Austrian Economics Newsletter Winter 1996

8/3/2019 Austrian Economics Newsletter Winter 1996

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T h e r o u b e w i h P r o s p e r i t yAn Interview w ith James Grant

kEN: Your argument about businesscydes in The Trouble with Prosperityrests heavily on the work of the _ ustrianconornist Wilhelm Hapk' instead of

the more well-known Austrians.GRANT: Iam an ob erver of thecontemporary scene, a journalist,rather than a theori s t, T p i c l ed up Aus-trian economics almost everywhere ex-cept in school. It carne to me, and I toit, in the way that the Au irian say thato many good things happen that is, by

accident, rather than by d sign.Over the years I read Mises, Hayek,Iiothbard, and others on interest rates,

capital, an d the business cycle. I've

long been inspired by H enry H az litt'scareer, om 'one who wrote as well ashe did, and as long_ To think that thism an profcs cd the idea he did in thpages oJ the mainstream pres' is cer-tuinly 'tartling and revelatory.

1 cho e to feature Hopke becauseof his book Crises and Cycles, whichappeared in English during the GreatDepression. He offer a clear and[orceful exposition of thernechanicsof th Austrian intere. t-rat and bu i-ness-cycle model, and the very diffi-cull buj rewarding structur of thetheory itsel r . Vera Smith must havedone a great jo b in translating the

J"IITIeS Cr.uu is Fnurulur a mleditor o r C;runl\ lnterestUa,lcObsl]r'lwr ($SHS it year::10 W "II Str""t, N,", Y"r1


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T~E LUDWIG' VOI'l MI!iES INSTITUTE

built to forestall another G reat De-pression.A EN: And what is th e consccluence ofthis w elfa re sta te ?GRANT: To promote great bullmar-kets an d ex cessiv e 1 '1 k taking in th efin nn cia J an d in vestm en t marl et. Thefiscal and labor wel la r tat -, generatethe perv rse eJ J ct of feeding the veJYe l i . eases they are suppo dly trying tocure. In a sim ilar way, the w elfarestate of credit feeds speculative fren-zies an d exce sive risk taking in thefi nancial and i nvcsune n t m arkets,while attempti ng to proven t. th e lo ssesassociated w ith exccssiv ~ ris] taking.1 .1 creates the boom that call es th ebust, but it attem pt to abolish thebust.

The long-run consequence is tosu bsid ize in sta bility


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TilE LUDWIG "O~ MISES INSTITUTE

Mises, it would he C l' en pail. [I . hasbeen pre ented w ith these idea s: h .ev n prof ssed them at on puint illhis lif .lnst a r l o he leads us to I J .lievcthat by the m anipulation of one inter-est rate amonz uncounted interestrates, he can re:;ulate the metuphori-ca l tem perature of the economy to g iveus 72 dezrees lour 'cason. out. of eVf:I') 'year, H e loves the cram . H e 10 csbeing The N I a l l .AEN: How would he re pond to ),ollr.r iticism?

GRANT: He would say, "that's [lo ttrue: I've often warned about y de s. , ',B ut he hasn 't. H e ha never eO IlH ' Oil!and mouthed the crucial Austrian i 11 -sizht: artificial boom s cause bust .. 1 1 f'has never said that w hen you arti li-cially subsidize credit creation, Y(HId i turh thc m arks t's in tm e nl ar ih itecture. G reenspan has be n in11"11 '-tually derelict. He w ill ta lk aboutcycl s a out id e nuisances thut arcorrectable by a deft tug on tire fundsrate.

Greenspan's .o llcag uc A lanBlinder i li a' p a rt ic u la rl y cocky aboutthis after he 1 It the F eel. H' woulday : "If w e had on ly g otte n this rishtin 1990, w e w ouldn't have had a recc t ,ion." Imagine. U they can get thoright funds rat , w e II never hav ~ an-other dow nturn. W ow . 'That' prettygood! How did the ovi t ta t: evercorne to gri f?]t didn 't have the rightin terest rate!

