WEBVTT NOTE Mises as a Currency School Free Banker 1 00:00:00.000 --> 00:00:21.760 I just want to reinforce what Matt had to say regarding a book that was published a hundred years ago and that is that it still continues to generate controversy, argument, and it gives us a framework for thinking about developments today, and thinking about, for example, the financial crisis. 2 00:00:21.760 --> 00:00:51.760 So my paper is more or less a response to an ongoing debate with the free banking school led by Larry White and George Selgin and others and the topic of my paper itself is controversial, I mean the title, excuse me, is controversial because a currency school free banker is a contradiction in terms according to the free banking school. 3 00:00:51.760 --> 00:00:57.480 Currently School believed in a central bank to set a rule to limit the amount of unbacked 4 00:00:57.480 --> 00:01:03.000 bank notes that were issued, whereas the free bankers don't believe there should be any 5 00:01:03.000 --> 00:01:09.400 regulation at all of banking, that is, that banks should be free to set their own reserve 6 00:01:09.400 --> 00:01:16.400 ratios. So how could Mises be a Currently School free banker? Well, Matt went into some 7 00:01:16.400 --> 00:01:22.800 Some of this, Matt explained that Mises indeed was a big admirer of the currency school, 8 00:01:22.800 --> 00:01:28.060 not only an admirer but an exponent of its main doctrine, the currency principle. 9 00:01:28.060 --> 00:01:32.820 So let me just give you an overview of what my paper is about, I'm not going to be able 10 00:01:32.820 --> 00:01:34.480 to go through the whole thing. 11 00:01:34.480 --> 00:01:37.200 But basically I talk a little bit about the currency school theory and history in the 12 00:01:37.200 --> 00:01:43.320 first chapter and then I have a number of quotes showing that indeed Mises was not only 13 00:01:43.320 --> 00:02:13.320 Mises was not only an admirer, but a proponent of the currency school and that he pretty much single-handedly brought back the currency school to relevance after it had fallen into complete discredit as a result of some flaws in its own theory that were applied with Peel's Act I also want to show that Mises was in favor of free banking but not for the reasons that the free bankers give 14 00:02:13.320 --> 00:02:21.800 that free banking would, in a very short while, suppress all additional issue of bank notes 15 00:02:21.800 --> 00:02:28.320 and deposits, okay, when you sort of rehabilitated the currency principle, if you added bank 16 00:02:28.320 --> 00:02:36.300 deposits, all additional emission of these notes and deposits would be suppressed simply 17 00:02:36.300 --> 00:02:41.320 by the force of competition, and as I'll argue in a moment, that's exactly the opposite 18 00:02:41.320 --> 00:02:44.440 of what White and Seljand see as the outcome 19 00:02:44.440 --> 00:02:46.520 of a free banking system. 20 00:02:46.520 --> 00:02:48.240 And then I wanna talk a little bit about a note 21 00:02:48.240 --> 00:02:51.720 on the banknote, which for the free bankers 22 00:02:51.720 --> 00:02:56.240 is the seen and known qua non of free banking. 23 00:02:56.240 --> 00:02:58.400 That is, free banks have to issue banknotes. 24 00:02:58.400 --> 00:02:59.440 If they don't issue banknotes, 25 00:02:59.440 --> 00:03:01.360 then it's not really free banking. 26 00:03:01.360 --> 00:03:05.340 Well, it's interesting that Mises has some very, 27 00:03:06.780 --> 00:03:09.200 some dubious thoughts on whether or not 28 00:03:09.200 --> 00:03:12.080 and this can actually exist in a free market. 29 00:03:12.080 --> 00:03:13.440 So who are the currency school? 30 00:03:13.440 --> 00:03:17.120 As Matt pointed out, they're a group of British bankers, 31 00:03:17.120 --> 00:03:19.520 merchants, economists, they wrote during the 19th century, 32 00:03:19.520 --> 00:03:21.180 they're their names. 