WEBVTT

NOTE 10. The Gold Standard in Theory and Myth (video)

1
00:00:00.000 --> 00:00:10.000
Today's lecture, or this afternoon's lecture, is on the topic of the gold standard in theory and in myth.

2
00:00:10.000 --> 00:00:19.000
The mythology of gold, as we might call it, really grew up with John Maynard Keynes.

3
00:00:19.000 --> 00:00:27.000
Actually, myths were starting to develop about the gold standard even before Keynes wrote it in the 1930s.

4
00:00:27.000 --> 00:00:36.000
in the 1930s. They began to grow up with the quantity theorists at the turn of the century, including Irving Fischer.

5
00:00:36.000 --> 00:00:47.000
In today's world, in the post-World War II era, the mythology of gold substitutes for any sort of sound analysis of the gold standard.

6
00:00:47.000 --> 00:00:56.000
So what I want to do is to give some of the more prominent myths and then to show how they are not based on sound theoretical reasoning,

7
00:00:56.000 --> 00:00:58.000
at least from the Austrian point of view.

8
00:00:58.000 --> 00:01:04.000
And then I want to talk a little bit about the plans for a transition back to the gold standard

9
00:01:04.000 --> 00:01:08.000
and some of the difficulties that we will face in such an endeavor.

10
00:01:08.000 --> 00:01:12.000
Let me just show you some of these myths.

11
00:01:21.000 --> 00:01:23.000
Okay, these are the six myths I'll deal with.

12
00:01:23.000 --> 00:01:28.000
The first is that the gold standard is unable to accommodate the monetary needs of a growing economy.

13
00:01:28.000 --> 00:01:38.000
Since our economy is growing from year to year, it is said that we require an increased money supply to accommodate the exchange of these additional goods.

14
00:01:38.000 --> 00:01:43.000
Secondly, under the gold standard, the quantity of money is arbitrarily determined.

15
00:01:43.000 --> 00:02:00.000
That is, it's determined by the costs of mining and by other factors that may influence the demand for money, or rather the demand for the use of gold as a non-monetary commodity.

16
00:02:00.000 --> 00:02:07.000
It's not in any sense planned in a rational way. That's what this means to say.

17
00:02:07.000 --> 00:02:13.000
Thirdly, the gold standard is a government price-fixing scheme writ large.

18
00:02:13.000 --> 00:02:25.000
This is a particularly monetarist critique that setting a fixed price of gold between the dollar and a unit of gold is nothing but a price-fixing scheme.

19
00:02:25.000 --> 00:02:35.000
Why would Austrians who believe so passionately in a free market fall victim or advocate such a scheme?

20
00:02:35.000 --> 00:02:41.000
Fourth, the international gold standard subjects a country to alternating bouts of inflation and deflation.

21
00:02:41.000 --> 00:02:50.000
That is, the money supply depends almost solely on what is happening to the balance of payments in a country.

22
00:02:50.000 --> 00:02:54.000
So if you have a surplus in the balance of payments, gold flows in, your money supply increases.

23
00:02:54.000 --> 00:02:58.000
Whereas, a deficit will result in a contraction of the money supply.

24
00:02:58.000 --> 00:03:04.000
And with corresponding effects on the price levels of those countries.

25
00:03:04.000 --> 00:03:22.000
Fifth, the gold standard involves high costs in terms of resources devoted to gold mining, as well, and even more importantly, as a sacrifice of productive uses of gold in industry, for example, in electronics, in dentistry, in jewelry.

26
00:03:22.000 --> 00:03:29.000
and sixth and last, the gold standard results in high interest rates that discourage investment and retard economic growth.

27
00:03:29.000 --> 00:03:35.000
This is a particular critique of Keynes of the gold standard.

28
00:03:35.000 --> 00:03:44.000
Well, I think basic supply and demand analysis in most cases will show us that these are certainly just myths

29
00:03:44.000 --> 00:03:51.000
and are not correct representations of how the gold standard actually works.

30
00:03:51.000 --> 00:04:01.000
So let me start with the first myth, the fact that the gold standard is unable to accommodate the needs of a growing economy.

31
00:04:01.000 --> 00:04:18.000
We might begin by pointing out that the decade in which we've had one of the greatest rates of growth in the United States was in the 1880s.

32
00:04:18.000 --> 00:04:22.000
Okay, and I have some statistics here regarding that.

33
00:04:28.000 --> 00:04:34.000
So, historically, it's certainly not true that the gold standard stunted growth.

34
00:04:35.000 --> 00:04:42.000
In fact, throughout the 19th century and up until World War II, a mild deflationary trend prevailed in the industrialized nations.

35
00:04:42.000 --> 00:04:53.000
So, despite the rapid growth that occurred as country after country industrialized in the 19th century, we had a gold standard in place.

36
00:04:53.000 --> 00:04:57.000
And this certainly didn't prevent that rapid growth.

37
00:04:57.000 --> 00:05:07.000
To go on, the reason for this was that the supply of goods did outstrip the supply of gold money.

38
00:05:07.000 --> 00:05:12.000
and yet there was growth and falling prices at the same time.

39
00:05:12.000 --> 00:05:20.000
And for example, in the U.S. from 1880 to 1896, the wholesale price level fell by about 30% in 16 years.

40
00:05:20.000 --> 00:05:23.000
That's about 1.7% per year.

41
00:05:23.000 --> 00:05:26.000
And those figures come from Friedman and Swartz.

42
00:05:26.000 --> 00:05:33.000
At the same time that the price level was declining, after the U.S. had gone back to gold in 1879,

43
00:05:33.000 --> 00:05:47.000
At the same time that we had this decline in the price level, real income rose by about 85% or around 5% per year, one of the most rapid, prolonged rates of growth in U.S. history.

44
00:05:47.000 --> 00:05:58.000
Aside from infrequent discoveries of major new sources of gold, this inflationary trend was only interrupted during periods of major wars, such as the Napoleonic Wars that Britain fought.

45
00:05:58.000 --> 00:06:28.000
Ford and from as I said 1797 to 1821 Britain had gone off the gold standard and as a result did experience rapid inflation and also of course the US during the Civil War but yet after they returned to the gold standard prices then continued to fall and that didn't impede growth well that's the history of it okay there are many other instances of increases in or high rates of growth coinciding with

46
00:06:28.000 --> 00:06:57.000
What about the theory? The theory can be explained with a simple supply and demand diagram in which we put the total stock of money in the economy on the horizontal axis and the purchasing power of money, the value of a money unit, or the amount of various units of goods that can be purchased by a unit of money.

47
00:06:57.000 --> 00:07:02.000
If you put that on the price axis, that's equal to one over P.

48
00:07:02.000 --> 00:07:13.000
So, for example, if you pay $10 for a compact disc, well then the value of money in terms of the compact disc is one-tenth of a compact disc.

49
00:07:13.000 --> 00:07:25.000
If a personal computer costs or has a price of $1,000, well then the value of money of a dollar in terms of personal computers is one-thousandth.

50
00:07:25.000 --> 00:07:29.560
One-one-thousandth of a personal computer.

51
00:07:29.560 --> 00:07:35.960
So as we said earlier in the week, the purchasing power of money is an array of alternative

52
00:07:35.960 --> 00:07:41.000
quantities of goods that can be purchased by a unit of money, in this case a dollar.

53
00:07:41.000 --> 00:07:42.520
So let's take a simple example.

54
00:07:42.520 --> 00:07:47.120
Let's say the quantity of gold at a given point in time is fixed, and so we draw a vertical

55
00:07:47.120 --> 00:07:53.640
supply of money, M. Let's have MS for money supply.

56
00:07:53.640 --> 00:07:56.280
And we have a certain demand for money, a certain amount of money that people wish to

57
00:07:56.280 --> 00:08:04.120
hold and wish to purchase with their labor and other goods that they're selling.

58
00:08:04.120 --> 00:08:15.960
And let's say that the money supply in billions of dollars is $100 billion.

59
00:08:15.960 --> 00:08:20.880
Now what would happen if suddenly we had a 10% increase in the supplies of goods and

60
00:08:20.880 --> 00:08:24.160
and Services Produced in this Economy.

61
00:08:24.160 --> 00:08:27.280
Well, in effect, the sellers of those goods

62
00:08:27.280 --> 00:08:30.760
would want to sell those goods at going prices.

63
00:08:30.760 --> 00:08:34.640
That would mean you would need 10% more money

64
00:08:34.640 --> 00:08:37.120
for the economy to be able to absorb those goods.

65
00:08:37.120 --> 00:08:43.440
So in effect, if this is the money demand before growth, MD1,

66
00:08:43.440 --> 00:08:46.240
in effect, what would occur is that the demand for money

67
00:08:46.240 --> 00:08:49.400
would increase.

68
00:08:49.400 --> 00:08:52.400
So now the demand for money would be 10% greater.

69
00:08:52.400 --> 00:08:56.560
So now you would have quantity demanded for money

70
00:08:56.560 --> 00:08:58.880
at the given purchasing power of money,

71
00:08:58.880 --> 00:09:02.720
at the given amount that money can purchase, PPM 1.

72
00:09:02.720 --> 00:09:05.440
It would now be $110 billion.

73
00:09:05.440 --> 00:09:10.040
But there's no Fed to create this additional $10 billion

74
00:09:10.040 --> 00:09:11.120
that we need.

75
00:09:11.120 --> 00:09:13.440
So how did the gold standard handle that?

76
00:09:13.440 --> 00:09:16.080
Very simply.

77
00:09:16.080 --> 00:09:17.840
If I can direct your attention for a moment

78
00:09:17.840 --> 00:09:24.640
In the high-tech industries in the last 20 to 30 years, how did they handle the fact

79
00:09:24.640 --> 00:09:31.860
that the supply of personal computers and software and so on was increasing so rapidly

80
00:09:31.860 --> 00:09:36.380
that it was outstripping even the inflationary rate of growth of the money supply caused

81
00:09:36.380 --> 00:09:40.520
by the Fed in the 80s and 90s?

82
00:09:40.520 --> 00:09:42.940
How did those additional computers get sold?

83
00:09:42.940 --> 00:09:47.160
The point is that because of the technological advances and increase in investment in those

84
00:09:47.160 --> 00:10:07.160
So, again, to give you an idea of the magnitude of this fall, we can go back to history, recent history in this case, and I have statistics here, I think, I believe I do, yes, I do.

85
00:10:07.160 --> 00:10:29.160
A mainframe computer sold for $4.7 million in 1970, while today one can purchase a personal computer that is 20 times faster for less than $1,000.

86
00:10:29.160 --> 00:10:44.160
So we had a substantial price deflation in high-tech industries, and that did not impair the growth in those industries, this fall in prices, because it corresponded to falling costs due to technological advances.

87
00:10:44.160 --> 00:10:51.160
In fact, we can point out that there was an enormous expansion of profits, productivity and outputs in these industries.

88
00:10:51.160 --> 00:11:08.160
This is reflected in the fact that in 1980, computer firms shipped a total of just about 1.5 million PCs, while in 1999, their shipments exceeded 43 million units, so it increased 86 times.

