Schlichter on Start The Week

As Brian Micklethwait informed us ahead of time, Detlev Schlichter appeared on the BBC Radio 4 programme Start The Week on Monday. A podcast of the programme can be downloaded. Remember that all of this is being talked about on the BBC, on Radio 4, which I imagine is listened to by lots of Guardian and Independent readers. Austrian economics is now Being Talked About, as Brian might point out.

The programme opens with Economist columnist Philip Coggan talking about the supposed conflict between money as a store of value and money as a medium of exchange. Creditors will always want a fixed supply of money and debtors will want an expanding supply of money, and this seems true enough, up to a point. Coggan goes on to point out that the biggest debtor is government and governments have always been very keen on expanding the money supply. He also explains how banks' interests are aligned with the governments because the expanding money supply props up asset prices. There is no way out except by defaulting or inflation.

Angela Knight of the British Bankers Association is worried about more immediate matters like tomorrow and the Eurozone crisis.

Detlev Schlichter is up next. He says that paper money systems have been tried throughout history and have always failed; have always been implemented to fund the state. The failure mode is either a return to commodity money or hyperinflation. He clarifies Coggan's point about conflict between debtors and creditors by pointing out that in a voluntary contract both expect to benefit. They would both like a means to honour that contract with money that they can trust. This makes sense because if debtors routinely get the expanding money supply they want, this ultimately will get factored into the price of the loan.

Coggan says that the trouble with the gold standard is that it imposes more austerity on governments than the voters will stand. I think Schlichter agrees, which is why he is predicting hyperinflation.

Maurice Glasman says that capitalism requires 'exploitation' of humans and their environment and short term returns. Detlev is ignoring the imbalance of power between the debtor and creditor. After that I couldn't follow what he was on about.

Schlichter responds to Marr's questions by saying that expanding money supply is right now being done to stimulate the economy rather than just to fund governments. Furthermore he is not suggesting that we walk around with little sacks of gold; payment technologies do not depend on state fiat currency. The BBC listeners are reminded that money is not backed by gold and that it's just an invention of the state. Schlichter advocates removing the state entirely from money. Consumers should control what is produced in the economy by sending price signals, but this does not work because of the expanding money supply. If we went back to gold, as has been done before in Britain, markets would correct. Andrew Marr is incredulous: interest rates shooting up!? In this day and age? Yes, says Schlichter, calmly, it is essential that savings and investments are coordinated by interest rates.

Philip Coggan says going back to gold is possible but very unlikely, but could arise from complete collapse of the system, Zimbabwe-style, but this is not imminent in the next two or three years. Schlichter agrees that politicians are unlikely to take that decision. Over the last 40 years, since the whole world has been on paper money, we have had unprecedented money expansion and, surprise surprise, the whole world is in a mess. If we suddenly went back to hard money now it would cause a sharp correction and a recession. So Politicians will avoid this and in so doing cause a worse outcome.

Angela Knight is asked whether bankers are failing savers by getting into league with the government and she avoids the question, but agrees that banks should not be protected and should be allowed to fail. But there are a lot of Buts that I didn't follow.

Philip Coggan says bankers have become so important because of the credit money expansion of the last 40 years. For some reason he brings international trade into the conversation. Knight starts waffling about ATM machines and the disruption to people's lives that a move to gold would entail. Schlichter says that gold works fine in an international economy (after all, gold is gold wherever you are). When he talks about disruption he is talking about the correction of the accumulated imbalances in the economy. It's clear he doesn't know what Knight is on about, either.

Maurice Glasman makes a distinction between… oh I give up. The man is completely incomprehensible.

Coggan and Knight dignify him far too much by conversing on his terms, which wastes most of the last 15 minutes of the programme. Schlichter disagrees with him completely and gets in a point about how Germany's success after WWII is a result of its relatively hard currency which encourages savings and avoids asset bubbles.

So there we have it. Coggan and Schlichter have their differences but would have appeared very close to each other to the BBC listeners. Knight didn't really say anything, and Glasman was the token lefty who only other committed lefties would have been cheering along with. All in all not a bad day for the spreading of Austrian ideas.