33 00:03:21.180 --> 00:03:24.200 The currency principles, easily stated, 34 00:03:24.200 --> 00:03:26.100 just simply said a nation's mixed money supply, 35 00:03:26.100 --> 00:03:28.480 which consisted of gold in various forms 36 00:03:28.480 --> 00:03:33.160 and at the time banknotes, should behave exactly 37 00:03:33.160 --> 00:03:35.640 and in their words as a purely metallic currency. 38 00:03:36.880 --> 00:03:38.160 There were also bank deposits, 39 00:03:38.160 --> 00:03:40.000 But that was one of the flaws of the currency school. 40 00:03:40.000 --> 00:03:44.320 They did not include bank deposits in their definition of the money supply, whereas the 41 00:03:44.320 --> 00:03:47.440 banking school did. 42 00:03:47.440 --> 00:03:52.640 And finally, they did triumph in 1844 with the Enactment Appeals Act. 43 00:03:52.640 --> 00:03:55.560 Now what were the implications of the currency principle? 44 00:03:55.560 --> 00:04:00.760 One that the changes in the money supply should rigidly reflect changes in the supply of gold. 45 00:04:00.760 --> 00:04:04.960 That is that your money supply should only increase or decrease if you were not a gold 46 00:04:04.960 --> 00:04:10.040 in a country through the changes in the balances of payments, which would reflect changes in 47 00:04:10.040 --> 00:04:16.080 relative demands for money in different countries. Secondly, all further issue of banknotes that 48 00:04:16.080 --> 00:04:22.720 are not fully backed by gold would be fully suppressed. That is a marginal 100% reserve 49 00:04:22.720 --> 00:04:27.240 ratio. That is, Mises wasn't in favor of, nor the current school, of getting rid of 50 00:04:27.240 --> 00:04:31.080 unbacked notes that already existed, okay, because that would involve deflation. But 51 00:04:31.080 --> 00:04:43.080 But in fact, going forward, there would be no more issue of what's called fiduciary media, unbacked notes to the currency school, unbacked notes and checking deposits to von Mises. 52 00:04:43.080 --> 00:04:47.080 And then all banking and political influence on the supply of money would be abolished. 53 00:04:47.080 --> 00:04:54.080 And finally, the quantity, value and distribution of money would then be exclusively determined by the market. 54 00:04:54.080 --> 00:05:06.400 Now, this seems like an alien principle in today's world, but in fact, abstracting for a moment from the Fed's actions in the United States, let's assume that the Fed lays off and doesn't increase the money supply or decrease the money supply. 55 00:05:06.400 --> 00:05:13.600 The currency principle is exactly what controls the various money supplies between the various states, between the various cities. 56 00:05:13.600 --> 00:05:26.600 So, for example, we've seen a precipitous drop in the money supply of Michigan because of the relative change in demand from products built in Detroit and the suppliers of autos and so on 57 00:05:26.600 --> 00:05:37.600 and a tremendous increase in the supply of money in Silicon Valley from the 1980s. This is done by the market. There was no central bank involved in this redistribution of the money supply. 58 00:05:37.600 --> 00:05:50.600 As people's incomes fell in areas that were economically retrogressing, their demands for money for cash balances fell because they were going to be engaging in fewer transactions. 59 00:05:50.600 --> 00:05:59.600 And conversely, as incomes increased in Silicon Valley, well, incomes increased, wealth increased, and of course, people's cash balances increased. 60 00:05:59.600 --> 00:06:11.600 So the currency principle, absent the central bank, is the principle that distributes money interregionally, between cities, even among families. 