Again, once you accept th pri nci-ple of Lh la irvoyancc it a n d -ard-that the centra] bank, know i rigthe future hould act to im prove it .before it happen -then you ca n argueabout. w ho is the clearer cluirvoyant.The m ethod itself is unsound.AEN: Isn't there a sense in which th eF ed is re porisibl fo r rece - ' ion?GRANT: If it fo llow s a Fed-in iuc idbu t , it i only indir otly r '1 n i b l c ,The F eel.i no t respon ib le for thinstitution: 0 1 ' a busines slump andn ither should it a ttem pt to outlaw it.'1 he boom ow the seeds of i 0\ nde truction. R m mber, there wereplenty of rece ions before Decem ber22,. 1913, w hen th F ed w as enacted. I

don 'I l now of any state-of-nature eco n-om y in which there i perp tual pro -pcrity,AE ': That b rings up at .nsion in y ourbook . . Do you regardthe husiness cycle asendogl:II()U~ or exoge-lI.OU" to th e market?

1 (J th o 111 i ri-tcens , bo nels y ields w ere at2. :.511. yet ther w as no rush to tal cout bank credit willi w hich to Iinan 'c'n 'W projc .ts. Why?Y s ther wa regu

lution. B ut mor to

Austrians shouldnot renderbusiness cycletheory toodeterministicallyand forget otherparts of thetheory of marketbehavior.

the point, there wasa et.tlcd attitude ofrisk aversion. Therewu a m o rhi d it yal au L the next de-pression.

The re lu ti o n-ship betw een theF ed and the m acro-economy is not din stone. The Fed"pa 1 action and i l l -actions. and the ex -p 'elations peoplehave developedabout its Iutu re nc-t ions. have a profound impa t on th e

Iin an cia ] cu ltu re an d on the directiono I ' (111' cycle.

GRANT: As an ob-server o r d ay -to -c la y.v 'Ill', il seems LaIII thut. for causesthat are not set in m o-t i on by a ce n tralbank, but for otherre a '0115, people wil lt a k it . Into theirhead ' La 0 erdo it orU 1 Il 1 ' r lu i L in rn a r-ket. 'I 'his i true insP ' .ilic sectors or F inancial m arkets generally . 1 hat" th enature o r the m arket: it gelS thingw rong and sr-l f corrects.

For example, I can't account Jarth e last th rcc or F our years in the s tockm arket sim ply from the point of viewo r F ed actions. O f course Y U L l ca n S < . l y :by suppr s i n g the fund ' rat' il l 1993 ,tlu- fed t in m otion a .rcdit-induccdspeculation that has CiJ rried w ell he-yond th - m onetary event i tsel I. Butthe P roxi m ate cau e ct ill tra in aP culative frenzy that flus fa r out-la ted the [irst cause. E ven apart IrornF ed intcrv 11tiO]], you can 't ru le outthe pow I' o r conditioned b huvior,AEN: In w hat sen e?GRANT: F or a tim e, the [unds ratew as the highest point on th , T reasury-y ield curv up to about fiv years.w hi h i arguab ly too high. ;\ m echa-nistic view or th e Austrian thcorymight predict a downturn. Yet thespeculative frenzy continued. Andonlpal 'c th is with previous decades.F rom the tim e of the ra h in 1929 toth en lIing liquidation of 193~, all theway until 1954 , people w or If orn-m on stocks. There w er m any tim esluring that period w hen th F d gav

Ll a PI' po t rously low rat F in te r-e t, on e th at s ho uld have' tin m otiona cr d it-in du ce d boom.

