WEBVTT

NOTE The Gold Standard in Theory and Myth

1
00:00:00.000 --> 00:00:10.760
Okay, today's lecture, or this afternoon's lecture, is on the topic of the gold standard in theory and in myth.

2
00:00:10.760 --> 00:00:19.520
And the mythology of gold, as we might call it, really grew up with John Maynard Keynes.

3
00:00:19.520 --> 00:00:27.440
Actually, myths were starting to develop about the gold standard even before Keynes wrote it in the 1930s.

4
00:00:27.440 --> 00:00:35.440
They began to grow up with the quantity theorists at the turn of the century, including Irving Fischer.

5
00:00:35.440 --> 00:00:46.440
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
00:00:46.440 --> 00:00:53.440
So what I want to do is to give some of the more prominent myths and then to show how they are not

7
00:00:53.440 --> 00:00:57.440
based on sound theoretical reasoning, at least from the Austrian point of view.

8
00:00:57.440 --> 00:01:03.440
And then I want to talk a little bit about the plans for a transition back to the gold standard

9
00:01:03.440 --> 00:01:07.440
and some of the difficulties that we will face in such an endeavor.

10
00:01:07.440 --> 00:01:11.440
Let me just show you some of these myths.

11
00:01:11.440 --> 00:01:27.440
Okay, these are the six myths I'll deal with. The first is that the gold standard is unable to accommodate the monetary needs of a growing economy.

12
00:01:27.440 --> 00:01:37.440
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.

13
00:01:37.440 --> 00:01:42.440
Secondly, under the gold standard, the quantity of money is arbitrarily determined.

14
00:01:42.440 --> 00:01:52.440
That is, it's determined by the costs of mining and by other factors that may influence the demand for money.

15
00:01:52.440 --> 00:01:59.440
Or rather, the demand for the use of gold as a non-monetary commodity.

16
00:01:59.440 --> 00:02:06.440
It's not in any sense planned in a rational way. That's what this means to say.

17
00:02:06.440 --> 00:02:12.440
Thirdly, the gold standard is a government price-fixing scheme writ large.

18
00:02:12.440 --> 00:02:24.440
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
00:02:24.440 --> 00:02:34.440
And why would Austrians who believe so passionately in a free market fall victim or advocate such a scheme?

20
00:02:34.440 --> 00:02:40.440
Fourth, the international gold standard subjects a country to alternating balance of inflation and deflation.

21
00:02:40.440 --> 00:02:49.440
That is, the money supply depends almost solely on what is happening to the balance of payments in a country.

22
00:02:49.440 --> 00:02:53.440
So if you have a surplus in the balance of payments, gold flows in, your money supply increases.

23
00:02:53.440 --> 00:02:57.440
Whereas, a deficit will result in a contraction of the money supply.

24
00:02:57.440 --> 00:03:03.440
And with corresponding effects on the price levels of those countries.

25
00:03:03.440 --> 00:03:21.440
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
00:03:21.440 --> 00:03:28.440
And sixth and last, the gold standard results in high interest rates that discourage investment and retard economic growth.

27
00:03:28.440 --> 00:03:34.440
This is a particular critique of Keynes of the gold standard.

28
00:03:34.440 --> 00:03:50.440
Well, I think basic supply and demand analysis in most cases will show us that these are certainly just myths and are not correct representations of how the gold standard actually works.

29
00:03:50.440 --> 00:04:00.440
So let me start with the first myth, the fact that the gold standard is unable to accommodate the needs of a growing economy.

30
00:04:00.440 --> 00:04:17.440
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.

31
00:04:17.440 --> 00:04:21.440
Okay, and I have some statistics here regarding that.

32
00:04:27.440 --> 00:04:33.440
So, historically, it's certainly not true that the gold standard stunted growth.

33
00:04:34.440 --> 00:04:41.440
In fact, throughout the 19th century and up until World War II, a mild deflationary trend prevailed in the industrialized nations.

34
00:04:41.440 --> 00:04:51.440
So, despite the rapid growth that occurred as country after country industrialized in the 19th century, we had a gold standard in place.

35
00:04:51.440 --> 00:04:55.440
And this certainly didn't prevent that rapid growth.

36
00:04:55.440 --> 00:05:05.440
To go on, the reason for this was that the supply of goods did outstrip the supply of gold money.

37
00:05:05.440 --> 00:05:35.440
of Gold Money and yet there was growth and falling prices at the same time and for example in the US from 1880 to 1896 the wholesale price level fell by about 30% in 16 years that's about 1.7% per year and those figures come from Friedman and Swartz at the same time that the price level was declining after the US had gone back to gold in 1879 at the same time that we had this decline in the price

38
00:05:35.440 --> 00:05:45.440
Real income rose by about 85% or around 5% per year, one of the most rapid, prolonged rates of growth in U.S. history.

39
00:05:45.440 --> 00:05:57.440
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.

40
00:05:57.440 --> 00:06:03.440
that Britain fought and from, as I said, 1797 to 1821 Britain had gone off the gold standard

41
00:06:03.440 --> 00:06:11.440
and as a result did experience rapid inflation and also, of course, the US during the Civil War.

42
00:06:11.440 --> 00:06:18.440
But yet, after they returned to the gold standard, prices then continued to fall and that didn't impede growth.

43
00:06:18.440 --> 00:06:20.440
Well, that's the history of it.

44
00:06:20.440 --> 00:06:28.940
And there are many other instances of increases or high rates of growth coinciding with the gold standard.

45
00:06:28.940 --> 00:06:30.440
But what about the theory?

46
00:06:30.440 --> 00:06:37.440
Well, the theory can be explained, I think, with a simple supply and demand diagram,

47
00:06:37.440 --> 00:06:45.440
in which we put the total stock of money in the economy on the horizontal axis,

48
00:06:45.440 --> 00:06:48.440
and the purchasing power of money, the value of a money unit,

49
00:06:48.440 --> 00:07:00.440
The amount of various units of goods that can be purchased by a unit of money, we can put that on the price axis, that's equal to 1 over P.

50
00:07:00.440 --> 00:07:12.440
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.

51
00:07:12.440 --> 00:07:28.440
If a personal computer costs or has a price of a thousand dollars, well then the value of money of a dollar in terms of personal computers is one thousandth, one one thousandth of a personal computer.

52
00:07:28.440 --> 00:07:40.440
So as we said earlier in the week, the purchasing power of money is an array of alternative quantities of goods that can be purchased by a unit of money, in this case a dollar.

53
00:07:40.440 --> 00:07:49.440
Let's take a simple example. Let's say the quantity of gold at a given point in time is fixed, and so we draw a vertical supply of money, M.

54
00:07:49.440 --> 00:08:00.440
Let's have M as for money supply. And we have a certain demand for money, a certain amount of money that people wish to hold and wish to purchase with their labor and other goods that they're selling.

55
00:08:00.440 --> 00:08:11.120
And let's say that the money supply in billions of dollars is 100 billion dollars.

56
00:08:11.120 --> 00:08:21.080
Now what would happen if suddenly we had a 10% increase in the supplies of goods and services

57
00:08:21.080 --> 00:08:28.200
produced in this economy? Well, in effect, the sellers of those goods would want to sell those

58
00:08:28.200 --> 00:08:36.200
at going prices, that would mean you would need 10% more money for the economy to be able to absorb those goods.

59
00:08:36.200 --> 00:08:46.200
So in effect, if this is the money demand before growth, MD1, in effect what would occur is that the demand for money would increase.

60
00:08:46.200 --> 00:08:51.200
So now the demand for money would be 10% greater.

61
00:08:51.200 --> 00:09:01.200
So now you would have quantity demanded for money at the given purchasing power of money, at the given amount that money can purchase, PPM 1.

62
00:09:01.200 --> 00:09:10.200
It would now be $110 billion. But there's no Fed to create this additional $10 billion that we need.

63
00:09:10.200 --> 00:09:14.200
So how did the gold standard handle that? Very simply.

64
00:09:14.200 --> 00:09:22.200
Okay? If I can direct your attention for a moment to the high-tech industries in the last 20 to 30 years,

65
00:09:22.200 --> 00:09:31.200
how did they handle the fact that the supply of personal computers and software and so on was increasing so rapidly

66
00:09:31.200 --> 00:09:39.200
that it was outstripping even the inflationary rate of growth of the money supply caused by the Fed in the 80s and 90s?

67
00:09:39.200 --> 00:09:42.200
How did those additional computers get sold?

68
00:09:42.200 --> 00:09:54.200
The point is that because of the technological advances and increase in investment in those industries, costs fell so that when these supplies of computers increased on the market, their prices fell.

69
00:09:54.200 --> 00:10:07.200
So, again, to give you an idea of the magnitude of this fall, we can go back to history, recent history in this case,

70
00:10:07.200 --> 00:10:28.960
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.

71
00:10:28.960 --> 00:10:43.960
Okay, 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.

72
00:10:43.960 --> 00:10:50.960
In fact, we can point out that there was an enormous expansion of profits, productivity and outputs in these industries.

73
00:10:50.960 --> 00:10:59.460
This is reflected in the fact that in 1980, computer firms shipped a total of just about 1.5 million PCs.

74
00:10:59.460 --> 00:11:06.960
While in 1999, their shipments exceeded 43 million units, so it increased 86 times.

75
00:11:06.960 --> 00:11:13.960
And that's despite the fact that quality-adjusted prices had fallen by over 90%.

76
00:11:13.960 --> 00:11:43.960
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, they bring these goods to market, what happens is exactly what happens in the high-tech industries, except it happens economy-wide, or not necessarily economy-wide, in those industries in which you have growth. So their prices will begin to fall. As their prices fall, each dollar will be able to purchase more of that.

77
00:11:43.960 --> 00:11:51.960
So, there's an excess demand for money, a so-called shortage of money, but it's only temporary on the market.

78
00:11:51.960 --> 00:11:58.960
What happens is that as the value of each dollar increases, we move up along the demand curve to this point.

79
00:11:58.960 --> 00:12:08.960
So that at the end of the process, prices are 10% lower, or roughly 10% lower, and the purchasing power of money is roughly 10% higher.

80
00:12:08.960 --> 00:12:14.960
So, each gold dollar can now purchase 10% more than it did before.

81
00:12:14.960 --> 00:12:16.960
Now, what does that mean?

82
00:12:16.960 --> 00:12:19.960
If you look at the total amount of goods that can be purchased, for example,

83
00:12:19.960 --> 00:12:26.960
if we have a situation where the good was originally, let's say, $10,

84
00:12:26.960 --> 00:12:34.960
so that means that a dollar could purchase one-tenth, and now it's $11,

85
00:12:34.960 --> 00:12:44.320
So now the dollar can purchase approximately 10% more.