61 00:06:11.600 --> 00:06:22.600 So at bottom, it's not an antiquarian principle, it's a principle that we all depend on within the country or within a common currency area. 62 00:06:22.600 --> 00:06:52.600 currency area. Now, the currency school and Mises certainly up until 1914 saw most developed nations on a gold standard. And so that, as Hayek pointed out, it's wrong to claim that there's a deflation in the money supply in Michigan because it has fallen as a result of a change in demand for products away from Michigan products towards, let's say, California products. Okay? Deflation and inflation occur in a closed system, not in an open system. The currency 63 00:06:52.600 --> 00:06:59.600 The principle applied to an open system, in which the money was, or the base money was, was gold. 64 00:06:59.600 --> 00:07:04.600 There were flaws, I'm not going to go through this, but that already did. 65 00:07:04.600 --> 00:07:15.600 One was that currency school could not get it through their thick skulls, that in fact, bank deposits were interchangeable bank notes, they functioned in the same way, so they left them out of the money supply. 66 00:07:15.600 --> 00:07:24.600 And they also could believe that the best way to enforce the currency principle was through a quasi-central bank. 67 00:07:24.600 --> 00:07:29.600 At the time, the Bank of England was a privileged private bank, it was a quasi-central bank. 68 00:07:29.600 --> 00:07:37.600 They thought that the only way to enforce the principle was to centralize power and reserves in the hands of the central bank. 69 00:07:37.600 --> 00:07:41.600 And they reaped the whirlwind. 70 00:07:41.600 --> 00:08:11.600 The Bank of England was free to expand deposits, because deposits were not included, they were not restrained pound for pound by the amount of gold, as were the notes, in fact they split the bank into two departments, the issue department and the banking department, the banking department just went on creating deposits, which were then used as the reserves for the private banks, which then inflated the overall money supply, 71 00:08:11.600 --> 00:08:22.600 And so we then had the boom and bust cycles of 47, 57, these were all in the 19th century, 66, 90, all of which were blamed on the currency school and Peel's Act. 72 00:08:22.600 --> 00:08:27.600 And so it fell into discredit by the time Mises wrote it, it had fallen into discredit. 73 00:08:27.600 --> 00:08:36.600 All right, that's the background. Let me just very quickly sort of outline the thesis of my paper in just a few paragraphs. 74 00:08:36.600 --> 00:08:42.600 What I argue in my paper is that Mises was a proponent of both the currency principle and free banking. 75 00:08:42.600 --> 00:08:48.600 This is contrary to the claims of the free banking school in Austrian Economics today, 76 00:08:48.600 --> 00:08:50.600 because they are opposed to the currency principle. 77 00:08:50.600 --> 00:08:54.600 This school denies that Mises was a follower of the currency school, 78 00:08:54.600 --> 00:08:59.600 or that he was an advocate of sound money as defined by the currency principle. 79 00:08:59.600 --> 00:09:04.600 The free bankers base their claims on the fact that Mises was a vigorous proponent of free banking, 80 00:09:04.600 --> 00:09:09.420 Banking, which I will show you in a moment, he indeed was. In contrast, most, although 81 00:09:09.420 --> 00:09:15.240 not all members of the original currency school, opposed free banking and were in favor of 82 00:09:15.240 --> 00:09:21.660 a powerful central bank, though constrained by the currency principle. Thus, modern free 83 00:09:21.660 --> 00:09:29.000 bankers maintain that Mises, as a free banker, must have supported what they call the monetary 84 00:09:29.000 --> 00:09:34.520 equilibrium principle. According to this principle, the supply of money must be continually 85 00:09:34.520 --> 00:09:41.680 changed and manipulated by the banking system in order to accommodate any changes in the demand for money. 