WEBVTT NOTE Answering the Same Old Arguments Against Sound Money 1 00:00:00.000 --> 00:00:02.000 Next speaker, Dr. Tom Woods. 2 00:00:09.600 --> 00:00:14.000 Tom's the author of 11 books, many of them New York Times bestsellers, most recently Rollback. 3 00:00:15.300 --> 00:00:18.300 Take a look at his wonderful website if you haven't, tomwoods.com. 4 00:00:18.600 --> 00:00:24.400 He has his Liberty Classroom teaching people the things in economics and politics they didn't learn in school. 5 00:00:24.900 --> 00:00:29.800 And he's going to talk to us today about the state and some of its competitors. 6 00:00:30.000 --> 00:00:34.000 I should also mention a senior fellow of the Mises Institute, Dr. Tom Woods. 7 00:00:34.000 --> 00:00:38.000 Okay, thanks. 8 00:00:38.000 --> 00:00:42.000 Alright, I hate when people do this but 9 00:00:42.000 --> 00:00:46.000 unfortunately I'm one of those people this one time. So I changed the 10 00:00:46.000 --> 00:00:50.000 topic at the last minute. So I want to talk about something that's 11 00:00:50.000 --> 00:00:54.000 I think closer to the theme of the event. And with hard money 12 00:00:54.000 --> 00:00:58.000 more and more in the news as something people are 13 00:00:58.000 --> 00:01:02.560 at least talking about or entertaining even if only for purposes of ridicule 14 00:01:02.560 --> 00:01:07.600 nevertheless it means that you read a lot more editorials these days about 15 00:01:07.600 --> 00:01:10.760 for example the gold standard and whether it's a good idea or not and 16 00:01:10.760 --> 00:01:14.560 I don't think you'll be terribly surprised to learn that most opinion 17 00:01:14.560 --> 00:01:16.600 molders are not of the opinion that it's a 18 00:01:16.600 --> 00:01:21.040 terribly good idea but the arguments they make against it 19 00:01:21.040 --> 00:01:25.240 are really bad. I mean there are only a handful of them that you see repeated over and 20 00:01:25.240 --> 00:01:27.280 over again and they're terrible 21 00:01:27.280 --> 00:01:32.360 It goes to show they're out of practice. They haven't had to talk about the gold standard in, you know, 30 years or something. 22 00:01:32.360 --> 00:01:35.920 Most of the people writing about it to condemn it are only 28. 23 00:01:35.920 --> 00:01:39.120 So this is something altogether new to them. 24 00:01:39.120 --> 00:01:43.960 So I don't blame them entirely. We've forced them into this position by 25 00:01:43.960 --> 00:01:45.560 being so 26 00:01:45.560 --> 00:01:50.520 insistent on getting this issue out to the public square, and now they feel like they have to respond. 27 00:01:50.520 --> 00:01:53.080 But the responses are terrible. 28 00:01:53.080 --> 00:01:55.880 And so what I want to do today is to go through 29 00:01:55.880 --> 00:02:00.200 some of the arguments, not all, but some of them, and answer them. I've done something 30 00:02:00.200 --> 00:02:04.480 like this in the past, so I'm going to try to come up with new bad arguments that they 31 00:02:04.480 --> 00:02:11.480 make. I have a YouTube called Smashing Myths and Restoring Sound Money from another Mises 32 00:02:11.640 --> 00:02:16.800 Circle in Greenville, South Carolina a couple years ago. So if there's a favorite myth of 33 00:02:16.800 --> 00:02:21.160 yours that wasn't addressed here today, good old YouTube will come to the rescue and you 34 00:02:21.160 --> 00:02:22.720 can have a look at that. 35 00:02:22.720 --> 00:02:27.880 So I want to start off with an easy one. In fact, it's so easy you'll think I'm stacking 36 00:02:27.880 --> 00:02:32.400 the deck, but I want to warm myself up. I haven't done any public speaking in about 37 00:02:32.400 --> 00:02:36.720 three weeks, so I'm going to warm up with an easy one. And this one you might not actually 38 00:02:36.720 --> 00:02:42.280 have heard, but if you travel in some of the circles I do, it comes up once in a while. 39 00:02:42.280 --> 00:02:48.840 Because there are some people in the Ron Paul movement who aren't fully on board on the 40 00:02:48.840 --> 00:02:50.560 and the sound money issue. 41 00:02:50.560 --> 00:02:53.040 They're on board with getting rid of the Fed, 42 00:02:53.040 --> 00:02:55.600 but for all the wrong reasons, 43 00:02:55.600 --> 00:02:58.360 we need the government directly through the Treasury 44 00:02:58.360 --> 00:03:00.100 to issue the money. 45 00:03:00.100 --> 00:03:01.780 So in other words, the problem with the Fed 46 00:03:01.780 --> 00:03:03.480 is a private institution and all that. 47 00:03:03.480 --> 00:03:04.960 So apparently the problem with the Fed 48 00:03:04.960 --> 00:03:08.260 is that it isn't socialist enough from this point of view. 49 00:03:08.260 --> 00:03:11.120 That's, to me, not the main problem. 50 00:03:11.120 --> 00:03:14.320 So this group, it's sort of like the LaRouche group. 51 00:03:15.280 --> 00:03:18.100 They will say that, for example, the first thing, 52 00:03:18.100 --> 00:03:23.100 is that Austrian economics in general, quite apart from its views on hard money, 53 00:03:23.100 --> 00:03:25.960 is really a tool of the elite. 54 00:03:25.960 --> 00:03:30.020 The elite want to encourage and spread Austrian economics 55 00:03:30.020 --> 00:03:33.620 because this gives a kind of an intellectual veneer 56 00:03:33.620 --> 00:03:37.560 to its enslavement of all of us. 57 00:03:37.560 --> 00:03:41.380 Now my response to this first is, well it seems to me the elites went to an awful lot 58 00:03:41.380 --> 00:03:44.820 of trouble to establish the central banks of the world. 