86
00:12:44.320 --> 00:12:47.520
What happens is that the real supply of money increases.

87
00:12:47.520 --> 00:12:54.160
The real supply of money is the money supply over the prices.

88
00:12:54.160 --> 00:13:02.520
So if we take this particular good, initially we had a money supply of $100 billion

89
00:13:02.520 --> 00:13:05.520
and we had a price of ten.

90
00:13:07.320 --> 00:13:12.720
So the number of units that could be purchased by that money supply was ten billion.

91
00:13:13.520 --> 00:13:14.020
Okay.

92
00:13:14.220 --> 00:13:15.920
But as the price falls,

93
00:13:18.720 --> 00:13:20.020
Okay, I'll move it over.

94
00:13:20.420 --> 00:13:21.820
Oh, I hit the button.

95
00:13:24.120 --> 00:13:24.820
Okay.

96
00:13:25.620 --> 00:13:26.320
There we go.

97
00:13:27.720 --> 00:13:29.820
If it falls to the nine dollars,

98
00:13:29.820 --> 00:13:43.820
The same $100 billion of gold, which hasn't changed, there's no Fed, increasing the money supply, can now purchase over or around 11 billion units of the good.

99
00:13:46.820 --> 00:13:58.820
So 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.

100
00:13:58.820 --> 00:14:02.820
And they will be sold profitably on the market because costs are also falling.

101
00:14:02.820 --> 00:14:05.820
That is the reason for economic growth.

102
00:14:05.820 --> 00:14:15.820
So that's the simple supply and demand, or the basic supply and demand theory that shows that the first argument against the gold standard is purely a myth.

103
00:14:15.820 --> 00:14:19.820
It's refuted by theory and by history.

104
00:14:19.820 --> 00:14:23.820
What about two? Under the gold standard, the quantity of money is arbitrarily determined.

105
00:14:23.820 --> 00:14:38.820
And what the Keynesians and monetarists generally mean by this is it's not determined by some central government agency that decides that the economy demands for more money and therefore they will rationally supply this additional money.

106
00:14:38.820 --> 00:14:50.820
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.

107
00:14:50.820 --> 00:15:11.820
So I gave you an example here of the gold standard at a particular point in time, 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.

108
00:15:11.820 --> 00:15:13.820
It takes a while to do that.

109
00:15:13.820 --> 00:15:35.820
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, 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.

110
00:15:35.820 --> 00:15:44.820
All right, let's say for a moment that there is a decrease in the cost of supplying gold, okay?

111
00:15:44.820 --> 00:15:49.820
A better technique is discovered for abstracting gold from the ore,

112
00:15:49.820 --> 00:15:56.820
or possibly better mines are found, okay, from which it's easier to extract the gold.

113
00:15:56.820 --> 00:16:02.820
For whatever reason now, you suddenly have a decrease in the cost of mining gold.

114
00:16:02.820 --> 00:16:04.820
Well, what would that mean?

115
00:16:04.820 --> 00:16:12.820
That would mean now that you would have an increase in the supply of gold, as in any other, in the case of any other industry in the economy.

116
00:16:12.820 --> 00:16:19.820
So you would have a shift to the right of the supply curve, the MS prime, let's say.

117
00:16:21.820 --> 00:16:25.820
You'd have more gold in the economy and as a result, prices would rise.

118
00:16:25.820 --> 00:16:33.820
Now, how would this come about?

119
00:16:33.820 --> 00:16:50.820
What would happen is that as the price of extracting gold from the ground dropped,

120
00:16:50.820 --> 00:17:08.820
That would mean that you would have a situation where an ounce of gold could be purchased from the ground, could be gotten from the ground for less than an ounce of gold that you have to pay in wages.

121
00:17:08.820 --> 00:17:19.820
So, now you would have higher, more workers, paying them the going wage rates, and there would be a higher profit, in other words, to producing gold.

122
00:17:19.820 --> 00:17:24.820
It would be if the price of apples fell, or if the price of computers fell, you would expand the industry.

123
00:17:24.820 --> 00:17:35.820
And so gold mining would expand, and what would happen is that more gold would come out of the ground, and the price of gold, or the value of gold would drop.

124
00:17:35.820 --> 00:17:39.020
In other words, there'll be more gold in circulation and drive prices up.

125
00:17:40.220 --> 00:17:44.420
But that's not the only or not the end of the effect.

126
00:17:44.820 --> 00:17:49.020
Some of that additional gold, since gold is now cheaper,

127
00:17:50.820 --> 00:17:55.420
as the price of, for example, of jewelry goes up and so on,

128
00:17:56.020 --> 00:18:01.620
it would now be more profitable to produce jewelry

129
00:18:02.020 --> 00:18:04.220
and more profitable to use gold in dentistry

130
00:18:04.220 --> 00:18:14.220
Because those prices have risen, so part of the new gold would go to directly satisfying consumer wants, and part of it would go into the money supply.

131
00:18:14.220 --> 00:18:23.220
In either case, you would have a higher price level, but you would also have more goods that would be produced by gold.

132
00:18:23.220 --> 00:18:26.140
So, society would benefit.

133
00:18:26.140 --> 00:18:34.900
That would occur with any sort of a particular good, whether it's gold or any other type of commodity.

134
00:18:34.900 --> 00:18:39.100
Now, why is that arbitrary? Why do they say that the quantity of money is arbitrarily determined?

135
00:18:39.100 --> 00:18:44.340
It's not arbitrarily determined. It's determined by the market.

136
00:18:44.340 --> 00:18:50.980
On the other hand, I'm going to draw it here, if you had an increase in demand for gold, prices would fall, okay?

137
00:18:50.980 --> 00:18:59.140
And as prices fell, the prices of those inputs or resources that you use to mine gold would fall.

138
00:18:59.140 --> 00:19:08.020
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.

139
00:19:08.020 --> 00:19:10.700
What would that do to gold production?

140
00:19:10.700 --> 00:19:18.140
In the long run, it would be more profitable to mine gold from the existing mines using existing techniques.

141
00:19:18.140 --> 00:19:25.380
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?

142
00:19:25.380 --> 00:19:36.460
As those prices fall, it spurs or stimulates the development of new sources of gold and also stimulates the production from existing gold mines.

143
00:19:36.460 --> 00:19:44.860
And as a result, you get an increase in the supply of gold that pushes prices up back towards their former level.

144
00:19:44.860 --> 00:19:46.860
Now, what's so arbitrary about that?

145
00:19:46.860 --> 00:19:48.860
That's not arbitrary.

146
00:19:48.860 --> 00:19:53.860
Basically, what the critics of gold call arbitrary

147
00:19:53.860 --> 00:19:57.860
simply means that the quantity of gold is not determined by governments.

148
00:19:57.860 --> 00:20:00.860
It's determined by people's demands for gold,

149
00:20:00.860 --> 00:20:04.860
and it's determined by the cost, the cost of gold

150
00:20:04.860 --> 00:20:10.860
based on technology and the availability of specific resources such as gold mines.

151
00:20:10.860 --> 00:20:14.860
I don't see that as arbitrary one bit.

152
00:20:14.860 --> 00:20:23.860
Thirdly, what about this whole idea that gold is a government price-fixing scheme on a large level?

153
00:20:23.860 --> 00:20:29.860
This is a particular criticism by Milton Friedman of the gold standard.

154
00:20:29.860 --> 00:20:36.860
But in fact, under a genuine gold standard, it's not price-fixing.

155
00:20:36.860 --> 00:20:43.860
If we go back to the 19th century, when we had genuine gold standards existing in most of the world,

156
00:20:43.860 --> 00:20:46.860
or silver standards, but let's focus on gold,

157
00:20:46.860 --> 00:20:57.860
we had a situation where for at least for about a hundred years in the US from 1834 until 1933,

158
00:20:57.860 --> 00:21:05.860
The dollar was defined legally as equal to one twentieth of an ounce of gold.

159
00:21:06.860 --> 00:21:08.860
That's not price fixing.

160
00:21:09.860 --> 00:21:24.860
When people brought their gold into banks, that meant that they formed a contract with the bank to return their property when they redeemed the bank note.

161
00:21:24.860 --> 00:21:45.860
banknote. The banknote itself was not money under a genuine gold standard. It was a receipt that permitted you to redeem that note for money. You could use it as a money substitute in an exchange because it was more convenient. But it itself was not the money and people understood that.

162
00:21:45.860 --> 00:21:57.360
It's as if someone says the pink slip, the title, to an automobile, which changes hands.

163
00:21:57.360 --> 00:22:03.860
I can sell you my automobile, my Grand Prix competition series.

164
00:22:03.860 --> 00:22:11.360
I could sell you that, and here in Alabama give you the pink slip, and the car could remain in New Jersey.

165
00:22:11.360 --> 00:22:13.860
I could store it for you for a few months, okay?

166
00:22:13.860 --> 00:22:27.860
I'd beat it into the ground at that point, but anyway, you wouldn't be deluded into believing that the pink slip, the so-called pink slip, which is the title to the car, is the car itself.

167
00:22:27.860 --> 00:22:30.860
Obviously, it's a title to the car.

168
00:22:30.860 --> 00:22:38.860
So keeping that in mind, when all nations were on the gold standard, everybody had the same money.

169
00:22:38.860 --> 00:22:43.860
They just use different names to designate their unit of money.

170
00:22:43.860 --> 00:22:50.860
So, for example, the British pound was equal to one-fourth of an ounce of gold.

171
00:22:50.860 --> 00:23:00.860
The French franc was equal to one-hundredth of an ounce of gold, and so on.

172
00:23:00.860 --> 00:23:12.860
So, for about a hundred years, the U.S. dollar, the exchange rate between the U.S. dollar was $4.86 per one British pound.

173
00:23:16.860 --> 00:23:21.860
Why was that? That wasn't arbitrary. There was no price fixing there.

174
00:23:21.860 --> 00:23:35.860
The reason why that exists is because there was five times the amount of gold in a British pound, since the fine is one-fourth of an ounce, as it was in an American dollar, which was defined as one-twentieth of an ounce.

175
00:23:35.860 --> 00:23:50.860
So, under the gold standard, the fixed exchange rates between the different goods is no different than the fixed exchange rate, it's not really an exchange rate, but we'll call it that for the moment.

176
00:23:50.860 --> 00:24:02.960
The fixed exchange rate between, let's say, a nickel and a quarter.

