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Interview with Joseph T. Salerno
The Austrian Economics Newsletter

Fall 1996
Volume 16, Number 3

Joseph T. Salerno

Why We're Winning

An Interview with Joseph T. Salerno

Joseph Salerno, professor of economics at Pace University, is a leading figure in today's growing Austrian School. He has been a pioneer in many fields, including monetary theory, comparative systems, the history of thought, and the economics of war. After the death of Murray N. Rothbard in 1995, Salerno assumed the editorship of the Review of Austrian Economics, together with Hans-Hermann Hoppe and Walter Block. He is now editor of its successor and current flagship scholarly journal, The Quarterly Journal of Austrian Economics. He was interviewed by the AEN staff at the 1996 Mises University, the Mises Institutes summer instructional conference at Auburn University.

AEN: What's your take on the present state of Austrian economics?

SALERNO: How could anyone be at the Mises University and not be elated? This is my eighth. The students are more passionate and well read than ever. We've got all levels, all fields, and many different countries represented. Many students have come on the recommendation 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 economics 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 Austrian economics.

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 issues in particular fields. It's what distinguishes dilettantes, 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 unavailable. The students and faculty love it.

AEN: Is there more evidence of the healthy state of the 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 contributions. 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 giants. Rothbard has placed the Austrian School in the center of the history of economic thought from the ancients to the moderns.

Today the school is so large and international that it is difficult to keep tabs on it. It has displaced the waning Chicago School in terms of representing the free-market plumbline. That's more than progress. Thats a revolution.

AEN: Do Austrian economists need to be accepted by mainstream journals before theres real progress?

SALERNO: Absolutely not. We shouldn't measure progress this way. Progress does not mean acceptance; it means the propagation and advancement of the truth. Austrian articles are appearing in mainstream journals, but this is a byproduct of our growing presence in the academic world. We shouldn't crave acceptance by the mainstream; we should seek to displace it.

AEN: Is this widening interest still the fallout from Hayek's 1974 Nobel Prize, or something entirely different?

SALERNO: The modern revival is usually dated from Hayek's award. That was also the year of the famous South Royalton conference, the first on Austrian economics in North America. Until recently, I accepted this conventional account of the "Austrian renaissance," perhaps because I was caught up in the excitement of having attended the conference.

More recently, I've come to understand that this view of events is seriously mistaken. It leaves aside what prepared the way for that conference and the boom that followed. For a full picture, we have to go back a decade earlier.

Mises's Theory and History appeared in 1957. It was to be his last major work, and meanwhile Hayek had moved on to spending full time with his social evolution theory. The Austrian School would have died over the next ten years if no new theoretical work had appeared. In retrospect, Rothbard's 1956 article "Toward a Reconstruction of Utility and Welfare Economics" was a sign that great days were ahead.

In 1962 and 1963, in amazingly rapid succession, Rothbard published his seminal works, Man, Economy, and State, Americas Great Depression, and What Has Government Done to Our Money? This last booklet is often seen as a primer on monetary theory, but it is much more. It contains his notable "progression theorem," which explains how the state caused a "progression"--actually a degeneration--from hard money to fiat currency. Such a systematic explanation of the origins of fiat currency was missing even in Mises's works.

AEN: And these three books in two years set the stage.

SALERNO: Absolutely. Rothbards astounding burst of creativity is unparalleled in the history of the Austrian School, if not in the history of economic thought. Remember too that Power and Marketwas completed in this phase as well, although it didn't make it into print until 1970.

In any case, these three books served as the model and inspiration for all future work in Austrian pure theory and applied economics. Rothbard respectfully built on the works of the acknowledged masters, especially Mises, Böhm-Bawerk, and Menger, while boldly advancing beyond them in the theory of utility and welfare, money, monopoly, taxation and interventionism, and the business cycle. Plus, he was a compelling writer and used his personal influence to nurture and sustain the movement. As a result, the young people who came to South Royalton already were, almost to a man, Rothbardians.

After this conference, there was an initial period of productivity. Rothbard again took the lead, publishing notable articles on the definition of the money supply, monetary calculation and cartels, and the pitfalls of fluctuating exchange rates.

But then a period of dormancy set in. Austrian theory got bogged down in a sterile debate over whether the market economy is equilibrating. This was pointless, since Mises had already resolved the issue. The concept of equilibrium is an indispensable analytical tool. It's not a realizable state that the economy moves closer to or further away from in history.

The theory side wasn't revived until the mid- and late-eighties. It picked up again because of political events (socialism was unraveling), the Mises Institutes founding of the first English-language journal devoted to Austrian economics (which Mises himself dreamed of), and the coalescence of a new Rothbardian circle, beginning at these summer conferences.

AEN: Why should it be important to revise the conventional view of the Austrian revival? Merely to give credit where it's due?

SALERNO: There's much more at stake. There has been an unfortunate tendency to limit the revival to the people who attended the South Royalton conference. The next step is to chart the progress of the revival by tracking the careers of some twelve or so people, all of them Americans. The result is a narrow sectarianism that squeezes out newcomers and is willfully blind to new contributions.