59 00:03:44.820 --> 00:03:48.700 Why would they want to encourage a school of thought that strongly implies we ought to 60 00:03:48.700 --> 00:03:53.900 dismantle those? It seems like after all the effort they put in, why would they do that? 61 00:03:53.900 --> 00:03:58.380 But more than that, think of what's really being said here. The elites of the world, 62 00:03:58.380 --> 00:04:03.480 the financial elites, the shadowy political elites and people in the shadows, we hardly 63 00:04:03.480 --> 00:04:07.580 even know who they are, running, pulling the strings around the world, these are super 64 00:04:07.580 --> 00:04:13.060 influential people, all world events are ultimately controlled by them in one way or another, 65 00:04:13.060 --> 00:04:16.740 And they are promoting Austrian economics. 66 00:04:16.740 --> 00:04:21.140 Then why are they doing such a lousy job of it? 67 00:04:21.140 --> 00:04:25.100 If the most powerful people in the world are promoting Austrian economics, how come your 68 00:04:25.100 --> 00:04:28.300 average undergraduate never even hears about it? 69 00:04:28.300 --> 00:04:32.740 How come your average graduate student never even hears about it? 70 00:04:32.740 --> 00:04:36.180 So could it be that these elites are really not that powerful after all? 71 00:04:36.180 --> 00:04:37.340 Probably not. 72 00:04:37.340 --> 00:04:41.100 More likely is, of course, the last thing in the world they want to do is promote Austrian 73 00:04:41.100 --> 00:04:42.100 economics. 74 00:04:42.100 --> 00:04:46.980 have to do that. We, those of us in this room, have to do that. And it's a laborious process, 75 00:04:46.980 --> 00:04:52.380 but an enjoyable one at the same time. Now, the flip side of this argument, or an additional 76 00:04:52.380 --> 00:04:59.380 argument that these folks make, is that the monetary system we have right now is already 77 00:05:00.140 --> 00:05:07.140 a private free market system. I've had it said to me that what we have now is already 78 00:05:07.140 --> 00:05:11.820 The Austrian Monetary Utopia. 79 00:05:11.820 --> 00:05:14.300 I told you this was an easy one, all right? 80 00:05:14.300 --> 00:05:18.220 So I'm just going to go through, so I listed just for the heck of it, I just listed like 81 00:05:18.220 --> 00:05:23.260 a half a dozen things about the current system that are not private, and again, you may think 82 00:05:23.260 --> 00:05:27.440 this is like shooting fish in a barrel, but I don't know, there's a really, really huge 83 00:05:27.440 --> 00:05:31.380 barrel out there, and I don't know if I like the shooting metaphor all that much, but the 84 00:05:31.380 --> 00:05:36.740 point is we have to address these fish because they just keep coming to the surface. 85 00:05:36.740 --> 00:05:40.700 Not because they're dead, by the way, but because they want to ask questions. 86 00:05:40.700 --> 00:05:46.340 So first of all, right away, the most obvious aspect about our system is that we have a 87 00:05:46.340 --> 00:05:49.340 coercively imposed monopoly on the production of money. 88 00:05:49.340 --> 00:05:52.260 This is entirely opposed to the free market. 89 00:05:52.260 --> 00:05:57.260 Secondly, we have legal tender laws, which are also foreign to market exchange because 90 00:05:57.260 --> 00:05:58.260 they're monopolistic. 91 00:05:58.260 --> 00:06:03.620 They artificially privilege the money that is issued by the government or by its privileged 92 00:06:03.620 --> 00:06:05.060 central bank. 93 00:06:05.060 --> 00:06:13.060 Then, speaking of the central bank, we have a central bank that was created by the Congress with monopoly power to create legal tender money out of thin air. 94 00:06:13.060 --> 00:06:19.060 So for all the talk about this being a private institution, if it didn't have this government-granted monopoly, it wouldn't be much of anything. 95 00:06:19.060 --> 00:06:29.060 It has a mandate to manipulate the money supply in the purported service of maximizing output and minimizing unemployment and price inflation. 96 00:06:29.060 --> 00:06:36.060 ization. You can clear your throat at this point. Thanks for actually doing that. 97 00:06:37.960 --> 00:06:42.540 We have interest rates that are influenced by a monopoly monetary authority instead of 98 00:06:42.540 --> 00:06:48.700 by normal market exchange. We have implicit and explicit bailout guarantees for large 99 00:06:48.700 --> 00:06:53.860 financial institutions. We have artificially low borrowing costs for large institutions 100 00:06:53.860 --> 00:06:58.500 since the public knows there's a good chance they'll be bailed out and the risk premium 101 00:06:58.500 --> 00:07:02.140 is connected to them is lower. 102 00:07:02.140 --> 00:07:04.960 We have artificial protection of the banks, this is actually number seven, it's more than 103 00:07:04.960 --> 00:07:10.460 half a dozen, in the form of government deposit insurance and the Federal Reserve, various 104 00:07:10.460 --> 00:07:15.540 Federal Reserve mechanisms that thereby keep afloat the fractional reserve system, a system 105 00:07:15.540 --> 00:07:19.980 which would be very different under a free market as Joe just said. 106 00:07:19.980 --> 00:07:23.780 And so under the existing system the banks will create more money out of thin air than 107 00:07:23.780 --> 00:07:26.620 they otherwise would. 108 00:07:26.620 --> 00:07:30.360 So a real free market banking system wouldn't have anything like this. It would have no 109 00:07:30.360 --> 00:07:35.860 central bank. It would have no monetary policy. It would not rely on politicians. It would 110 00:07:35.860 --> 00:07:43.340 rely entirely on the normal laws of commerce and contract. So we don't in fact have a private 111 00:07:43.340 --> 00:07:48.060 system. We don't have to take the blame for what's going on with it. So that's the first 112 00:07:48.060 --> 00:07:53.640 one. Now the second one is much more common. The second claim is one that you hear formulated 113 00:07:53.640 --> 00:07:59.520 in various ways, and you see it in numerous articles, that the gold standard was, I just 114 00:07:59.520 --> 00:08:06.520 read in a big newspaper, someone saying the gold standard was mostly a disaster, basically 115 00:08:06.960 --> 00:08:11.920 a disaster, and there was no elaboration on this, this doesn't even require proof, we 116 00:08:11.920 --> 00:08:17.680 all know it was a disaster. Now the thing about this is that it did exist and there 117 00:08:17.680 --> 00:08:23.520 There are history books that talk about it, so this one is pretty easy to answer. 