89
00:11:08.160 --> 00:11:16.160
And that's despite the fact that quality-adjusted prices had fallen by over 90%.

90
00:11:16.160 --> 00:11:26.160
So the point is here, as people bring their goods to market, there's been an increase in supply of goods because there's been technological improvement, as I said, at lower costs.

91
00:11:26.160 --> 00:11:32.160
They bring these goods to market, what happens is exactly what happens in the high-tech industries, except it happens economy-wide.

92
00:11:32.160 --> 00:11:37.160
Or not necessarily economy-wide, in those industries in which you have growth.

93
00:11:37.160 --> 00:11:39.160
So their prices will begin to fall.

94
00:11:39.160 --> 00:11:46.160
As their prices fall, each dollar will be able to purchase more of that particular good than it did before.

95
00:11:46.160 --> 00:11:52.160
So, there's an excess demand for money, a so-called shortage of money, but it's only temporary on the market.

96
00:11:52.160 --> 00:11:59.160
What happens is that as the value of each dollar increases, we move up along the demand curve to this point.

97
00:11:59.160 --> 00:12:06.160
So that at the end of the process, prices are 10% lower, roughly 10% lower,

98
00:12:06.160 --> 00:12:09.680
And the purchasing power of money is roughly 10% higher.

99
00:12:09.680 --> 00:12:15.600
So each gold dollar can now purchase 10% more than it did before.

100
00:12:15.600 --> 00:12:17.040
Now, what does that mean?

101
00:12:17.040 --> 00:12:19.840
If you look at the total amount of goods that can be purchased,

102
00:12:19.840 --> 00:12:23.560
for example, if we have a situation where the good was originally,

103
00:12:23.560 --> 00:12:30.880
let's say, $10, so that means that $1 could purchase 1 tenth.

104
00:12:30.880 --> 00:12:41.880
And now it's $11, so now the dollar can purchase, I'm sorry $9 excuse me, the dollar can purchase

105
00:12:41.880 --> 00:12:45.240
approximately 10% more.

106
00:12:45.240 --> 00:12:48.000
What happens is that the real supply of money increases.

107
00:12:48.000 --> 00:12:54.640
The real supply of money is the money supply over the prices.

108
00:12:54.640 --> 00:13:03.360
So if we take this particular good, initially we had a money supply of $100 billion and

109
00:13:03.360 --> 00:13:07.760
we had a price of 10.

110
00:13:07.760 --> 00:13:14.640
So the number of units that could be purchased by that money supply was 10 billion.

111
00:13:14.640 --> 00:13:33.920
But as the price falls, if it falls to the $9, the same $100 billion of gold, which hasn't

112
00:13:33.920 --> 00:13:42.680
changed, there's no Fed, increasing the money supply, can now purchase over or around 11

113
00:13:42.680 --> 00:14:05.680
The Market Process will adjust the purchasing power of money so as to enable the additional goods and services to be sold on the market, and they will be sold profitably on the market because costs are also falling. That is the reason for economic growth.

114
00:14:05.680 --> 00:14:15.680
So that's the basic supply and demand theory that shows that the first argument against the gold standard is purely a myth.

115
00:14:15.680 --> 00:14:19.680
It's refuted by theory and by history.

116
00:14:19.680 --> 00:14:23.680
What about two? Under the gold standard, the quantity of money is arbitrarily determined.

117
00:14:23.680 --> 00:14:30.680
And what the Keynesians and monetarists generally mean by this is it's not determined by some central government agency

118
00:14:30.680 --> 00:14:51.680
Under the gold standard, as in the case of any other commodity on the market, costs of production, in conjunction with demand, determine the quantity of money.

119
00:14:51.680 --> 00:14:59.680
So I gave you an example here of the gold standard at a particular point in time.

120
00:14:59.680 --> 00:15:12.680
But if you look over a prolonged period of time, you'll find that the supply of gold does react to an increase in demand for gold.

121
00:15:12.680 --> 00:15:14.680
It takes a while to do that.

122
00:15:14.680 --> 00:15:22.680
So we have the purchasing power of money here again, and we have whatever the purchasing power may be at a given point in time,

123
00:15:22.680 --> 00:15:35.680
the point in time, the equilibrium purchasing power, and a certain money supply here, let's just call it M1 as the money supply, this is the money supply, this is the money demand, M is the quantity of money at a given point in time.

124
00:15:35.680 --> 00:15:43.680
Alright, let's say for a moment that there is a decrease in the cost of supplying gold.

125
00:15:43.680 --> 00:15:56.680
A better technique is discovered for abstracting gold from the ore, or possibly better mines are found, from which it's easier to extract the gold.

126
00:15:56.680 --> 00:16:01.680
For whatever reason now, you suddenly have a decrease in the cost of mining gold.

127
00:16:01.680 --> 00:16:04.680
Well, what would that mean?

128
00:16:04.680 --> 00:16:12.680
That would mean now that you would have an increase in supply of gold, as in any other, in the case of any other industry in the economy.

129
00:16:12.680 --> 00:16:22.400
So, you would have a shift to the right of the supply curve, to MS prime, let's say.

130
00:16:22.400 --> 00:16:31.360
You'd have more gold in the economy and, as a result, prices would rise, okay, 14.2.

131
00:16:31.360 --> 00:16:43.360
Now, how would this come about?

132
00:16:43.360 --> 00:16:52.200
What would happen is that as the price of extracting gold from the ground dropped, that

133
00:16:52.200 --> 00:17:00.520
would mean that you would have a situation where an ounce of gold could be purchased

134
00:17:00.520 --> 00:17:07.080
from the ground, could be gotten from the ground for less than an ounce of gold that

135
00:17:07.080 --> 00:17:10.560
you have to pay in wages.

136
00:17:10.560 --> 00:17:17.560
So now you would have higher, more workers, paying them the going wage rates, and you'll

137
00:17:17.560 --> 00:17:21.860
be a higher profit, in other words, to producing gold, just as it would be if the price of

138
00:17:21.860 --> 00:17:26.080
apples fell, or if the price of computers fell, you would expand the industry.

139
00:17:26.080 --> 00:17:30.360
And so gold mining would expand, and what would happen is that more gold would come

140
00:17:30.360 --> 00:17:39.360
and the price of gold or the value of gold would drop. In other words, there would be more gold in circulation and drive prices up.

141
00:17:39.360 --> 00:17:55.360
But that's not the end of the effect. Some of that additional gold, since gold is now cheaper, as the price, for example, of jewelry goes up and so on,

142
00:17:55.360 --> 00:18:06.360
It would now be more profitable to produce jewelry and more profitable to use gold in dentistry because those prices have risen.

143
00:18:06.360 --> 00:18:14.360
So part of the new gold would go to directly satisfying consumer wants and part of it would go into the money supply.

144
00:18:14.360 --> 00:18:22.360
In either case, you would have a higher price level but you would also have more goods that would be produced by gold.

145
00:18:22.360 --> 00:18:35.360
So, society would benefit. That would occur with any sort of a particular good, whether it's gold or any other type of commodity.

146
00:18:35.360 --> 00:18:39.360
Now, why is that arbitrary? Why do they say that the quantity of money is arbitrarily determined?

147
00:18:39.360 --> 00:18:43.360
It's not arbitrarily determined. It's determined by the market.

148
00:18:43.360 --> 00:18:49.360
On the other hand, I'm going to draw it here, if you had an increase in demand for gold, prices would fall.

149
00:18:49.360 --> 00:18:59.360
And as prices fell, the prices of those inputs or resources that you use to mine gold would fall.

150
00:18:59.360 --> 00:19:07.360
So you'd have a fall in the price of capital goods, a fall in the prices of the various raw materials and energy that you use to mine gold.

151
00:19:07.360 --> 00:19:10.360
What would that do to gold production?

152
00:19:10.360 --> 00:19:17.360
In the long run, it would be more profitable to mine gold from the existing mines, using existing techniques.

153
00:19:17.360 --> 00:19:25.360
So, when there's an increase in demand for gold, in the short run, yes, prices fall, but in the longer run, what tends to happen?

154
00:19:25.360 --> 00:19:36.360
As those prices fall, it spurs or stimulates the development of new sources of gold and also stimulates the production from existing gold mines.

155
00:19:36.360 --> 00:19:44.360
And as a result, you get an increase in the supply of gold that pushes prices up back towards their former level.

156
00:19:44.360 --> 00:19:48.360
Now what's so arbitrary about that? That's not arbitrary.

157
00:19:48.360 --> 00:19:57.360
Basically, what the critics of gold call arbitrary simply means that the quantity of gold is not determined by governments.

158
00:19:57.360 --> 00:20:10.360
It's determined by people's demands for gold and it's determined by the cost of gold based on technology and the availability of specific resources such as gold mines.

159
00:20:10.360 --> 00:20:23.360
I don't see that as arbitrary one bit. Thirdly, what about this whole idea that gold is a government price-fixing scheme on a large level?

160
00:20:23.360 --> 00:20:36.360
This is a particular criticism by Milton Friedman of the gold standard, but in fact, under a genuine gold standard, it's not price-fixing.

161
00:20:36.360 --> 00:21:05.360
If we go back to the 19th century when we had genuine gold standards existing in most of the world, or silver standards, but let's focus on gold, we had a situation where for at least for about a hundred years in the US from 1834 until 1933, the dollar was defined legally as equal to one twentieth of an ounce of gold.

162
00:21:06.360 --> 00:21:21.400
When people brought their gold into banks, they formed a contract with the bank to return

163
00:21:21.400 --> 00:21:26.000
their property when they redeemed the bank note.

164
00:21:26.000 --> 00:21:29.840
The bank note itself was not money under a genuine gold standard.

165
00:21:29.840 --> 00:21:35.580
It was a receipt that permitted you to redeem that note for money.

166
00:21:35.580 --> 00:21:39.820
You could use it as a money substitute in an exchange because it was more convenient.

167
00:21:39.820 --> 00:21:46.420
But it itself was not the money and people understood that.

168
00:21:46.420 --> 00:21:58.180
It's as if someone says the pink slip, the title to an automobile which changes hands.

169
00:21:58.180 --> 00:22:04.660
I can sell you my automobile, my Grand Prix competition series.

170
00:22:04.660 --> 00:22:11.660
I could sell you that, and here in Alabama give you the pink slip and the car could remain in New Jersey.

171
00:22:11.660 --> 00:22:16.660
I could store it for you for a few months, okay. I'd beat it into the ground at that point.

172
00:22:16.660 --> 00:22:24.660
But anyway, you wouldn't be deluded into believing that the pink slip, the so-called pink slip,

173
00:22:24.660 --> 00:22:30.660
which is the title to the car, is the car itself, okay. Obviously, it's a title to the car.

174
00:22:30.660 --> 00:22:38.660
So keeping that in mind, when all nations were on the gold standard, everybody had the same money.

175
00:22:38.660 --> 00:22:43.660
They just used different names to designate their unit of money.

176
00:22:43.660 --> 00:22:50.660
For example, the British pound was equal to one-fourth of an ounce of gold.

