

price increases. We see a fall in the loan rate of interest.

We see a boom in real estate as a higher-order good. We

see a boom in the stock market, which trades titles to

higher-order goods, that is, capital goods. To focus on in-

flation as price increases means we don't capture the full-

ness of the inflationary phenomenon.

AEN: Why isn't the Austrian business cycle theory

modeled in an econometric form more often?

SALERNO: Praxeological theorems of cause and ef-

fect can only be applied by first establishing precisely

where and when the precipitating causal. phenomenon

has occurred. This requires historical investigation. For

example, in business cycle theory, we must first estab-

lish that an increase inthe supply of fiduciary media has

taken place ..Only then can we identify a sequence of his-

torical phenomena that make up the business cycle.

Econometrics wastes most of its time in a rigged game

searching for mysterious causes among millions of poten-

tial variables.

Austrian theory is essentially qualitative. We deny

(hat there are any quantitative constants in human ac-

tion. Therefore, we can talk about changes that bring

AUSTRIAN SCHOLARS CONFERENCEApril 4--5, 1997

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4 I AUSTRIAN ECONOMICS NEWSLETTER Fall 1996



about other changes in the economy in a qualitative

sense. We can say that an increase in the money supply

drives down the purchasing power of money, or, ob-

versely, drives up overall prices. But we cannot establish

quantitative constants between money and prices.

AEN: What kind of new empirical research is possible?

SALERNO: Let me give you an example. A wonder-

ful paper is coming out in The Review oj Austrian Eco-nomics hy Arthur Hughes which explains the recession

of 1990. He relies on a qualitative understanding of

cause and effect drawn from Austrian theory. He then

applies it to the inflation IUn-up of the eighties and its

effects on the capital-goods sector. To do this, he

breaks down government figures, which are con-

structed based on Keynesian theory. Hughes iden-

tifies the various stages of production. It works

beautifully.

Now, this would not be acceptable according

to current economic fashion, which requires that

statistical techniques demonstrate what causedthe downturn, whether technological shocks, the

weather, sun spots, or the man in the moon. All

this is silly, Empirical data alone, no matter how

weU massaged, cannot establish causation. For

that: we need real theory, arrived at deductively,

and applied to the real world as an explanatory de-

vice.

AEN: You had a debate with Gordon Tullock on the

business cycle theory: What was his objection?

SALERNO: Tullock's main point was that the typi-

cal Austrian-style business cycle would lead to an in-

crease in GDP, while unemployment would only be aminor transitional problem. He raises this point after

tracing the effects of an overinvestment theory of the

boom and bust. The trouble is that Austrians do not

view generalized overinvestment as the essence of the cy-

cle. Austrians distinguish higher-order from lower-order

goods, and show how a credit-induced boom stimulates

malinvestment, which involves diversion of resources

away from lower-order to higher-order goods. His was a

common error, but as with all debates, it helps people

clarify their own positions.

AEN: You've had a number of big debates in the Re-

v~ew.SALEHNO: You often hear that Austrians are nar-

row and dogmatic, reviewing the canon all the time in-

stead of debating or adding to the theory. That has no

connection to reality. The Review has more substantive

and wide-ranging debates than any journal I see. And these

are fierce, exciting debates that deal with fundamental is-

sues, and involve both Austrians and non-Austrians,

That's the way it should be. If you see a journal

that merely runs article after article, with no mutual

engagement among the authors, no replies or rejoin-

ders-in short, no vibrant interchange-it is a sure sign

of intellectual stagnation. It means people aren't reading

the journal, which is a huge problem, or that the editors

and writers don't really care about advancing the disci-

pline. In the Review, there's ongoing debate in practi-

cally every field.

AEN: How did the knowledge/calculation debate get

started in the first place?

SALERNO: It actually began with a provocative1988Review article by Israel Kirzner, "The Economic Calcula-

tion Debate: Lessons for Austrians." Kirzner claimed

that calculation-comparing costs and benefits in mone-

tary terms-played a very small part in the Austrian cri-

I f you see a journal that m erely runs article

after article, with no m utual engagem ent

am ong the authors, no replies or rejoin-

ders-in short, no vibrant interchange-it is asure sign of intellectual stagnation. It also

m eans that people aren't reading it.

tique of socialism. He further suggested that Mises's

1920 article was deficient in not pointing to the role of

economic change in making central planning impossible.

To Kirzner, Hayek's theory of knowledge acquisi-

tion, from the late thirties and forties, stated the crucial

point of the debate in a more sophisticated way. The vir-tue of prices is the knowledge about time and place they

somehow embody, to which central planners cannot

have access. With Hayek, Kirzuer says socialism may not

be impossible, but it is radically impractical.

