WEBVTT NOTE The Ten Best Books on Money 1 00:00:00.000 --> 00:00:08.400 I'm going to talk about the ten best books on money. Unfortunately, if you read books 2 00:00:08.400 --> 00:00:16.200 on monetary theory, it doesn't enable you to make money. I think there's a story that 3 00:00:16.200 --> 00:00:22.880 Karl Marx's mother once said that she thought it was unfortunate that Karl wrote so much 4 00:00:22.880 --> 00:00:33.880 The first book I want to mention is one by an economist who is very different in his views from Karl Marx. 5 00:00:33.880 --> 00:00:42.880 It's one that Walter just talked about in his talk. It's the one by Murray Rothbard, What Has Government Done To Our Money? 6 00:00:42.880 --> 00:00:49.880 This is a very short book. I think it originally came out as a pamphlet with the Freedom School of Robert LeFave. 7 00:00:49.880 --> 00:01:03.880 I think the primary thesis of Murray Rothbard's book is some people have an idea that money is purely conventional. 8 00:01:03.880 --> 00:01:07.880 They'll say, well, why do we accept these pieces of paper in exchange? 9 00:01:07.880 --> 00:01:11.880 Well, we accept them because we know everybody else will accept them. 10 00:01:11.880 --> 00:01:18.880 For example, the philosopher John Searle, who's a very good philosopher of language but not so good on money, says exactly that. 11 00:01:18.880 --> 00:01:25.280 Exactly that, but according to Murray Rothbard, this is a completely false picture of money. 12 00:01:25.280 --> 00:01:35.120 What in money, in his view, is strictly, must begin and ought always to be strictly a commodity. 13 00:01:35.120 --> 00:01:43.440 He points out that originally the names for money were simply designated units of weight. 14 00:01:43.440 --> 00:01:50.840 For example, a British pound, the British pound before World War I, was defined as 113 grains of gold. 15 00:01:50.840 --> 00:02:00.740 So according to, as Rothbard said, well, money must be, if the economy is to work, probably, must be a commodity. 16 00:02:00.740 --> 00:02:13.140 Now, the problem comes in, this is again something Walter was discussing, is it's very often people find it inconvenient just to carry around, say, bars of gold. 17 00:02:13.140 --> 00:02:25.140 So they have the idea of having certificates where they'll be, instead of having to actually carry the gold, they'll just have certificates that are representing the money. 18 00:02:25.140 --> 00:02:32.140 So the problem comes in if you have more of these certificates than your actual money available. 19 00:02:32.140 --> 00:02:42.140 And this generates, allows government to inflate the currency and it will lead to business cycles and have all sorts of bad things. 20 00:02:42.140 --> 00:03:00.140 Murray, in the book, gives just a few page of capsule summary of monetary history, showing the bad effects of not maintaining money strictly as a commodity. 21 00:03:00.140 --> 00:03:10.140 Now, I just want to move on to a book that's quite a bit more difficult than What Has Government Done to Our Money. 22 00:03:10.140 --> 00:03:20.140 This is the book by Ludwig von Mises, originally came out in 1912, of course in German, called The Theory of Money and Credit. 23 00:03:20.140 --> 00:03:26.140 This is undoubtedly the greatest of all books on monetary theory. 24 00:03:26.140 --> 00:03:39.140 Mises in that book solved a big problem for monetary theory that economists had never been able previously to solve. 25 00:03:39.140 --> 00:04:05.140 The problem is this. In the subjective theory of value, which is one that Austrian economics uses, the prices of goods are explained by the subjective values that consumers put on them, say, why, if you say, why does an apple have a certain price, it's because consumers value an apple so much on their preference scale compared with other things. 26 00:04:05.140 --> 00:04:25.140 The problem seems to be that if you ask what's the value of money, that depends on what the prices of all the other goods are. 27 00:04:25.140 --> 00:04:33.140 If you try to have a subjective theory of money, you seem to be engaging in a circle. 