177
00:22:50.660 --> 00:23:00.660
The French franc was equal to one hundredth of an ounce of gold, and so on.

178
00:23:00.660 --> 00:23:12.660
So, for about a hundred years, the US dollar, the exchange rate between the US dollar was $4.86 per one British pound.

179
00:23:12.660 --> 00:23:23.260
Why was that? That wasn't arbitrary. There was no price fixing there. The reason why

180
00:23:23.260 --> 00:23:30.300
that exists is because there was five times the amount of gold in a British pound, defined

181
00:23:30.300 --> 00:23:35.100
as one fourth of an ounce, as there was in an American dollar, which was defined as one

182
00:23:35.100 --> 00:23:41.900
twentieth of an ounce. So, under the gold standard, the fixed exchange rates between

183
00:23:41.900 --> 00:23:49.060
Between the different goods is no different than the fixed exchange rate, it's not really

184
00:23:49.060 --> 00:23:53.180
an exchange rate but we'll call it that for the moment, the fixed exchange rate between

185
00:23:53.180 --> 00:24:03.180
let's say a nickel and a quarter.

186
00:24:03.180 --> 00:24:08.080
A nickel is defined as one-twentieth of a dollar, a quarter is defined as one-quarter

187
00:24:08.080 --> 00:24:24.080
5 nickels exchange for one quarter. That's not an exchange. That's not a government price-fixing scheme. That's simply a result of the laws of arithmetic.

188
00:24:24.080 --> 00:24:32.080
So Friedman is wrong under at least a genuine gold standard. That's not true of the Bretton Woods system.

189
00:24:32.080 --> 00:24:41.080
and we'll talk about some other gold standards in which it would be artificial price fixing, but under a genuine gold standard it is not a price fixing scheme.

190
00:24:41.080 --> 00:24:48.080
Fourth, the international gold standard subjects a country to alternating bouts of inflation and deflation.

191
00:24:48.080 --> 00:24:59.080
For example, if the U.S. were to run a surplus under the gold standard, gold would flow into the country, it would increase the money supply and drive prices up.

192
00:24:59.080 --> 00:25:09.080
The country that was losing gold that had the deficit, let's say that was Great Britain, would find that its money supply is shrinking because gold is falling out of the country and therefore its prices are falling.

193
00:25:09.080 --> 00:25:22.080
But we have to ask ourselves, why do these deficits and surpluses occur? Are they an act of God? No, of course not.

194
00:25:22.080 --> 00:25:32.080
Let's take the United States. The United States, just as the world was under the gold standard, the United States today is a single currency area using dollars.

195
00:25:32.080 --> 00:25:43.080
Do we worry about or even know whether, for example, New Jersey has a deficit or a surplus with California, or whether Nebraska has a deficit or a surplus with Indiana?

196
00:25:43.080 --> 00:25:47.080
Fortunately, state governments don't keep those kinds of statistics, so no one worries about them.

197
00:25:47.080 --> 00:26:07.080
The point is this, let's say that there's an increase in output in California, an increase in productivity because the high-tech industry is in Silicon Valley.

198
00:26:07.080 --> 00:26:22.080
And on the other hand, there's a fall in demand for output from Michigan because U.S. cars are no longer in demand.

199
00:26:22.080 --> 00:26:30.080
Well, Michigan's exports, the things that they sell to the rest of the country, would begin to decline.

200
00:26:30.080 --> 00:26:38.080
On the other hand, California's exports to the rest of the country, the computers and software, would increase.

201
00:26:38.080 --> 00:26:47.080
Michigan's citizens and so on would find that they had fewer dollars as their incomes fell.

202
00:26:47.080 --> 00:26:51.080
California's citizens on the other hand would find they had more dollars.

203
00:26:51.080 --> 00:26:57.080
So money would be redistributed from Michigan to California, but that's not deflation.

204
00:26:57.080 --> 00:27:14.080
Deflation in Michigan, inflation in California. That's simply a result of the fact that the demand for output in a certain area has fallen and therefore people's incomes in that area have fallen and people want to hold less money when their incomes are less so that the money supply falls.

205
00:27:14.080 --> 00:27:19.080
It's a voluntary action on the part of the people of Michigan who are losing income.

206
00:27:19.080 --> 00:27:27.080
Think about it, if your income was cut in half, hopefully it doesn't happen to you, but if it's cut in half, you're not going to hold as much cash anymore.

207
00:27:27.080 --> 00:27:36.080
So cash is going to flow out from your household for a while, until you have the proper reduced amount that maximizes your utility.

208
00:27:36.080 --> 00:27:42.080
Your household is going to have a deficit, if you lose your job or if you take a pay cut.

209
00:27:42.080 --> 00:27:56.080
On the other hand, if your household enjoys an increase in income, then because of the higher value of your labor that you're selling, you're going to find that money is going to flow in, you're going to hold a greater amount of money.

210
00:27:56.080 --> 00:28:08.080
Money is going to be redistributed, and always is, continually, from minute to minute, from those areas that are losing, the demand for whose products are falling, to those areas where the demand for their products are rising.

211
00:28:08.080 --> 00:28:20.080
As Hayek pointed out, that's not deflation or inflation, because deflation or inflation means an increase or a fall in the money supply in a closed area.

212
00:28:20.080 --> 00:28:30.080
So if the US is a dollar area and the number of dollars in the US falls, then you have monetary deflation, or if it rises, you have monetary inflation.

213
00:28:30.080 --> 00:28:36.080
Now, what's the closed area under the gold standard? It's not one country.

214
00:28:36.080 --> 00:28:47.080
Every country's money, despite the names that they use, the differing names, every country's money is in fact gold.

215
00:28:47.080 --> 00:28:58.080
So the reason why, for example, Great Britain would lose gold to the US under a genuine pure gold standard would be because the productivity in the US is increasing faster than in Great Britain.

216
00:28:58.080 --> 00:29:06.080
or let's say demand has shifted from textiles from Great Britain, world demand, to wheat.

217
00:29:06.080 --> 00:29:11.080
So wheat would be more valuable here in the U.S. Farmers' incomes would rise in the U.S.

218
00:29:11.080 --> 00:29:15.080
and that would be reflected in an increase in the amount of gold they hold.

219
00:29:15.080 --> 00:29:20.080
On the other hand, those people in the British textile industries, the stockholders and workers,

220
00:29:20.080 --> 00:29:25.080
would find their incomes are falling. When your incomes fall, you hold less money.

221
00:29:25.080 --> 00:29:29.080
So it's just a redistribution of gold within a closed system.

222
00:29:29.080 --> 00:29:34.080
Countries don't have alternating bouts of deflation and inflation.

223
00:29:34.080 --> 00:29:41.080
In fact, that occurs when you begin to get paper money pyramided on top of the gold standard.

224
00:29:41.080 --> 00:29:48.080
Then, if gold flows out, not only do you lose, let's say you lose $1 million worth of gold,

225
00:29:48.080 --> 00:29:51.080
but then what happens is that the banks, they lose gold,

226
00:29:51.080 --> 00:29:59.080
The banks, as they lose gold, then have to decrease their loans and decrease the amount of paper money and what that does is to exacerbate the outflow.

227
00:29:59.080 --> 00:30:08.080
Hayek pointed that out also. So it's fractional reserve banking that causes the added deflation or added inflation.

228
00:30:08.080 --> 00:30:19.080
It's not the gold standard itself. Under a pure gold standard, the whole world is a closed system and as part of the world gets richer, faster than other parts of the world,

229
00:30:19.080 --> 00:30:26.080
The gold itself doesn't cause people to be richer or poorer, the inflow of gold, it's a result of that, okay?

230
00:30:26.080 --> 00:30:39.080
And it's the same thing with your household, right? If your income increases, it's because whatever you're selling has become more valuable, and therefore, the consequence of that is that the income is increasing.

231
00:30:39.080 --> 00:30:44.520
If your income increases, it's because your good, whatever you're selling has become

232
00:30:44.520 --> 00:30:50.280
more valuable and therefore the consequence of that is that you get an increase in your

233
00:30:50.280 --> 00:30:55.840
money income and you hold the larger proportion, or you hold more money income over the year

234
00:30:55.840 --> 00:30:56.840
than you would have.

235
00:30:56.840 --> 00:31:05.800
What about the fifth objection to the gold standard?

236
00:31:05.800 --> 00:31:24.800
that it allegedly involves extremely high costs in terms of resources, resources both that are used to mine new gold as well as the opportunity cost of using gold not in jewelry or dentistry or in electronics but using it as money, okay?

237
00:31:24.800 --> 00:31:31.800
Adam Smith was one of the first economists to claim that the gold standard had a high resource cost.

238
00:31:31.800 --> 00:31:35.800
Believe it or not, the early Ludwig von Mises actually accepted this.

239
00:31:35.800 --> 00:31:38.800
What Adam Smith said was the following.

240
00:31:38.800 --> 00:31:47.800
Replacing gold with paper money is like replacing a highway that goes through fertile land with a highway in the sky.

241
00:31:47.800 --> 00:31:49.800
So we use that analogy.

242
00:31:49.800 --> 00:31:59.800
Because a highway in the sky wouldn't have the opportunity cost of causing land that could have been used to grow various crops

243
00:31:59.800 --> 00:32:06.800
Now to be used for a road, and the materials that are used in the road could also be used for other uses.

244
00:32:06.800 --> 00:32:15.800
So Smith basically said was this, as we, now he was in favor of a gold standard, but he wanted a fractional reserve gold standard, he was very comfortable with that.

245
00:32:15.800 --> 00:32:25.800
He says as we print more paper money and drive prices up in Great Britain, we send gold out of the country in exchange for capital goods, and that makes us more productive.

246
00:32:25.800 --> 00:32:37.800
So the paper money in effect allows us to create capital goods by pushing gold out to foreign countries in exchange for these capital goods that make our labor more productive.

247
00:32:37.800 --> 00:32:46.800
That was this argument. The French economists always rejected that argument and later on von Mises did and of course Rothbard did.

248
00:32:46.800 --> 00:32:53.800
There's a couple of responses to this argument.

249
00:32:53.800 --> 00:33:01.800
The first response is, well, even if gold standard has high resource costs,

250
00:33:01.800 --> 00:33:08.800
those high resource costs are justified as a way of preventing the government from inflating.

251
00:33:08.800 --> 00:33:26.800
If you lived in a world where, let's say, you could trust governments, which is a never-never land, not to inflate the money supply, not to do what's natural and try to increase spending and buy votes by simply printing new money.

252
00:33:26.800 --> 00:33:34.800
If you live in that kind of a world, then you might say, well, we really don't need a gold standard. We don't live in that kind of a world.

253
00:33:34.800 --> 00:33:47.800
Economists in the 19th century used to look on the gold standard as golden handcuffs to tie the hands of government and prevent the government from printing new money.

254
00:33:47.800 --> 00:34:01.800
It's like saying, you know, if we could just get rid of, let's put it this way, there's a lot of, there's very high resource costs, there's a lot of resources tied up in steel bicycle locks.