177
00:24:02.960 --> 00:24:09.860
A nickel is defined as one-twentieth of a dollar, a quarter is defined as one-quarter of a dollar, or one-fourth of a dollar.

178
00:24:09.860 --> 00:24:18.460
Therefore, five nickels exchange for one-quarter.

179
00:24:18.460 --> 00:24:19.560
That's not an exchange rate.

180
00:24:19.560 --> 00:24:25.560
But that's not a government price-fixing scheme, that's simply a result of the laws of arithmetic, okay?

181
00:24:25.560 --> 00:24:31.560
So Friedman is wrong under at least a genuine gold standard, and that's not true of the Bretton Woods system,

182
00:24:31.560 --> 00:24:37.560
and we'll talk about some other gold standards in which it would be artificial price-fixing.

183
00:24:37.560 --> 00:24:42.560
But under a genuine gold standard, it is not a price-fixing scheme, okay?

184
00:24:42.560 --> 00:24:48.560
Fourth, the international gold standard subjects a country to alternating bouts of inflation and deflation.

185
00:24:48.560 --> 00:24:59.560
For example, if the US 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.

186
00:24:59.560 --> 00:25:09.560
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 flowing out of the country and therefore its prices are falling.

187
00:25:09.560 --> 00:25:20.560
So we have to ask ourselves, why do these deficits and surpluses occur? Are they an act of God?

188
00:25:20.560 --> 00:25:23.560
Well, no, of course not.

189
00:25:23.560 --> 00:25:28.560
Let's take the United States. The United States, just as the world was under the gold standard,

190
00:25:28.560 --> 00:25:32.560
the United States today is a single currency area using dollars.

191
00:25:32.560 --> 00:25:39.560
Do we worry about or even know whether, for example, New Jersey has a deficit or a surplus with California?

192
00:25:39.560 --> 00:25:42.560
Or whether Nebraska has a deficit or a surplus with Indiana?

193
00:25:42.560 --> 00:25:47.560
Fortunately, state governments don't keep those kinds of statistics, so no one worries about them.

194
00:25:47.560 --> 00:25:54.560
If they did, of course, then people would be worrying about the balance of payments in their town and so on.

195
00:25:54.560 --> 00:26:08.560
The point is this, let's say that there's an increase in output in California, an increase in productivity because of the high-tech industries in Silicon Valley, that's a good example, I would say.

196
00:26:08.560 --> 00:26:20.560
And on the other hand, there's a fall in output, or a fall in demand for output from Michigan because U.S. cars are no longer in demand.

197
00:26:20.560 --> 00:26:28.560
Well, Michigan's exports, the things that they sell to the rest of the country, would begin to decline.

198
00:26:28.560 --> 00:26:37.560
On the other hand, California's exports to the rest of the country, the computers and software they sell, would increase.

199
00:26:37.560 --> 00:26:46.560
Michigan's citizens and so on would find that they had fewer dollars, as their incomes fell.

200
00:26:46.560 --> 00:26:50.560
California citizens on the other hand would find they had more dollars.

201
00:26:50.560 --> 00:26:54.560
So money would be redistributed from Michigan to California.

202
00:26:54.560 --> 00:27:00.560
But that's not deflation or deflation of Michigan inflation in California.

203
00:27:00.560 --> 00:27:05.560
That's simply a result of the fact that the demand for output in a certain area has fallen

204
00:27:05.560 --> 00:27:08.560
and therefore people's incomes in that area have fallen

205
00:27:08.560 --> 00:27:11.560
and people want to hold less money when their incomes are less

206
00:27:11.560 --> 00:27:13.560
so that the money supply falls.

207
00:27:13.560 --> 00:27:18.560
It's a voluntary action on the part of the people of Michigan who are losing income.

208
00:27:18.560 --> 00:27:22.560
Think about it, if your income was cut in half, hopefully that doesn't happen to you,

209
00:27:22.560 --> 00:27:26.560
but if it's cut in half, you're not going to hold as much cash anymore.

210
00:27:26.560 --> 00:27:29.560
So cash is going to flow out from your household for a while,

211
00:27:29.560 --> 00:27:35.560
until you have the proper reduced amount that maximizes your utility.

212
00:27:35.560 --> 00:27:38.560
Your household is going to have a deficit.

213
00:27:38.560 --> 00:27:41.560
You lose your job or if you take a pay cut.

214
00:27:41.560 --> 00:27:56.100
Paycut. 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.

215
00:27:56.100 --> 00:28:07.600
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 the products are rising.

216
00:28:07.600 --> 00:28:19.600
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.

217
00:28:19.600 --> 00:28:29.600
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.

218
00:28:29.600 --> 00:28:34.600
Now, what's the closed area under the gold standard? It's not one country.

219
00:28:34.600 --> 00:28:46.600
Every country's money, despite the names that they use, the differing names, every country's money is, in fact, gold.

220
00:28:46.600 --> 00:28:58.600
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.

221
00:28:58.600 --> 00:29:06.000
Or, let's say, demand has shifted from textiles from Great Britain, world demand, to wheat.

222
00:29:06.000 --> 00:29:09.000
So, wheat would be more valuable here in the U.S.

223
00:29:09.000 --> 00:29:11.300
Farmers' incomes would rise in the U.S.

224
00:29:11.300 --> 00:29:14.800
and that would be reflected in an increase in the amount of gold that they hold.

225
00:29:14.800 --> 00:29:19.700
On the other hand, those people in the British textile industries, the stockholders and workers,

226
00:29:19.700 --> 00:29:21.700
would find their incomes are falling.

227
00:29:21.700 --> 00:29:24.400
When your incomes fall, you hold less money.

228
00:29:24.400 --> 00:29:25.600
Okay, it's natural.

229
00:29:25.600 --> 00:29:29.080
So, it's just a redistribution of gold within a closed system.

230
00:29:29.080 --> 00:29:34.360
Countries don't have alternating bouts of deflation and inflation.

231
00:29:34.360 --> 00:29:41.960
In fact, that occurs when you begin to get paper money pyramid on top of the gold standard.

232
00:29:41.960 --> 00:29:49.160
Then, if gold flows out, not only do you lose, let's say you lose one million dollars worth of gold,

233
00:29:49.160 --> 00:29:55.560
but then what happens is that the bank, as they lose gold, then have to decrease their loans and decrease the amount of paper money.

234
00:29:55.560 --> 00:30:01.120
And what that does is to exacerbate the outflow. Hayek pointed that out also.

235
00:30:01.120 --> 00:30:07.680
So it's fractional reserve banking that causes the added deflation or added inflation.

236
00:30:07.680 --> 00:30:14.200
It's not the gold standard itself. Under a pure gold standard, the whole world is a closed system.

237
00:30:14.200 --> 00:30:18.480
And as part of the world gets richer, faster than other parts of the world,

238
00:30:18.480 --> 00:30:26.480
and the inflow of gold flows away from the parts that are lagging behind to those parts in which the income is increasing.

239
00:30:26.480 --> 00:30:34.480
The gold itself doesn't cause people to be richer or poorer, the inflow of gold, it's a result of that, okay?

240
00:30:34.480 --> 00:30:38.480
And it's the same thing with your household, right?

241
00:30:38.480 --> 00:30:45.480
If your income increases, it's because your good, whatever you're selling has become more valuable

242
00:30:45.480 --> 00:30:57.480
Therefore, the consequence of that is that you get an increase in your money income and you hold the larger proportion, or you hold more money income over the year than you would have.

243
00:30:57.480 --> 00:31:05.480
What about the fifth objection to the gold standard?

244
00:31:05.480 --> 00:31:09.920
that it allegedly involves extremely high costs in terms of resources.

245
00:31:11.720 --> 00:31:18.120
Resources both that are used to mine new gold as well as the opportunity cost

246
00:31:18.400 --> 00:31:23.680
of using gold not in jewelry or dentistry or in electronics but using it as money.

247
00:31:24.640 --> 00:31:30.600
Adam Smith was one of the first economists to claim that the gold standard had a high resource cost.

248
00:31:32.160 --> 00:31:35.320
Believe it or not, the early Ludwig von Mises actually accepted this.

249
00:31:35.480 --> 00:31:38.480
What Adam Smith said was the following.

250
00:31:38.480 --> 00:31:47.480
Replacing gold with paper money is like replacing a highway that goes through fertile land with a highway in the sky.

251
00:31:47.480 --> 00:31:49.480
So he used that analogy.

252
00:31:49.480 --> 00:32:02.480
Because a highway in the sky wouldn't have the opportunity cost of causing land that could have been used to grow various crops now to be used for a road.

253
00:32:02.480 --> 00:32:06.960
and the materials that are used in the road could also be used for other uses.

254
00:32:06.960 --> 00:32:15.640
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.

255
00:32:15.640 --> 00:32:26.720
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.

256
00:32:26.720 --> 00:32:37.720
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.

257
00:32:37.720 --> 00:32:46.720
So that was this argument. The French economists always rejected that argument, and later on von Mises did, and of course Rothbard did.

258
00:32:46.720 --> 00:32:53.720
There's a couple of responses to this argument.

259
00:32:53.720 --> 00:33:01.720
The first response is, well, even if gold standard has high resource costs,

260
00:33:01.720 --> 00:33:08.720
those high resource costs are justified as a way of preventing the government from inflating.

261
00:33:08.720 --> 00:33:18.720
If you lived in a world where, let's say, you could trust governments, which is a never-never land,

262
00:33:18.720 --> 00:33:26.720
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,

263
00:33:26.720 --> 00:33:32.720
if you live in that kind of a world, then you might say, well, we really don't need a gold standard.

264
00:33:32.720 --> 00:33:35.720
We don't live in that kind of a world.

265
00:33:35.720 --> 00:33:47.720
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.

266
00:33:47.720 --> 00:34:01.720
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.

267
00:34:01.720 --> 00:34:08.720
If we got rid of the steel bicycle locks and simply put a piece of paper around it and wrote lock on it,

268
00:34:08.720 --> 00:34:15.720
wouldn't we have all the steel to produce other things that are useful to human beings?

269
00:34:15.720 --> 00:34:21.720
Well, if we lived in a world where no one stole bicycles, yeah, sure, that's not the case in New Jersey.

270
00:34:21.720 --> 00:34:27.720
We put two locks on our bikes.

271
00:34:27.720 --> 00:34:38.720
Okay, so first of all, even if there are high resource costs, think of it as buying insurance against inflation.

272
00:34:38.720 --> 00:34:55.720
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.