118 00:08:23.520 --> 00:08:30.840 The greatest burst of economic progress in the history of the world occurred under the 119 00:08:30.840 --> 00:08:33.000 gold standard. 120 00:08:33.000 --> 00:08:38.480 So to me, I think they're being a little bit nitpicky when they call this a disaster. 121 00:08:38.480 --> 00:08:44.000 We're talking about a period that includes the great inventions of the Industrial Revolution, 122 00:08:44.000 --> 00:08:51.080 The steam engine, trains, ships, macadamized roads, the powered looms, sewing machines, 123 00:08:51.080 --> 00:08:57.160 modern printing, electricity, the automobile, I think that's a pretty good record as a matter 124 00:08:57.160 --> 00:09:02.760 of fact. I don't consider that to be disastrous. And you can look at prices, which you didn't 125 00:09:02.760 --> 00:09:07.000 see people losing the purchasing power of their money. I mean, on pretty much any standard 126 00:09:07.000 --> 00:09:11.720 you'd want to measure it by, the record is actually pretty good. There was recently an 127 00:09:11.720 --> 00:09:16.720 In an article, I don't know where, I think it was, I don't know, it could have been Market Watch or Business Insider, I can't keep up with it. 128 00:09:16.720 --> 00:09:20.720 And it was some chart showing how unstable things were under gold. 129 00:09:20.720 --> 00:09:26.720 But it was a chart showing like 20 years of gold when it wasn't even a real gold standard anymore, it was a gold exchange standard. 130 00:09:26.720 --> 00:09:38.720 But if you look at the 19th century, you see totally stable prices during peace time and people were able to hold on to the purchasing power of their money, if not increase the purchasing power of that money. 131 00:09:38.720 --> 00:09:46.720 So I don't think the gold standard was a disaster, but the argument would be, but, but, but, we had a lot of instability. 132 00:09:46.720 --> 00:09:49.720 So maybe that's what they mean, the gold standard was a disaster. 133 00:09:49.720 --> 00:09:56.720 I mean, sure, it gave us the greatest burst of economic progress in the history of mankind, but we had these panics once in a while. 134 00:09:56.720 --> 00:10:01.720 And that's a problem, and that was solved by the creation of a central bank. 135 00:10:01.720 --> 00:10:04.720 All right, there are a lot of problems with this argument. 136 00:10:04.720 --> 00:10:11.720 I mean, Canada didn't suffer these panics, the sort of panics that you would see in the post-Civil War era in the US. Canada didn't have this. 137 00:10:11.720 --> 00:10:16.720 They also didn't have a central bank. They didn't have a central bank till 1934. 138 00:10:16.720 --> 00:10:21.720 So how would they respond to that? Answer, blank out, there is no answer to that. 139 00:10:21.720 --> 00:10:26.720 I actually made up a page of resources on this because I think this needs to be looked into more. 140 00:10:26.720 --> 00:10:30.720 We need more work done on these pre-Federal Reserve panics. 141 00:10:30.720 --> 00:10:35.720 Because people will say to you, when you talk about the Fed, and we want to end the Fed, they'll say, 142 00:10:35.720 --> 00:10:41.720 well, Mr. Wiseguy, didn't we used to have all these panics, and ups and downs, and booms and busts before the Fed? 143 00:10:41.720 --> 00:10:43.720 You can't blame that on the Fed. 144 00:10:43.720 --> 00:10:48.720 Well, I made up a page on my site, tomwoods.com slash panics, 145 00:10:48.720 --> 00:10:53.720 where I've got a video that I gave at Mises University last year, 146 00:10:53.720 --> 00:10:57.720 and some links to some resources on this, some stuff I've written, other people have written. 147 00:10:57.720 --> 00:11:04.720 But to make a long story short for our purposes, actually the panics in the US were not caused by the gold standard. 148 00:11:04.720 --> 00:11:09.720 The mechanism, the causal mechanism is hardly ever described. What is it about gold? 149 00:11:09.720 --> 00:11:15.720 What is it about a money that is spontaneously adopted by society that suddenly leads to booms and busts 150 00:11:15.720 --> 00:11:20.720 such that we need to introduce violence and force people at the point of a gun to accept pieces of paper instead? 151 00:11:20.720 --> 00:11:26.720 Like what would be wrong with this system that would cause this? We hardly ever get the causal mechanism. 152 00:11:26.720 --> 00:11:32.720 It's just explained to us that there is a correlation. Before we had the Fed, we had these panics. 153 00:11:32.720 --> 00:11:43.720 But when you look at them, there's the Panic of 1819. Well, all contemporaries basically said, well, most contemporaries basically said this was a problem of artificial paper money creation 154 00:11:43.720 --> 00:11:49.720 that was spearheaded in large part by the Bank of the United States, especially privileged by the U.S. government. 155 00:11:49.720 --> 00:12:19.720 and so after the panic of 1819, as Murray Rothbard showed in his study of this published by Columbia University Press in 1962 in fact after this there was a huge hard money movement that swept the United States people began to say this paper money creation just yields us boom and bust and we want real money so they all perceived it that way now a lot of times when you get these banks in US history there it's claimed that we need these banks in order 156 00:12:19.720 --> 00:12:25.120 in order to restrain the local banks so that when these local banks or state banks issue 157 00:12:25.120 --> 00:12:30.360 their own notes, if these notes get to the national bank, the national bank will return 158 00:12:30.360 --> 00:12:36.200 those notes and demand specie from the local or state banks and this will keep them honest. 