255
00:34:01.800 --> 00:34:16.800
If we got rid of the steel bicycle locks and simply put a piece of paper around it and wrote lock on it, wouldn't we have all the steel to produce other things that are useful to human beings?

256
00:34:16.800 --> 00:34:28.800
If we lived in a world where no one stole bicycles, yeah, sure, that's not the case in New Jersey. We put two locks on our bikes.

257
00:34:28.800 --> 00:34:39.800
Okay, so first of all, even if there are high resource costs, think of it as buying insurance against inflation.

258
00:34:39.800 --> 00:34:56.800
But secondly, as Roger Garrison has pointed out, these are economists that are making this point, and yet they're not taking into account the alternatives.

259
00:34:56.800 --> 00:34:58.800
Remember, you have to compare institutions.

260
00:34:58.800 --> 00:35:06.800
What about the resource costs of paper money that causes the economy to go through a business cycle

261
00:35:06.800 --> 00:35:14.800
in which you have inflation and misdirection of capital that is then revealed in a recession and layoffs of workers?

262
00:35:14.800 --> 00:35:22.800
I would venture to say that the resource costs that we've suffered from paper money business cycles,

263
00:35:22.800 --> 00:35:29.360
and business cycles that are induced by paper money are greater than the resource cost of

264
00:35:29.360 --> 00:35:32.360
a gold standard.

265
00:35:32.360 --> 00:35:39.000
But beyond that, and actually this is Roger Garrison's point, what happened when we had

266
00:35:39.000 --> 00:35:50.160
state inflation in the 1970s and beyond, when we had crises in the 1980s, when we had financial

267
00:35:50.160 --> 00:35:59.160
What do people do when they're confronted with rapid inflation or fear of bank collapses and financial collapses?

268
00:35:59.160 --> 00:36:01.160
Well, they rush out and they buy gold, don't they?

269
00:36:01.160 --> 00:36:06.160
In fact, in the late 1970s, the price of gold shot up to around $800 an ounce.

270
00:36:06.160 --> 00:36:10.160
What did that do to the amount of resources in gold mining?

271
00:36:10.160 --> 00:36:14.160
It pushed more resources into gold mining.

272
00:36:14.160 --> 00:36:19.160
Why? Because people wanted to use gold as a hedge.

273
00:36:19.160 --> 00:36:26.160
So, governments haven't gotten rid of their gold. All governments hold big stocks of gold.

274
00:36:26.160 --> 00:36:36.160
I don't see governments selling that gold off, allowing the market to use that gold to produce more products for dentistry, more electronics, and so on.

275
00:36:36.160 --> 00:36:44.160
In fact, the stocks of gold held now out of production may be greater than they were under the gold standard.

276
00:36:44.160 --> 00:36:46.460
Resources devoted to gold mining might be greater.

277
00:36:46.460 --> 00:36:49.260
You don't know what would happen under the gold standard.

278
00:36:49.260 --> 00:36:57.160
So first, so we can respond is, first of all, even if it is high, that is resource cost.

279
00:36:57.160 --> 00:36:59.760
It's a form of insurance against government inflation.

280
00:36:59.760 --> 00:37:10.360
Two, government fiat money inflation has caused repetition of the business cycle to recur again and again.

281
00:37:10.360 --> 00:37:18.360
And that has resource cost, and no monetarist has tried to add that up and compare that to the resource cost of gold,

282
00:37:18.360 --> 00:37:24.360
though they have come up with figures, Friedman has and others have, of what the resource cost of gold are,

283
00:37:24.360 --> 00:37:27.360
but you want to compare it to something, to the alternative institution.

284
00:37:27.360 --> 00:37:33.360
And finally, paper money doesn't save on the resource cost of gold because people use gold as a hedge.

285
00:37:33.360 --> 00:37:37.360
It's the first hedge against inflation or against crisis.

286
00:37:37.360 --> 00:37:41.880
Lastly, the gold standard results in high interest rates that discourage investment and

287
00:37:41.880 --> 00:37:44.400
retard economic growth.

288
00:37:44.400 --> 00:37:47.000
Basically this is a Keynesian criticism.

289
00:37:47.000 --> 00:37:53.080
Again, if you have a gold standard, especially a genuine pure gold standard, it's impossible

290
00:37:53.080 --> 00:37:58.360
for the Fed to increase bank reserves and push down interest rates, bringing about a

291
00:37:58.360 --> 00:38:00.000
business cycle.

292
00:38:00.000 --> 00:38:04.800
And we know in the short run of the business cycle, you do seem to get a boom in output.

293
00:38:04.800 --> 00:38:06.800
And that's what they're talking about.

294
00:38:06.800 --> 00:38:09.920
Alan Greenspan would not be able to manipulate interest rates.

295
00:38:09.920 --> 00:38:11.320
Well, I think that's a good thing.

296
00:38:11.320 --> 00:38:14.760
I think it's a good thing not to have overinvestment.

297
00:38:14.760 --> 00:38:26.200
So basically, the response to that is that we don't want low interest rates if low interest rates are the result of manipulation by central banks.

298
00:38:26.200 --> 00:38:32.720
Because low interest rates result in misallocation of resources and eventual recession.

299
00:38:32.720 --> 00:38:39.720
So those are my critiques of the objections to the gold standard.

300
00:38:39.720 --> 00:38:44.720
Let's talk about returning to the gold standard.

301
00:38:44.720 --> 00:38:53.720
I think this is an interesting and important and unresolved area of the theory of the gold standard.

302
00:38:53.720 --> 00:39:00.720
The thing that we do not want to do is to return to what we might call a pseudo-gold standard or a phony gold standard.

303
00:39:00.720 --> 00:39:12.720
and the gold standard. Because when that breaks down, like when Bretton Woods broke down, they will blame, that is the Keynesians and monetarists and others, will blame the gold standard for the breakdown.

304
00:39:12.720 --> 00:39:22.720
So if you return to a gold standard, you want to go back to a genuine gold standard. So let's look at some of these plans to return to pseudo-gold standards.

305
00:39:22.720 --> 00:39:46.720
When Alan Greenspan first took office as chairman of the Fed, he and others on the Board of Governors of the Fed, Wayne Angel being someone else, began to talk about using the price of gold as one of a number of indicators of inflation or deflation, along with some other commodity prices.

306
00:39:46.720 --> 00:40:03.720
So if the price of gold was suddenly rising, that would indicate to Greenspan and the others on the Federal Open Market Committee that there was inflation that is imminent in the U.S. economy.

307
00:40:03.720 --> 00:40:12.720
So that would indicate to them, ideally, that they should drain reserves from the banking system and slow down the rate of growth in the money supply.

308
00:40:12.720 --> 00:40:22.720
Well, that's not a real gold standard. Just looking at gold as one price among many is certainly not a real gold standard.

309
00:40:22.720 --> 00:40:29.720
And so we can criticize it as it really does still leave the monopoly of money squarely in the hands of the Fed.

310
00:40:29.720 --> 00:40:33.720
It's just another indicator to them. They're using it as an indicator.

311
00:40:33.720 --> 00:40:40.720
Also, it makes central bank policy gold-plated, meaning that it's not a true gold standard.

312
00:40:40.720 --> 00:40:52.720
The true gold standard is not a gold standard under there, but it opens a gold standard for criticism, so gold can be blamed for the inevitable failure of this.

313
00:40:52.720 --> 00:40:57.720
Now, we came a little bit closer in the early 1980s to a gold standard.

314
00:40:57.720 --> 00:41:09.720
President Reagan's advisors, the supply-siders, most prominently Arthur Laffer, Robert Mundell and Jack Kemp and other writers at the Wall Street Journal,

315
00:41:09.720 --> 00:41:26.720
were pushing for what they called a new Bretton Woods, which was a distorted form of the gold standard in which only the U.S. dollar was, as I said, convertible into gold and then only for foreign governments and official institutions, not for American citizens.

316
00:41:26.720 --> 00:41:32.720
Plus, of course, there would be no gold coin in circulation and so on.

317
00:41:32.720 --> 00:41:58.720
So they were pushing Reagan to institute a new Bretton Woods and in fact Reagan did convene a commission to study this question and they held hearings and it was dominated of course by monetarists and other right-wing Keynesian Republican economists and they came out, the majority report came out against instituting a new gold standard.

318
00:41:58.720 --> 00:42:10.720
Murray Rothbard was asked to testify and he gave a talk and was one of the people that wrote up the Minority Report.

319
00:42:10.720 --> 00:42:16.720
I think George Reisman also testified before Congress on this point.

320
00:42:16.720 --> 00:42:21.720
And again, he was one of the few that argued for going back to a genuine gold standard.

321
00:42:21.720 --> 00:42:27.720
What was the blueprint, though, that these supply-siders set forth?

322
00:42:27.720 --> 00:42:32.720
One thing about the supply-siders, they want sound money and plenty of it.

323
00:42:32.720 --> 00:42:36.720
So they want a gold standard, but they want a lot of money.

324
00:42:36.720 --> 00:42:41.720
They want a gold standard that can be inflated in some sense.

325
00:42:41.720 --> 00:42:47.720
This is called a Laffer blueprint. He wrote a blueprint on this, Arthur Laffer.

326
00:42:47.720 --> 00:42:54.720
He wants the Fed to convert dollars into gold at a fixed price, a range.

327
00:42:54.720 --> 00:43:04.720
The price of gold is a price fixing scheme. He wanted the Fed to fix the price of gold, let's say $400 per ounce, plus or minus $10.

328
00:43:04.720 --> 00:43:20.720
So, if suddenly the price of gold began to rise towards $410, that would indicate to the supply-siders, who believed that gold was a very sensitive indicator of what was going to happen to the rest of the prices in the economy very quickly,

329
00:43:20.720 --> 00:43:43.720
They would look on that rise of the price of gold as a warning that inflation was about to break out and at that point then they would go out into the market and they would sell gold and dollars would return and the monetary, the money supply would be reduced.

330
00:43:43.720 --> 00:43:54.720
On the other hand, if the price of gold fell towards $390, that meant that we were going to have an inflation, or there was an impending deflation, excuse me,

331
00:43:54.720 --> 00:44:06.720
and the way they would react, the Fed in that case, would be to go into the market, print dollars and buy gold to drive the price back up to $400.

332
00:44:06.720 --> 00:44:14.720
So now gold really takes the place of government securities in open market operations.

333
00:44:14.720 --> 00:44:17.720
If you want to increase the money supply, well, you print dollars and you buy gold.

334
00:44:17.720 --> 00:44:20.720
If you want to decrease the money supply, you sell gold for dollars.

335
00:44:20.720 --> 00:44:24.720
And you try to keep the price fixed at around $400.

336
00:44:24.720 --> 00:44:32.720
Also, they put in here, which they didn't really need, that there would be what was called a target reserve quantity,

337
00:44:32.720 --> 00:44:40.720
40% of the Fed's liabilities had to be covered by gold, so the Fed would have gold backing up 40% of its liabilities,

338
00:44:40.720 --> 00:44:47.720
which meant 40% of currency and circulation plus bank reserves.