273
00:34:55.720 --> 00:35:14.720
Remember, you have to compare institutions. What about the resource costs of paper money that causes the economy to go through a business cycle in which you have inflation and misdirection of capital that is then revealed in a recession and layoffs of workers?

274
00:35:14.720 --> 00:35:22.720
I would venture to say the resource costs that we've suffered from paper money business cycles,

275
00:35:22.720 --> 00:35:29.720
business cycles that are induced by paper money, are greater than the resource costs of a gold standard.

276
00:35:29.720 --> 00:35:34.720
But beyond that, and actually this is Roger Garrison's point,

277
00:35:34.720 --> 00:35:50.720
What happened when we had inflation in the 1970s and beyond, when we had crises in the 1980s, when we had financial crises?

278
00:35:50.720 --> 00:35:58.720
What do people do when they're confronted with rapid inflation or fear of bank collapses and financial collapses?

279
00:35:58.720 --> 00:36:01.720
Well, they rush out and they buy gold, don't they?

280
00:36:01.720 --> 00:36:06.720
In fact, in the late 1970s, the price of gold shot up to around $800 an ounce.

281
00:36:06.720 --> 00:36:10.720
What did that do to the amount of resources in gold mining?

282
00:36:10.720 --> 00:36:13.720
It pushed more resources into gold mining.

283
00:36:13.720 --> 00:36:18.720
Why? Because people wanted to use gold as a hedge.

284
00:36:18.720 --> 00:36:22.720
So, governments haven't gotten rid of their gold.

285
00:36:22.720 --> 00:36:25.720
All governments hold big stocks of gold.

286
00:36:25.720 --> 00:36:35.720
I don't think government is selling that gold off, allowing the market to use that gold to produce more products for dentistry, more electronics, and so on.

287
00:36:35.720 --> 00:36:43.720
In fact, the stocks of gold held now out of production may be greater than they were under the gold standard.

288
00:36:43.720 --> 00:36:48.720
Resources devoted to gold mining might be greater. You don't know what would happen under the gold standard.

289
00:36:48.720 --> 00:36:59.360
So, first, so we can respond is, first of all, even if it is high, that is resource cost, it's a form of insurance against government inflation,

290
00:36:59.360 --> 00:37:11.920
two, government, fiat money inflation has caused a repetition of the business cycle, okay, to recur again and again, and that has resource cost,

291
00:37:11.920 --> 00:37:18.320
No monetarist has tried to add that up and compare that to the resource cost of gold

292
00:37:18.320 --> 00:37:24.320
Though they have come up with figures, Friedman has and others have, of what the resource cost of gold are

293
00:37:24.320 --> 00:37:27.420
But you want to compare it to something, to the alternative institution

294
00:37:27.420 --> 00:37:33.120
And finally, paper money doesn't save on the resource cost of gold because people use gold as a hedge

295
00:37:33.120 --> 00:37:37.120
It's the first hedge against inflation or against crisis

296
00:37:37.120 --> 00:37:41.640
Lastly, the gold standard results in high interest rates that discourage investment and

297
00:37:41.640 --> 00:37:44.160
record economic growth.

298
00:37:44.160 --> 00:37:46.760
Basically this is a Keynesian criticism.

299
00:37:46.760 --> 00:37:52.840
Again, if you have a gold standard, especially a genuine pure gold standard, it's impossible

300
00:37:52.840 --> 00:37:58.120
for the Fed to increase bank reserves and push down interest rates, bringing about a

301
00:37:58.120 --> 00:37:59.760
business cycle.

302
00:37:59.760 --> 00:38:04.560
And we know in the short run of the business cycle, you do seem to get a boom in output.

303
00:38:04.560 --> 00:38:06.560
And that's what they're talking about.

304
00:38:06.560 --> 00:38:09.680
Alan Greenspan would not be able to manipulate interest rates.

305
00:38:09.680 --> 00:38:11.040
Well, I think that's a good thing.

306
00:38:11.040 --> 00:38:14.520
I think it's a good thing not to have overinvestment.

307
00:38:14.520 --> 00:38:22.120
So basically, the response to that is that we don't want low interest rates

308
00:38:22.120 --> 00:38:25.960
if low interest rates are the result of manipulation by central banks.

309
00:38:25.960 --> 00:38:29.200
Because low interest rates result in misallocation of resources

310
00:38:29.200 --> 00:38:32.480
and eventual recession.

311
00:38:32.480 --> 00:38:39.480
So, those are my critiques of the objections to the gold standard.

312
00:38:39.480 --> 00:38:42.480
Let's talk about returning to the gold standard.

313
00:38:44.480 --> 00:38:52.480
I think this is an interesting and important and unresolved area of the theory of the gold standard.

314
00:38:53.480 --> 00:39:00.480
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.

315
00:39:00.480 --> 00:39:12.480
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.

316
00:39:12.480 --> 00:39:16.480
So if you return to a gold standard, you want to go back to a genuine gold standard.

317
00:39:16.480 --> 00:39:22.480
So let's look at some of these plans to return to pseudo-gold standards.

318
00:39:22.480 --> 00:39:36.480
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,

319
00:39:36.480 --> 00:39:46.480
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.

320
00:39:46.480 --> 00:40:03.480
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 US economy.

321
00:40:03.480 --> 00:40:12.480
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.

322
00:40:12.480 --> 00:40:22.480
Well, that's not a real gold standard. Just looking at gold as one price among many is certainly not a real gold standard.

323
00:40:22.480 --> 00:40:29.480
And so we can criticize it as it really does still leave the monopoly of money squarely in the hands of the Fed.

324
00:40:29.480 --> 00:40:33.480
It's just another indicator to them. They're using it as an indicator.

325
00:40:33.480 --> 00:40:40.480
Also, it makes central bank policy gold-plated, meaning that it's not a true gold standard.

326
00:40:40.480 --> 00:40:46.480
The true gold standard is not a gold standard under there, but it opens a gold standard for criticism, right?

327
00:40:46.480 --> 00:40:52.480
And so gold can be blamed for the inevitable failure of this.

328
00:40:52.480 --> 00:40:58.480
Now, we came a little bit closer in the early 1980s to a gold standard.

329
00:40:58.480 --> 00:41:06.480
President Reagan's advisors, the supply-siders, most prominently Arthur Laffer, Robert Mundell and Jack Kemp,

330
00:41:06.480 --> 00:41:14.480
and other writers at the Wall Street Journal were pushing for what they called a new Bretton Woods

331
00:41:14.480 --> 00:41:21.480
which was a distorted form of the gold standard in which only the US dollar was, as I said, convertible into gold

332
00:41:21.480 --> 00:41:26.480
and then only for foreign governments and official institutions, not for American citizens.

333
00:41:26.480 --> 00:41:33.480
Plus, of course, there would be no gold coin in circulation and so on.

334
00:41:33.480 --> 00:41:58.480
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 the majority report came out against instituting a new gold standard.

335
00:41:58.480 --> 00:42:10.480
Murray Rothbard was asked to testify and he gave a talk and was one of the people that wrote up the minority report.

336
00:42:10.480 --> 00:42:16.480
I think George Reisman also testified before Congress on this point.

337
00:42:16.480 --> 00:42:21.480
And again, he was one of the few that argued for going back to a genuine gold standard.

338
00:42:21.480 --> 00:42:27.480
What was the blueprint though that these supply-siders set forth?

339
00:42:27.480 --> 00:42:33.480
One thing about the supply-siders, they want sound money and plenty of it.

340
00:42:33.480 --> 00:42:36.280
So they want a gold standard, but they want a lot of money.

341
00:42:36.280 --> 00:42:42.680
They want money to be, you know, they want a gold standard that can be inflated in some sense.

342
00:42:42.680 --> 00:42:45.480
Well, the first, this is called a Laffer blueprint.

343
00:42:45.480 --> 00:42:48.180
He wrote a blueprint on this, Arthur Laffer.

344
00:42:48.180 --> 00:42:55.580
He wants the Fed to convert dollars into gold at a fixed price, a range.

345
00:42:55.580 --> 00:43:05.080
Now, this 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.

346
00:43:05.080 --> 00:43:13.780
So, if suddenly the price of gold began to rise towards $410, that would indicate to the supply-siders,

347
00:43:13.780 --> 00:43:20.980
who believe that gold was a very sensitive indicator of what was going to happen to the rest of the prices in the economy very quickly,

348
00:43:20.980 --> 00:43:28.340
They would look on that rise of the price of gold as a warning that inflation was about to break out.

349
00:43:28.340 --> 00:43:43.860
And at that point then, they would go out into the market and they would sell gold and dollars would come in, would return and the monetary, the money supply would be reduced.

350
00:43:43.860 --> 00:43:51.260
On the other hand, if the price of gold fell towards $390, that meant that we were going to have an inflation,

351
00:43:51.260 --> 00:44:00.460
or there was an impending deflation, excuse me, and the way they would react, the Fed in that case, would be to go into the market,

352
00:44:00.460 --> 00:44:06.860
print dollars and buy gold to drive the price back up to $400.

353
00:44:06.860 --> 00:44:13.860
So now, gold really takes the place of government securities as open market operations.

354
00:44:13.860 --> 00:44:16.860
If you want to increase the money supply, well, you print dollars and you buy gold.

355
00:44:16.860 --> 00:44:20.860
If you want to decrease the money supply, you sell gold for dollars.

356
00:44:20.860 --> 00:44:23.860
And you try to keep the price fixed at around $400.

357
00:44:23.860 --> 00:44:31.860
Also, they put in here, which they didn't really need, that there would be what was called a target reserve quantity,

358
00:44:31.860 --> 00:44:35.860
that 40% of the Fed's liabilities had to be covered by gold.

359
00:44:35.860 --> 00:44:45.860
So the Fed would have gold backing up 40% of its liabilities, which meant 40% of currency and circulation plus bank reserves.

360
00:44:45.860 --> 00:44:57.860
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%.

361
00:44:57.860 --> 00:45:02.860
So in other words, as long as it was plus or minus, 40% plus or minus 10%.

362
00:45:02.860 --> 00:45:13.660
What would happen if the amount of gold suddenly fell, meaning that there was inflation, below 30%?

363
00:45:13.660 --> 00:45:20.060
Well then at that point the Fed could not, its liabilities would be frozen, it could not create any more reserves.

364
00:45:20.060 --> 00:45:26.460
It was an attempt to force the Fed to restrict its inflation.

365
00:45:26.460 --> 00:45:41.460
If the gold backing fell below 20% of its liabilities, then they had to reduce the monetary base by 1% per year.

366
00:45:41.460 --> 00:45:45.460
In other words, they had to begin to actually reduce the money supply.