But if 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 understanding of the present state of the school. The current Austrian boom is massive and international, and encompasses literally thousands of students, faculty, and professors the world over. Thanks to this, we are experiencing another explosive burst of creative energy.

AEN: Yet Rothbard himself never took credit for the Austrian revival.

SALERNO: He was too busy crediting past Austrians for their contributions and, at the same time, encouraging 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 acknowledge 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 Austrian School.

SALERNO: My 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 a New Deal Democrat, nearly threw him out of the house. That sparked 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 graduate 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 banking debates.

SALERNO: Actually, a good part of my thesis and argument can be found in Rothbard's Classical Economics, Volume 2 of his history of thought. My dissertation was on a slightly more narrow topic: the divisions and debates 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 uncertainty and the chaos of capital markets do not constitute Austrian insights. I think we should leave Keynes to the Keynesians--and Lachmann to the Lachmannians for that matter. In my paper, I attempted to show that Keynes moved from Marshallianism to classic millennarianism. In the end, he was attempting to use the state to bring about a world that appealed to his personal intuition, but does not and cannot exist.

In Keynes's dreamland, the interest rate would fall to zero because there would no longer be scarcity of capital. That achieved, we would see the disappearance of "avarice, usury, and precaution." Moreover, his attack on orthodoxy wasn't limited to economics. He opposed bourgeois ethics, folkways, and institutions, and longed for a new order designed by the intellectual elites.

AEN: You have encouraged Austrians to rediscover the writings of W.H. Hutt.

SALERNO: Professor Hutt is most famous for his work on labor unions, which is great. But in response to Keynes, he developed a wonderful theory of market price coordination that is consistent with Misesian theory. I have 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 describes what actually occurs at every moment on the market.

What if a person withholds labor? What if a capitalist withholds investment? Then they have reason to do so: they are making rational judgments about future consumer demands. When the data change, they may withhold 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 moment. 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 Austrian traits: the theory of heterogeneous capital, the structure of production, the passage of time, sequential analysis of monetary interventionism, the market origins and function of the interest rate, and more. And it tells a compelling story about an area of history neoclassicals think of as their turf. The model of applying this theory remains Rothbard's Americas Great Depression.

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. Friedman 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's book. As far as Murray could tell, Friedman was especially incensed that Rothbard had cited a 1937 Lin Lin article arguing that savings deposits are part of the money supply, on a priori or Austrian, not positivist, grounds. Later, Friedman was peppered with questions from curious 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 Federal Reserve Policy during the 1920s. Monetary inflation had 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 demonstrate that a significant inflation had occurred in the 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 Friedmanite canard. But it's made the rounds, even among some Austrians. 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 positivists 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 reserves 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 be withdrawn at any time and are thus readily spendable dollars.

Besides, it turns out not to matter in Rothbard's theory. Including life-insurance policies, the increase in Rothbard's money aggregate between mid-1921 and the end of 1928 totaled about 61%, yielding an annual rate of monetary inflation of 6.5%, compounded annually. Leave them out, and we get 55% over the period, or 6.0% per annum. For comparison, in the highly inflationary 1970s, 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 Nelson 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, but that the Fed inflated in the 1920s, even though it didn't show up in increased prices.

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

SALERNO: It goes to the core of economic theory. For most mainstream economists, inflation is not a matter of money and bank credit expansion; it is essentially a price phenomenon. If prices don't rise, there is no inflation. It doesn't matter what the monetary data say. In the 1920s, there was no substantial 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 truly believe inflation is a monetary phenomenon. When you increase the amount of money in 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 inflation as price increases means we don't capture the fullness 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 effect 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 establish that an increase in the supply of fiduciary media has taken place. Only then can we identify a sequence of historical phenomena that make up the business cycle. Econometrics wastes most of its time in a rigged game searching for mysterious causes among millions of potential variables.

Austrian theory is essentially qualitative. We deny that there are any quantitative constants in human action. Therefore, we can talk about changes that bring 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, obversely, 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 wonderful paper is coming out in The Review of Austrian Economics by 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 run-up of the eighties and its effects on the capital-goods sector. To do this, he breaks down government figures, which are constructed based on Keynesian theory. Hughes identifies 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 caused the downturn, whether technological shocks, the weather, sun spots, or the man in the moon. All this is silly. Empirical data alone, no matter how well massaged, cannot establish causation. For that we need real theory, arrived at deductively, and applied to the real world as an explanatory device.

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 typical Austrian-style business cycle would lead to an increase in GDP, while unemployment would only be a minor 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 cycle. 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: Youve had a number of big debates in the Review.

SALERNO: You often hear that Austrians are narrow and dogmatic, reviewing the canon all the time instead 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 issues, 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 rejoinders--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 discipline. In the Review, there's ongoing debate in practically every field.

AEN: How did the knowledge/calculation debate get started in the first place?

SALERNO: It actually began with a provocative 1988 Review article by Israel Kirzner, "The Economic Calculation Debate: Lessons for Austrians." Kirzner claimed that calculation--comparing costs and benefits in monetary terms--played a very small part in the Austrian critique 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 acquisition, from the late thirties and forties, stated the crucial point of the debate in a more sophisticated way. The virtue of prices is the knowledge about time and place they somehow embody, to which central planners cannot have access. With Hayek, Kirzner 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 thinking?