339
00:44:47.720 --> 00:44:58.720
And then the Fed would retain full discretion in monetary policy as long as this target reserve quantity of gold was within 10% of 40%.

340
00:44:58.720 --> 00:45:12.160
What would happen if the amount of gold suddenly fell, meaning that there was inflation below

341
00:45:12.160 --> 00:45:18.360
30%, well then at that point the Fed could not, its liabilities would be frozen, it could

342
00:45:18.360 --> 00:45:27.040
not create any more reserves, it was an attempt to force the Fed to restrict its inflation.

343
00:45:27.040 --> 00:45:42.040
If the gold backing fell below 20% of its liabilities, then they had to reduce the monetary base by 1% per year.

344
00:45:42.040 --> 00:45:47.040
In other words, they had to begin to actually reduce the money supply.

345
00:45:47.040 --> 00:45:57.040
And finally, if the target reserve quantity fell below 10% of the Fed's liabilities, well, what would happen? Nothing.

346
00:45:57.040 --> 00:46:01.040
What would happen would be, well, you have to raise the price of gold now.

347
00:46:01.040 --> 00:46:08.040
So there was no punishment for inflating to the point where they began to lose their gold stock.

348
00:46:08.040 --> 00:46:14.040
So this was not a real gold standard. This was a phony gold standard. It was a price-fixing scheme.

349
00:46:14.040 --> 00:46:23.040
In fact, some of the supply-siders later on said, you know what, we don't even have to buy and sell gold or keep gold, all we have to do is look at the price of gold.

350
00:46:23.040 --> 00:46:34.040
So, if the price of gold went towards $410, we'll simply take government securities, sell them on the market, absorb some of the dollars and bring the price of gold back to $400.

351
00:46:34.040 --> 00:46:40.040
And if we had a deflation, we would do the opposite. We'd go out and we'd print money and we'd buy securities.

352
00:46:40.040 --> 00:46:45.040
So that gold didn't need to be what they call the intervention asset.

353
00:46:45.040 --> 00:46:51.040
So they're talking in bureaucratic, technocratic terms.

354
00:46:51.040 --> 00:46:59.040
They had no intention of allowing gold to be the real medium of exchange.

355
00:46:59.040 --> 00:47:04.040
Well, it could be the intervention asset, the asset that you buy and sell to keep the price of gold fixed,

356
00:47:04.040 --> 00:47:07.040
or you could use government securities. It didn't matter.

357
00:47:07.040 --> 00:47:32.040
And one of these supply side, who happened to be my professor at Rutgers when I was getting my PhD, his name was Mark Miles, he wrote a book on this and he basically came out and said look we don't need gold in this scheme, we just need to use government securities to fix the price of gold.

358
00:47:32.040 --> 00:47:39.040
So that, Friedman would be right, and the monetarists would be right, to call that a price fixing scheme.

359
00:47:39.040 --> 00:47:48.040
In fact, later on, I named it in price rule monetarism. It's simply monetarism.

360
00:47:48.040 --> 00:47:56.040
Regular monetarism, the brand that Friedman promotes, is quantity rule monetarism.

361
00:47:56.040 --> 00:48:03.040
Under Friedman's scheme, you would simply increase the money supply at about 3% per year to try to keep the price level stable.

362
00:48:03.040 --> 00:48:09.040
Under price rule monetarism, you'd keep the price of gold fixed to try to keep the price level stable.

363
00:48:09.040 --> 00:48:17.040
So it was basically monetarism which took into account the fact that the demand for money may change, which quantity rule monetarism doesn't take into account.

364
00:48:17.040 --> 00:48:21.040
And if the demand for money changes, well then you're going to have a change in the price of gold.

365
00:48:21.040 --> 00:48:29.040
So, in fact, in Mark Miles' book on this, he said, we're a better brand of monetarism, okay?

366
00:48:29.040 --> 00:48:35.040
The monetarists want to increase money supply at the same rate as the quantity of goods are increasing.

367
00:48:35.040 --> 00:48:39.040
But what if the velocity of circulation is changing?

368
00:48:39.040 --> 00:48:42.040
There's no way to adjust the quantity rule.

369
00:48:42.040 --> 00:48:47.040
But with a price rule, that would affect the price of gold, and we could react to it.

370
00:48:47.040 --> 00:48:56.040
All right, so it came down to basically giving, coming up with a rule to kind of, like monetarism, to restrain a government monopoly.

371
00:48:56.040 --> 00:49:04.040
And any rule that you try to come up with to restrain a government monopoly is simply a pious wish.

372
00:49:04.040 --> 00:49:11.040
It's basically saying, please don't increase the money supply too fast if you're a monetarist, or please don't let the price of gold rise too high.

373
00:49:11.040 --> 00:49:14.040
There's nothing to stop the Fed from doing that.

374
00:49:14.040 --> 00:49:26.040
People aren't there ready to turn in their dollars for gold like in the old days, causing the Fed to fear, and the bank is in the fear that they're going to lose their gold reserves.

375
00:49:26.040 --> 00:49:30.040
So those are the fake gold standards.

376
00:49:30.040 --> 00:49:36.040
Now, there was an interesting plan, I think which Guido Hulsman supports.

377
00:49:36.040 --> 00:49:46.040
I think it was maybe introduced by Henry Hazlitt, it was later picked up by Hans Sendholz and by Professor Timberlake, who I did criticize this morning.

378
00:49:46.040 --> 00:49:54.040
He actually at one time promoted this plan. I thought it's a step in the right direction, away from monetarism.

379
00:49:54.040 --> 00:50:04.040
It's called parallel private gold standard. Basically, you don't get rid of the monopoly fiat money.

380
00:50:04.040 --> 00:50:12.040
What you do is you allow individuals, and you give them the means, to make exchanges and contracts in gold.

381
00:50:12.040 --> 00:50:15.040
Now how would that work?

382
00:50:15.040 --> 00:50:20.040
And Hazlitt and Sennholz's, and even I think in Timberlake's plan, you would abolish the Fed.

383
00:50:20.040 --> 00:50:22.040
You get rid of the Fed.

384
00:50:22.040 --> 00:50:28.040
Now, you wouldn't get rid of the Fed notes, and you wouldn't get rid of fractional reserve banking.

385
00:50:28.040 --> 00:50:37.040
You simply abolish the Fed, which means that you could never have any further increase in bank reserves or currency.

386
00:50:37.040 --> 00:50:39.040
They would be frozen.

387
00:50:39.040 --> 00:50:49.040
So you do get rid of the agency that can increase these things, though the government treasury could increase them if it wanted to, but you get rid of the Fed.

388
00:50:49.040 --> 00:50:52.040
And then you freeze the monetary base.

389
00:50:52.040 --> 00:51:00.040
There's no more Fed notes, there's no more Fed deposits which are held by banks as reserves, all that's gone.

390
00:51:00.040 --> 00:51:05.040
You then convert member bank reserve deposit accounts into Fed notes.

391
00:51:05.040 --> 00:51:13.040
In other words, if your bank is holding a certain amount of reserves as 10% backing for the checking deposits that you have,

392
00:51:13.040 --> 00:51:17.040
they would go and get Fed notes in return.

393
00:51:17.040 --> 00:51:25.040
So you got rid of the Fed deposit, you get rid of the Fed, the only reserve now is actual Fed notes, and that's frozen.

394
00:51:25.040 --> 00:51:29.040
You can't change the number of them in the economy because there is no Fed to do that.

395
00:51:29.040 --> 00:51:32.040
I like that.

396
00:51:32.040 --> 00:51:40.040
Now the Treasury has 260 million ounces of gold, which it stole from the American people in 1933,

397
00:51:40.040 --> 00:51:51.040
When President Roosevelt forced all Americans to turn their gold in for Fed notes, you would do one of two things.

398
00:51:51.040 --> 00:52:01.040
You would either give it away proportionally, a proportional amount of this gold to each American citizen, which if, take an example,

399
00:52:01.040 --> 00:52:08.040
if you have 260 million citizens and there's 260 million ounces of gold, each person would get one ounce.

400
00:52:08.040 --> 00:52:14.040
Or you could sell it, but whatever you do, you have to get it into private hands.

401
00:52:14.040 --> 00:52:16.040
You would then abolish legal tender laws.

402
00:52:16.040 --> 00:52:23.040
In other words, people would no longer be forced to accept for their debts paper Fed notes.

403
00:52:23.040 --> 00:52:29.040
And you would make gold clauses in contracts enforceable.

404
00:52:29.040 --> 00:52:53.040
So, if myself and Simon made a contract in gold that I would pay him next week for that scarf, one-tenth of an ounce of gold, I love that scarf, anyway, so he gave me the scarf and then I was going to pay him a tenth of an ounce of gold next week.

405
00:52:53.040 --> 00:52:59.040
I could not come to him and say, I'm paying in dollars, in paper dollars, because they're legal tender.

406
00:52:59.040 --> 00:53:09.040
They're not legal tender any longer, so I can't force him to take them in payment, as you can today, and the gold clause is enforced.

407
00:53:09.040 --> 00:53:19.040
Now, according to Sennholz, Hazlitt, I think, I believe Guido, once you get rid of the legal tender laws and you get gold in the people's hands, then you can have two monies.

408
00:53:19.040 --> 00:53:29.040
Then people can take the gold if they wish and they can begin to deposit it in banks or have it minted privately and begin to use it.

409
00:53:29.040 --> 00:53:33.040
Now, I have an objection to this. I think it's a pretty strong objection.

410
00:53:33.040 --> 00:53:37.040
And Murray Rothbard has voiced an objection to this kind of a scheme.

411
00:53:37.040 --> 00:53:40.040
First of all, you get rid of the Fed. Alright.

412
00:53:40.040 --> 00:53:46.040
The government can still at some point, I mean, people are still tied to these notes.

413
00:53:46.040 --> 00:53:51.040
These Fed notes are dollars in their minds.

414
00:53:51.040 --> 00:53:59.360
So if there is some sort of national emergency, quote unquote, if we expand the war on terrorism

415
00:53:59.360 --> 00:54:05.280
and they want to finance a greater deficit, or if there's a recession for some reason

416
00:54:05.280 --> 00:54:11.880
and they want to push down interest rates, they can, remember this is paper, they can

417
00:54:11.880 --> 00:54:19.320
have Congress pass an emergency exception to the rule that these liabilities have to

418
00:54:19.320 --> 00:54:25.320
be frozen and the Treasury can print them up and finance a deficit with them.

419
00:54:25.320 --> 00:54:33.960
So you don't get rid of the paper dollar, but more importantly, if it actually begins

420
00:54:33.960 --> 00:54:40.340
to work and these things are frozen for time, why would people use gold?

421
00:54:40.340 --> 00:54:48.100
You and I and businessmen and everyone in the economy think, calculate, compare in terms

422
00:54:48.100 --> 00:54:49.600
of dollars.

