In an exclusive dialogue with La Derecha Diario, the prestigious economist Jesús Huerta de Soto analyzed the impact of Javier Milei's figure, highlighted the importance of 100% reserve banking, and explained his vision of anarcho-capitalism as a model of social organization.
Additionally, he addressed essential topics such as the theory of economic cycles from the Austrian perspective, the difficulties of implementing a banking reform in Argentina, and the influence of libertarian ideas worldwide. Huerta de Soto also delved into the debate on political participation from a libertarian approach and refuted the theoretical criticisms of authors like Robert Nozick. Finally, he recommended key readings for those who wish to delve into the thought of the Austrian School of Economics.
The complete interview with Jesús Huerta de Soto
Ares: How are you, friends of La Derecha Diario? We are here with Jesús Huerta de Soto, someone who needs no introduction and whom it is a complete honor for us to have here.
I wanted to start with something that caught my attention the other day at the conference you gave at ESEADE, which is the fact that this is the first time you have come to Argentina.
Huerta de Soto: Yes, because I normally don't travel and, in fact, I would never have come if it weren't for the very special circumstances brought about by Javier Milei's political triumph. He is very generous intellectually, he always cites me whenever he can, acknowledging the influence I have had on his thinking and, moreover, they have recognized it by awarding me an honorary doctorate and an undeserved, in my opinion, decoration: the Order of May to Merit. We say in Castile: "To be well-born is to be grateful" and, therefore, I have decided to come and I am very happy, I think the trip has been worth it.
Ares: Now I wanted to move to a more academic side. You make an interpretation of economic cycles. Could you briefly explain what economic cycles are and how your interpretation differs from that of Hayek or Mises?
Huerta de Soto: My monetary and capital theory, from which the theory of cycles is deduced, is the Austrian one, developed by Mises and Hayek. It starts from recognizing that money is injected into the system today not only by monetizing the deficit, that is, when the State spends more than it collects by manufacturing it, which is what caused hyperinflation in Germany, sorry, Germany's in the 1920s and Argentina's, which Milei has managed to dominate and control, which is one of his main achievements, reducing public spending by no less than 30%, achieving a surplus and controlling inflation. But there is a second system, equally or more perverse, which is through the creation of money by the banking system that operates with fractional reserve. This is the result of a historical accident, that in Peel's Banking Act of July 19, 1844, although the problems were correctly diagnosed and a 100% reserve ratio in real money was required for the issuance of paper money, which was then issued by banks, they forgot to require the same for demand deposits.
Then, banks redirected their business from issuing unsupported paper money to issuing unsupported deposits. This is something that is not very intuitive, the public doesn't understand it well, but it is easy to understand because what banks do is receive demand deposits of money that are part of their clients' treasury balances and then, immediately afterwards, lend it to a third party, thereby doubling the amount of money. But it is also spent and reproduced in the banking system, which in turn lends it again, and thus, in a snowball effect, a massive creation of virtual money occurs that only has its manifestation in the banks' accounting entries.
In fact, only about a tenth of the money we humans use in modern economies is embodied in real money, paper money or fractional currency. The other tenths are simply these accounting entries that banks create out of nothing. And it doesn't cost, because if this money they appropriate and create out of nothing were used to spend on goods and services, it would produce certain disturbances, but the serious thing is that they lend it, and then they lead entrepreneurs to the erroneous idea that there is more savings available than there actually is.
And this generates a bubble at first that induces widespread erroneous investments, which are not sustainable, and the market, which is very efficient in dynamic terms, sooner or later discovers it, and that is when everything collapses and the recession arrives. In fact, the Central Bank was precisely created to save banks from the bad times that regularly occurred. Therefore, it is essential in a market economy to fulfill property rights in relation to bank deposits and require a 100% reserve ratio.
Just as it was correctly done in 1844 for the issuance of the other type of fiduciary media, paper money, also require 100% for demand deposits, forcing banks to only lend what has been previously lent to them, as true financial intermediaries, but not as money creators now. And this is especially important in Argentina, especially if there is a dollarization project, not only to avoid speculative bubble cycles and crises, but to prevent any new corralito from occurring in the future, because if banks have 100% and people go for their money, it will always be there. Then, no dollarization is conceivable without a 100% reserve ratio.