86 00:09:42.120 --> 00:09:45.160 Okay, so any time there's an increase in demand for cash balances and there's a 87 00:09:45.920 --> 00:09:53.000 the the implication is that their prices will fall, the free bankers believe that under a free banking system banks will automatically respond 88 00:09:53.240 --> 00:09:59.840 by just offsetting that increase in demand by issuing further unbacked bank notes and checking deposits. 89 00:09:59.840 --> 00:10:11.840 And for them, this would preserve monetary equilibrium, maintain the aggregate flow of spending, and prevent purchasing power of the dollar from increasing, that is, prices falling. 90 00:10:11.840 --> 00:10:23.840 I just want to point out that in modern macroeconomic jargon, this so-called macro-monetary equilibrium principle is nothing more than a nominal income target that many Keynesians favor. 91 00:10:23.840 --> 00:10:29.160 favor, except they set the nominal income target at zero, whereas Keynesians would want 92 00:10:29.160 --> 00:10:33.960 it set at the rate of real growth, potential output and so on. 93 00:10:33.960 --> 00:10:39.660 And it's not surprising that both Larry White and George Selden did support at least one 94 00:10:39.660 --> 00:10:46.280 of the two quantitative easing programs, because in fact there was an increase in the demand 95 00:10:46.280 --> 00:10:47.280 for money. 96 00:10:47.280 --> 00:10:53.820 We did have what's a decline in velocity right before the first quantitative easing episode 97 00:10:53.820 --> 00:10:59.020 and so they were both in favor of that and I think George was in favor of even the second one. 98 00:10:59.020 --> 00:11:04.120 So let me go on and now prove, in a sense, my thesis in a few minutes. 99 00:11:04.120 --> 00:11:12.420 Okay, here are a number of quotations taken from Mises in his 1928 book. 100 00:11:12.420 --> 00:11:13.620 And I'll just read the first one. 101 00:11:13.620 --> 00:11:18.620 Every advance toward explaining the business fluctuations to date is due to the currency school. 102 00:11:18.620 --> 00:11:22.420 We are also indebted to this school alone, alone. 103 00:11:22.420 --> 00:11:27.420 The idea is responsible for policies aimed at eliminating business fluctuations. 104 00:11:27.420 --> 00:11:31.380 He was an admirer of the currency school. 105 00:11:31.380 --> 00:11:38.100 Now, in his earlier work, in the book that we're celebrating here, The Theory of Money and Credit, written 100 years ago, 106 00:11:38.100 --> 00:11:50.180 he was a little bit ambivalent about whether or not setting a 100% reserve ratio on future deposits and bank notes was the best thing to do. 107 00:11:50.180 --> 00:11:54.260 He called it a heroic remedy with a vengeance 108 00:11:54.260 --> 00:11:56.180 and said that it renounced all advantages 109 00:11:56.180 --> 00:11:58.060 of stabilizing the purchasing power of money. 110 00:11:58.060 --> 00:11:59.620 Sounds a bit free-banky here, right? 111 00:11:59.620 --> 00:12:04.620 He wants the price level to be maintained stable, okay? 112 00:12:05.840 --> 00:12:09.540 But he ends his book by quoting from, 113 00:12:09.540 --> 00:12:11.300 this is the second edition, which is in English, 114 00:12:11.300 --> 00:12:14.980 he quotes in the first edition, okay, in the second edition. 115 00:12:14.980 --> 00:12:15.820 Right at the end he says, 116 00:12:15.820 --> 00:12:18.500 it is obvious that the only way of eliminating human, 117 00:12:18.500 --> 00:12:23.860 And when he talked about human influence, he always meant the influence of politicians rather than the market. 118 00:12:23.860 --> 00:12:27.900 On the credit system is to suppress all further issue of fiduciary media. 119 00:12:27.900 --> 00:12:32.020 That is unbacked, the issue of unbacked notes and deposits. 120 00:12:32.020 --> 00:12:38.100 Notes and deposits that were not backed dollar for dollar, pound for pound by gold. 121 00:12:38.100 --> 00:12:44.060 The basic conception of Peel's Act ought to be restated and more completely implemented. 