423
00:54:49.600 --> 00:54:55.940
So if you go back to the regression theorem, somehow if you want to get gold back into circulation

424
00:54:55.940 --> 00:54:59.740
as money and not just give it back to people, if you want to get it back into circulation

425
00:54:59.740 --> 00:55:05.000
as money, what you need to do is to make them think of gold as dollars again.

426
00:55:05.000 --> 00:55:06.500
How do you do that?

427
00:55:06.500 --> 00:55:10.500
You have to establish a link between the dollar and the gold.

428
00:55:10.500 --> 00:55:17.500
Under the parallel standard, all you have to do is have gold over here and you still have these dollars that people have been using all along.

429
00:55:17.500 --> 00:55:21.500
This is a potential problem with this.

430
00:55:21.500 --> 00:55:31.500
I'm still willing to entertain this as one way of going back because no one has come up, I think, with the perfect way of going back to gold.

431
00:55:31.500 --> 00:55:43.500
This would work if we had a horrendous inflation. If we had a very, very bad hyperinflation, then people would have the gold in their hands and they would be able to begin to use it in exchange.

432
00:55:43.500 --> 00:55:52.500
But the whole point is to freeze the Fed notes and not allow inflation any longer. So I don't see how you would get gold back into circulation.

433
00:55:52.500 --> 00:56:02.500
Now, very interestingly, some of the free bankers have said, initially they said, well, we want free banking, the Austrian free bankers like George Selgin, Larry White, Steve Horowitz.

434
00:56:02.500 --> 00:56:15.500
They initially said, we want gold as at the base of our free banking system. But then George Selgin said, you know what, and I don't think the others have said this, we don't really need gold.

435
00:56:15.500 --> 00:56:21.100
If we get rid of the Fed and freeze the amount of paper dollars we have in the economy now,

436
00:56:21.100 --> 00:56:27.200
then they can serve as the base of the free banking system.

437
00:56:27.200 --> 00:56:30.180
So we just have this paper, and if they wear out, then the government will replace only

438
00:56:30.180 --> 00:56:33.180
the ones that wear out and so on.

439
00:56:33.180 --> 00:56:38.020
So the problem is that it ignores the regression theorem, ignores the fact that people love

440
00:56:38.020 --> 00:56:44.740
the dollar, are used to the dollar, and compute and calculate and exchange in terms of dollars.

441
00:56:44.740 --> 00:56:59.740
Secondly, it still leaves the Fed notes in existence, which allows government at some point, because people believe it's money, to increase the money supply, by having the Treasury print up new Fed notes.

442
00:56:59.740 --> 00:57:08.740
Let's take Ludwig von Mises' plan. Ludwig von Mises liked the currency school, but he just believed that they didn't go far enough.

443
00:57:08.740 --> 00:57:21.740
Remember the currency school, what they wanted to do was, even though there were unbacked notes in circulation, they wanted any new note that came into circulation to be 100% backed by gold.

444
00:57:21.740 --> 00:57:28.740
But what they forgot was that checking account money is also part of the money supply.

445
00:57:28.740 --> 00:57:32.740
And banks can increase checking account money and cause business cycles that way.

446
00:57:32.740 --> 00:57:40.740
So Von Mises recognized that and he said he wanted a strict currency school gold standard.

447
00:57:40.740 --> 00:57:47.740
He put forth a plan in 1953 for the United States in an epilogue to his book, The Theory of Money and Credit,

448
00:57:47.740 --> 00:58:00.740
and in it he said we should impose a 100% reserve on banks for all future checking account deposits and currency.

449
00:58:00.740 --> 00:58:06.940
currency. If banks were allowed to issue bank notes, that also would have to be 100% back.

450
00:58:06.940 --> 00:58:12.260
All new notes and all new checking deposits. Whatever was unbacked at the time of the reform

451
00:58:12.260 --> 00:58:17.260
can stay unbacked because it's really only the new injections of money into the system

452
00:58:17.260 --> 00:58:23.780
that pushes down interest rates and creates the business cycle. He also, at the time,

453
00:58:23.780 --> 00:58:28.460
Americans couldn't buy and sell gold. We only got that right back in 1976. But anyway,

454
00:58:28.460 --> 00:58:32.620
He wanted to reestablish the freedom of buying and selling gold.

455
00:58:32.620 --> 00:58:35.260
Once that was done, then there would be a gold market in the United States, as there

456
00:58:35.260 --> 00:58:38.820
is today, and we could see then what the price of gold would be.

457
00:58:38.820 --> 00:58:45.340
So after a period of time, after let's say three months of a gold market, the U.S. government

458
00:58:45.340 --> 00:58:54.420
would announce that within another period of time, so within the month, the dollar would

459
00:58:54.420 --> 00:58:58.620
would be convertible at whatever the price of gold was after three months.

460
00:58:58.620 --> 00:59:03.340
So if it was $400 per ounce, then you would announce that in one month, anybody who wants

461
00:59:03.340 --> 00:59:10.820
to come to the bank and convert dollars for gold at the rate of 1 400th ounce of gold

462
00:59:10.820 --> 00:59:11.820
for a dollar.

463
00:59:11.820 --> 00:59:14.340
So banks would then be buying and selling gold.

464
00:59:14.340 --> 00:59:16.060
That would be a genuine gold standard.

465
00:59:16.060 --> 00:59:21.420
It would be a fractional reserve gold standard, but it would be a genuine gold standard.

466
00:59:21.420 --> 00:59:25.940
He would establish a conversion agency, not a central bank, but what he called a conversion

467
00:59:25.940 --> 00:59:28.980
agency, to buy and sell gold for dollars.

468
00:59:28.980 --> 00:59:31.420
So actually it wouldn't be the commercial banks initially that did it, it would be this

469
00:59:31.420 --> 00:59:34.420
conversion agency.

470
00:59:34.420 --> 00:59:40.420
Anyone who brought FedNotes to the bank or checks drawn on their checking account deposits

471
00:59:40.420 --> 00:59:46.500
at commercial banks, anyone who brought these to the conversion agency, would receive gold

472
00:59:46.500 --> 00:59:54.200
gold coin at the rate of one ounce of gold coin to $400 or if they wish they could sell

473
00:59:54.200 --> 00:59:57.700
gold for $400 to the conversion agency.

474
00:59:57.700 --> 01:00:02.220
The Fed could still exist but it would no longer be able to buy any more government

475
01:00:02.220 --> 01:00:03.220
bonds or securities.

476
01:00:03.220 --> 01:00:11.940
In other words, it could not print up money to perform open market operations with.

477
01:00:11.940 --> 01:00:15.020
For some reason he didn't say that we should get rid of the Fed, he said that the Fed could

478
01:00:15.020 --> 01:00:19.260
He would not interfere with the operations of the conversion agency.

479
01:00:19.260 --> 01:00:24.780
He would also have withdrawn all small denomination bills from circulation, and I guess he meant

480
01:00:24.780 --> 01:00:28.300
one dollar bills and five dollar bills, maybe ten dollar bills.

481
01:00:28.300 --> 01:00:32.180
And they would no longer, they could no longer be in circulation so that people would have

482
01:00:32.180 --> 01:00:34.860
to use gold for small purchases.

483
01:00:34.860 --> 01:00:37.540
So gold coins would be in people's pockets.

484
01:00:37.540 --> 01:00:44.100
Now of course, at the price of gold as it is today, you know, that, that would really

485
01:00:44.100 --> 01:00:51.100
The dollar is one four hundredth of an ounce of gold, so there's a link between the dollar and gold, people can still think in dollars, but now their dollar is defined legally as a weight of gold, so I think it's better than the parallel standard that I told you about.

486
01:01:14.100 --> 01:01:19.100
parallel gold standard I talked about, but it does leave the old Fed notes in existence

487
01:01:19.100 --> 01:01:22.980
and again the government can increase them.

488
01:01:22.980 --> 01:01:28.620
Now Rothbard, there's Rothbard 1 and there's Rothbard 2, there's two different plans that

489
01:01:28.620 --> 01:01:30.460
Rothbard puts forth.

490
01:01:30.460 --> 01:01:38.900
His newer plan is the following, this came out in his book, The Case Against the Fed.

491
01:01:38.900 --> 01:01:43.100
What he says is that we should liquidate the Fed, we have to get rid of the Fed, we have

492
01:01:43.100 --> 01:01:50.000
to cancel all its assets except the gold that it owns, and then we're going to re-price

493
01:01:50.000 --> 01:01:52.000
the gold.

494
01:01:52.000 --> 01:01:55.800
And the way we're going to determine the price of gold according to Rothbard would be to

495
01:01:55.800 --> 01:02:05.800
take the total amount of currency in the economy, and I just checked online today, at the end

496
01:02:05.800 --> 01:02:25.120
On May 30th, we had $707 billion of currency in the U.S. economy held by the public.

497
01:02:25.120 --> 01:02:36.240
Right into that, the ounces of gold owned by the Treasury, which is $260 million, and

498
01:02:36.240 --> 01:02:46.880
that would give you a price of $2,272 per ounce, enormously higher than the market price.

499
01:02:46.880 --> 01:02:51.120
I'll get to that point.

500
01:02:51.120 --> 01:02:54.040
So then what Rothbard would do is he would abolish the Fed, then he would call it all

501
01:02:54.040 --> 01:02:58.240
All Fed notes, at least you get rid of the Fed notes, and people bring their Fed notes

502
01:02:58.240 --> 01:03:02.680
in and exchange it for gold at that rate.

503
01:03:02.680 --> 01:03:08.820
For every $2,272 you would get an ounce of gold.

504
01:03:08.820 --> 01:03:12.600
So you and I would be able to do that as well as the banks.

505
01:03:12.600 --> 01:03:22.640
The banks that have reserve deposits at the Fed would also be able to turn them in for

506
01:03:22.640 --> 01:03:23.640
for Gold.

507
01:03:23.640 --> 01:03:38.780
Basically, what would happen is that all this gold would flow into the U.S. and automobiles

508
01:03:38.780 --> 01:03:47.160
and everything else would flow out of the U.S. until there was an equilibrium reached.

509
01:03:47.160 --> 01:03:52.440
And so prices in the U.S. would rise rapidly to adjust to this very high price of gold.

510
01:03:52.440 --> 01:03:54.920
That's one of the problems with this plan.

511
01:03:54.920 --> 01:04:00.840
But it would be a once in a fall inflation and it wouldn't create a business cycle because

512
01:04:00.840 --> 01:04:05.760
it would be going on through the banking system.

513
01:04:05.760 --> 01:04:08.320
So that's one of the problems with that.

514
01:04:08.320 --> 01:04:13.720
Now and it would leave fractional reserve banking.

515
01:04:13.720 --> 01:04:29.720
So, all the gold would either be held by people in their hands, or would be deposited in the banks and they could go on with their fractional reserve, whatever fractional reserve they wish they could hold, it would be a fractional reserve system still.

516
01:04:29.720 --> 01:04:40.720
Demand deposits would not be 100% backed by gold, only the currency notes would be transformed into gold itself, so you get rid of the Fed notes.

517
01:04:40.720 --> 01:04:48.480
So once you've got your gold and you deposit it in the bank, the bank wouldn't have to hold 100% reserves against your deposit.