By the way, with 100% reserve, the Central Bank is no longer necessary as a lender of last resort, thus closing the circle. Everything President Milei promised can be fulfilled: dollarize and eliminate the Central Bank.
Ares: What do you think are the main obstacles precisely to apply this type of model and to implement, perhaps, a Simon banking, which Milei talks about so much?
Huerta de Soto: Be careful, the Simon banking, I have very cordially told President Milei, is a mistake, because Simon was a Chicago economist from the 1930s, who, although he defended the 100% reserve ratio, he did so with a radically different objective, namely, to make Central Bank policy more predictable and effective, when Milei's goal is to eliminate it. And, in fact, long before Simon, Ludwig von Mises had already defended that the property rights requirement that the capitalist system needs to function was embodied in banking practice, the 100% reserve ratio, with the goal of eliminating central banks. Then, more than Simon banking, we should talk about Mises banking.
And what difficulties? Well, they are obvious. Anyone who proposes to make this reform will always have against them. First, they will have the Central Bank against them, which doesn't want to commit harakiri. Second, all private banks, because their main source of profit is monetary creation. Third, many entrepreneurs who do not understand the system and believe that the current situation makes it easier for them to obtain credit easily.
Then, the mission is almost impossible, because they will also have against them all international organizations: International Monetary Fund, World Bank, because the moment the correct reform is made and succeeds, which it will certainly have if done, all the organizations that today pyramid this drunkenness of monetary creation based on the fractional reserve of all central banks, the Eurozone, the Federal Reserve, will be exposed. They will tremble, because they will see: "When you see your neighbor's beard being cut, put yours to soak," to see if we are also going to free the European Central Bank. And the International Monetary Fund, World Bank. We are talking about really a revolution that would not only drive a truly stable financial system, but growth and prosperity like never seen before in humanity, because we would no longer have these recurring cycles of boom, recession, with unemployment, and also that are used, which is unbelievable, as an argument against the market economy.
It is said: these crises are of the "capitalist system," which proves that there must be a Central Bank to avoid them. There is a whole generalized hypocrisy and a tremendous lie that, thanks to the teachings of the Austrian School or people like the head of state of Argentina, Javier Milei, it is already beginning to be discovered that the golden calf of the State is naked and that the legitimacy of authorities and central banks is zero.
Ares: Perfect. Now I wanted to ask you more about political philosophy. You are a staunch anarcho-capitalist and I wanted to ask you: what conditions in society would have to be met to be able to get closer to that model?
Huerta de Soto: It's not the other way around, it's not that society has to evolve for the model... No, it's the other way around. Once the ideas and the model are clear and filter through society, society changes.
Then, the first issue is the one that has already begun: the revolution in the field of ideas, the explosion of libertarian ideas, which thanks to the Austrian School are already prepared and thanks to Javier Milei have become known worldwide, because he has acted as a kind of amplifier. It should be noted that President Milei is not a politician, he is an economist who came from the erroneous mainstream, from that reactionary pseudoscientific current that discovered the Austrian School and that, moreover, is giving him tremendous worldwide popularity, which is acting as a kind of shock therapy, a stimulant in consciences, because people are not stupid, they see that this fits, they see the truth where it is.
And this is what will change the world and not the other way around. It is ideas that change the world and not the world that changes ideas.
Ares: Many anarcho-capitalists argue that one should not vote. What is your position?
Huerta de Soto: Well, there is a debate here, but I am more inclined to what Rothbard thought. See everything Rothbard wrote on the subject: he said that in the ideal, pure model, there would be no politics or voting. But if we are in the reality of day-to-day life, obviously—and Rothbard defended it this way—it seems that it is a moral responsibility to vote for the least bad. That is what Rothbard always said.
Ares: Reading Nozick, he talks about an impossibility of reaching anarcho-capitalism, because we always end up in a kind of proto-state. How do you refute that?