28 00:04:33.140 --> 00:04:44.140 Well, the value of the price of money depends on the value consumers assign it, but the value of money in turn depends on the prices. 29 00:04:44.140 --> 00:04:51.140 So this was a problem economists couldn't solve, but Mises figured out a way to solve it. 30 00:04:51.140 --> 00:05:01.140 I won't go through his solutions, famous money regression theorem. You'll be able to see that in the book. 31 00:05:01.140 --> 00:05:27.140 Now, Mises in that theory of money and credit develops also the theory of the business cycle that was dependent on expansion of bank credit, and he applies this theory in a volume that you can get on the causes of the economic crisis. 32 00:05:27.140 --> 00:05:38.420 Mises, in 1928, was able to foresee that there would be a crisis coming. 33 00:05:38.420 --> 00:05:46.340 He was able to see that if the inflationary policy of the 1920s continued, there was going to be a depression. 34 00:05:46.340 --> 00:05:50.540 A lot of other economists, such as the great American economist Irving Fisher, were saying, 35 00:05:50.540 --> 00:06:03.540 I know that we've reached permanent prosperity, but Mises said, look, if you have the government expanding the money supply and have an increase in bank credit, this is going to generate all sorts of problems. 36 00:06:03.540 --> 00:06:18.540 And he also, in this book, there's an essay he has just called, Cause of the Economic Crisis, it was a lecture I think he gave in 1931. 37 00:06:18.540 --> 00:06:25.140 And he asks the question, well, why is this crisis more severe than past depressions? 38 00:06:25.140 --> 00:06:31.940 And he points out that the governments are interfering in the economy in various ways. 39 00:06:31.940 --> 00:06:34.940 For example, they're propping up wage rates. 40 00:06:34.940 --> 00:06:40.440 They're not allowing wage rates to fall, and this is leading to unemployment. 41 00:06:40.440 --> 00:06:47.040 Now, as I said, Mises relied on the theory of the business cycle 42 00:06:47.040 --> 00:07:05.040 But probably the most elaborate account of the Austrian business cycle theory, the best account, is in the book called Prices in Production by Friedrich Hayek. 43 00:07:05.040 --> 00:07:12.040 This you can get, the very good edition that's just come out edited by Joe Salerno, Prices in Production and Other Works. 44 00:07:12.040 --> 00:07:24.040 Hayek, in that book, elaborates in detail on the mechanism by which the Austrian theory develops. 45 00:07:24.040 --> 00:07:35.040 What you have is, if the bank expands credit, this will lower the monetary rate of interest below what's called the natural rate of interest. 46 00:07:35.040 --> 00:07:37.880 Natural Rate of Interest According to the Austrian theory, natural rate 47 00:07:37.880 --> 00:07:44.240 of interest depends on the rate of time preference, the rate by which people prefer present goods 48 00:07:44.240 --> 00:07:52.120 over future goods. So if there's an increase in bank credit, then the government, then 49 00:07:52.120 --> 00:07:58.720 businesses will tend to take the money and they'll expand their business. In particular, 50 00:07:58.720 --> 00:08:04.720 Invest more heavily in capital goods industry. Hayek calls this an expansion. 51 00:08:04.720 --> 00:08:15.720 They'll expand the production of these capital goods industry, but they'll expand the structure of production. 52 00:08:15.720 --> 00:08:27.720 Then, after the monetary expansion stops, then they'll most probably be returned to the true rate of interest dependent on, which is termed by time preference. 53 00:08:27.720 --> 00:08:41.720 and then he found out that these businesses are not good investments. They'll have to be all liquidated and this is precisely the depression. It's the liquidation of all these businesses. 54 00:08:41.720 --> 00:08:55.720 Now one thing you find in the book by Hayek particularly with the additional works that Joseph Salerno was included is Hayek was quite deadly in his replies to critics. 