518
01:04:48.480 --> 01:04:54.520
They could create checking accounts that were, let's say, 10% backed by gold dollars.

519
01:04:54.520 --> 01:04:59.680
There would no longer be a law limiting them to 10%.

520
01:04:59.680 --> 01:05:06.240
Whatever they thought would be prudent would be what they would decide as the back reserves.

521
01:05:06.240 --> 01:05:36.240
Rothbard's earlier plan would be to go back to a 100% gold standard and what he would have to do there is you would have to take the total amount of checking account money as well as currency and that would determine what the price of gold was and I looked again I looked online St. Louis Fed right now M1 stands at

522
01:05:36.240 --> 01:05:44.880
M1, which is basically currency plus demand deposits or cheque accounts, that's equal

523
01:05:44.880 --> 01:05:56.200
to $1,354 billion dollars, so basically $1.3 trillion dollars, okay?

524
01:05:56.200 --> 01:06:19.200
If you divided that by the amount of 260 million ounces of gold, you come out with an enormously high price of $5,209 per ounce.

525
01:06:19.200 --> 01:06:35.200
But now, all Fed notes would be redeemed at that rate, and Federal Reserve deposits, as well as the checking account money.

526
01:06:35.200 --> 01:06:40.200
Everything would be backed. Now, what would you do about savings accounts?

527
01:06:40.200 --> 01:06:48.200
Savings accounts could be turned into what they actually are. Really, they're a claim on the bank's assets, on the bank's loans.

528
01:06:48.200 --> 01:06:59.200
So you could turn them into a form of mutual fund. You could separate the bank into a 100% warehouse in which any notes they issue must be 100% backed by gold.

529
01:06:59.200 --> 01:07:07.200
Any checking accounts they issue must be 100% backed by gold. That would be, let's say, the deposit part of the bank.

530
01:07:07.200 --> 01:07:14.200
And on the other hand, you would have the loan part of the bank. And there, all the bank's loans would be there.

531
01:07:14.200 --> 01:07:25.200
and people would own, their savings accounts would be turned into rights to pro-rata shares or pro-rated shares of the bank's loans.

532
01:07:25.200 --> 01:07:29.200
And the same thing with their certificates of deposit.

533
01:07:29.200 --> 01:07:32.200
So they would become more like mutual funds.

534
01:07:32.200 --> 01:07:40.200
So the banks could take in money and loan it out, but they would only do that through their loan department.

535
01:07:40.200 --> 01:07:52.200
That's what the Currency School did. They separated the Bank of England into a deposit department, I'm sorry, into a deposit or issue, they call it an issue department and a loan department.

536
01:07:52.200 --> 01:08:08.200
So you'd have 100% back money and you would still have banks able to accept investments or savings from clients and then to loan them out of interest and pay the client's interest.

537
01:08:08.200 --> 01:08:22.200
In the same way that mutual funds do that, and money market mutual funds are not part of the money supply, and neither would be the loan banking operations that wouldn't cause any inflation at all.

538
01:08:22.200 --> 01:08:32.200
Also, you then could abolish the FDIC because the banks are, all deposits are 100% backed, there's 100% reserve banking.

539
01:08:32.200 --> 01:08:39.000
Banking, you would abolish the mint and have private mints, minting coins, and you would

540
01:08:39.000 --> 01:08:44.920
transform the savings deposits either into mutual funds or you could tell people, we're

541
01:08:44.920 --> 01:08:49.760
going to turn them into certificates of deposit.

542
01:08:49.760 --> 01:08:55.360
So for example, if the banks, the average maturity of the bank's loans are nine months,

543
01:08:55.360 --> 01:09:00.760
then you would tell people, well, you can't get your money out for nine months.

544
01:09:00.760 --> 01:09:12.760
And then they would know from then on that anything that they put in that interest into the loan part of the bank would be in a certificate of deposit that would be a true investment.

545
01:09:12.760 --> 01:09:18.760
So you wouldn't have any inflation.

546
01:09:18.760 --> 01:09:23.760
Let me mention a plan that I recently came up with.

547
01:09:23.760 --> 01:09:34.160
In the old days, for example, the U.S. after the Civil War in 1879, Great Britain in 1821

548
01:09:34.160 --> 01:09:43.520
after the Napoleonic Wars, Great Britain again in 1925, they would go back to the gold standard

549
01:09:43.520 --> 01:09:53.520
by simply deflating the money supply and going back at some lower price of gold than was

550
01:09:53.520 --> 01:09:58.520
is existing during the period of non-convertibility.

551
01:09:58.520 --> 01:10:03.520
Now, there was a problem because of unions in 1925.

552
01:10:03.520 --> 01:10:08.520
There was no problem going back after the Civil War in 1879 or 1821.

553
01:10:08.520 --> 01:10:12.520
There was a little bit of a problem with the deflation, but it was nothing like it was in Britain in 1925.

554
01:10:12.520 --> 01:10:19.520
So all economists today look back at 1925 and say it's wrong to go back to the gold standard,

555
01:10:19.520 --> 01:10:24.520
You're a gold standard economist by deflating, trying to deflate the money supply.

556
01:10:24.520 --> 01:10:27.520
Even Rothbard and Mises believe that.

557
01:10:27.520 --> 01:10:38.520
And let me just read you a little, or some comments by Rothbard and Mises.

558
01:10:38.520 --> 01:10:41.520
Also Hayek has the same view.

559
01:10:41.520 --> 01:10:47.520
Mises opposed the deflationist policy and went on to argue that it was erroneous.

560
01:10:47.520 --> 01:10:55.520
Even in the case in which a country was attempting to revalue its depreciated currency in order to return to the gold standard at the previous mid-poor.

561
01:10:55.520 --> 01:11:02.520
To avoid monetary contraction, Mises favored a restoration of gold parity at or near the currently prevailing price of gold.

562
01:11:02.520 --> 01:11:09.520
And we saw that was his plan. Okay, figure out what the price of gold is right now and then let's go back.

563
01:11:09.520 --> 01:11:16.520
Even Murray Rothbard, although an enthusiastic proponent of bank credit deflation, that is, he likes when banks fail

564
01:11:16.520 --> 01:11:26.020
and you get bank credit deflation, that is a disappearance of these unbacked bank deposits.

565
01:11:26.020 --> 01:11:39.520
However, he generally refrains from advocating a deliberate contraction of the money supplied by the Fed under an existing fiat money regime.

566
01:11:39.520 --> 01:11:50.520
So, for example, he referred to, quote, the crucial British error and, quote, fateful decision of returning to the gold standard in the 1920s at the pre-war parity.

567
01:11:50.520 --> 01:11:56.520
For Rothbard, the, quote, sensible thing to do would have been to recognize the facts of reality.

568
01:11:56.520 --> 01:12:07.520
The fact of the depreciated pound, franc, mark, and to return to the gold standard at a redefined rate, a rate that would recognize the existing supply of money and price levels, unquote.

569
01:12:07.520 --> 01:12:18.520
Additionally, in his proposals for the restoration of the 100% gold standard in the United States today, as I pointed out to you, a contraction of the supply of fiat dollars is avoided.

570
01:12:18.520 --> 01:12:23.520
He doesn't want to reduce the number of fiat dollars. He simply wants to increase the price of gold to back them up.

571
01:12:23.520 --> 01:12:28.520
But as we see, there are problems with increasing the price of gold to that great an extent.

572
01:12:28.520 --> 01:12:36.520
So, in thinking about this, I looked at another comment that Rothbard made that was very interesting.

573
01:12:36.520 --> 01:12:44.520
In talking about the kind of deflation that he's willing to accept, which is when banks fail, he doesn't want the Fed to bail them out.

574
01:12:44.520 --> 01:12:54.520
He doesn't want the Fed to contract the money supply deliberately, but if during a recession banks are failing, then allow that to happen and allow the money supply to fall.

575
01:12:54.520 --> 01:13:04.520
And so to defend this, he says, in a broad sense, this bank credit contraction takes away from the original course of gainers from credit expansion

576
01:13:04.520 --> 01:13:07.520
and benefits the original course, losers.

577
01:13:07.520 --> 01:13:13.520
While this will certainly not be true in every case, in the broad sense, much the same groups will benefit and lose,

578
01:13:13.520 --> 01:13:18.520
but in reverse order from that of the redistributive effects of credit expansion.

579
01:13:18.520 --> 01:13:23.520
Fixed income groups, widows and orphans, will gain, and businesses and owners of original factors

580
01:13:23.520 --> 01:13:26.520
previously reaping gains from inflation will lose.

581
01:13:26.520 --> 01:13:33.520
What does he mean by this? Well, as I showed you, according to Mises' step-by-step process, when you have inflation,

582
01:13:33.520 --> 01:13:42.520
Those people who receive the money first, and they're usually the government itself and its favorites in the economy, they benefit because prices haven't gone up yet.

583
01:13:42.520 --> 01:13:50.520
And people who receive the new money 18 months later or two years later are the ones that are hurt, especially people on fixed incomes who never get any of the new money.

584
01:13:50.520 --> 01:13:56.520
Because they have to pay higher prices during 18 months, or they have to pay higher prices forever because they're on fixed incomes.

585
01:13:56.520 --> 01:14:10.520
What Rothbard says is, if you reverse that, or allow that to be reversed, if you suddenly have a deflation, then those people who lose the money first, while prices are still high, they're the ones that lose.

586
01:14:10.520 --> 01:14:16.520
People on fixed incomes gain. The people who are hurt during the inflation gain during the deflation.

587
01:14:16.520 --> 01:14:35.520
Well, if that's true then, if the welfare of those people who were coercively expropriated by the inflation process, why not reverse the process and have the Fed do that?

588
01:14:35.520 --> 01:14:42.520
Now, so that if the Fed were to bring about a contraction of money, a slow contraction of money over time,

589
01:14:42.520 --> 01:14:46.520
you would have these welfare effects benefiting people that were hurt by the previous inflation.

590
01:14:46.520 --> 01:14:54.520
But also, you would lower the amount of dollars in the economy at the same time and make it easier to go back to gold at a lower price.

591
01:14:54.520 --> 01:14:59.520
So, let me just read you a little bit of my plan.

592
01:14:59.520 --> 01:15:10.520
Again, I haven't thought, it's not completely thought through, I think a lot more has to be done on this, so I wouldn't stand by it as a plan that I would want to implement.

593
01:15:10.520 --> 01:15:23.520
So it says, in order to analyze the case within the context of contemporary institutions, it is necessary to provide some technical details of the relationship between the Fed and the Treasury.

594
01:15:23.520 --> 01:15:27.020
Basically, the Treasury maintains two types of deposits.

595
01:15:27.020 --> 01:15:29.020
It has deposits at commercial banks.

596
01:15:29.020 --> 01:15:32.520
When you pay your taxes, those taxes go to the commercial banks.

597
01:15:32.520 --> 01:15:35.020
And it has deposits at the Fed.

598
01:15:35.020 --> 01:15:38.520
When they want to spend, they use their deposits at the Fed.