367
00:45:45.460 --> 00:45:54.460
And finally, if the target reserve quantity fell below 10% of the Fed's liabilities,

368
00:45:54.460 --> 00:46:00.460
Well, what would happen? Nothing. What would happen would be, well, you have to raise the price of gold now, okay?

369
00:46:00.460 --> 00:46:07.460
So there was no punishment for inflating to the point where they began to lose their gold stock, okay?

370
00:46:07.460 --> 00:46:13.460
So this was not a real gold standard, okay? This was a phony gold standard. It was a price-fixing scheme.

371
00:46:13.460 --> 00:46:19.460
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.

372
00:46:19.460 --> 00:46:22.460
All we have to do is look at the price of gold.

373
00:46:22.460 --> 00:46:28.460
So, if the price of gold went towards $410, we'll simply take government securities,

374
00:46:28.460 --> 00:46:33.460
sell them on the market, absorb some of the dollars and bring the price of gold back to $400.

375
00:46:33.460 --> 00:46:36.460
And if we had a deflation, we would do the opposite.

376
00:46:36.460 --> 00:46:40.460
We'd go out and we'd print money and we'd buy securities.

377
00:46:40.460 --> 00:46:45.460
So that gold didn't need to be what they call the intervention asset.

378
00:46:45.460 --> 00:46:50.960
Okay, so they're talking in bureaucratic, technocratic terms.

379
00:46:53.960 --> 00:46:59.460
They had no intention of allowing gold to be the real medium of exchange.

380
00:47:00.460 --> 00:47:06.460
Well, it could be the intervention asset, the asset that you buy and sell to keep the price of gold fixed, or you could use government securities, it didn't matter.

381
00:47:06.460 --> 00:47:17.460
And one of these supply-siders, who happened to be my professor at Rutgers when I was getting my PhD, his name was Mark Miles,

382
00:47:17.460 --> 00:47:26.460
he wrote a book on this and he basically came out and said, look, we don't need gold in this scheme.

383
00:47:26.460 --> 00:47:31.460
We just need to use government securities to fix the price of gold.

384
00:47:31.460 --> 00:47:38.460
So that, Friedman would be right, and the monetarists would be right to call that a price-fixing scheme.

385
00:47:38.460 --> 00:47:46.460
In fact, later on, I named it price-rule monetarism. It's simply monetarism.

386
00:47:46.460 --> 00:47:55.460
Regular monetarism, the brand that Milton Friedman promotes, is quantity-rule monetarism.

387
00:47:55.460 --> 00:48:02.460
Under Friedman's scheme, you would simply increase the money supplied at about 3% per year to try to keep the price level stable.

388
00:48:02.460 --> 00:48:08.460
Under price rule monetarism, you keep the price of gold fixed to try to keep the price level stable.

389
00:48:08.460 --> 00:48:16.460
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.

390
00:48:16.460 --> 00:48:20.460
And if the demand for money changes, well then you're going to have a change in the price of gold.

391
00:48:20.460 --> 00:48:28.460
So, in fact, in Mark Miles' book on this, he said, we're a better brand of monetarism, okay?

392
00:48:28.460 --> 00:48:34.460
The monetarists want to increase money supply at the same rate as the quantity of goods are increasing.

393
00:48:34.460 --> 00:48:37.460
But what if the velocity of circulation is changing?

394
00:48:37.460 --> 00:48:41.460
There's no way to adjust the quantity rule.

395
00:48:41.460 --> 00:48:46.460
But with a price rule, that would affect the price of gold and we could react to it.

396
00:48:46.460 --> 00:48:56.460
All right, so it came down to basically giving, coming up with a rule to kind of, like monetarism, to restrain a government monopoly.

397
00:48:56.460 --> 00:49:03.460
And any rule that you try to come up with to restrain a government monopoly is simply a pious wish.

398
00:49:03.460 --> 00:49:10.460
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.

399
00:49:10.460 --> 00:49:13.460
There's nothing to stop the Fed from doing that.

400
00:49:13.460 --> 00:49:25.460
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.

401
00:49:25.460 --> 00:49:29.460
So those are the fake gold standards.

402
00:49:29.460 --> 00:49:41.460
Now there was an interesting plan, I think which Guido Hulsman supports, I think this may have been introduced by Henry Hazlitt, it was later picked up by Hans Sendholz,

403
00:49:41.460 --> 00:49:45.460
by Professor Timberlake, who I did criticize this morning.

404
00:49:45.460 --> 00:49:49.460
He actually at one time promoted this plan.

405
00:49:49.460 --> 00:49:54.460
I thought it's a step in the right direction, away from monetarism.

406
00:49:54.460 --> 00:49:59.460
It's called parallel private goal standards, or a parallel private goal standard.

407
00:49:59.460 --> 00:50:03.460
Basically, you don't get rid of the monopoly fiat money.

408
00:50:03.460 --> 00:50:08.460
What you do is you allow individuals, and you give them the means,

409
00:50:08.460 --> 00:50:11.460
to make exchanges and contracts in gold.

410
00:50:11.460 --> 00:50:12.460
Now how would that work?

411
00:50:12.460 --> 00:50:18.460
And Hazlitt and Sennholz's, and even I think in Timberlake's plan,

412
00:50:18.460 --> 00:50:19.460
you would abolish the Fed.

413
00:50:19.460 --> 00:50:21.460
They get rid of the Fed.

414
00:50:21.460 --> 00:50:24.460
Now, you wouldn't get rid of the Fed notes,

415
00:50:24.460 --> 00:50:27.460
and you wouldn't get rid of fractional reserve banking.

416
00:50:27.460 --> 00:50:29.460
You'd simply abolish the Fed, which means that

417
00:50:29.460 --> 00:50:34.460
you could never have any further increase in bank reserves or currency.

418
00:50:34.460 --> 00:50:49.460
or currency. They would be frozen. 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.

419
00:50:49.460 --> 00:51:00.460
And then you freeze the monetary base. There's no more Fed notes, there's no more Fed deposits which are held by banks as reserves, all that's gone.

420
00:51:00.460 --> 00:51:05.340
You then convert member bank reserve deposit accounts into Fed notes.

421
00:51:05.340 --> 00:51:09.620
In other words, if your bank is holding a certain amount of reserves

422
00:51:09.620 --> 00:51:13.660
as 10% backing for the checking deposits that you have,

423
00:51:13.660 --> 00:51:17.220
they would go and get Fed notes in return.

424
00:51:17.220 --> 00:51:20.300
So you got rid of the Fed deposit, you get rid of the Fed,

425
00:51:20.300 --> 00:51:24.860
the only reserve now is actual Fed notes, and that's frozen.

426
00:51:24.860 --> 00:51:28.580
You can't change the number of them in the economy because there is no Fed to do that.

427
00:51:28.580 --> 00:51:48.580
The Treasury has 260 million ounces of gold, which it stole from the American people in 1933 when President Roosevelt forced all Americans to turn their gold in for Fed notes.

428
00:51:48.580 --> 00:51:51.220
You would either do one of two things.

429
00:51:51.220 --> 00:51:55.220
You would either give it away proportionally,

430
00:51:55.220 --> 00:51:59.180
a proportional amount of this gold to each American citizen,

431
00:51:59.180 --> 00:52:03.420
which, take an example, if you have 260 million citizens

432
00:52:03.420 --> 00:52:06.100
and there's 260 million ounces of gold,

433
00:52:06.100 --> 00:52:08.860
each person would get one ounce.

434
00:52:08.860 --> 00:52:11.020
Or you could sell it.

435
00:52:11.020 --> 00:52:13.980
But whatever you do, you have to get it into private hands.

436
00:52:13.980 --> 00:52:15.860
You would then abolish legal tender laws.

437
00:52:15.860 --> 00:52:22.660
In other words, people would no longer be forced to accept, for their debts, paper FedNotes.

438
00:52:24.660 --> 00:52:29.160
And you would make gold clauses in contracts enforceable.

439
00:52:29.160 --> 00:52:38.560
So, if myself and Simon made a contract in gold, that I would pay him next week for that scarf,

440
00:52:39.860 --> 00:52:42.660
one-tenth of an ounce of gold, I love that scarf.

441
00:52:42.660 --> 00:52:52.900
Anyway, he gave me the scarf and then I was going to pay him a tenth of an ounce of gold next week.

442
00:52:52.900 --> 00:52:58.780
I could not come to him and say, I'm paying in paper dollars because they're legal tender.

443
00:52:58.780 --> 00:53:08.980
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.

444
00:53:08.980 --> 00:53:18.980
Now, according to Senholtz, 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.

445
00:53:18.980 --> 00:53:28.980
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.

446
00:53:28.980 --> 00:53:36.980
Now, I have an objection to this. I think it's a pretty strong objection. And Murray Rothbard has voiced an objection to this kind of a scheme.

447
00:53:36.980 --> 00:53:40.380
First of all, you get rid of the Fed.

448
00:53:40.380 --> 00:53:42.860
The government can still, at some point,

449
00:53:42.860 --> 00:53:46.180
I mean, people are still tied to these notes.

450
00:53:46.180 --> 00:53:50.620
These Fed notes are dollars in their minds.

451
00:53:50.620 --> 00:53:55.660
So if there is some sort of national emergency,

452
00:53:55.660 --> 00:53:59.140
quote unquote, if we expand the war on terrorism

453
00:53:59.140 --> 00:54:02.260
and they want to finance a greater deficit,

454
00:54:02.260 --> 00:54:05.060
or if there's a recession for some reason

455
00:54:05.060 --> 00:54:08.900
and they want to push down interest rates.

456
00:54:08.900 --> 00:54:15.700
They can, remember this is paper, they can have Congress pass an emergency exception

457
00:54:15.700 --> 00:54:20.100
to the rule that you have to have, that these liabilities have to be frozen

458
00:54:20.100 --> 00:54:25.660
and the Treasury can print them up and finance a deficit with them, okay?

459
00:54:25.660 --> 00:54:29.580
So you don't get rid of the dollar, but more importantly, you don't get rid of the paper dollar.

460
00:54:29.580 --> 00:54:38.580
But more importantly, if it actually begins to work, and these things are frozen for time, why would people use gold?

461
00:54:38.580 --> 00:54:48.580
You and I and businessmen and everyone in the economy think, calculate, compare in terms of dollars.

462
00:54:48.580 --> 00:54:57.580
So if you go back to the regression theorem, somehow, if you want to get gold back into circulation as money and not just give it back to people,

463
00:54:57.580 --> 00:55:04.580
If you want to get back into circulation as money, what you need to do is to make them think of gold as dollars again.