Israel ended his piece with a call for "a new round in

the debate" to restate the Austrian position on prices and

markets with clarity. That's precisely what has taken place.

AEN: How did Kirzner's article stimulate your think-

ing?

SALERNO: It was a thought-provoking piece, subtly

argued. I considered it, reviewed the relevant literature,

and realized that Mises was actually making stronger, more

sophisticated, and more persuasive arguments about the

role of prices than Hayek. This was directly contrary to

the lesson Kirzner wanted to teach. I then began the

effort to "dehomogenize" Mises and Hayek-that is, to

show that they were seeking to demonstrate very differ-

ent points-and argued that Mises was on firmer

ground.

By the way, the editors of the Review have come

across a 1938 manuscript written by Mises in German

and then translated to French. Here, Mises sharply dis-

tinguishes his position from Hayek's. It is an important

Fall 1996 AUSTRIAN ECONOMICS NEWSLETTER / 5



piece that has never appeared in English. We are work-

ing on a translation for the Review.

AEN: Also in "Mises as Social Rationalist," you fur-

ther distinguished Mises's approach from Hayek's the-

ory of social evolution. Students at this conference

speak about it often.

SALERNO: That article had an interesting origin.

Lew Rockwell had asked me to write about the concept

monetary calculation? It's merely a linear-programming

problem.

SALERNO: Mathematical solutions do Dot obviate

the need for the market's pricing process. Let's assume

we can generate equilibrium prices. They are not actual

prices. It still leaves the essential problem that econom-

ics deals with: judgment and appraisement in an uncer-

tain future. In Mises's concept of calculation, thefunction of the price system is to per-

mit entrepreneurs to appraise the

quantitative importance of resources

when confronted with constant

change. Equilibrium prices-the dual

values of linear programming-are

completely irrelevant to a world in

which the capital stock must be con-

tinually changed.

AEN: Can you give a concrete ex-

ample?

SALERNO: Let's say someoneneeds to produce an automobile. There are hundreds of

different ways to go about it. The inputs are steel, paint,

labor, rubber, etc., but they are all heterogeneous magni-

tudes. They cannot be summed up in a single unitary

cost figure-a common denominator-that can be used to

compare the cost with the output of the automobile it-

self. He can't determine whether he is wasting resources

or not because he can't calculate.

M i s e s d i d n 't t h i n k f r e e b a n k i n g w o u l d e v o l v e t o w a r d

a s m a l l r e s e r v e r a t i o o f g o l d t o l i a b i l i t i e s . W i t h r e a l

c o m p e t i t i o n , h e p r e d i c t e d e v o l u t i o n w o u l d b e i n t h e

o p p o s i t e d i r e c t i o n , t o w a r d 1 0 0 p e r c e n t r e s e r v e s . H e

w a s m o r e o f a R o t h b a r d i a n t h a n a W h i t e i a n .

of equilibrium in Mises,.When I thought about it, I real-

ized I would have to deal with the concept of spontane-

ous order also, since some Austrians had claimed that it

is the proper replacement for all equilibrium theorizing.

Looking through Mises , however-much to my sur-

prise at the time-I found there was no concept of sponta-

neous order at all. That's when my topic changed, and I

began this project of replacing the entire "knowledge

problem" framework with the Misesian perspective of so-

cial rationalism and monetary calculation.

AEN: Can you sum up Mises's calculation argument?SALERNO: "What Mises argued was simply this: In

an industrial economy, featuring a complex division of lao

bar, and many heterogeneous capital goods, planners

would not be able to use subjective evaluations in figur-

ing out the most valuable use of their resources, as they

would in a household economy. This requires objective

economic calculation using market prices. I f a society

does not have the benefit of market prices, arrived at

through the exchange of private property, resources can-

not be rationally allocated.

In analyzing socialism, Mises assumes the director

of the central planning board has all the knowledge of the

economic data at his fingertips. He knows the technology.

He has engineers and technical support. He knows the value

scales of consumers or he can substitute his own values. He

has a roster of all the kinds and qualities of labor available.

And he has lists of all the varieties of capital goods and

their quantities at his disposal, Given all that, he is still un-

able to engage in economic calculation. All these data are

qualitative. He still cannot derive quantitative exchange

ratios from them.

AEN: Do you agree that in neoclassical models, all

this information will yield prices that can be used in

AEN: Anything ven more concrete?

SALERNO: Okay, I have a friend who got married

and moved from New Jersey to Montana. She had her

house built in a factory in Indiana, and then shipped toth e site. The reason has to do with the scarcity of labor

in Montana relative to Indiana. Unlike in New Jersey, it

would not be cost effective to build a house on site in

Montana. It could be done, of course, but not economi-

cally. We know that because we have market prices that

allow us to calculate.