159 00:12:36.200 --> 00:12:40.400 But there was a U.S. Senator, I don't normally look to the U.S. Senate for wisdom, even though 160 00:12:40.400 --> 00:12:45.980 Senex, old man, the root of Senate implies they're supposed to be wise, but there was 161 00:12:45.980 --> 00:13:15.980 There was a U.S. Senator from Delaware, William Wells, who predicted right around 1816, he said this whole idea that you're going to protect Americans against the unsound principles of the banks by creating one giant unsound bank seems unsound to me as a strategy and he basically said it's like saying I don't want to be out in the rain, I hate being out in the rain, so I'm going to hide in the ocean. 162 00:13:15.980 --> 00:13:27.980 And that is exactly the outcome that we had. 1837, likewise, you look at contemporary accounts, they're all saying the second bank has given us all these fluctuations and look at the problems that we have. 163 00:13:27.980 --> 00:13:37.980 In 1857, which is a fairly mild downturn, this was the period of the independent treasury where there was the closest thing ever in American history to the complete separation of bank and state. 164 00:13:37.980 --> 00:13:44.980 You had the least severe of these panics. It lasted about six months and then everything was okay. 165 00:13:44.980 --> 00:13:54.980 James Buchanan, President Buchanan, actually said that the problem with this, and we're going to keep having this problem, is this system of artificial bank credits. 166 00:13:54.980 --> 00:14:01.980 He did not say, well, there's that stupid old gold standard causing this problem again, but people at the time understood the connection. 167 00:14:01.980 --> 00:14:13.980 In fact, Buchanan proposed a special bankruptcy law for banks because he did not agree with the principle that if banks get in trouble and they can't return your money on demand, 168 00:14:13.980 --> 00:14:17.820 on Demand that they ought to be given a couple of years to come up with the money. They ought 169 00:14:17.820 --> 00:14:21.660 to be allowed to suspend species payment. He was not a supporter of that system. He 170 00:14:21.660 --> 00:14:27.180 favored a special law whereby it would be clear that banks would go under. They would 171 00:14:27.180 --> 00:14:33.420 suffer what he called their quote civil death if they cannot pay depositors on demand. He 172 00:14:33.420 --> 00:14:38.900 thought that would be a salutary reform. Well, it would have been a salutary reform in 1857 173 00:14:38.900 --> 00:14:45.900 1873, here this one a lot. Oh my goodness, we had such a terrible recession in 1873, 174 00:14:48.060 --> 00:14:52.620 it just didn't stop. It just went on and on and on for years and years and years and years. 175 00:14:52.620 --> 00:14:56.980 Well it turns out that basically economic historians no longer believed there was such 176 00:14:56.980 --> 00:15:01.580 a long depression after 1873. And to the contrary, this was one of the most prosperous periods 177 00:15:01.580 --> 00:15:08.580 in all of American history. There was a recession in 1873, but there was no six year depression 178 00:15:08.900 --> 00:15:14.900 23-year depression or in some of the more outlandish forms of the argument, 23-year depression. 179 00:15:14.900 --> 00:15:22.180 Nobody believes this anymore. This is a misconception. A professor at Berkeley, that bastion of hard 180 00:15:22.180 --> 00:15:28.540 money, Andrew Jalil says, contrary to the conventional wisdom, there is no evidence 181 00:15:28.540 --> 00:15:33.300 of a decline in the frequency of panics during the first 15 years of the existence of the 182 00:15:33.300 --> 00:15:38.700 Federal Reserve. Panics go away, by the way, because of the FDIC. It has nothing to do 183 00:15:38.700 --> 00:15:43.500 with a Central Bank, and then the FDIC in turn leads to its own problems. 184 00:15:43.500 --> 00:15:49.540 A book published in the year 2000 called Banking Panics in the Gilded Age says as follows, 185 00:15:49.540 --> 00:15:53.500 says that in fact the record is still even not that bad, is that there were no more than 186 00:15:53.500 --> 00:15:59.620 three major banking panics between 1873 and 1907, and two incipient banking panics in 187 00:15:59.620 --> 00:16:06.620 1884 and 1890. Twelve years elapsed between the panic of 1861 and the panic of 1873, 20 188 00:16:06.620 --> 00:16:15.220 1873, 20 years between the panics of 1873 and 1893, and 14 years between 1893 and 1907. 189 00:16:15.220 --> 00:16:20.340 Three banking panics in half a century. And in only one of the three, 1893, did the number 190 00:16:20.340 --> 00:16:26.220 of bank suspensions match those of the Great Depression. Whereas by contrast, in the first 191 00:16:26.220 --> 00:16:31.580 three years of the Great Depression, which is the Fed era, there were five separate bank 192 00:16:31.580 --> 00:16:39.420 Panics. Now I've got sources for this, again, but I have that at tomwoods.com slash panics. 193 00:16:39.420 --> 00:16:44.740 So that's another source. You can click on that and find this stuff. Now also, if we 194 00:16:44.740 --> 00:16:51.260 define a banking crisis as a wave of bank failures that are associated with substantial 195 00:16:51.260 --> 00:16:58.820 losses, then between 1874 and the eve of World War I, we can count on one hand the number 196 00:16:58.820 --> 00:17:01.620 There were a number of such crises there were around the world. 197 00:17:01.620 --> 00:17:07.420 There were four such crises, Argentina, Australia, Italy and Norway. 198 00:17:07.420 --> 00:17:14.900 By contrast, from 1978 to 2008, there were 140 banking crises, 20 of which were worse 199 00:17:14.900 --> 00:17:20.420 than the two worst from this earlier period I just mentioned. 