B ut ill 1946, consum er pri 'e rose

kEN: i\ rc yo u uggesting a revision tnthe orthodox Austrian business cyclomodel?GilA '1': Nol at all. I'm sugge tingthai w e avoid th . lem ptation to L arthe Au trian m odel aw ay from thlarger ontcx t of Au. irian theory . W edon 't w ant to en d up w ith a B ul cGolJberg contraption that proves u e-1 s ill explaining real vents. Thlarger body or Austrian thought in -elude in jght about uncertainty , uh-jcelive va luati o n s , and p e o p lesperception of e vent

Wc,, ; r an eXllain'vents at som elevel b y referring to th e last creditxpcricnc '. But we k to \II ek, there is

a lut goin o r 011 in m ark ts that has todo w ith attitudes and collective im -pulses tlli)1 are not imm ediately rcduc-ihlc to central bank actions, That'sw hy .u trians must be cautious aboutrendering the bu .in s eyel th or.'l oo d et r- rr nin itically, while forgellin~other pa rt of the b roader theory ofm ark et b eh av ior,A EN: EV'f1 a central bank r's w ords,th II, 'an m ean m ore than hi action-in th i" hothou e.GRANT: Hight., and so can ilence. Totire extent that people regard Alan

Winter 1996 ~UITHnH ECONOMICS NEWSLETTER / 3


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T "E L U D W '6 VON ~1' S fS 'N S T '. T UTE

C reenspan as th ~ prot tor and dc-fender of the Iinan iial faith, and La thex tent that G reen pan docs not acautionary thing~ belo re the cuatcB anking Com rnitte _ . to .iu t that x -tent. he is guilty of a in of orni sion.

hou.ld Gre nspan be telling themarket where fair v alu e sh ou ld be? j o.B ut people have com e to take him a theJ . P . Morgan of the day -til leader of the[inancial m arkets. And h . i not ayingth things he ought to 'ay to m akep opleles inclined to ride t o t empo ra ryriches during a false 1'" overy.A .EN: You w rite that M arriner E cole ,like Creenspan, often w arned the Sell-at e of th e dang r or inflation.GHANT : That' tundard central-banking b oilerplate. 'l'h y know whatLa say an d many o r them ay it vcr)'w ell. lot all do. F or hi part, C reen-~pan speak c n tral-l ani ing E'-reranto very w ell, w hi ;h is not th sam ething as lucid speech. I e . n ot in te nd ed1.0 be.

Central banker. m ay decry oneform of inflation. But amcne the 'on-lribuLions of the Au trians i the in-'ight that there can b an inflation 0['a:sets as well as aninf lation 0 1 " price'.In WaIL S treet and the F inancial pI" 55,inflation m eans on thing only : th,PI going up. But. to tucient of til 'Au trian S chool, that i-n t even hal r ofit .AEN : How can w e t 11 ,th n. what . th efed is really L ip to?GHANT: It's only po' iblc at th ex-trcme . Day La day , it is difficult tok now . C erta in ly in cptcm ber 1993, itwas clear 'what the F ed w as up to. Theheadline in Grant's w as: "Let" Borrow Som e Money." J t was my way ordeclaring my conviction that ratesw ere too low and w ere bound to go 1 . 1 [ 1 .

F lere's a ile way you call tell. W h 11the Fed irnpos a reull y low rat ,thepeculators will s iz it opporluJ1 I LI-ally , w ill b orrow at that rat , and w ill

L u.' securities yi ldinz a b Iter rate. II'the l' d ha g iven us a 3% fundra t -financing cost , in the phra o rthe bond m arkeu-peopl . b orrow a1 .3%an d invest a t 4 .5% or 5% . Y ou can dothis al l day and all n igh t.

Th r ar way 0[' I ep.ing soreall. thi . W hen you, ce loan piling upto finance s curitic '. you know theF d i~Iiriauci IItT all old-Ia hiond"Boy's Night Oul. ' That wa plainlytru in late ]99.3 and into 1994.AEN : This app iars am dogou to whathappens to th e capital rnarketsjn amore traditional A ustrian-style b oom .GRANT: In th e arne w ay ther is atructurc of production, th rc is a stru '-

ture r [inance and a tr u ture of sp 'Il-lation. It i tiiv en to 1 . 1 . by th yield cu r v "til alignm nt of rate over Lime, It ca nbe bent out of hapc b y the F ed just asthe relation hip betw 'en capital andconsum ption can be distorted.