55 00:08:55.720 --> 00:09:05.720 He was really a very tough critic. If you think, say, some of my reviews and Mises' review are bad, you should see what he said. 56 00:09:05.720 --> 00:09:13.220 It reminded me, when I was reading, particularly, say, he had an essay criticizing Frank Knight on the Capitol, 57 00:09:13.220 --> 00:09:21.720 it reminded me of a comment that American critic Dwight MacDonald made when he was reviewing a book, 58 00:09:21.720 --> 00:09:51.720 There was a military manual during World War II by Colonel Rex Applegate called Kill or Get Killed and McDonald said that the thesis of this book could be summarized always kick below the belt especially when the other man is down so this is what Hayek is like when he takes after some opponent of his theories, an extremely good critic 59 00:09:51.720 --> 00:10:01.680 Now, a later book that I want to mention is also on the Austrian Theory of the Business 60 00:10:01.680 --> 00:10:02.680 Cycle. 61 00:10:02.680 --> 00:10:09.080 It's one by the Spanish economist Jesus Huerta de Soto, and this is called Money, Bank, Credit 62 00:10:09.080 --> 00:10:11.200 and Economic Cycle. 63 00:10:11.200 --> 00:10:21.680 And de Soto is particularly good at replying to the monetarists such as Milton Friedman 64 00:10:21.680 --> 00:10:36.680 And he makes a comment, which I think is very interesting in the book. He says that he thinks that compared to the Austrian theory, there isn't really that much difference between monetarists and Keynesians. 65 00:10:36.680 --> 00:10:50.680 Of course, in mainstream economics, the monetarists and Keynesians are very strongly opposed to each other. But he says, well, compared to the Austrian, you can really put them in the same category. 66 00:10:50.680 --> 00:11:20.680 and he also, besides being an economist, he's an expert on legal theory and he points out, he devotes a great deal of attention in the beginning of the book, to a criticism of the legal basis of fractional reserve banking, remember from Walter Block's talk, fractional reserve banking is the system in which a bank doesn't have to have gold or other 67 00:11:20.680 --> 00:11:35.680 and Commodity Money backing up all of the demand deposits that it has. It could issue credit beyond this. It has certain minimum reserve requirements, but it can issue credit beyond this. 68 00:11:35.680 --> 00:11:50.680 Werder de Soto said it's been impossible for lawyers really to come up with a good way of characterizing how the situation would be described legally. 69 00:11:50.680 --> 00:12:02.680 He said you can't really say it's a loan contract because in a genuine loan contract, while the loan is, while you have the money to say that you've borrowed, 70 00:12:02.680 --> 00:12:32.680 you can do whatever you want with it for that period say if I borrowed $500 from you for six months you can't come back to me say after two months say I want the money for the period loan I can do whatever I want with it of course if you loan the money to me for six months you wouldn't get it back in six months either but that that's a side point so he said well we can't call it a genuine 71 00:12:32.680 --> 00:12:44.320 loan contract, but because the people in a demand deposit, you can get your money back whenever you want. 72 00:12:44.320 --> 00:12:50.240 So he said, well, we can't really characterize this in any acceptable form. 73 00:12:50.240 --> 00:12:57.640 He goes on to describe all sorts of ways people tried to get around this point, but they haven't been able to do it. 74 00:12:57.640 --> 00:13:14.840 Now, I mentioned a few books on the Austrian business cycle theory, but now I want to turn to an application of that theory to a historical event, the American Great Depression. 75 00:13:14.840 --> 00:13:22.440 And this is the – I want to mention a great book of Murray Rothbard, which came out in 1963, called America's Great Depression. 76 00:13:22.440 --> 00:13:48.940 Now, what Rothbard does in the start of the book, he gives a very good account of Austrian business cycle theory, he stresses, and compares it with all sorts of other popular theories of business cycle, and he said the Austrian theory is the one that's able to explain, as the other theories can't, the key thing that business cycle theory has to account for is what he calls a cluster of entrepreneurial errors. 