200 00:17:20.420 --> 00:17:24.980 And even during the pre-fed panics, there is still, in terms of depositor losses, we're 201 00:17:24.980 --> 00:17:28.400 not talking about people losing everything. 202 00:17:28.400 --> 00:17:35.520 Depositor losses in the worst of the pre-fed panics, 1893, amounted to 0.1% of GDP. 203 00:17:35.520 --> 00:17:40.320 But in just the past 30 years of the central bank era alone, the world has seen 20 banking 204 00:17:40.320 --> 00:17:46.960 crises that led to depositor losses in excess of 10% of GDP, and half of those saw losses 205 00:17:46.960 --> 00:17:50.400 in excess of 20% of GDP. 206 00:17:50.400 --> 00:17:55.120 Then of course, an aggravating factor were the unit banking regulations in many of the 207 00:17:55.120 --> 00:17:57.360 states, which prohibited the banks from opening branches. 208 00:17:57.360 --> 00:18:03.360 You can have one office, period. It's not that there's no interstate banking, there's no branch banking whatsoever. 209 00:18:03.360 --> 00:18:06.360 So obviously the banks are fragile and undiversified. 210 00:18:06.360 --> 00:18:24.820 But then simultaneously with this, in the post-Civil War period, we have 211 00:18:24.820 --> 00:18:40.820 The gold holdings of the U.S. money supply in the vaults of seven privileged New York banks that then could create their own notes, and then these notes were then used as a base from which to pyramid additional inflation by other more local banks. 212 00:18:40.820 --> 00:18:50.820 And a number of scholars have pointed this out. This is the source of the turbulence that you're having. It's not gold. It's the evasion, evasions of gold. 213 00:18:50.820 --> 00:18:55.100 Alright, but you can't talk about this stuff without having the objection of what about 214 00:18:55.100 --> 00:19:00.300 deflation. Deflation is the worst outcome imaginable. If we have prices falling, this 215 00:19:00.300 --> 00:19:06.340 is a bad thing, because this leads to, well, a series of problems that I'll get into now. 216 00:19:06.340 --> 00:19:12.420 One of the difficulties with this is that we had falling prices all through US history, 217 00:19:12.420 --> 00:19:16.220 up through the early 20th century. So, like, who are you going to believe? These critics 218 00:19:16.220 --> 00:19:23.220 or Your Own Eyes. We had falling prices and apparently not everyone died instantly. It 219 00:19:23.380 --> 00:19:30.380 still went on. Just for that reason alone, two of the periods of the most robust economic 220 00:19:31.620 --> 00:19:38.620 growth in U.S. history were the periods from 1820 to 1850 and 1865 to 1900. In those two 221 00:19:38.620 --> 00:19:46.020 And in those two cases, in each case, prices fell about in half, and yet, robust growth. 222 00:19:46.020 --> 00:19:49.020 Well now, we're not supposed to talk about this. Now, there will be some who will say, 223 00:19:49.020 --> 00:19:53.420 who will concede that it's okay in some circumstances for prices to fall. 224 00:19:53.420 --> 00:19:57.020 If they're falling because of greater productivity and greater abundance of goods, 225 00:19:57.020 --> 00:20:03.020 pushing prices down, that's okay. Others still don't even like this particular type of deflation. 226 00:20:03.020 --> 00:20:07.020 I'll get to those in a minute. First, I just want to see, is there empirically any link 227 00:20:07.020 --> 00:20:11.860 between Deflation Episodes and Episodes of Depression. 228 00:20:11.860 --> 00:20:16.860 And here I refer to an article that I referred to in 2009, my book Meltdown. 229 00:20:16.860 --> 00:20:19.260 I learned about this article from Joe Salerno. 230 00:20:19.260 --> 00:20:25.020 In the American Economic Review by economists Atkinson and Kehoe, they evaluated the evidence 231 00:20:25.020 --> 00:20:28.540 from 17 countries over a period of 100 years. 232 00:20:28.540 --> 00:20:35.040 Here's what they concluded, quote, a broad historical look finds more periods of deflation 233 00:20:35.040 --> 00:20:41.280 with reasonable growth than with depression, and many more periods of depression with inflation 234 00:20:41.280 --> 00:20:48.280 than with deflation. Overall, the data show virtually no link between deflation and depression. 235 00:20:50.080 --> 00:20:56.660 So they bothered to look, unlike the people in the Guardian or the New York Times or whatever. 236 00:20:56.660 --> 00:21:01.420 Even in the Great Depression, the countries that were studied all experienced deflation, 237 00:21:01.420 --> 00:21:04.540 But only eight of them suffered a depression. 238 00:21:04.540 --> 00:21:08.260 And these researchers further found that the relationship between deflation and depression 239 00:21:08.260 --> 00:21:11.420 was not statistically significant. 240 00:21:11.420 --> 00:21:15.520 For the rest of the period that they studied, which went as far back as 1820, they found 241 00:21:15.520 --> 00:21:21.100 that 65 out of 73 deflation episodes had no depression. 242 00:21:21.100 --> 00:21:27.000 And that 21 of 29 depressions had no deflation. 243 00:21:27.000 --> 00:21:29.340 But thirdly, does the argument even hold? 244 00:21:29.340 --> 00:21:33.380 What's the logic behind the argument? Well, first of all, let's realize there's a prima 245 00:21:33.380 --> 00:21:39.020 facie reason not to be alarmed by the phenomenon of falling prices, because think of it this 246 00:21:39.020 --> 00:21:46.780 way. What are we doing in the free market when entrepreneurs invest in capital equipment 247 00:21:46.780 --> 00:21:52.500 and they increase the physical capacity of their production process and we get a greater 248 00:21:52.500 --> 00:21:57.980 and greater abundance of goods? What are we doing? We are fighting against scarcity. That's 249 00:21:57.980 --> 00:22:02.780 That's what we're doing. We can't ultimately conquer scarcity, but we are fighting against 250 00:22:02.780 --> 00:22:07.420 scarcity. Now, real, if we conquered scarcity, it would be like Rothbard's example, that 251 00:22:07.420 --> 00:22:11.860 you would just wish for a Coke and instantly it would be going down your throat. Like, 252 00:22:11.860 --> 00:22:16.980 that would be a true zero-price, costless world. We're never going to get there. But 253 00:22:16.980 --> 00:22:23.480 a world where scarcity had been abolished would be a world of zero price. So when prices 254 00:22:23.480 --> 00:22:28.920 These fall systemically in a hard money system, in the market. 