The distortion o r th . tru .tur o rspeculation result lrom a ti mul us inthe lront en d of the ield curve. 'I hi ,cnhanc .. in tab ility bccaus the en -til" structure b e .orne vulnerab le to achange in the co lo f b o rr ow i ng , thatis a chang in the fund rate, \ '{Thenthe F ed tighten'd in 1994 , that struc-ture toppled dow n. It call. cd the m ostlos -ridden year in the history of the

. . bond mark 1.AEN : nd A ustrian theo ry helps yo uvisualize the trend .?GRANT: If YOli Inow that the econ-am y i dom inat d by th e ti m e- ho un dtructures of production and specula-tion. the w orld orne into I arer 1 ' 0 -cus .. These are not ju t a b tra ctio ns.W e applied thi notion of artificialstirnulu very profituhly in 1995 b yfa 'u ing on the serniconductor indus-try . W saw that one con quencc ofthis 3% funds rat w a a capital pend-in g boom il l sem i .ondu tor . ~ e sa id

that M icron T c hnology -w hich wastil n in the rn o tati eli t at th e NewYorl itock Exchange-w as overval-ued. The "lock later w ent from 9il to3 0,

or cour e, we've been wrong a lo ttoo, especially on the overall directiono l th stock m arket. B u t. w e have beenvery I'ight in certain situations inwhich we have been able to apply thideas of the Au irian School .Algregate. If thatwere .ver po ib lc, it ' no l anym ore.Iobody even car" w hat the agg l'e-" " ,H e a. '. Sam' people pay attention

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.~ I ~U!lAI~H ECONOMICS NEWSLETTER Winter 1996


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IH E LUDWIG VOl'll II1ISES II'ISTITtllf

1 :0 to tal deb t. B u t as to M 2, M 1 , M 3?No. They are as outre a s k n ic k er s.

It's no t just a m atter D r fashioneither. It is fundamental Technologyhas allow ed one dollar to do the workof m any dollar . The ra t o f tu rnoverin m oney has b een heigh tened enor-mous ly by com puter technology .Every day over one in terna tiona l b ank-ing w ire, the C !-:IIPS w ire , m ore than$1 trillion w orth of transac tions talcplace.

There are all sorts of w ondroustechnolog ica l advances in m oney. S o-ca lled "sw eep accounts" are on - exam -ple. Suff ice it to say that it w a . alwayhard to count this stuff calledmen 'yoIt i harder now because it moves sofast. There are m any near-rn on ytJ lings that seem to do the work ofmoney in transactions. S o m onetaryagg regate no longer seem to c ou nt.

Doctr inaire monetarists d on 't; g iv eup so e asily . T hey still insist that bankreserves are the th ing to watch. I f youI,J)OW bank reserves and the grow thra te thereof, you w ill b e c loser to thek ingdom of Heaven, I don't see that,AEN : Is m oney counting im possib lei n p ra c ti ce and theory?GRANT : There is such a tbing as amoney supply, but .i t is (lui ksilvcr,Just w hen you th ink you 've cap turedit. y ou h av en 't. There are all m ann rof w ays for m oney not to be counted .Bow ever good the F ed has b ecom e atcounting money , the private m arke thas b een that m uch better at reinvent-in g it. The proof of the lack of utility0 1 ' m onetary agg rega tes is that peopldon 't pay m uch atten tion to th rn,AEN : That goes for the F ed too?GRANT : R igh t. The F ed w ill g ive ag row th target fo r M2 and M3 (they'vetopped try ing to target M ]). B utthese don't m ean much . Austrian aredead se t against counting th ings youca n t c ou nt. In cre asin glY lT lo ne yseems to be one of those things. B uttha t shores up the Austrian ncl of thedebate , and pose terrih l probl IIIIo r those w ho believe in m on taryc en tr al p la nn in g.AEN : A re there any other techniquesbeside w atch ing the yield curve to