122 00:12:44.060 --> 00:12:46.260 That is, let's bring in deposits. 123 00:12:46.260 --> 00:12:49.120 by including the issue of credit in the form of bank balances 124 00:12:49.120 --> 00:12:51.900 within the legislative prohibition. 125 00:12:51.900 --> 00:12:55.780 So he wanted 100% reserves. 126 00:12:56.620 --> 00:13:01.040 And then here he says that all of this means 127 00:13:01.040 --> 00:13:03.100 a return to the theory of the currency school 128 00:13:03.100 --> 00:13:06.200 which sought to suppress all future expansion 129 00:13:06.200 --> 00:13:09.680 of circulation credit and thus all further creation 130 00:13:09.680 --> 00:13:11.860 of fiduciary media. 131 00:13:11.860 --> 00:13:15.740 Now, the free bankers believe that banks have, 132 00:13:15.740 --> 00:13:17.620 that under a free banking system, 133 00:13:17.620 --> 00:13:19.080 you're not gonna get a suppression 134 00:13:19.080 --> 00:13:22.540 of unbacked notes and deposits. 135 00:13:22.540 --> 00:13:25.840 In fact, they're going to have to flexibly respond 136 00:13:25.840 --> 00:13:27.860 to changes in demand for money, or in today's terms, 137 00:13:27.860 --> 00:13:29.640 to changes in velocity. 138 00:13:31.060 --> 00:13:32.620 He goes on, I mean, he goes on and he says, 139 00:13:32.620 --> 00:13:34.260 the banks would be obliged at all times 140 00:13:34.260 --> 00:13:36.400 to maintain metallic backing for all notes, 141 00:13:36.400 --> 00:13:38.620 except for the sums of those outstanding. 142 00:13:38.620 --> 00:13:40.580 So he didn't wanna go back in time 143 00:13:40.580 --> 00:13:42.860 and cause a deflation and back them all, 144 00:13:42.860 --> 00:13:44.920 but just the future ones, okay? 145 00:13:45.740 --> 00:13:51.240 He also says, by this act alone, cyclical policy would be directed in earnest toward the elimination of crises. 146 00:13:51.240 --> 00:13:53.240 This is all in 1928, okay? 147 00:13:53.240 --> 00:13:58.740 This is the second, the next book on money after Theory of Money and Credit. 148 00:13:58.740 --> 00:14:05.740 Okay, now, how can this be consistent with his favoring of free banking? 149 00:14:05.740 --> 00:14:14.740 How are you going to suppress, without a central bank in place, all further issue of, again I use the older term, fiduciary media? 150 00:14:14.740 --> 00:14:23.460 Well, Mises talked a little bit about this. So in his first attempt at this, which was 151 00:14:23.460 --> 00:14:28.480 in 1928, he pointed out that, well, people will be able to distinguish between different 152 00:14:28.480 --> 00:14:34.620 brands of notes, number one, and the ones that are obviously, the banks are obviously 153 00:14:34.620 --> 00:14:40.140 irresponsible, imprudent, and reckless, their brands of notes will immediately be ejected, 154 00:14:40.140 --> 00:14:43.960 as he puts it, from circulation. But he said there's a second more subtle mechanism, it's 155 00:14:43.960 --> 00:14:47.800 It's basically the price PC flow mechanism that controls the balance of payments. 156 00:14:47.800 --> 00:14:50.880 What he said was that there'll be an inter-bank clearing mechanism. 157 00:14:50.880 --> 00:14:56.160 So if one bank is reckless, or not reckless, but tends to inflate more than other banks, 158 00:14:56.160 --> 00:15:00.520 so to issue more on back notes and deposits, then in fact what's going to happen is that 159 00:15:00.520 --> 00:15:04.260 the clients of other banks are going to get these notes as they sell things to the clients 160 00:15:04.260 --> 00:15:08.640 of the expanding bank, and they're going to have an adverse clearing balance. 161 00:15:08.640 --> 00:15:11.720 That is, the bank that expands too much is going to have to pay these notes off with 162 00:15:11.720 --> 00:15:12.720 gold. 163 00:15:12.720 --> 00:15:15.400 That was his mechanism. 164 00:15:15.400 --> 00:15:17.680 But then later on, when he got to human action, 165 00:15:19.680 --> 00:15:22.360 he makes some statements. 