255 00:22:28.920 --> 00:22:34.680 This is simply, in effect, capitalism working out its destiny, if I may speak that way, 256 00:22:34.680 --> 00:22:41.240 of moving us away from scarcity and toward a world of abundance, toward that world of 257 00:22:41.240 --> 00:22:42.760 zero price. 258 00:22:42.760 --> 00:22:46.760 So there's a prima facie reason to think this is a glorious thing that we are seeing unfold 259 00:22:46.760 --> 00:22:48.880 before us. 260 00:22:48.880 --> 00:22:53.360 But you may think that, but the sophisticates in the financial press will tell you otherwise. 261 00:22:53.360 --> 00:22:56.640 Here's Duncan Weldon from The Guardian who writes, 262 00:22:56.640 --> 00:22:59.720 Falling prices might sound like a good thing 263 00:22:59.720 --> 00:23:03.240 and in individual cases they often are. He throws us a bone there. 264 00:23:03.240 --> 00:23:07.000 But a falling general price level is 265 00:23:07.000 --> 00:23:12.400 a falling general price level is usually associated with severe economic strains. 266 00:23:12.400 --> 00:23:16.240 Okay, we've already seen that's not true. Usually. What's that? Where's your evidence? 267 00:23:16.240 --> 00:23:19.520 Show me. Prove it. Usually. What are you talking about? 268 00:23:19.520 --> 00:23:23.840 The evidence has already been looked at. There is no connection. Where did it usually come from? 269 00:23:23.840 --> 00:23:28.720 I'm sure he'll retract this article when this video comes out. 270 00:23:28.720 --> 00:23:30.680 And then he says, 271 00:23:30.680 --> 00:23:34.280 and this is the logic of at least some of the popular renditions of the 272 00:23:34.280 --> 00:23:36.240 argument of what's wrong with deflation, 273 00:23:36.240 --> 00:23:39.800 why buy anything today if it's going to be cheaper next week? 274 00:23:39.800 --> 00:23:43.920 That's the argument. That if prices are falling, no one will buy. 275 00:23:43.920 --> 00:23:47.240 Because you'll say, look, I'm not going to have a cup of coffee this morning because I bet tomorrow 276 00:23:47.240 --> 00:23:50.240 it'll be five cents cheaper. 277 00:23:50.240 --> 00:23:54.240 And then tomorrow will come and you say, well, that coffee people think I must be some kind of a sucker. 278 00:23:54.240 --> 00:23:58.360 It's going to be five cents cheaper tomorrow. Like, eventually you're going to break down and say, 279 00:23:58.360 --> 00:24:01.920 on the other hand, time preference exists and I prefer goods in the present 280 00:24:01.920 --> 00:24:06.760 to goods, to the same good in the future, I'm going to break down and buy that cup of coffee. 281 00:24:06.760 --> 00:24:11.840 In the same way that you buy a laptop, even though you know that a year from now you're going to feel like a sucker, 282 00:24:11.840 --> 00:24:16.480 because they're cheaper and they're better and whatever, but at some point you need the laptop. 283 00:24:16.480 --> 00:24:17.900 But in this version of the argument, 284 00:24:17.900 --> 00:24:19.220 none of us are gonna buy anything 285 00:24:19.220 --> 00:24:20.660 until we're on our deathbeds 286 00:24:20.660 --> 00:24:22.500 and then we'll finally grab an iPod 287 00:24:22.500 --> 00:24:23.940 just as we're expiring. 288 00:24:23.940 --> 00:24:27.220 It's not how people act. 289 00:24:30.180 --> 00:24:31.740 All right, so there's that. 290 00:24:31.740 --> 00:24:32.980 But then the other argument would be, 291 00:24:32.980 --> 00:24:34.900 well, it's hard for businesses to make a profit 292 00:24:34.900 --> 00:24:36.260 if prices are falling. 293 00:24:37.260 --> 00:24:38.460 Well, that's of course not true 294 00:24:38.460 --> 00:24:40.660 because what matters, it doesn't matter where prices are. 295 00:24:40.660 --> 00:24:43.340 It matters the price spread between the thing you're selling 296 00:24:43.340 --> 00:24:45.140 and the cost of the inputs to make those things 297 00:24:45.140 --> 00:24:45.960 that you're selling. 298 00:24:45.960 --> 00:24:49.960 And that price spread can still exist even when prices are falling. 299 00:24:49.960 --> 00:24:53.960 It doesn't matter where prices are. As long as there's a difference between the price and the cost, 300 00:24:53.960 --> 00:24:57.960 then you're fine. That's not an issue. But also businesses, 301 00:24:57.960 --> 00:25:01.960 this is what entrepreneurs are supposed to do. The role of the entrepreneur, 302 00:25:01.960 --> 00:25:05.960 one of the important tasks of the entrepreneur is to adjust. 303 00:25:05.960 --> 00:25:09.960 To adjust is to take resources and allocate them 304 00:25:09.960 --> 00:25:13.960 in ways that he anticipates will please consumers. 305 00:25:13.960 --> 00:25:21.960 So that goods are produced in the economy in such a way that the least cost is borne by society. 306 00:25:21.960 --> 00:25:27.960 And so it's up to the entrepreneur to anticipate output prices and to anticipate all the factors, 307 00:25:27.960 --> 00:25:30.960 all the factors that go into making output prices what they are. 308 00:25:30.960 --> 00:25:39.960 And so knowing, or I suppose not knowing, but making his best entrepreneurial appraisal of the situation, 309 00:25:39.960 --> 00:25:41.960 he bids for the factors of production. 