determ ine w hat the F ed is up to?GUANT : The dollar exchange rat ISw o rth w a tc hin g. if there are too m anydollars in the w orld , o ther th ings be-ing the arne, the dolla r will tend tow eal en . The troub le com es w ith the

foreign

w as a tim e 0 1 ' mater ial progress. CoslsIV re falling and prices should . havebeen fariing but werert't , ergo, Murrayinferred there w as a cred it in flation .And you coull ee tha t express rl ineq uity p rice, and th e pr ices of se uri-ti sand claim s, 1 th ink that is w hat is

happening at th is m o-ment .A EN : W ill the new ly -created indexedbond improve ou rdi scer n .m e nt a h i li -

r serve currency fandango:ce n tr al banks are r-------'------~hoard ing dollars.They buy dollars andthcn ob lig ing ly investthem in the securitiesissued by the verygovernm ent tha t ishelping to p erp etu ateth e payment deficit.One you get overthat hum p you haveto ask: what does th isarray of exchangera te and y ield curvestell you about F ed ac-tions?

It is possible totravel from the

bottom to the topand back to the

bottom again of abusiness

cycle and see nochanges in

overall pricesfor final goods ..

ties?GllA IT: The til '01')'is that it wil l revealfu ture in fla tion topolicymakers . B utthey w ill b e se ve re lydisappointed. Th I'Car a number 0(' dif-f rent in fla tions.W hichever one theyfocus 011 w ill be thew rong one . A nd w ill

no t im prove tho inform ation availab leto the F ed to run m onetary policy .Mol' over it doesn't exci te me at all aa .peeulative or investment vehicle.Any securities innovation com ingfrom the governm ent leaves m e coldas a first princ iple. Y ou can ha y m y'hare o r any and aU future indexedbond isuance.

Then there is thestatistical w ay oflo ok -ing a t the Fed's actions itself. The F edis a b ank , a t least in form and struc-ture, and it publishes a balance shee t.W e t rack this and s tudy the rate of itsg row th . W e look at th e rate oJ turnoverin deposits. W e look a t the level ofborrow ing to finance peculative hold-ings and dealer ho ld inzs of T reasuries.W e look at m utua l fund flow s andcentral bank purcha es of do llars andthe like,

W e are eclectic b ecause hanges inF ed policy occur at the m arg in andw e 're going to have an edge if w e findtr nds ill an obscure place rather thana familiar one . We look. at xtremes,obscurity , and the contrary outcom ebecause that's where you get thebest odds in inv es tm en t and specl l -lations.AEN : D oes a ll th is m ake it imposs ibleto forecast change in the overall pricelevel?GRANT : Harder, certain ly . B ut that'snot w here the real action is. It ispas ible La trave l from th bottom tothe top and back to th bottom againof a hu iness cycle and see no changein overall p rices for final zo od s. T hat'sjust w hat M urray Rothbard poin tedout about the 1920 s. L ike the 19905 , it

A E 1 : Is it ano ther exam ple of theattempt at monetary cen tral plan-ning?GRANT : lt is worse . Itis a symptomof G reenspan's fundam ental failingtha t w ill p ro e to be his undoing. B e-lo re th is is aU ov r, there w ill b e a b iO 'sp eculative upset, a loss of fa ith inC i nancial asse ts, and a loss of faith inthe stew ard of financial markets :G r cnspan him self. H is trag ic flaw istha t he th inks=contrary to the teach-ings of the Austr ian masters-thatthere is some piece of data that w illallow hirn to sec the fu ture c learly andhead it off at the pass. H e rea lly b -lieves that, no tw ithstanding w hat hknow s about M i es. '- '

T here is no w or: e error, ome -body once to ld m e that w hen G reen-span w ent to W ashington , he felt that a tIn t he w ould have the inform ation he