166 00:15:22.360 --> 00:15:24.160 For example, he says, the establishment of free banking 167 00:15:24.160 --> 00:15:26.040 was never seriously considered precisely 168 00:15:26.040 --> 00:15:28.280 because it would have been too efficient 169 00:15:28.280 --> 00:15:30.160 in restricting credit expansion. 170 00:15:30.160 --> 00:15:33.480 That is, central banks tend to expand, not free banks. 171 00:15:34.600 --> 00:15:36.680 And he says, the notion of normal credit expansion 172 00:15:36.680 --> 00:15:40.920 is absurd, meaning, and this is in direct contradiction 173 00:15:40.920 --> 00:15:45.580 to what the free bankers say that there would be 174 00:15:45.580 --> 00:15:48.680 no additional issuance of fiduciary immediately. 175 00:15:48.680 --> 00:15:51.680 There's no such thing as a normal increase 176 00:15:51.680 --> 00:15:53.440 in the money supply. 177 00:15:53.440 --> 00:15:56.160 An increase that just offsets a fall in velocity 178 00:15:56.160 --> 00:16:00.040 or just offsets the tendency for prices to fall. 179 00:16:00.040 --> 00:16:02.040 And then he goes on to say that 180 00:16:02.040 --> 00:16:03.320 if the government's never interfered, 181 00:16:03.320 --> 00:16:04.640 we would have a free banking system 182 00:16:04.640 --> 00:16:08.780 in which there would be severe restriction 183 00:16:08.780 --> 00:16:12.020 on the Emission of Fiduciary Media, okay? 184 00:16:12.900 --> 00:16:15.260 And banks would look to their own solvency 185 00:16:15.260 --> 00:16:18.060 and they would be very cautious. 186 00:16:18.060 --> 00:16:20.140 And he brings back in Human Action, 187 00:16:20.140 --> 00:16:23.100 which he wrote in 1949, the inter-bank clearing mechanism. 188 00:16:23.100 --> 00:16:24.840 But in Human Action, he went a step further 189 00:16:24.840 --> 00:16:27.700 and said there's an even narrower restraint, 190 00:16:27.700 --> 00:16:29.700 which the free bankers completely ignore. 191 00:16:29.700 --> 00:16:32.980 There's a narrower restraint on the issue 192 00:16:32.980 --> 00:16:34.580 of unbanked notes and deposits. 193 00:16:34.580 --> 00:16:38.580 He talks about the money substitute. It's a very definition. 194 00:16:38.580 --> 00:16:42.580 Checks are not money. Especially checks from different banks 195 00:16:42.580 --> 00:16:46.580 that aren't backed up by a central bank. They all are branded. They have different brands. 196 00:16:46.580 --> 00:16:50.580 People trust the brands more or less. Banks know that. They have to build up a 197 00:16:50.580 --> 00:16:54.580 fund of goodwill. So he says that claims for definite sums of money 198 00:16:54.580 --> 00:16:58.580 against a debtor about whose solvency and willingness to pay them does not 199 00:16:58.580 --> 00:17:02.580 prevail the slightest doubt. That's how he defines a money substitute. 200 00:17:02.580 --> 00:17:32.580 The slightest doubt, so these are the essential qualities, there must be undoubted solvency and willingness to pay, by the debtor, meaning the bank, there has to be daily maturity, you have to be able to redeem your check at any moment in time, again, there's no lender of last resort here, so people are very, very suspicious of any delay, even from one day to the next, in paying off their, or allowing them to withdraw their money. 201 00:17:32.580 --> 00:17:37.580 All the parties that the individual exchanges with must be perfectly familiar with the qualities of the claim. 202 00:17:37.580 --> 00:17:42.180 That is to say, if you have a multiplicity of banks competing against one another, 203 00:17:42.180 --> 00:17:47.580 different clients choose different banks for locational reasons, for reasons of size and so on, 204 00:17:47.580 --> 00:17:52.980 and they're not as familiar with other, the checks of other banks, okay? 205 00:17:52.980 --> 00:18:02.380 So what he's pointing out is that your clientele puts narrow limits on how much you can expand your deposits. 