464
00:55:04.580 --> 00:55:10.580
How do you do that? You have to establish a link between the dollar and the gold.

465
00:55:10.580 --> 00:55:17.580
Under the parallel standard, all you do is have gold over here and you still have these dollars that people have been using all along.

466
00:55:17.580 --> 00:55:20.580
So this is a potential problem with this.

467
00:55:20.580 --> 00:55:31.580
Now, 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.

468
00:55:31.580 --> 00:55:35.580
This would work if we had a horrendous inflation.

469
00:55:35.580 --> 00:55:43.580
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.

470
00:55:43.580 --> 00:55:49.580
But the whole point is to freeze the Fed notes and not allow inflation any longer.

471
00:55:49.580 --> 00:55:52.500
So I don't see how you would get gold back into circulation.

472
00:55:52.500 --> 00:55:56.100
Now, very interestingly, some of the free bankers have said,

473
00:55:56.100 --> 00:55:58.460
you know, initially they said, well, we want free banking.

474
00:55:58.460 --> 00:56:03.580
The Austrian free bankers like George Selgin, Larry White, Steve Horowitz.

475
00:56:03.580 --> 00:56:09.220
They initially said, we want gold as at the base of our free banking system.

476
00:56:09.220 --> 00:56:12.620
But then George Selgin said, you know what?

477
00:56:12.620 --> 00:56:14.180
And I don't think the others have said this.

478
00:56:14.180 --> 00:56:15.460
We don't really need gold.

479
00:56:15.460 --> 00:56:19.220
If we get rid of the Fed and freeze the amount of paper dollars

480
00:56:19.220 --> 00:56:31.220
So the problem is that it ignores the regression theorem, ignores the fact that people love the dollar, are used to the dollar, and compute and calculate in exchange in terms of dollars.

481
00:56:31.220 --> 00:56:38.220
And secondly, it still leaves the Fed notes in existence, which I'll talk about in a minute.

482
00:56:38.220 --> 00:56:44.220
are used to the dollar and compute and calculate and exchange in terms of dollars.

483
00:56:44.220 --> 00:56:51.220
And secondly, it still leaves the Fed notes in existence, which allows government at some point,

484
00:56:51.220 --> 00:56:58.220
because people believe it's money, to increase the money supply by having the Treasury print up new Fed notes.

485
00:56:58.220 --> 00:57:03.220
Let's take Ludwig von Mises' plan.

486
00:57:03.220 --> 00:57:08.720
Ludwig von Mises liked the currency school, but he just believed that they didn't go far enough.

487
00:57:08.720 --> 00:57:16.720
Remember the currency school, what they wanted to do was, even though they were on back notes in circulation,

488
00:57:16.720 --> 00:57:21.720
they wanted any new note that came into circulation to be 100% backed by gold.

489
00:57:21.720 --> 00:57:28.720
But what they forgot was that checking account money is also part of the money supply.

490
00:57:28.720 --> 00:57:32.720
And banks can increase checking account money and cause business cycles that way.

491
00:57:32.720 --> 00:57:40.720
So von Mises recognized that and he said he wanted a strict currency school gold standard.

492
00:57:40.720 --> 00:57:47.720
He put forth a plan in 1953 for the United States in an epilogue to his book, The Theory of Money and Credit,

493
00:57:47.720 --> 00:58:00.720
and in it he said we should impose a 100% reserve on banks for all future checking account deposits and currency.

494
00:58:00.720 --> 00:58:05.720
If banks were allowed to issue bank notes, that also would have to be 100% back, okay?

495
00:58:05.720 --> 00:58:09.720
All new notes and all new checking deposits, okay?

496
00:58:09.720 --> 00:58:12.720
Whatever was unbacked at the time of the reform can stay unbacked,

497
00:58:12.720 --> 00:58:20.720
because it's really only the new injections of money into the system that pushes down interest rates and creates the business cycle.

498
00:58:20.720 --> 00:58:24.720
He also, at the time, Americans couldn't buy and sell gold.

499
00:58:24.720 --> 00:58:27.720
We only got that right back in 1976.

500
00:58:27.720 --> 00:58:30.760
But anyway, he wanted to re-establish the freedom of buying and selling gold.

501
00:58:32.120 --> 00:58:35.520
Once that was done, then there would be a gold market in the United States, as there is today,

502
00:58:35.520 --> 00:58:37.880
and we could see then what the price of gold would be.

503
00:58:38.440 --> 00:58:43.000
So after a period of time, after let's say three months of a gold market,

504
00:58:44.240 --> 00:58:49.760
the U.S. government would announce that within another period of time,

505
00:58:49.760 --> 00:58:57.560
within the month, the dollar would be convertible at whatever the price of gold was,

506
00:58:57.560 --> 00:59:11.560
after three months. So, if it was $400 per ounce, then he would announce that in one month anybody who wants to come to the bank and convert dollars for gold at the rate of one 400th ounce of gold for a dollar, okay?

507
00:59:11.560 --> 00:59:19.560
So, banks would then be buying and selling gold. That would be a genuine gold standard. It would be a fractional reserve gold standard, but it would be a genuine gold standard.

508
00:59:19.560 --> 00:59:28.560
He would establish a conversion agency, not a central bank, but what he called a conversion agency, to buy and sell gold for dollars.

509
00:59:28.560 --> 00:59:32.560
So actually it wouldn't be the commercial banks initially that did it, it would be this conversion agency.

510
00:59:32.560 --> 00:59:40.560
Anyone who brought Fed notes to the bank or checks drawn on their checking account deposits at commercial banks,

511
00:59:40.560 --> 00:59:56.560
would receive gold coin at the rate of one ounce of gold coin to $400 or if they wish they could sell gold for $400 to the conversion agency.

512
00:59:56.560 --> 01:00:02.560
The Fed could still exist but it would no longer be able to buy any more government bonds or securities.

513
01:00:02.560 --> 01:00:08.560
In other words, it could not print up money to perform open market operations with.

514
01:00:08.560 --> 01:00:17.560
For some reason he didn't say that we should get rid of the Fed. He said that the Fed could not interfere with the operations of the conversion agency.

515
01:00:17.560 --> 01:00:23.560
He would also have withdrawn all small denomination bills from circulation.

516
01:00:23.560 --> 01:00:27.560
And I guess he meant one dollar bills and five dollar bills, maybe ten dollar bills.

517
01:00:27.560 --> 01:00:33.560
And they could no longer be in circulation so that people would have to use gold for small purchases.

518
01:00:33.560 --> 01:00:36.560
So gold coins would be in people's pockets.

519
01:00:36.560 --> 01:00:44.560
Now, of course, at the price of gold as it is today, that would really be impossible.

520
01:00:44.560 --> 01:00:48.560
You couldn't use gold for small purchases if an ounce is equal to $400.

521
01:00:52.560 --> 01:00:57.560
Well, again, this is a good plan. This does not ignore the regression theorem.

522
01:00:57.560 --> 01:01:01.560
Now, there's a link. The dollar is 1 400th of an ounce of gold.

523
01:01:01.560 --> 01:01:04.560
So there's a link between the dollar and gold.

524
01:01:04.560 --> 01:01:10.560
People can still think in dollars, but now their dollar is defined legally as a weight of gold.

525
01:01:10.560 --> 01:01:16.560
So I think it's better than the parallel gold standard I talked about.

526
01:01:16.560 --> 01:01:22.560
But it does leave the old Fed notes in existence, and again, the government can increase them.

527
01:01:22.560 --> 01:01:30.060
Now, there's Rothbard 1 and there's Rothbard 2. There's two different plans that Rothbard puts forth.

528
01:01:30.060 --> 01:01:38.060
His newer plan is the following. This came out in his book, The Case Against the Fed.

529
01:01:38.060 --> 01:01:42.060
What he says is that we should liquidate the Fed. We have to get rid of the Fed.

530
01:01:42.060 --> 01:01:48.060
We have to cancel all its assets except the gold that it owns.

531
01:01:48.060 --> 01:01:51.060
And then we're going to reprice the gold.

532
01:01:51.060 --> 01:01:55.060
And the way we're going to determine the price of gold according to Rothbard

533
01:01:55.060 --> 01:02:00.740
would be to take the total amount of currency in the economy,

534
01:02:00.740 --> 01:02:08.620
and I just checked online today, at the end of, on May 30th,

535
01:02:08.620 --> 01:02:24.260
we had $707 billion of currency in the US economy held by the public.

536
01:02:24.260 --> 01:02:35.380
divide into that the ounces of gold owned by the treasury, which is 260 million,

537
01:02:35.380 --> 01:02:47.900
and that would give you a price of $2,272 per ounce, enormously higher than the market price.

538
01:02:47.900 --> 01:03:17.900
I'll get to that point, but so then what Rothbard would do is abolish the Fed, then you would call it all Fed notes, at least you'd get rid of the Fed notes and people would bring their Fed notes in and exchange it for gold at that rate, okay, for every $2,272 you would get an ounce of gold, okay, so you and I would be able to do that as well as the banks, the banks that have reserved deposits at the Fed would also be able to

539
01:03:17.900 --> 01:03:23.900
and how to turn them in for gold, okay?

540
01:03:28.900 --> 01:03:34.900
Well, not melting down, but just people from all over the world would be coming to the U.S.

541
01:03:34.900 --> 01:03:37.900
Basically what would happen is that all this gold would flow into the U.S.

542
01:03:37.900 --> 01:03:40.900
and automobiles and everything else would flow out of the U.S.

543
01:03:40.900 --> 01:03:44.900
Okay? Until there was an equilibrium reached, okay?

544
01:03:44.900 --> 01:03:51.900
And so prices in the U.S. would rise rapidly to adjust to this very high price of gold.

545
01:03:51.900 --> 01:03:54.900
That's one of the problems with this plan.

546
01:03:54.900 --> 01:04:02.900
It would be a once and for all inflation and it wouldn't create a business cycle because it would be going on through the banking system.

547
01:04:02.900 --> 01:04:07.900
So that's one of the problems with that.

548
01:04:07.900 --> 01:04:11.900
And it would leave fractional reserve banking.

549
01:04:11.900 --> 01:04:27.900
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 reserves, whatever reserves they wish they could hold, it would be a fractional reserve system still.

550
01:04:27.900 --> 01:04:39.900
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.

551
01:04:39.900 --> 01:04:47.900
So, once you got your gold and you deposit it in the bank, the bank wouldn't have to hold 100% reserves against your deposit.