Winter 1996 ~UIT~I~N ECONOMICS NEWSLETTER I 5


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THE LUDWIG \101'1 MISES II'ISTITUTE

needed to make him a great economicforecaster. He evidently thought thatin the upper-left-hand drawer of hisdesk, there was going to b a chart bookthat would show him everything.AEN: There has been a perceptionthat Greenspan and the Clinton ad-ministration are very close.GRANT: It isn t clear that hi refusalto rai e rates before the election wasnecessarily political. But Greenspan'scareer ha been an essay in careerism.He has . ought outpower and prestige,t.he great and the good,and wants to be one ofthem, and he is. Hehas arrived. He is anestablish mentarianwho is going to dothings in the estab-lishmentarian way.AEN: What do youthinkwas r ally be-hind the Mexican bail-out?

make the economy clean and honestagain. To reduce the downsid is todampen the up ide.AEN: Is the deficit really going down?GRANT: To Iind the deficit, look notat the published number. It doesn'tincorporate the debt of the Social Se-curity trust Iund or other pockets ofgovernment debt. Look at that annualaddition to public debt. While thereported deficit is falling dramati-cally, the rate of groVlrthin public debt

. - - - - - - ' - - - - - - - - , i : slowing but not a'much,Instability isa vital andnecessary partof the

capitalist drama.The purposeof the downsideof thebusiness cycleis to makethe economyclean andhonest again.

GRANT: The pesohas never had a bullmarl et. It has alwaysdeteriorated. Its meltrate has been hotterand colder, but it hasnever failed to melt. ItI remarkable thateven for a few fiscal quarter , peoplewould suspend their knowledge of itscertain path. It is no less remarkablethat the 'Mexican people put up withwhat they put up with.

It goe. back to the pri mary goal ofthe welfare state of cred it: tability.That's what Robert Rubin and Green-span want. There is nothing quite sounstable as a run on a currency, as arun on a mutual fund that happens tohave gotten itself too long of MexicanTreasury bill. The taxpayers are notout of pocket but there ain't no freelunch, and the Mexican bailout was anexample of a particularly unappetizingpeanut-l utt r-and-jelly andwich,

Stability is a false ideal. Instabilityis a vital and necessary part of thecapitalist drama. The purpose of thedownside of the business cycle is to

Another way ofgt.::tting at the deficitissue is to ask whatth e deficit signifiesIor inter st rate. Be-tween 1981 and 1993,when the deficit wasexpanding at a break-neck pace, hond yieldswere being choppedin half. If the reasonpeople care about thedeficit is the putativeconnection it bas withmortgage rates, thatconnection doe' notexist. The deficit isbad becau e it sug-gests a profligate gov-ernment and an

unsound monetary regime, and be-cause it is eventually paid at publicexpense.AEN: Should we deplore the .urrentboom?GRANT: I'm at my worst when Ideplore. I'm uppo ed to be thinkingabout how to get ahead of tb curve.How do we profit hom whatever ex-cess is upon u ? The excess Gould beone of extreme caution, but we ha-ven't seen that for 15 or 20 year. J rna bear in a bull market, which iwrong. The really seasoned observer issupposed to be in step with thing, notcredulous of the existing tr nd, I uttiLl not fighting it.AEN: It just goe . t o show that ev n thesmartest forecu .ters can't know it all.GRANT: Thanks, but here's some-thing I'd like a full-blown Au trian

economist to tell Ill'. \Vhy is it that acertain redundancy of credit an dmoney in centra] hank a. sets at onepoint in the cycle can give rise toinflation in common stocks, but atanother point in the cycle, it gives riseto aninflation of goods and commodi-ties bu t not of common stocks? Whydoes the e .cess seem to flow intovariable channels? In 19 L1.6 , we golhigh meat prices and low stock prices;in 1996, we get low meat prices an dhigh uock prices. Why i that? Maybean Au trian business cycle theori tcan write a hook-in English-explain.ing that mystery.AEN: What iIdeposit insurance wereabolished today? What would happento the banking system?GRANT: Right now? othing. Therea on is the same rea, on the asdaqis selling at 45 times earnings, the samereason that gold won't go up, the samereason every single corporate bond inthe world seems to be priced as if it werea government security. This is a bullmarket. In a bull market, confidenceis perfect. People doubt nothing.Abolishing depo it insurance wouldbe regarded as anoth r whole omClinton reform on downsizing govern-ment. In a real economic downturn,the story would be very different.