206 00:18:02.380 --> 00:18:11.380 So here's what he talks about. He says, what makes a banknote a good money substitute is the kind of special goodwill of the issuing bank. 207 00:18:11.380 --> 00:18:21.380 And again, the slightest doubt concerning that bank's ability or willingness to pay will cause the banknote to be kicked out. 208 00:18:21.380 --> 00:18:23.380 The people will suddenly not accept it. 209 00:18:23.380 --> 00:18:53.380 So even before they start losing a lot of gold reserves, if there's any sort of glitch in paying off depositors, then according to Mises, you have the money substitute suddenly becoming just a piece of paper, no one trusts it, actually there's an intermediate step, some people start not to trust it, and it begins to circulate at a discount, 210 00:18:53.380 --> 00:18:56.360 full dollar, it's only 80 cents, but at which point you have the arbitrageurs 211 00:18:56.360 --> 00:19:00.980 coming in buying them up at 80 cents and then going to the bank and causing it 212 00:19:00.980 --> 00:19:07.660 more of a drain of gold because they have to pay off at face value. IT says 213 00:19:07.660 --> 00:19:11.700 that every bank that issues fiduciary media is in a rather precarious position 214 00:19:11.700 --> 00:19:16.300 because of its asset being its reputation. It must go bankrupt as soon as 215 00:19:16.300 --> 00:19:20.940 doubts arise concerning its perfect trustworthiness and insolvency. And so 216 00:19:20.940 --> 00:19:28.820 So it goes on and on, okay, basically what he keeps saying is that free banks have to 217 00:19:28.820 --> 00:19:33.180 be very cautious and will be forced to be very cautious after a number of failures in 218 00:19:33.180 --> 00:19:40.180 issuing fiduciary media to the point at which they will stop altogether. That is any additional 219 00:19:40.180 --> 00:19:45.140 bank note or checking account that they issue will always be based on an influx of gold. 220 00:19:45.140 --> 00:19:50.900 The currency principle then will have been established not just internationally but interregionally 221 00:19:50.900 --> 00:20:07.500 Interlocally, between banks, money will move according to changes in demand, as the monetary approach to the balance of payments, Arthur Laffer, and so on, used to say in the 1970s and 1980s, and Mundell, 222 00:20:07.500 --> 00:20:21.500 The money supply would be completely demand driven, that is determined by consumers and their demands for cash balances, and not driven, supply driven, that is determined by central banks and issuers. 223 00:20:21.500 --> 00:20:27.500 Putting aside for a moment that there would be a very slow increase in the mining of gold. 224 00:20:27.500 --> 00:20:35.500 And then I want to close with something that I found that I didn't, you know, I read the book a number of times, I didn't realize it was in there. 225 00:20:35.500 --> 00:20:51.500 A note on banknotes, actually a note on the banknote, Mises doesn't even think that money certificates, those are fully backed banknotes, would exist in a free market because they're very costly to put into circulation, okay? 226 00:20:51.500 --> 00:21:00.500 And he says, issuing money certificates, that is, unlike fiduciary media, fully backed notes, is a ruinous business if not connected with issuing fiduciary media. 227 00:21:00.500 --> 00:21:07.500 In other words, if you don't, issue them with these unbacked notes, which you can create out of thin air and generate interest on. 228 00:21:07.500 --> 00:21:16.500 And he points out that really the only banks that issued money certificates were the Bank of Amsterdam. They were connected to government. 229 00:21:16.500 --> 00:21:28.500 One last point here. He has an interesting sort of a joke. He says, governments did not foster the use of bank notes in order to avoid inconvenience to lady shopping. 