Let’s talk “Austrian“

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Here is a conversation that I had with Gregor Hochreiter, an Austrian economist, on the Austrian School of Economics, the gold standard, the “Crack-up Boom,“ a fully gold-backed Euro, and “money as god.“

By Lars Schall

Gregor Hochreiter, born June 1st, 1977, is an Austrian economist, co-founder of the Institut für Wertewirtschaft (“Institute for Value-based Economics“) based in Vienna, Austria, and a lecturer at the University of Liechtenstein. Previously he worked for the Centre for European Policy Studies, CEPS, in Brussels and as an analyst for Raiffeisen Zentralbank. He is the author of the German written book “Krankes Geld, kranke Welt. Analyse und Therapie der globalen Depression“ (“Sick Money, Sick World. Analysis and Therapy of the global Depression“), that was published in 2010 at the Resch Verlag. The general thesis of Hochreiter’s book is that fiat money, money created out of thin air without anything backing it, is one of the main reasons for the increasingly rapid following financial crises. These crises are not natural cycles, but effects of the false premise.

Mr. Hochreiter, what is the Austrian School of Economics exactly?

The Austrian School of Economics goes back to Carl Menger, who wrote in 1871 “Principles in Economics.“ Basically, the main idea of the Austrian School is that he takes the person as an individual, that means that the preference and value in economics is subjective, and from this on evolves a complete school of economics dealing with all different branches of economics. The main contribution, I think, has been the capital theory, and then also the money theory and the business cycle theory. This is what the Austrian School is known for.

The main figures, in particular in the money theory, are Ludwig von Mises and Friedrich August von Hayek, who was his student, and in the United States especially Murray Rothbard, an affiliate of the Ludwig von Mises Institute in Auburn, Alabama. Currently, I believe, the two most remarkable scholars in Austrian Economics are Jörg Guido Hülsmann, a German who is teaching in France, and Jesús Huerta de Soto, who teaches in Madrid.

One of your main research topics is “The gold standard – the theory and the reality.“ Would you like to tell us a bit about this?

Sure. We were sponsored at the Institute for Value-based Economics to do a research on the historical gold standard. That was quite interesting because we found out that everybody means something different when they talk about the gold standard, and this is one of the main problems nowadays if reform ideas are debated that quite often people are talking about different things using the same term. We also found out that the historical gold standard was never 100 percent backed by gold.

Then we have the problem whether the gold standard facilitated the increase in the unbacked money supply, both of money in a narrow sense and in a wider sense, including fractional reserve banking. That research is still ongoing. But so far our main idea is: when you take an ideological stance you often interprete history in your way without seeing seriously the facts as they are presented. This is a source of misunderstanding, of course. In that sense we try to build a bridge between various camps and widen their perspective insofar that they should look at the facts and not at their ideological position accordingly.

How did it come that you became interested in Austrian Economics?

I was studying at the University of Economics in Vienna and I’ve never heard anything about von Mises and von Hayek there during my studies.

So in a sense „A prophet is honored everywhere except in his own hometown“?

Well, one can put it that way, yes. – After I had finished my studies in Vienna, I did a master programme in Denmark that had nothing to do with economics, but I had a lot of time for myself. I wanted to read von Mises for a longer period of time already, and so the first book that I’ve read by him was “Socialism: An Economic and Sociological Analysis.“ I remember that I couldn’t really follow him, but then I read “Human Action,“ and that was a real eye-opener for me, because suddenly economics made sense to me.

When you’re studying economics nowadays, then the first courses are macro-economics, micro-economics, mathematics and statistics, and I actually didn’t knew what the connection was between mathematics and statistics on the one side and economics and human beings as they are on the other. Human beings are not just a bunch of mathematical figures, but they have a variaty of aims. And so when you read “Human Action,“ then you understand that the Austrians treat human beings as persons, and suddenly especially devolopments in the monetary and business cycle theory made sense.

A lot of mainstream economists could not explain the collapse of the stock exchange in 1929 and other similiar events, whereas the Austrians had a profound theory. They did not prognose the collapse of the stock exchange by luck, they had a theory which had clear causes and basically fit very well with the facts that the historians provide to us. That was in general the starting point for a kind of re-education of myself, so that I tried to get rid of the mainstream economic thinking that I never really adhere to, but adapt a new way of thinking.

One concept of von Mises is the so called “Crack-up Boom.“ Do you think this is something in store for us?

The Crack-up Boom is the equivalent in the business supply cycle theory to what the hyperinflation is in the monetary realm, they both go hand in hand. Yes, I’m afraid we’re heading to some type of a hyperinflationary scenario, at least in the end. It could well happen that we have a kind of Japanese Lost Decade (which are by now two lost decades) in the run up to a hyperinflation, if you take the decisions by most governments and central banks in the last two years that they think that they can solve the debt crisis by increasing the debt level of the societies even more.

The main position of the Austrian School of Economics is that basically a recession is a healing phase or that a boom is the illness, if you want, and that a recession is a structural phenomenon. This means that the business structure has to adapt to the time preference of the society again, but if you try to solve a structural problem by monetary means that cannot work out. The boom of course is a monetary phenomenon. So in the end by opening up the flood gates of monetary production you are just increasing the amplitude of the boom and recession phases ever more – and then you will end up with the Crack-up Boom. But it can also well happen that we will have a deflationary period. One can make actually a good argument for this as well, though I think it is rather unlikely.