Again Ill)' footnote-scale contribu-tion to the Austrian debate would beto urgc people not to underestimatethe collective psychology of investors,voters, the general populace at varioustimes in the cycle.AEN: Any ornment about its origin'in the 1930s?GRANT: At the bottom or the cyele in1933, the government introduced de-posit. insurance. Itseemed to be a greatthing for the country, a long-overduereform and, at last, the key to thestability of the financial ystem. But itwas at this moment when it wasn'tneeded. The banking system had aJ-ready been liquidated. There were nohad a et to purge be 'au e nobodywas mal ing any loan .

It was supposed to encourage risk-taking, but it didn't work. In an anti-capitalist environment, you're not

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THE LUDWIG VON MISES INSTITUTE

going to b e very successfu l in encourag-ing risk-taking by insuring deposits.T lwl was the iron ic tim ing of the re-lorrn. It would stand to reason tha tth 'y'd Lake it off at: the top of the cyclew hen the b ad loan . in the fu ture werebeing made.

Notor iously , deposit insurance w asincreased from $4 ,0 ,0 00 to $100 ,000 in1980 . That w as a Iatalincrease. That go tthe cred it boom in the real estate in -dustry roU ing along. That go t everytwo-bi t S&L in the country involved inthe ommereial real estate business.That w as the last b ig increa e. E venthe governm ent now know s w hat itm eans to subsid ize a m oral hazard.AEN: Do you think the consum eror .d i t m arket is itsel f a creation oflo ose c re dit?GRANT: It has been subsid ized andncouraged by the cen tral bank , and the

ri e of deb t tha t has '0m withit, but itha a life of its ow n-by and large asucces . Iu l life, I m ight add . W ilhelmHopk e c ri ti ci ze d all consumer credit asbeing a product o r th e inflation ary ag e.He couldn 't have anticipated how fullyd .vcloped the m arket. w ould end up .

lu G erm any today , onsum er cred it.is on ly a m inor fixture in the fin an cialm arkets; t.he m ain use of credit. cards is1 .0 debit one's bank account, not to runup balances. Am ericans think G erm anshuveit all b ackw ards; II I e purpose ofcred it cards is to get yourself in deb tand go to A ruba.AEN: Does t.he rnerican practiceh av e a d va n ta ge s?GRANT: Am erica has how n that abank can stay open 24 hours a day. It hasshow n that you can conduct businessw ithout a teller d iscovering the detailso r your personal financial lile. That'se reat. The technique of consum er fi-nance in A merica is w ouderfu lvH as itopened the w ay to abuses? Certain ly .Hasit changed the nature of the econ-om y? Certain ly , for bette r and w orse .AEN: Y et under the gold standard, theavai lahil ity of credit w as severely re-stri ted .GRANT: Correct, and only by degreeJid bankers com e to tru t ordinaryw orking m en and w om en. There is

no th ing incompatib le b tw e n thegold s ta n da rd an d a demo ratio re-g i me o f cre dit. N inete enth -c entu ryba nker s m iscalcu lated an d o verlo ok eda g rea t business opportunity w henthey overlooked the average Am ericanw orl er, H ad W orld W ar I no t hap-p ned , the m arkets w ould have discov-cred, th rough trial and error, thatconsum er cred it is a leg itim ate andlucrative business. A s it tum out,consumers collectively have pr .enteda m uch better cred it risk than corpo-rations individually. That's not likelyto r m ain tru e in de fin ite ly .