552
01:04:47.900 --> 01:04:53.900
They could create checking accounts that were, let's say, 10% backed by gold dollars.

553
01:04:53.900 --> 01:04:58.900
There would no longer be a law limiting them to 10%.

554
01:04:58.900 --> 01:05:04.900
Whatever they thought would be prudent would be what they would decide as the back reserves.

555
01:05:04.900 --> 01:05:20.900
Rothbard's earlier plan would be to go back to a 100% gold standard and what you would have to do there is you would have to take the total amount of checking account money as well as currency

556
01:05:20.900 --> 01:05:24.900
and that would determine what the price of gold was.

557
01:05:24.900 --> 01:05:43.000
Again, I looked online, St. Louis Fed. Right now, M1 stands at that M1, which is basically currency plus demand deposit or checking accounts,

558
01:05:43.000 --> 01:05:56.000
that's equal to $1,354 billion, so basically $1.3 trillion, okay?

559
01:05:56.000 --> 01:06:10.000
If you divided that, so 0.583, divide that by the amount of 260 million ounces of gold,

560
01:06:10.000 --> 01:06:35.000
You come out with an enormously high price of $5,209 per ounce, but now all Fed notes would be redeemed at that rate and Federal Reserve deposits, as well as the checking account money.

561
01:06:35.000 --> 01:06:40.000
So everything would be backed. Now what would you do about savings accounts?

562
01:06:40.000 --> 01:06:47.000
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.

563
01:06:47.000 --> 01:06:58.000
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.

564
01:06:58.000 --> 01:07:06.000
Any checking account that you have to be 100% backed by gold, that would be, let's say, the deposit part of the bank.

565
01:07:06.000 --> 01:07:10.000
And on the other hand, you would have the loan part of the bank.

566
01:07:10.000 --> 01:07:25.000
And there, all the bank's loans would be there, 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.

567
01:07:25.000 --> 01:07:32.000
and the same thing with their certificates of deposit, so they would become more like mutual funds.

568
01:07:32.000 --> 01:07:40.000
So the banks could take in money and loan it out, but they would only do that through their loan department.

569
01:07:40.000 --> 01:07:45.000
That's what the currency school did, they separated the Bank of England into a deposit department,

570
01:07:45.000 --> 01:07:53.000
I'm sorry, into a deposit, they call it an issue department and a loan department.

571
01:07:53.000 --> 01:08:08.000
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.

572
01:08:08.000 --> 01:08:22.000
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.

573
01:08:22.000 --> 01:08:32.000
Also, you then could abolish the FDIC because the banks are, all deposits are 100% backed, there's 100% reserve banking.

574
01:08:32.000 --> 01:08:41.000
You'd abolish the mint and have private mints, minting coins, and you would transform the savings deposits either into mutual funds,

575
01:08:41.000 --> 01:08:49.000
or you could tell people, we're going to turn them into certificates of deposit.

576
01:08:49.000 --> 01:08:55.000
So, for example, if the banks, the average maturity of the bank's loans are nine months,

577
01:08:55.000 --> 01:09:00.000
then you would tell people, well, you can't get your money out for nine months.

578
01:09:00.000 --> 01:09:07.000
And then they would know from then on that anything that they put in that interest into the loan part of the bank

579
01:09:07.000 --> 01:09:12.000
would be in a certificate of deposit that would be a true investment.

580
01:09:12.000 --> 01:09:18.000
So you wouldn't have any inflation.

581
01:09:18.000 --> 01:09:23.440
Okay, let me mention a plan that I recently came up with.

582
01:09:23.440 --> 01:09:37.120
In the old days, for example, the U.S. after the Civil War in 1879, Great Britain in 1821 after the Napoleonic Wars,

583
01:09:37.120 --> 01:09:46.120
Great Britain again in 1925, they would go back to the gold standard by simply deflating the money supply

584
01:09:46.120 --> 01:09:52.120
and going back at some past price of gold, at some lower price of gold,

585
01:09:52.120 --> 01:09:58.120
than was existing during the period of non-convertibility.

586
01:09:58.120 --> 01:10:03.120
Now, there was a problem because of unions in 1925.

587
01:10:03.120 --> 01:10:08.020
There was no problem going back after the Civil War in 1879 or 1821.

588
01:10:08.020 --> 01:10:12.020
There was a little bit of a problem with the deflation, but it was nothing like it was in Britain in 1925.

589
01:10:12.020 --> 01:10:18.920
So all economists today look back at 1925 and say it's wrong to go back to the gold standard,

590
01:10:18.920 --> 01:10:24.020
even if you're a gold standard economist, by deflating, trying to deflate the money supply.

591
01:10:24.020 --> 01:10:27.020
Even Rothbard and Mises believe that.

592
01:10:27.020 --> 01:10:33.460
And let me just read you a little, or some comments by Rothbard and Mises.

593
01:10:37.980 --> 01:10:40.140
Also, Hayek has the same view.

594
01:10:41.580 --> 01:10:46.860
Mises opposes deflationist policy and went on to argue that it was erroneous,

595
01:10:47.260 --> 01:10:51.460
even in the case in which a country was attempting to revalue its depreciated currency

596
01:10:51.580 --> 01:10:54.580
in order to return to the gold standard at the previous mid-poor.

597
01:10:54.580 --> 01:11:03.580
To avoid monetary contraction, Mises favored a restoration of gold parity at or near the currently prevailing price of gold, and we saw that was his plan.

598
01:11:03.580 --> 01:11:06.580
Okay, figure out what the price of gold is right now, and then let's go back.

599
01:11:06.580 --> 01:11:15.580
Even Murray Rothbard, although an enthusiastic proponent of bank credit deflation, that is, he likes when banks fail,

600
01:11:15.580 --> 01:11:25.580
and you get bank credit deflation, that is a disappearance of these unbacked bank deposits.

601
01:11:25.580 --> 01:11:38.580
However, he generally refrains from advocating a deliberate contraction of the money supplied by the Fed under an existing fiat money regime.

602
01:11:38.580 --> 01:11:49.580
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.

603
01:11:49.580 --> 01:11:55.580
For Rothbard, the, quote, sensible thing to do would have been to recognize the facts of reality,

604
01:11:55.580 --> 01:12:06.580
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.

605
01:12:06.580 --> 01:12:17.580
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.

606
01:12:17.580 --> 01:12:22.580
He doesn't want to reduce the number of fiat dollars. He simply wants to increase the price of gold to back them up.

607
01:12:22.580 --> 01:12:27.580
But as we see, there are problems with increasing the price of gold to that great an extent.

608
01:12:27.580 --> 01:12:35.580
So, in thinking about this, I looked at another comment that Rothbard made that was very interesting.

609
01:12:35.580 --> 01:12:43.580
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.

610
01:12:43.580 --> 01:12:53.580
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.

611
01:12:53.580 --> 01:13:07.580
Supply to Fall. And so to defend this, he says, in a broad sense, this bank credit contraction takes away from the original coercive gainers from credit expansion and benefits the original coerced losers.

612
01:13:07.580 --> 01:13:18.580
While this will certainly not be true in every case, in the broad sense, much the same groups will benefit and lose, but in reverse order from that of the redistributive effects of credit expansion.

613
01:13:18.580 --> 01:13:26.580
Fixed income groups, widows and orphans, will gain, and businesses and owners of original factors previously reaping gains from inflation will lose.

614
01:13:26.580 --> 01:13:35.580
What does he mean by this? Well, as I showed you, according to Mises' step-by-step process, when you have inflation, those people who receive the money first,

615
01:13:35.580 --> 01:13:42.580
and they're usually the government itself and its favorites in the economy, they benefit because prices haven't gone up yet,

616
01:13:42.580 --> 01:13:47.580
and people who receive the new money 18 months later or two years later are the ones that are hurt,

617
01:13:47.580 --> 01:13:56.580
Especially people on fixed incomes who never get any of the new money, because they have to pay higher prices during 18 months, or they have to pay higher prices forever because they're on fixed incomes.

618
01:13:56.580 --> 01:14:10.580
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.

619
01:14:10.580 --> 01:14:16.580
People on fixed incomes gain. The people who are hurt during the inflation gain during the deflation.

620
01:14:16.580 --> 01:14:29.580
Well, if that's true then, if the welfare of those people who were coercively expropriated by the inflation process,

621
01:14:29.580 --> 01:14:35.580
why not reverse the process and have the Fed do that?

622
01:14:35.580 --> 01:14:42.580
So that if the Fed were to bring about a contraction of money, a slow contraction of money over time,

623
01:14:42.580 --> 01:14:46.580
You would have these welfare effects, benefiting people that were hurt by the previous inflation.

624
01:14:46.580 --> 01:14:50.580
But also, you would lower the amount of dollars in the economy at the same time,

625
01:14:50.580 --> 01:14:53.580
and make it easier to go back to gold at a lower price.

626
01:14:53.580 --> 01:14:58.580
So, let me just read you a little bit of my plan.

627
01:14:58.580 --> 01:15:05.580
Again, it's not completely thought through. I think a lot more has to be done on this.

628
01:15:05.580 --> 01:15:09.580
So, I wouldn't stand by it as a plan that I would want to implement.

629
01:15:09.580 --> 01:15:23.580
So, 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.

630
01:15:23.580 --> 01:15:34.580
Basically, the Treasury maintains two types of deposits. It has deposits at commercial banks, when you pay your taxes, those taxes go to the commercial banks, and it has deposits at the Fed.

631
01:15:34.580 --> 01:15:41.580
When they want to spend, they use their deposit at the Fed. They write a check on the Fed to buy the things that the government needs.

632
01:15:41.580 --> 01:15:52.580
Now, in between, when they take the money, the deposits out of the commercial banks, and they put them in the Fed, guess what happens to the money supply?

633
01:15:52.580 --> 01:16:00.580
Well, because the banks lose reserves, those reserves go back to the Fed, the money supply shrinks.

634
01:16:00.580 --> 01:16:07.580
Now, to prevent a deflation, what the treasury does is to make sure that funds are flowing,

635
01:16:07.580 --> 01:16:12.580
that as you're taking funds out of the commercial banks to spend them through the Fed,

636
01:16:12.580 --> 01:16:15.580
the same amount of funds are flowing into the commercial banks, okay,

637
01:16:15.580 --> 01:16:19.580
so that the commercial banks reserves don't fall, so they prevent a deflation.

638
01:16:19.580 --> 01:16:28.580
So my plan revolves around the treasury allowing the, when they're spending money,

639
01:16:28.580 --> 01:16:32.740
allowing the reserves to decline and the money supply to shrink.