But a central planning board operating without the

benefit of prices might look at the situation, know all the

various techniques, the value scales, and the resources,

and conclude-reasonably-that on-site building is the

best way. Itmight dismiss the idea of house shipping as

absurd. It might ask: why build the house in one placeonly to move it to another? The board can't calculate to

compare costs of shipping versus the costs of labor.

AEN: Why isn't that a knowledge problem?

SALERNO: It's not a knowledge problem because

the planning board has all the qualitative knowledge.

What it doesn't hav is the means of calculating the

value of the different methods. Remember, I am using

the term "knowledge" in the pure Hayekian sense:

meaning, technical knowledge, that is, general knowl-

edge that can be gotten from engineers, and knowledge

of "particular circumstances of time and place."

6 / AUSTRIAN ECONOMICS NEWSLETTER Fall 1996



Hayek only refers to qualitative knowledge; he

thinks gaining that knowledge is the key issue. Im not

using the term knowledge as in "knowing the exchange

ratio." Of course, if you know 111ecorrect resource and

output prices, you can calculate, by definition. But that's

precisely what the central planner, no matter what else

he knows, does not have ...Social rationality requires 111e

on-going social appraisement of resource prices, which

rests on market exchange and private property.

AEN: But didn't Mises have a peculiar definition of

rationality?

SALERNO: It's only peculiar ifwe misunderstand

what he means. Let's say your readers readthis interview

instead of watching tv. And at the end, they decide they

wastedtheir time. That doesn't meantheir initial decision

to read this was irrational. On the contrary: they made the

rational choice based on a forecast. That they turned out

to be wrong, from their point of view, has no bearing on

111essue. Their action was rational, but their forecast was

mistaken. They will take that into account in choosing

whether to read future issues of the AEN ,

We regret our actions al l 111etime. The point is that

if we don't have market prices and economic calculation,

we can't even begin to make purposeful choices about re -

source allocation. A lack of foresight is always with us.

But a social planner working without the benefit of eco-

nomic calculation has no idea whatsoever of where to be-

gin or how to test his results against his forecast. That

means the planner is acting irrationally.

AEN: But is it really true that socialism is inherently

irrational? How could it have survived so long?

SALERl,\\O: A good example is the Soviet Union,which instituted full-blown socialism for two years, from

1918 to 1920_ It was called War Communism. They didn't

check capitalist prices from international markets. They

didn't use money at all, Wi111intwo years, 111ewhole

economy had broken down. There was a return to 'house-

hold production of 111emost primitive form. Lenin then

introduced the New Economic Policy, which reinstated

money and prices. The experience reinforces Mises's

point: an industrial economy literally cannot exist with-

out economic calculation.

AEN: What are 111eimplications for a mixed econ-

omy like the U.S.?SALERNO: Mises's theory of interventionism says

that price controls fail to achieve the goals of 1110sewho

intervene. Rothbard picked up on this, and talked about

the mixed economy as containing "centers of calcula-

tional chaos." That's a good description of the mixed

economy.

AEN: On another controversial area, did Mises favor

10 0 percent reserve banking or not?

SALERNO:. The Review has published a paper by

Larry White and George Selgin arguing he did not, and

they make a credible case. But I've argued 111eother view.

Looking at the whole of his writings, we see that the very rea-

son Mises favored free banking was mainly to suppress theis-

suance of fiduciary media, that is, bank notes and deposits

not covered by 10 0 percent cash reserves.

In the monetary theory section of The Theory of

Money and Credit, Mises lists the benefits of fiduciary

media. Then in a later chapter on 1 1 1 e business cycle, he

demonstrates that fiduciary media are a necessary andsufficient cause of the cycle. When Mises finally ad-

dresses "basic questions" of future policy, he calls for

the suppression of all further creation of fiduciary me-

dia, if not an outright ban on fractional-reserves. Even

the early Mises clearly thought that the disadvantages of

fiduciary media outweighed their advantages.

AEN: A more careful reading, then, should settle

the issue?

SALERNO: A careful and wide reading. Mises tough-

ened his stance even more between 1924 and 1940, with

the publication of Nationalokonomie, the German Ian-

, guage forerunner of Human Action. There he is conspicu-ously silent on 111ebenefits he had once attributed to 111e

creation of fiduciary media .. Instead, he concludes that the

only way to eliminate business cycles and inflation is to

"suppress all further issue of fiduciary media." Only this,

he says, will create 111enecessary safeguards. Finally, in his

1952 epilogue to 771eTheory of Money and Credit, he of-

fers a detailed plan for a 10 0 percent backing fo r future in -

creases in hank notes and deposits.