The purpose of m arkets is to test thelim its of ideas, and som etim es take themto absurd extremes, hrleets tested theab surd extrem es of financial leverage inth e 19805. They 've tested the ab surdex trem es of the equity m arket in the1990s. They 've Lest d various struc-tur s of corporate finance during vari-OIJS .yclcs. M arkets will lest theex trem e lim its of consum er cred it too.AEN: Y ou w rite in The Trouble with.Prosperity tha t th e m ilita ry rep re se ntsa kind of "shadow socialism ."GRANT: It is a disti nct form . look atthe c ity-state collec tivism of the air-cru It carrier. It has all the inefficien-cies of so ialism, and all th quirks ,com plete w ith b lack m ark t on thehangar deck. People arc huying andselling governm ent property . Like al lsocialist system s, it is parasitical ono utsid e m arkets.

The g reat paradox of the Cold W aris that in the nam e of defend ing free-dom , A merica sacrificed lilt! h of herow n [reedom , and even becam e a G ar-rison S tate. H egi.m entation becam e ani IIIportant undercurren t in nationallife and a destructive one. W e shouldbethankfu l that the soc iety is so resilien ta nd a da pta ble . L ew R ock well and thelate M urray Rothbard alw ays poin t outhow the trad ition of the O ld R igh t w asfar m ore an ti-m ilitarist than today 's po-Iitica] c lass, and precisely l ecause m ili-tarism represen ts a threat to lilJ crty .AEN: Do you have pCI' a na l I av ori te sarnong the an ti-statis ts of th 1930s?GHANT: I'm a huge fan of Caret G ar-re tt, a w onderful w rite r and thinker. H e

w as a g reat pal of B ernard M . B tU 'uch .Iw rote a book about B aruch a w hileago , and w hile reading through his pa-pers , I : found a correspondence betweenthem. I cam e to be an admir r o f G aretG arretL He was so industrious and pro-duct ive. He w as such a studen t of m ar-kets an d W a l J S treet am ong other things.

In 1922, he w rote a great bookcalled The Driver. It w as about a ra il-road titan, an d it's clear to m e that AynH and-shall w e say borrow d?-fromth is book for Atlas Shrugged. I di: cov-ered this w hen I w as w ork ing on theB aruch book in the late 1970 s.

Garret t also w rote a b iography ofH enry F ord called The w iu f{lheel,am ong m any other books. H e w roteIor th e Saturday Evening Post, and forthe old Ii-vening Post. In any ca .c, hew as a t rrifically prolific and high-c la s: jo urn ali t.AEN: W here has the Carrettiun-styleattachment to principle gone?GRAN'l': It's certainly not on W allS treet. W hat m akes a successfu l inves-lo ris, am ong other thing , a fine lydevelope d ens of expediency. A sue-cessfu I I' rater in the stock m arket isom eone w ho gets on the righ t ide ofthe prim ary trend and stays there . H edoes not ob ject if the m otive force ofth e primary trend is an excess crea-tion of cred it b y the cen tral b ank,a ided a n d abetted by an unprincip ledTreasury.

A guy like \ \ ' 7 alT en B uffet is no tgo ing to co m e out and say , w e .houldn't

The T r ou bl e WHhP r os pe 1 'i ty by JamesGrant i $30.00, Other hooks of inter-est include MUl'ray . Rothbard'sArneri.cCl's Great Dep.essioa ($]9.95),.Ludw ig von M ises 's The Theory ofMoney and Credit ($20.00), and TheAustrian. Theory of the Trade Cycle byMi es, Hayek, Rothbard, and Haber-le)' ($9.9:-'). Add $3 shipping to theIirst bool and $1 to each sub clluent011', and mail your check to the Lud-'I ig vo n [ise Institute, A ub urn, A Ja -hama 3684.9, or phone to charge toyour cr dit card at 1 -3 34 .8 44 ,2 50 0 . .

Wil1ter 1996 n u m l n N ECONOMICS NEWSLETTEH / 7


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buy Coca Cola at forty tiIlles earningsbecause we know that al l these thingsend badly. W

Austrian Economics Newsletter Winter 1996

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