77 00:13:48.940 --> 00:13:53.440 Why is it that a lot of businesses are failing all at once? 78 00:13:53.440 --> 00:13:57.940 And he said, well, the reason for this is that just this process I mentioned before, 79 00:13:57.940 --> 00:14:03.440 that there's been an expansion of the bank credit that distorts the structure of production. 80 00:14:03.440 --> 00:14:11.940 So then when businesses find that the true rate of interest won't sustain their products, 81 00:14:11.940 --> 00:14:17.940 there's a liquidation of these unsound investments. 82 00:14:17.940 --> 00:14:44.940 and he applies this to explaining the great 1929 depression. He says there's been, there was a Federal Reserve during the 1920s under the, especially as determined by the most prominent person in the system, the governor of the Federal Reserve Bank of New York, Benjamin Strong, 83 00:14:44.940 --> 00:15:13.940 was inflating the money supply. In doing so, the reason that they were doing that, they were acting in conjunction with the head of the Bank of England, Montague Norman, who wanted the other countries to inflate, so he could try to, this would help the British pound, so Murray Rothbard says that American policy was really subservient to English interests. 84 00:15:13.940 --> 00:15:43.940 Now, there is an objection that people might give them, monetarists such as Milton Friedman, given this, they said, well, look, if you look at the 1920s, there wasn't a big increase in prices, so how can you say that the 1920s, the Federal Reserve policy was following an inflationist policy, the prices didn't go up, but here what you would have to do is say, well, what would have happened had they not expanded the money supply and prices would have fallen, so you see, there was 85 00:15:43.940 --> 00:16:13.940 actually it isn't the fact that prices weren't rising so much in the 20s doesn't contradict Rothbard's account because prices would otherwise have gone down and then later on in the book he goes on to explain the long summer lines to what Mises had done in this 1931 talk I gave I mentioned that he says the policies that the government especially at the end of Herbert Hoover's administration 86 00:16:13.940 --> 00:16:19.380 and the frustration established in propping up wage rates, interfering in the economy, 87 00:16:19.380 --> 00:16:25.980 prolonged the depression, made much worse than it otherwise would have been. 88 00:16:25.980 --> 00:16:35.780 I think Rothbard's work can be here, especially in the international aspect, very usefully 89 00:16:35.780 --> 00:16:43.940 supplemented by another book which came out I think in 1972 by Melchior Pali called Twilight 90 00:16:43.940 --> 00:16:50.540 of Gold. This was actually brought out after he died a couple years before but his wife 91 00:16:50.540 --> 00:16:59.300 brought it out. Pali was a Hungarian who taught in Germany for a long time. He was the chief 92 00:16:59.300 --> 00:17:08.300 He was the chief economist of the Deutsche Bank until I think he left in March 1933, right after Hitler had come to power in January. 93 00:17:08.300 --> 00:17:19.300 He was also a disciple of the great German sociologist Max Weber and in fact edited Max Weber's Festschrift. 94 00:17:19.300 --> 00:17:39.800 So, what Pally points out, again, continuing the theme that Rothbard had mentioned, he stresses the influence of Montague Norman on monetary policy after World War I. 95 00:17:39.800 --> 00:17:47.800 He contrasts Montague Norman with Lord Keynes. At that time, he wasn't Lord Keynes, he was just John Maynard Keynes. 96 00:17:47.800 --> 00:18:17.800 He said, Norman didn't want, wanted to try to restore the British, before returning to the full gold standard, he wanted to restore the British economy to a stronger position, but he did eventually want to return to the full gold standard, but he said Keynes didn't, Keynes was a full-fledged economic nationalist, and he didn't really want an international system based on the gold standard, and 97 00:18:17.800 --> 00:18:32.800 Pauli is very critical of Milton Friedman and the monetarists, and he says that Milton Friedman has an unduly narrow view of the monetary supply in the 1920s. 98 00:18:32.800 --> 00:18:38.800 If you had a longer view, a better view, you would see there was inflation in this period. 