What is wrong with our debt-based money system and why does it have bad effects on the world as a whole?

Well, the driving force of economic development is not the availability of credit, but of real savings, i.e. production, which has not been consumed and which is invested. Almost everybody though believes that the availability of credit is decisive for economic growth. By falling prey to this economic fallacy, more and more parts of society get indebted and finally over-indebted. Widespread defaults of private households and of businesses or even the default of the state is just a question of time.

During the process of ever increasing indebtness the banking system earns unjustified income, while the poor suffer from rising prices as a consequence of the inflationary increase of the money supply. In sharp contrast to the commercial messages of the banking sector taking up a credit does not bring more personal freedom. Maybe in the short-run, but in the long-run, the debtors are at the mercy of their creditors. Being in debt is a kind of (self-)enslavement. Moreover, the necessity to pay an accrued interest on debt promotes the short-sighted exploitation of natural ressources as well as of one self.

If the choice was yours: what would you do different with the way money works?

First of all, in accordance with sound legal principals banks must not lend the money that has been deposited in demand deposits. In other words, commercial banks shall not be allowed to create credit ex nihilo. Secondly, they must also heed the so-called „golden rule of banking“, i.e. the maturity of their claims against must not exceed the maturity of their obligations. At the level of money production in the narrow sense, no increase in the money supply should promote or reward borrowing. A non-balance-sheet-money like coins would be a step in the right direction.

Are central banks necessary?

Well, in an age of political and economical centralization one should not be surprised of the institution of central banks. These institutions have quite often been used to foster political centralization as in the case of German unification and of the Euro. A much more decentralized system of monetary-production is definitely desirable, as is the devolution of political power.

Do you think that money has to be backed by gold? Or are other solutions possible, too – like an energy-based system? Without energy (that means by definition: the ability to do work), money is rather useless, isn’t it?

I  prefer the circulation of coins instead of money substitutes such as money certificates or fiduciary media. If we want to prevent the authorities and the commercial banks from massively abusing their power to create ever more money and credit titles, we have to check the money on a regular basis by simply using it. From this point of view oil, electricity and many other raw materials are not as convenient as silver or gold or other metals as general medium of exchange.

To give an example what a gold-backed currency could mean: if the euro were fully backed by gold, what price would be hit then for a troy ounce of gold?

This calculation is rather simple: Take the money supply – which definition is not so easy – divide it by central bank holdings of gold – assuming they exist and the central bank has direct control over „their“ gold, which is not necessarily the case – and you get the exchange ratio. If M1 is the reference money supply we have €13 500 covered by 1 troy ounce of central bank gold (as of Jan/11).

What are your thoughts related to the rigging of precious metal prices in general? Is this an important factor for the financial crisis?

Actually, it is an attempt to prevent the final collapse of the system. As soon as the population realizes that money is about to loose its function as store of purchasing power they will reduce their demand for money holding, i.e. they will withdraw their money from their demand deposits as well as time and saving deposits. Given the meagre coverage of demand deposits in a fractional-reserve-banking-system, this would crush the entire system.

Speculators and investors do only think in relative terms. Which asset promises a higher return? So if rigging one asset class brings about a higher demand for –  let’s say – U.S. treasuries, there is an economic case for rigging. (Of course only, if one understands economics as value-neutral science free of any moral considerations).

One thing that I frequently observe is that the followers of Keynes rave at the „Austrians“ and the „Austrians“ rave at the Keynes desciples, as if they were respectively evil and dangerous nutcases. Do you think that this is really necessary? Or do you think that both sides tend to have stereotypes and false perceptions of each other in their minds when they talk about each other – like you’ve mentioned earlier with regard to the gold standard? (i)

No, I do not think this ideological fights are conducive. Quite often these controversies divert the attention from the important questions. For example, is maximizing economic growth really desirable? Most ideologies share the utilitarian-materialist assumption that maximising one’s income is the meaning of life. Moreover, most ideologies believe that a kind of paradise on earth is possible. The debates are so fierce, because each faction believes to have the key to paradise in its hands. But we have to acknowledge that we always can do better. Our spirit has to change, has to become more realistic.

One last question: could it be that a major problem of our time is that the German philosopher Georg Simmel was „right on the money“ when he stated in his book „The Philosophy of Money“ (published 1900) that money is basically today’s god?

Yes, definitely yes. Actually we have to say that modern man dances around the golden calve and adores not God, but an idol. Our entire life is directed towards maximing personal income, a good entrepreneur is somebody who manages to earn a high return on investment, public policy is directed towards the permanent increase of GDP, parents send their children to the kindergarden as to not endanger their career.

The occidental position though is that economics is subservient to the cultural and spiritual uplifting of society – states Aristotle: „We work so we can have leisure“. By contemplating the essence of a good life we will be able to get things straight again. But this requires to break out of the vicious circle of longing for ever more material goods or more money that enables the purchase of these goods.

Thank you very much for taking your time, Mr. Hochreiter!


i An interesting take offers Edward Harrison: “On Ideology, economics and the compatibility of Chartalists and Austrians“, published at Credit Writedowns on May 2, 2011 under:


as well as Cullen Roche: “The Austrians are intrigued…“, published at Pragmatic Capitalism on May 9, 2011 under: http://pragcap.com/the-austrians-are-intrigued.

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