599
01:15:38.520 --> 01:15:42.020
They write a check on the Fed to buy the things that the government needs.

600
01:15:42.020 --> 01:15:49.020
Now, in between, when they take the money, the deposits out of the commercial banks,

601
01:15:49.020 --> 01:15:53.020
and they put them in the Fed, guess what happens to the money supply?

602
01:15:53.020 --> 01:16:01.020
Well, because the banks lose reserves, those reserves go back to the Fed, the money supply shrinks.

603
01:16:01.020 --> 01:16:08.020
Now, to prevent a deflation, what the Treasury does is to make sure that funds are flowing,

604
01:16:08.020 --> 01:16:13.020
that as you're taking funds out of the commercial banks to spend them through the Fed,

605
01:16:13.020 --> 01:16:16.020
the same amount of funds are flowing into the commercial banks, okay,

606
01:16:16.020 --> 01:16:20.020
so that the commercial banks' reserves don't fall, so they prevent a deflation.

607
01:16:20.020 --> 01:16:33.020
So my plan revolves around the treasury allowing, when they're spending money, allowing the reserves to decline and the money supply to shrink.

608
01:16:33.020 --> 01:16:36.020
So let me give you an example of what I mean by that.

609
01:16:36.020 --> 01:16:40.020
Let's say that you have $1,000 of fiat money in the economy.

610
01:16:40.020 --> 01:16:43.020
It's all held in commercial bank demand deposits.

611
01:16:43.020 --> 01:16:46.020
And that the required reserve ratio is 10%.

612
01:16:46.020 --> 01:16:55.020
In this economy, we have $1,000 of checking account money, that's the money supply, and $100 backing that up in the banks, so it's 10% reserves.

613
01:16:55.020 --> 01:17:03.020
If all banks are fully loaned out, they are holding $100 in required reserves in the reserve deposits at the Fed.

614
01:17:03.020 --> 01:17:12.020
When the Treasury shifts a surplus of, say, $20 to its general account at the Fed, it will leave the commercial banks with only $80.

615
01:17:12.020 --> 01:17:18.020
They have to pay the treasury in their reserves. The reserves flow out. $20 of reserves flow out.

616
01:17:18.020 --> 01:17:26.020
So now they only have $80 of reserves and they have to reduce the money supply by the same 20%.

617
01:17:26.020 --> 01:17:32.020
Reserves fall from $100 to $80, so the money supply has to fall from $1,000 to $800. They call in loans.

618
01:17:32.020 --> 01:17:36.020
If you've had money in banking, you know how this works.

619
01:17:36.020 --> 01:17:48.020
So, what I advocate is that as this money supply shrinks, the Fed will then mandate an increase in the required reserve ratio to 12.5%.

620
01:17:48.020 --> 01:17:56.020
And simultaneously, the Treasury will spend its surplus funds by transferring them to the reserve deposits of the commercial banks,

621
01:17:56.020 --> 01:18:02.020
permitting them to meet the new reserve requirements with total bank reserves once again equal to $100.

622
01:18:02.020 --> 01:18:20.020
In other words, what would happen is that this would shrink, this is the money supply, it would shrink from $1,000 to, that's in time T1, it would be $800.

623
01:18:20.020 --> 01:18:33.020
If this is the reserves, the reserves would shrink initially from $100 to $80, but then the money would be spent and would get back into the commercial banks.

624
01:18:33.020 --> 01:18:42.020
But we don't want them to use that extra $20 in the multiple deposit expansion to increase the money supply back to $1,000.

625
01:18:42.020 --> 01:19:06.020
So the Fed would increase the reserve requirement up to 12.5%, meaning that now $80 would, or rather $100 would be necessary as money gets back into the commercial banks.

626
01:19:06.020 --> 01:19:34.020
In the following year, the Treasury again runs a surplus of $20, which at the new higher purchasing power of money exceeds in real terms the prior year's surplus.

627
01:19:34.020 --> 01:19:43.020
In the prior year, the surplus was $20. But now, since prices are lower, since you have a lower money supply, you have a greater real surplus.

628
01:19:43.020 --> 01:19:50.020
Following the same procedure of disposing of the fiscal surplus, the money supply shrinks by another 20%.

629
01:19:50.020 --> 01:20:03.020
So now it's down to $640. The Fed then raises the required reserve ratio to about 15%, so that the $100 now supports $640, and so on.

630
01:20:03.020 --> 01:20:09.020
So you can continue to reduce the money supply at some, maybe a slow rate, year after year.

631
01:20:09.020 --> 01:20:14.020
And that would mean that there are less dollars to back by gold.

632
01:20:14.020 --> 01:20:19.020
So when you go back to the gold standard, that would imply that you're going to go back at a lower gold price.

633
01:20:19.020 --> 01:20:22.020
Now, this has a problem too.

634
01:20:22.020 --> 01:20:30.020
The problem is, can we depend on the Fed to continue to engage in this policy of slowly contracting the money supply?

635
01:20:30.020 --> 01:20:35.540
Especially when we know that it's going to bring about a temporary recession, okay?

636
01:20:35.540 --> 01:20:39.620
Initially it will bring about a recession, but as people get used to the, and businesses

637
01:20:39.620 --> 01:20:46.340
get used to the slowly falling prices that will result, the depression will be a recovery

638
01:20:46.340 --> 01:20:47.700
in the economy.

639
01:20:47.700 --> 01:20:52.740
So, excuse me, my worry is that the Federal Reserve, we have a recession, you know, we

640
01:20:52.740 --> 01:20:59.980
have to stop this program and so it's the length of the program that's a problem, right?

641
01:20:59.980 --> 01:21:25.680
There's another possible solution here, and I'll just mention it and then end, and that is, in Argentina, when Argentina had problems with its currency board, back in the late 1990s, early 2000s,

642
01:21:25.680 --> 01:21:36.680
So what happened was Argentina had approximately $70 billion worth of pesos and dollars.

643
01:21:36.680 --> 01:21:41.680
Now, remember Argentina backed their peso with American dollars.

644
01:21:41.680 --> 01:21:45.680
So whether you had a dollar checking account, which you could have in Argentina,

645
01:21:45.680 --> 01:21:53.680
or a peso checking account, the Argentine Central or the Argentine Currency Board had to pay off in dollars.

646
01:21:53.680 --> 01:22:03.680
But there was only five billion dollars because of the massive inflation had gone on.

647
01:22:03.680 --> 01:22:07.680
There was only five billion dollars backing up the seventy billion dollars of deposits.

648
01:22:07.680 --> 01:22:11.680
So you have your much greater deposits.

649
01:22:11.680 --> 01:22:19.680
Well, my recommendation, which I had written up for an Indian journal, was this.

650
01:22:19.680 --> 01:22:39.680
Give people back, the Argentine government, in this case dollar standard, and at the same time you have a situation where banks, when that money is put back into banks, have to back it up by 100% if they put it back in the checking accounts.

651
01:22:39.680 --> 01:22:52.680
And as I said, the savings component, the investment component of the bank's portfolio, whatever it doesn't have in reserves, turn that over to the people in the sense that make it into a mutual fund.

652
01:22:52.680 --> 01:22:59.680
The bank is bankrupt, the shareholders should have nothing, should have no assets, all those assets should go to the people.

653
01:22:59.680 --> 01:23:05.680
Alright, so I'll stop there and take about one or two questions.

654
01:23:05.680 --> 01:23:24.680
On your first about the policy of the gold standard, I would add number seven. A friend of mine said with a problem with the gold standard, gold fluctuates too much in value. So I tried to explain to him, no, it wasn't the gold.

655
01:23:35.680 --> 01:24:05.680
If you look at gold, then gold is the money, and it's simply the supply and demand for money that determines the value of gold at that point, and it doesn't fluctuate wildly at all, because the supply of gold doesn't change very rapidly, as we know, and people's demand for gold, if they trust the money, that doesn't change very rapidly, it changes every year as the economy grows, it changes slowly, and prices slowly fall, but the value of gold doesn't change under a gold standard, it changes under a paper standard.

656
01:24:05.680 --> 01:24:32.680
Well, that's a very good question. The reason why they did is because it didn't contradict the regression theorem.

657
01:24:32.680 --> 01:24:40.680
The euro, there was an exchange rate between the euro and each individual currency.

658
01:24:40.680 --> 01:24:48.680
So, in other words, the euro was based on the various national currencies.

659
01:24:48.680 --> 01:24:56.680
And they were fixed exchange rates, so you easily passed from, let's say, the franc to the euro.

660
01:24:56.680 --> 01:25:04.680
But if you just put euros into circulation, print them up, and there was no exchange rate,

661
01:25:04.680 --> 01:25:08.680
transitional exchange rate to the existing currencies, no one would accept the euro.

662
01:25:08.680 --> 01:25:14.680
Now, with gold, it's a little bit better because gold is bought and sold in terms of dollars.

663
01:25:14.680 --> 01:25:18.680
But my concern is that people are not going to calculate in ounces of gold.

664
01:25:18.680 --> 01:25:22.680
They don't look on it as money.

665
01:25:22.680 --> 01:25:31.680
You know, anyone who remembers gold as actually in circulation, if there is anyone, is a very small portion of the population.

666
01:25:31.680 --> 01:25:38.680
So, not having had recent experience with gold as money, people will still look on paper dollars as money.

667
01:25:38.680 --> 01:25:44.680
And I don't think they're going to take this gold that they're given or sold and put it in banks and start gold banks and so on.

668
01:25:44.680 --> 01:25:46.680
I think they're going to continue to operate in dollars.

669
01:25:46.680 --> 01:25:52.680
That's why I think the parallel gold standard will not come into operation.

670
01:25:52.680 --> 01:25:58.680
It's a good start because you get rid of the Fed, you freeze the amount of dollars and so on,

671
01:25:58.680 --> 01:26:06.680
you get gold back in the hands of people, but it's better than what we have, but I think we might be able to do better.

672
01:26:06.680 --> 01:26:26.680
I feel like the swaying in public opinion that a plan that has a first step abolished the Fed, you're already asking so much of people's changing of opinion. Is it so much to ask that they consider gold to be money?

673
01:26:36.680 --> 01:26:42.680
They do use dollars on a daily basis, and I think psychologically that means a lot.

674
01:26:42.680 --> 01:26:47.680
Now, we're just trying to get this, I mean, there's a second problem which I won't go into,

675
01:26:47.680 --> 01:26:52.680
but we're just trying to figure out the best theoretical way to go back, given our institutions.

676
01:26:52.680 --> 01:26:58.680
Then there's the political problem, okay, that's a separate issue which, you know, you can write a lot on that.

677
01:26:58.680 --> 01:27:04.680
But I think we ought to get straight what the best practical way to go back is if there were no political barriers.

678
01:27:04.680 --> 01:27:05.680
careers.

679
01:27:05.680 --> 01:27:06.680
Okay.

680
01:27:06.680 --> 01:27:07.680
Okay, I'll stop here.

681
01:27:07.680 --> 01:27:07.700
Thanks.