99 00:18:38.800 --> 00:18:56.300 In one point he differs with Rothbard. He thinks that the British could have restored the pre-war parity, when they restored the pre-war parity, the gold standard. He said this wasn't a bad thing to do. Rothbard said they shouldn't have done that, but he thinks they should. 100 00:18:56.300 --> 00:19:07.300 Now, one thing that Paoli mentions is, this is taken up by the next book that I want to mention is Jacques Rouef, The Monetary Sin of the West, 101 00:19:07.300 --> 00:19:25.300 is there's a very big difference between the classical gold standard and the system that was put in in the 1920s, which was called, after the General Conference in 1922, the gold exchange standard. 102 00:19:25.300 --> 00:19:31.220 On the classical gold standard, as the great British philosopher, David Hume, first explained, 103 00:19:31.220 --> 00:19:38.580 there's a very strict limit on how much inflation the government can perpetrate because if it 104 00:19:38.580 --> 00:19:44.200 increases the supply of money, then prices will go up and there's a mechanism by which 105 00:19:44.200 --> 00:19:51.860 it will lose gold, but in the gold exchange standard, it's just one or two countries in 106 00:19:51.860 --> 00:20:00.860 The American-Britain had money that was backed by gold, and all the others had money that 107 00:20:00.860 --> 00:20:07.100 was based on the British pound. The British pound also could pyramid on American dollars. 108 00:20:07.100 --> 00:20:18.180 It was a rather complicated system. This allowed much more inflation. Rueff applies this criticism 109 00:20:18.180 --> 00:20:26.180 with a Gold Exchange Angle. He thinks the gold exchange system marked the beginning and the end of Western civilization. 110 00:20:26.180 --> 00:20:31.180 So he applies this also to monetary policy in the 1950s and 60s. 111 00:20:31.180 --> 00:20:37.180 So I want to finish up, just in a minute, left me with two works of historical importance. 112 00:20:37.180 --> 00:20:44.180 One came out in 1875 by a great British economist, William Stanley Jevons. 113 00:20:44.180 --> 00:20:59.180 And Jevons was really the one who developed first these requirements for a commodity to be money such as being a store of value that Walter was mentioning. 114 00:20:59.180 --> 00:21:04.180 And one point Jevons makes in the book, he's rather critical of fractional reserve. 115 00:21:04.180 --> 00:21:11.180 He says on minimum reserve requirements where he says the bank has to have a certain amount of money and then it can just expand. 116 00:21:11.180 --> 00:21:20.180 Well, this is like telling a spendthrift that you should keep a shilling in your pocket to make sure you don't overspend. 117 00:21:20.180 --> 00:21:24.180 Always keep a shilling in your pocket wouldn't be very good advice. 118 00:21:24.180 --> 00:21:31.180 And the last book I want to mention is one by Edwin Cannon called Money, came out in 1918. 119 00:21:31.180 --> 00:21:36.180 Cannon was one of the first ones to popularize the idea, which we take for granted now, 120 00:21:36.180 --> 00:21:42.540 you know that there's a the reason prices go up is that there's a government is 121 00:21:42.540 --> 00:21:47.220 the government expanded the money supply before can a lot of people thought well 122 00:21:47.220 --> 00:21:51.860 money supply increases just a response to price increase but cannon said no 123 00:21:51.860 --> 00:21:58.780 it's this if the money supply causes increasing prices if you don't want 124 00:21:58.780 --> 00:22:02.820 price to go up you shouldn't expand the money supply he was very critical of 125 00:22:02.820 --> 00:22:06.420 and British Policy in World War I for doing that. 126 00:22:06.420 --> 00:22:08.980 Well, I think, so those are the ten books. 127 00:22:08.980 --> 00:22:13.100 If you read those, I think you'll have at least a beginning 128 00:22:13.100 --> 00:22:15.420 of a good grasp on monetary theory. 129 00:22:15.420 --> 00:22:16.340 Thanks very much.