230 00:21:28.500 --> 00:21:33.500 Their idea was to lower the rate of interest and to open a source of cheap credit to their treasuries. 231 00:21:33.500 --> 00:21:38.500 Bank notes are not indispensable. He's talking about all bank notes now, even fully backed ones. 232 00:21:38.500 --> 00:21:42.500 All the economic achievements of capitalism would have been accomplished if they had never existed. 233 00:21:42.500 --> 00:21:45.500 Besides, deposit currency can do all the things bank notes do. 234 00:21:45.500 --> 00:21:50.500 He talks about deposit currency. He talks about deposit currency in places like Germany and France, 235 00:21:50.500 --> 00:21:54.500 where only big business used checking accounts. 236 00:21:54.500 --> 00:21:56.060 Workers did not use them. 237 00:21:56.060 --> 00:21:59.060 In this case, whenever a business gave a check 238 00:21:59.060 --> 00:22:01.300 to another business, gold was immediately withdrawn. 239 00:22:01.300 --> 00:22:03.620 So there could be no pyramiding. 240 00:22:03.620 --> 00:22:05.860 So there were no bank notes, 241 00:22:05.860 --> 00:22:08.500 and checks would only be used to transfer money. 242 00:22:08.500 --> 00:22:13.260 There could be no pyramiding in the multiple deposit expansion 243 00:22:13.260 --> 00:22:15.580 multiplier process that we talk about. 244 00:22:15.580 --> 00:22:17.820 So when Mises, at the end here, 245 00:22:17.820 --> 00:22:20.860 when he quotes the French economist 246 00:22:20.860 --> 00:22:24.380 who was testifying before the French parliament, 247 00:22:24.380 --> 00:22:27.660 on banknotes, who was also a free banker. 248 00:22:27.660 --> 00:22:29.300 He means this literally, I never knew that before. 249 00:22:29.300 --> 00:22:31.500 He says, this is what Czernuski said. 250 00:22:31.500 --> 00:22:34.100 He said, I believe that what is called freedom of banking 251 00:22:34.100 --> 00:22:35.540 would result in a total suppression 252 00:22:35.540 --> 00:22:37.120 of banknotes in France. 253 00:22:37.120 --> 00:22:39.740 I want to give everybody the right to issue banknotes 254 00:22:39.740 --> 00:22:42.860 so that nobody should take banknotes any longer. 255 00:22:42.860 --> 00:22:45.760 Now I thought he just meant, when I originally read this, 256 00:22:45.760 --> 00:22:48.820 that, and even Murray Rothbard interpreted it this way, 257 00:22:48.820 --> 00:22:52.220 just fiduciary banknotes, banknotes that run back. 258 00:22:52.220 --> 00:22:56.060 but if you read Mises more closely it means 259 00:22:56.060 --> 00:22:58.140 he wants to get rid of all banknotes 260 00:22:58.140 --> 00:23:03.140 and to end, in 1952 when he wrote his epilogue 261 00:23:03.720 --> 00:23:05.180 to The Theory of Money and Credit 262 00:23:05.180 --> 00:23:09.520 on the, when it came to monetary reform 263 00:23:09.520 --> 00:23:11.900 for the United States, which was a sort of 264 00:23:11.900 --> 00:23:14.040 a halfway house back to the gold standard, 265 00:23:14.040 --> 00:23:18.820 Mises said, I think all banknotes below $10, 266 00:23:18.820 --> 00:23:21.340 back then $10 could buy you something in 1952, 267 00:23:21.340 --> 00:23:23.500 should be suppressed. 268 00:23:23.500 --> 00:23:25.980 That is, that only gold coins should circulate 269 00:23:25.980 --> 00:23:28.060 for below $10. 270 00:23:28.060 --> 00:23:30.940 Otherwise, Banknotes, again, wasn't his complete plan, 271 00:23:30.940 --> 00:23:33.420 but I think that all goes together to show 272 00:23:33.420 --> 00:23:37.700 that Mises actually was not only anti-futurary media, 273 00:23:37.700 --> 00:23:39.620 he was anti-banknote. 274 00:23:39.620 --> 00:23:44.620 And if you talk to George Selgin and Larry White, 275 00:23:45.660 --> 00:23:47.620 for them, the banknote is the whole key 276 00:23:47.620 --> 00:23:49.220 to the free banking system. 277 00:23:49.220 --> 00:23:52.220 That's what it stands on. 278 00:23:52.220 --> 00:23:54.220 I'll stop here. Thank you.