310 00:25:41.960 --> 00:25:45.560 Production. If he thinks, gosh, the things that I'm selling, I'm selling widgets, they're 311 00:25:45.560 --> 00:25:50.160 going for $5 a widget now, but I think next year they're going to be down to $3 a widget. 312 00:25:50.160 --> 00:25:55.680 He's not going to spend as much to buy the widget banking machine or the widget laborers 313 00:25:55.680 --> 00:26:02.600 as he would before. He's going to lower his bids for those goods. And so then the cost 314 00:26:02.600 --> 00:26:08.580 of his inputs will commensurately come down. And so the price spread between output and 315 00:26:08.580 --> 00:26:13.980 and Cost is preserved. If the cost of his inputs don't come down, then that indicates 316 00:26:13.980 --> 00:26:18.380 that elsewhere in the economy there's greater demand for those inputs in some other line 317 00:26:18.380 --> 00:26:22.340 of production producing some other type of consumer good. This is what entrepreneurs 318 00:26:22.340 --> 00:26:26.460 do. There's no reason they can't cope with this. But even if they can't, even if one 319 00:26:26.460 --> 00:26:32.340 day it turns out that they all fail to anticipate that their selling prices were going to crash 320 00:26:32.340 --> 00:26:36.500 and this leads them into such financial straits they've got to sell all their products at 321 00:26:36.500 --> 00:26:39.820 at these hopelessly low prices and it ruins them. 322 00:26:39.820 --> 00:26:40.660 Well, what does this do? 323 00:26:40.660 --> 00:26:42.020 I mean, Guido Holzman points this out. 324 00:26:42.020 --> 00:26:44.620 Well, all this does is it means that 325 00:26:44.620 --> 00:26:46.140 they go into bankruptcy proceedings 326 00:26:46.140 --> 00:26:48.340 and their resources are just shifted around 327 00:26:48.340 --> 00:26:50.180 to other owners now. 328 00:26:50.180 --> 00:26:52.420 So the resources don't just vanish, 329 00:26:52.420 --> 00:26:54.100 the resources of these firms don't just vanish 330 00:26:54.100 --> 00:26:56.660 into thin air, they're still there. 331 00:26:56.660 --> 00:26:59.020 Now they're just owned by different owners. 332 00:26:59.020 --> 00:27:01.620 And from the aggregate point of view in the economy, 333 00:27:01.620 --> 00:27:03.460 nobody cares who the individual owners are. 334 00:27:03.460 --> 00:27:05.600 It's a tragedy for those owners that, you know, 335 00:27:05.600 --> 00:27:09.400 So they should have been better forecasters of prices. 336 00:27:09.400 --> 00:27:13.680 But overall production is not compromised by this. 337 00:27:13.680 --> 00:27:18.880 There is a sticky prices argument, I'm not sure, I've only got six minutes, so I'm not 338 00:27:18.880 --> 00:27:19.880 going to jump into this. 339 00:27:19.880 --> 00:27:23.640 I'll just say that I do want to do a little something on this at some point, but there's 340 00:27:23.640 --> 00:27:29.120 the argument that prices don't adjust necessarily quickly enough. 341 00:27:29.120 --> 00:27:34.880 So for example, there could be a decrease in demand for some product, but the wages 342 00:27:34.880 --> 00:27:41.880 The prices of the workers who work and produce that product don't fall commensurately and so the market doesn't clear, the labor market doesn't clear. 343 00:27:41.880 --> 00:27:46.880 You can't employ all the workers in that field at that going wage if the price is going down to here. 344 00:27:46.880 --> 00:27:50.880 And so you have a surplus of labor that's unemployed. 345 00:27:50.880 --> 00:27:58.880 And this is a problem, this is because markets can't adjust and there are reasons for this alleged, partly it's that there are long-term contracts that you enter into people 346 00:27:58.880 --> 00:28:10.880 You say, we'll pay you X dollars over three years. That's already locked in, in the contract, so that wage, that salary is sticky, and you can't adjust, and you're stuck with it, and this leads to discoordination. 347 00:28:10.880 --> 00:28:18.880 There are labor unions that aren't going to let the wage go down any lower. There are all these problems that lead to sticky wages. 348 00:28:18.880 --> 00:28:23.880 But first of all, if the government is causing the sticky wages by encouraging the labor unions, there's your problem. 349 00:28:23.880 --> 00:28:31.880 But number two, and let's bear in mind that this stickiness, I know I said I wasn't going to do this, and yet here I am, doing it. 350 00:28:31.880 --> 00:28:40.880 The stickiness, I can't help it. The stickiness is chosen. The stickiness is chosen by the market. It's chosen by consumers, it's chosen by entrepreneurs, it's chosen by workers. 351 00:28:40.880 --> 00:28:47.880 Maybe workers don't want perfectly flexible wages. Maybe they don't want a wage that would change every 10 seconds. 352 00:28:47.880 --> 00:28:50.520 Like they're going to do a productivity study and 10 seconds later it's out 353 00:28:50.520 --> 00:28:55.320 Well right now your wage is only two dollars an hour and then five seconds later up back up to ten 354 00:28:55.440 --> 00:28:59.920 Like no one would want to work under those conditions and in fact Bob Murphy has a good point 355 00:28:59.920 --> 00:29:06.120 He says suppose we did have perfectly flexible adjusting wages that adjusted constantly changing conditions constantly like that 356 00:29:06.480 --> 00:29:11.400 Well workers would be so insecure from one moment to the next not knowing what their wage is going to be 357 00:29:11.640 --> 00:29:16.400 They wouldn't be willing to for example buy houses because they don't know if they're gonna be able to make the mortgage payment next month 358 00:29:46.400 --> 00:30:16.400 They love to deal with slackening demand, they can have coupons, they can have special offers, they can have discounts on the concessions as Joe puts it, but people want stability, so in other words there is no non-arbitrary place from which you can judge what would be the optimal level of stickiness apart from what people actually choose according to their own preferences. Now there's much more that can be said, and I'm not trying to claim that's the only argument, but trying to fight price stickiness by 359 00:30:16.400 --> 00:30:19.480 or wage stickiness by increasing the money supply. 