640
01:16:32.740 --> 01:16:35.580
So let me give you an example of what I mean by that.

641
01:16:35.580 --> 01:16:39.940
Let's say that you have $1,000 of fiat money in the economy.

642
01:16:39.940 --> 01:16:43.060
It's all held in commercial bank demand deposits.

643
01:16:43.060 --> 01:16:45.420
And that the required reserve ratio is 10%.

644
01:16:45.420 --> 01:16:49.140
So in this economy, we have $1,000 of checking account money.

645
01:16:49.140 --> 01:16:50.380
That's the money supply.

646
01:16:50.380 --> 01:16:53.340
And $100 backing that up in the banks.

647
01:16:53.340 --> 01:16:55.980
So it's 10% reserves.

648
01:16:55.980 --> 01:17:03.260
If all banks are fully loaned out, they are holding $100 in required reserves in the reserve deposits at the Fed.

649
01:17:03.260 --> 01:17:11.660
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.

650
01:17:11.660 --> 01:17:17.680
In other words, they have to pay the Treasury in their reserves, the reserves flow out, $20 of reserves flow out.

651
01:17:17.680 --> 01:17:25.900
So now they only have $80 of reserves and they have to reduce the money supply by the same 20%.

652
01:17:25.900 --> 01:17:30.400
Reserves fall from $100 to $80, so the money supply has to fall from $1,000 to $800.

653
01:17:30.400 --> 01:17:32.200
They call in loans, okay?

654
01:17:32.200 --> 01:17:36.400
If you've had money in banking, you know how this works.

655
01:17:36.400 --> 01:17:42.500
So, what I advocate is that as this money supply shrinks,

656
01:17:42.500 --> 01:17:48.600
the Fed will then mandate an increase in the required reserve ratio to 12.5%, okay?

657
01:17:48.600 --> 01:17:52.300
And simultaneously, the Treasury will spend its surplus funds

658
01:17:52.300 --> 01:18:01.580
By transferring them to the reserve deposits of the commercial banks, permitting them to meet the new reserve requirements with total bank reserves once again equal to $100.

659
01:18:01.580 --> 01:18:18.780
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 T0, in time T1 it would be $800.

660
01:18:18.780 --> 01:18:26.780
If this is the reserves, the reserves would shrink initially from $100 to $80.

661
01:18:26.780 --> 01:18:32.780
But then the money would be spent and would get back into the commercial banks.

662
01:18:32.780 --> 01:18:40.780
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.

663
01:18:40.780 --> 01:19:05.780
So the Fed would increase the reserve requirement up to 12.5%, meaning that now $80 or rather $100 would be necessary as money gets back into the commercial banks.

664
01:19:05.780 --> 01:19:10.080
Okay, so this could be, you know, I'll just take it a few more rounds.

665
01:19:10.080 --> 01:19:12.580
This could continue to happen. The Fed will then manda...

666
01:19:19.680 --> 01:19:24.980
In the following year, so you knew this each year, in the following year the Treasury again runs a surplus of $20.

667
01:19:24.980 --> 01:19:28.780
Okay, so this is a fiscal deflation. What it's doing is it's deflating, okay,

668
01:19:28.780 --> 01:19:33.880
which at the new higher purchasing power of money exceeds in real terms the prior year's surplus.

669
01:19:33.880 --> 01:19:42.880
So, 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.

670
01:19:42.880 --> 01:19:51.880
Following the same procedure of disposing of the fiscal surplus, the money supply shrinks by another 20%, so now it's down to $640.

671
01:19:51.880 --> 01:20:02.880
The Fed then raises the required reserve ratio to about 15% so that the $100 now supports $640, and so on.

672
01:20:02.880 --> 01:20:09.880
So you can continue to reduce the money supply at some, maybe a slow rate, year after year, okay?

673
01:20:09.880 --> 01:20:13.880
And that would mean that there are less dollars to back by gold.

674
01:20:13.880 --> 01:20:18.880
So when you go back to the gold standard, that would imply that you're going to go back at a lower gold price.

675
01:20:18.880 --> 01:20:20.880
Now, this has a problem too.

676
01:20:20.880 --> 01:20:28.880
The problem is, can we depend on the Fed to continue to engage in this policy of slowly contracting the money supply?

677
01:20:28.880 --> 01:20:35.180
Money Supply, especially when we know that it's going to bring about a temporary recession, okay?

678
01:20:35.180 --> 01:20:42.780
Initially, it'll bring about a recession, but as people get used to the, and businesses get used to the slowly falling prices that will result,

679
01:20:42.780 --> 01:20:47.280
the depression will be a recovery in the economy.

680
01:20:47.280 --> 01:20:58.580
So, excuse me, my worry is that the Fed will say, oh, we have a recession, you know, we have to stop this program and so it's the length of the program that's a problem,

681
01:20:58.580 --> 01:21:10.680
There's another possible solution here, and I'll just mention it and then end, and that is in Argentina,

682
01:21:10.680 --> 01:21:25.380
when Argentina had problems with its currency board back in the late 1990s, early 2000s,

683
01:21:25.380 --> 01:21:36.380
What happened was, Argentina had approximately $70 billion worth of pesos and dollars.

684
01:21:37.380 --> 01:21:41.380
Now, remember, Argentina backed their peso with American dollars.

685
01:21:41.380 --> 01:21:45.380
So whether you had a dollar checking account, which you could have in Argentina,

686
01:21:45.380 --> 01:21:53.380
or a peso checking account, the Argentine Central or the Argentine Currency Board had to pay off in dollars.

687
01:21:53.380 --> 01:22:03.780
But there was only five billion dollars, because of the massive inflation had gone on.

688
01:22:03.780 --> 01:22:08.380
There was only five billion dollars backing up the seventy billion dollars of deposits, okay?

689
01:22:08.380 --> 01:22:11.780
So you have your much greater deposits.

690
01:22:11.780 --> 01:22:19.380
Well, my recommendation, which I had written up for an Indian journal, was this.

691
01:22:19.380 --> 01:22:45.380
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.

692
01:22:45.380 --> 01:22:52.140
And as I said that the savings component or the investment component of the bank's portfolio,

693
01:22:52.140 --> 01:22:58.420
whatever it doesn't have in reserves, turn that over to the people in the sense that make it into a mutual fund, okay?

694
01:22:58.420 --> 01:23:05.140
The bank is bankrupt, the shareholders should have nothing, should have no assets, all those assets should go to the people, okay?

695
01:23:05.140 --> 01:23:08.100
All right, so then I'll stop there and take about one or two questions.

696
01:23:08.100 --> 01:23:25.100
On your first about the policy of the gold standard, I would add, number seven, a friend of mine said that the problem with the gold standard, gold, what choice is too much in value?

697
01:23:25.100 --> 01:23:30.100
So I tried to explain to him, no, what is gold?

698
01:23:38.100 --> 01:23:44.340
going up and down. Once you link the dollar to gold, then gold is the money, and it's

699
01:23:44.340 --> 01:23:48.540
simply the supply and demand for money that determines the value of gold at that point,

700
01:23:48.540 --> 01:23:54.340
and it doesn't fluctuate wildly at all, because the supply of gold doesn't change very rapidly,

701
01:23:54.340 --> 01:23:58.220
as we know, and people's demand for gold, if they trust the money, that doesn't change

702
01:23:58.220 --> 01:24:03.380
very rapidly. It changes every year as the economy grows, it changes slowly, and prices

703
01:24:03.380 --> 01:24:13.380
The people, it seems to me, in the European Union countries are still over from their local currency to the Euro pretty readily, I think. I'm not sure of that.

704
01:24:13.380 --> 01:24:19.380
But you seem to be concerned about people's ability to change from dollars to ounces in gold.

705
01:24:19.380 --> 01:24:25.180
From the local currency to the euro, it's pretty regular, I think. I'm not sure of that.

706
01:24:25.180 --> 01:24:25.680
Yes.

707
01:24:25.680 --> 01:24:30.980
But you seem to be concerned about people's ability to change from dollars to ounces to gold.

708
01:24:30.980 --> 01:24:33.180
Well, that's a very good question.

709
01:24:33.180 --> 01:24:38.280
The reason why they did it is because it didn't contradict the regression theorem.

710
01:24:38.280 --> 01:24:46.780
The euro, there was an exchange rate between the euro and each individual currency.

711
01:24:46.780 --> 01:25:01.780
So, in other words, the euro was based on the various national currencies, and they were fixed exchange rates, so you easily passed from, let's say, the franc to the euro.

712
01:25:01.780 --> 01:25:14.780
But if you just put euros into circulation, print them up, and there was no exchange rate, transitional exchange rate to the existing currencies, no one would accept the euro.

713
01:25:14.780 --> 01:25:24.780
With gold, it's a little bit better because gold is bought and sold in terms of dollars, but my concern is that people are not going to calculate in ounces of gold.

714
01:25:24.780 --> 01:25:36.780
They don't look on it as money. Anyone who remembers gold as actually in circulation, if there is anyone, it's a very small portion of the population.

715
01:25:36.780 --> 01:25:49.780
So, not having had recent experience with gold as money, people will still look on paper dollars as money 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.

716
01:25:49.780 --> 01:25:57.780
I think they're going to continue to operate in dollars. That's why I think the parallel gold standard will not come into operation.

717
01:25:57.780 --> 01:26:03.780
It's a good start because you get rid of the Fed, you freeze the amount of dollars and so on.

718
01:26:03.780 --> 01:26:31.780
I feel like the swing in public opinion that a planet that has the first step abolished at that would, you're already asking so much of people for gold, changing of opinion, is it so much to ask that they consider gold to be money?

719
01:26:33.780 --> 01:26:39.180
I mean, if the Fed goes, it's one institution, it goes, but they don't run into the Fed,

720
01:26:39.180 --> 01:26:45.980
they don't use the Fed as an institution on a daily basis, they do use dollars on a daily basis.

721
01:26:45.980 --> 01:26:49.280
And I think, psychologically, that means a lot.

722
01:26:49.280 --> 01:26:53.180
Now, we're just trying to get this, I mean, there's a second problem, which I won't go into,

723
01:26:53.180 --> 01:26:59.080
but we're just trying to figure out the best theoretical way to go back, given our institutions.

724
01:26:59.080 --> 01:27:04.480
Then there's the political problem, okay? That's a separate issue which, you know, you can write a lot on that.

725
01:27:04.480 --> 01:27:11.980
But I think we ought to get straight what the best practical way to go back is if there were no political barriers, okay?

726
01:27:11.980 --> 01:27:13.980
Okay, I'll stop here. Thanks.