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 different 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 distinguishes his position from Hayeks. It is an important piece that has never appeared in English. We are working on a translation for the Review.

AEN: Also in "Mises as Social Rationalist," you further distinguished Mises's approach from Hayek's theory 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 of equilibrium in Mises. When I thought about it, I realized I would have to deal with the concept of spontaneous order also, since some Austrians had claimed that it is the proper replacement for all equilibrium theorizing.

Looking through Mises, however--much to my surprise at the time--I found there was no concept of spontaneous 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 social 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 labor, and many heterogeneous capital goods, planners would not be able to use subjective evaluations in figuring out the most valuable use of their resources, as they would in a household economy. This requires objective economic calculation using market prices. If a society does not have the benefit of market prices, arrived at through the exchange of private property, resources cannot 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 unable 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 monetary calculation? It's merely a linear-programming problem.

SALERNO: Mathematical solutions do not obviate the need for the markets pricing process. Lets assume we can generate equilibrium prices. They are not actual prices. It still leaves the essential problem that economics deals with: judgment and appraisement in an uncertain future. In Mises's concept of calculation, the function of the price system is to permit 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 continually changed.

AEN: Can you give a concrete example?

SALERNO: Let's say someone needs 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 magnitudes. 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 itself. He can't determine whether he is wasting resources or not because he can't calculate.

AEN: Anything even 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 to the 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 economically. 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. It might dismiss the idea of house shipping as absurd. It might ask: why build the house in one place only 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 have 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 knowledge that can be gotten from engineers, and knowledge of "particular circumstances of time and place."

Hayek only refers to qualitative knowledge; he thinks gaining that knowledge is the key issue. I am not using the term knowledge as in "knowing the exchange ratio." Of course, if you know the correct 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 rationalityrequires the 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 if we misunderstand what he means. Lets say your readers read this interview instead of watching tv. And at the end, they decide they wasted their time. That doesn't mean their 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 the issue. 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 all the time. The point is that if we don't have market prices and economic calculation, we can't even begin to make purposeful choices about resource allocation. A lack of foresight is always with us. But a social planner working without the benefit of economic calculation has no idea whatsoever of where to begin 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?

SALERNO: 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 didnt use money at all. Within two years, the whole economy had broken down. There was a return to household production of the most 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 without economic calculation.

AEN: What are the implications for a mixed economy like the U.S.?

SALERNO: Mises's theory of interventionism says that price controls fail to achieve the goals of those who intervene. Rothbard picked up on this, and talked about the mixed economy as containing "centers of calculational chaos." That's a good description of the mixed economy.

AEN: On another controversial area, did Mises favor 100 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 Ive argued the other view. Looking at the whole of his writings, we see that the very reason Mises favored free banking was mainly to suppress the issuance of fiduciary media, that is, bank notes and deposits not covered by 100 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 the business cycle, he demonstrates that fiduciary media are a necessary and sufficient cause of the cycle. When Mises finally addresses "basic questions" of future policy, he calls for the suppression of all further creation of fiduciary media, 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 toughened his stance even more between 1924 and 1940, with the publication of Nationalökonomie, the German language forerunner of Human Action. There he is conspicuously silent on the benefits he had once attributed to the 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 the necessary safeguards. Finally, in his 1952 epilogue to The Theory of Money and Credit, he offers a detailed plan for a 100 percent backing for future increases in bank 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 in the opposite direction, toward 100 percent reserves, as bankers swiftly learned that any increase in fiduciary media would leave them open to bank runs and insolvency. In the balance, then, he was more of a Rothbardian than a Whiteian on the fractional-reserve question.

AEN: What are your strongest criticisms of the free banking/fractional-reserve position?

SALERNO: That any increase in the supply of fiduciary media brings about the business cycle. The free bankers have gone to great lengths to get around this point.

Also, the contagion effect--the tendency of bank runs to spread--has doomed fractional-reserve systems throughout 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 100 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 insurance and the Feds power to create new money, the public correctly perceives that all deposits are guaranteed at face value. Deposits are in fact risk-free claims to currency. That means we effectively live under 100 percent reserves. If 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 circulation. It has stimulated new interest among new people. It has provided an outlet for Austrians to get their articles published.

AEN: Why is that important, versus trying to sell articles 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 investment grows, it becomes more difficult to give it up. Before 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 absence 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. Austrian 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 history for the better, not merely to go along.

Mises wrote in Human Action that a good economist is always telling government officials what they dont want to hear. They should think of us as the bearers of bad news. I'd rather do almost anything else in life than be an economist 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 conference is packed. To be sure, this is a nice town. But these students--some of the best I've encountered--could be doing anything else with the last of their summer weeks.

Instead they are competing to spend a grueling training 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 something 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 economic science and the future of liberty generally.

AEN: Any hints of future controversies in forthcoming 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 neoclassical economist has blasted one of the editors. He pulls no punches. And that's just the way it should be.