360 00:30:19.480 --> 00:30:22.140 The argument would be, you can't employ all these people 361 00:30:22.140 --> 00:30:24.160 because they're stuck at this nominal wage. 362 00:30:24.160 --> 00:30:26.200 But if we create all this inflation, 363 00:30:26.200 --> 00:30:27.880 then what are we really doing to that wage? 364 00:30:27.880 --> 00:30:30.360 We're pushing it down, it can't buy as much anymore. 365 00:30:30.360 --> 00:30:32.060 Then that'll solve the problem. 366 00:30:32.060 --> 00:30:34.720 But money creation through the banking system 367 00:30:34.720 --> 00:30:37.160 leads to the Austrian business cycle. 368 00:30:37.160 --> 00:30:39.080 It would lead to more entrepreneurial error 369 00:30:39.080 --> 00:30:41.080 because it's yet another thing that entrepreneurs 370 00:30:41.080 --> 00:30:44.300 have to try to figure out when the central bank does 371 00:30:44.300 --> 00:30:46.040 something like that. 372 00:30:46.040 --> 00:30:50.760 So, in any case, there's a lot that can be said on this sticky price thing, and sticky 373 00:30:50.760 --> 00:30:54.600 wages, but this is not, by any means, a difficulty for us. 374 00:30:54.600 --> 00:31:01.440 The final thing I'll do is the gold standard costs resources, okay, it costs us something 375 00:31:01.440 --> 00:31:02.440 because you have to go... 376 00:31:02.440 --> 00:31:05.600 Ben Bernanke used this argument when he was lecturing to those students at that university 377 00:31:05.600 --> 00:31:09.160 in Washington, and he said, well, you know, it's kind of silly because you got to go dig 378 00:31:09.160 --> 00:31:15.560 up the gold, and then we just sit there with it, and that's a lot of wasted resources. 379 00:31:15.560 --> 00:31:20.240 What Guido points out in his book, The Ethics of Money Production, if you look at the number 380 00:31:20.240 --> 00:31:24.760 of employees at the central banks of the world, you know, France employs 12,000 people, Germany 381 00:31:24.760 --> 00:31:29.480 employs 12,000 people, the Fed employs 23,000 people, that's a waste of resources too. 382 00:31:29.480 --> 00:31:35.200 But also, consider what the gold standard or hard money does, it restrains the government. 383 00:31:35.200 --> 00:31:41.840 When it tries to embark on some crazy scheme by means of inflation, people can take their 384 00:31:41.840 --> 00:31:45.200 claims to money and go to the banks and demand their gold for it and shut the whole thing 385 00:31:45.200 --> 00:31:50.680 down. So I would say, given that the gold standard makes that possible, whatever trivial 386 00:31:50.680 --> 00:31:56.520 costs are involved in gold mining, this is the greatest bargain in the history of mankind. 387 00:31:56.520 --> 00:32:01.840 All right, well, I have got about one minute, so I will leave you with this. The premise 388 00:32:01.840 --> 00:32:08.840 behind all these arguments against sound money are that basically the Federal Reserve Board 389 00:32:08.840 --> 00:32:15.840 The Federal Reserve Board can make better decisions than can millions of people pursuing their own interests. 390 00:32:15.840 --> 00:32:20.840 I mean, it is the classic argument of central planning against the voluntary sector. 391 00:32:20.840 --> 00:32:29.840 And so what I did at TomWoods.com slash money is I'm linking you there to the testimony of Professor Jeff Herbiner, 392 00:32:29.840 --> 00:32:34.840 a senior fellow of the Mises Institute before Congress at the same session where Peter Klein testified. 393 00:32:34.840 --> 00:32:41.400 And he outlines exactly what the argument is, theoretically and practically, for a money 394 00:32:41.400 --> 00:32:43.320 that is separated from the state. 395 00:32:43.320 --> 00:32:49.440 How it would work, why it would be superior, why the current system is utterly irrational. 396 00:32:49.440 --> 00:32:54.960 Because unlike every other good in the economy, fiat money cannot be regulated by profit. 397 00:32:54.960 --> 00:32:59.520 It can't be regulated through the normal entrepreneurial process of economic calculation. 398 00:32:59.520 --> 00:33:03.080 Because it's always profitable to produce more fiat money. 399 00:33:03.080 --> 00:33:11.080 It's always profitable to produce more. So its production is always arbitrary. It's always at some arbitrary level, unlike the production of every other good in society. 400 00:33:11.080 --> 00:33:21.080 There's no reason we should want this. We should instead want a real money produced on the market, given that money emerged on the market in the first place, according to Menger and Mises. 401 00:33:21.080 --> 00:33:24.080 Well, this is where it ought to come from in the future. 402 00:33:24.080 --> 00:33:35.080 And yes, it's true that this is a hard stance and uncompromising because we're actually saying that we don't like the gold standard either because it's too wussy. 403 00:33:35.080 --> 00:33:46.080 We want to be hardcore. Yeah, that's a tough position to take. But the cause of monetary reform is so critical that we can't afford to be milquetoast about it or middle of the road about it. 404 00:33:46.080 --> 00:33:53.080 We've got to take the logical outcome of the Austrian view and present it to the public and argue for it and not back down. 405 00:33:53.080 --> 00:33:59.080 And you can be absolutely sure that the Mises Institute will never back down. 406 00:33:59.080 --> 00:34:01.080 And I thank you very much for your attention.