Also, it is important to recognize that Mises didn't

think free banking would evolve toward a small reserve

ratio of gold to liabilities. With real competition, Mises

predicted, evolution would be inthe opposite direction,toward 10 0 percent reserves, as bankers swiftly learned

that any increase in fiduciary media would leave them

open to bank runs and insolvency. In the balance, 111en,

he was more of a Rothbardian than a Whiteian on the

fractional-reserve question.

AEN: What are your strongest criticisms ofthe free

banking/fractional-reserve position?

SALERNO: That any increase in the supply of fiduci-

ary media brings about the business cycle. The free bank-

ers have gone to great lengths to get around 111i8point.

Also, the contagion effect-the tendency of bank runs

to spread-has doomed fractional-reserve systemsthrough-out history. As bank after bank falls, it creates the illusion

that central banking is necessary to correct for a supposed

"market failure ... But under a 10 0 percent reserve system,.

there is no instability and no contagion effect. Bank runs

have no macroeconomic consequences.

AEN: But we have fractional reserves now and the

system is not plagued by runs.

SALERNO: Today's fractional reserves are a fiction

of accounting, and don't exist in fact. Because of deposit in-

surance and the Fed's pmver to create new money, the pub-

lic correctly perceives that all deposits are guaranteedat

Fall 1996 AUSTRIAN ECONOMICS NEWSLETTER I 7



face value. Deposits are in fact risk-free claims to cur-

rency. That means we effectively live under 100 percent

reserves. I f we did away with deposit insurance, we'd be

better off in the long run, but the present system would

quickly collapse.

AEN: You devote an enormous amount of time and

energy to the Review. Is it a good investment?

SALERNO: The Review has really enhanced the

prospects of the Austrian School. It has world-wide circu-

lation. It has stimulated new interest among new people.

It has provided an outlet for Austrians to get their arti-

cles published.

kEN: Why is that important versus trying to sell ar-

ticles to mainstream journals?

SALERNO: When you court the mainstream, at

best, you can. insert a few watered-down Austrian points

while working with mainstream theoretical tools. You

build up intellectual capital in this, and as the invest-

ment grows, it becomes more difficult to give it up. Be-

fore you know it, you're no longer doing Austrian work.

There must be a journal that encourages talking

about and writing in the Austrian tradition. In the ab-

sence of the Review, there would be some independent

interest among European Hayekians. But debate would

degenerate into speaking about Austrian economics in

terms of the history of thought, rather than as a living

body of theory as it is discussed now. That's crucial, Aus-

trian theory must advance or it will die.

AEN: Then there's the practical question of

whether this will help anyone s career.

SALERNO: It's no longer true that being an Austrian

is a career killer. The profession is in such transition that

good economists of any stripe can do well. Of course,

you're always better off echoing the mainline opinion. But

Austrians are in this for more than professional success.

We are Austrians because we are interested in the

truth. Sometimes that requires sacrifice. Menger sacrificed,

as did Mises, and Rothbard, and many other seekers of

truth in political economy. The point is to change his-

tory for the better, not merely to go along.

Miseswrote in Human Action that a good economist is

always telling government officials what they don't want to

hear. They should think of us as the bearers of bad news.

I'd rather do almost anything else in Iii than be an econo-

mist who gives comfort to the powers-that-be.

AEN: Do you get the sense that younger Austrians

agree?

SALERNO: Not only that, it is the very radicalism of

the school that attracts today's best students. Think of it,

Here we are in Auburn, Alabama in August, and the con-

ference is packed. To be sure, this is a n.ice town. But these

students-some of tile best I've encountered-could be doing

anything else with the last of their summer weeks.

Instead they are competing to spend a grueling train-

ing period with us, and most of them get no credit on

their transcript for doing so. What drives them? It's the

sense that something is gravely wrong in the world and

that Austrian economics offers answers for doing some-

thing about it.They want to be involved. The mainstream

does not inspire this kind of attitude. That is one reason

we stand a good chance of winning this battle for true eco-

nomic science and the future of liberty generally.

AEN: Any hints of future controversies in forthcom-

ing issues of the Review?

SALERNO: Actually, they're a secret, locked in a

file cabinet. And only the managing editor has the key.

But I will give a hint: an extremely prominent neoclassi-

cal economist has blasted one of the editors. He pulls no

punches. And that's just the way it should be.

~ R ~ Iu s t ria n

~ Economics NewsletterINSTITUTE Auburn. AlahamaJ6!l49.5JOI

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Austrian Economics Newsletter Fall 1996