WEBVTT NOTE Smashing Myths and Restoring Sound Money 1 00:00:00.000 --> 00:00:12.500 Today I'm going to talk about sound money, but in particular I'm going to sort of give the talk that if I were a spectator, I would want someone to give. 2 00:00:12.500 --> 00:00:17.100 That's the normal strategy I follow. So I'm extremely narcissistic, as you notice. 3 00:00:17.100 --> 00:00:22.100 Everything I say revolves entirely around me and things that I'm interested in. 4 00:00:22.100 --> 00:00:36.100 But here, in particular, what I want to do is lay out as clearly as possible, from the ground up, what the case is for the position that we hold on money. 5 00:00:36.100 --> 00:00:40.100 And I think this is useful to do, just to have it on the record. 6 00:00:40.100 --> 00:00:50.100 I think it's useful because there are people who are coming to these ideas for the first time who might still feel like they don't have the full 100% argument mastered. 7 00:00:50.100 --> 00:01:00.100 And I hope that what I have to say will also be of some use even to those of you who have been reading all the books that Jeff mentioned there on the website. 8 00:01:00.100 --> 00:01:10.100 So let's start right in here. I mean, I had some initial banter and jokes, but those are just out the window. No time for that. We've got to just get right down to business. 9 00:01:10.100 --> 00:01:19.100 I'm told that I still get my full time. So, you know, everybody just hang on. I will finish. You don't have to worry that I'll be droning on for hours. 10 00:01:19.100 --> 00:01:30.100 What I want to do, first of all, is point out that we could subtitle this talk I'm giving as a tribute to Guido Hulsman. 11 00:01:30.100 --> 00:01:36.100 And you may not know who Guido Hulsman is, but we'll rectify that difficulty right now. 12 00:01:36.100 --> 00:01:43.100 Guido, among many other things, wrote this very, very important book called The Ethics of Money Production. 13 00:01:43.100 --> 00:01:53.100 came out in 2008. There are apparently six copies available here, including this one, which I'll replace at the end. 14 00:01:53.100 --> 00:02:01.100 But Guido is an extremely original and important thinker. He's the chairman of the economics department at the University of Angers in France. 15 00:02:01.100 --> 00:02:05.100 A very, very impressive person in every way, and I've learned a tremendous amount from him. 16 00:02:05.100 --> 00:02:09.100 And I've been meaning to review his book, The Ethics of Money Production, from Mises, Oregon. 17 00:02:09.100 --> 00:02:39.100 for Mises, Oregon. I've just never, for one reason or another, never gotten around to it, so I hope to make this up to him today by this tribute, because much of what I'm going to tell you today is derived from the writings of Guido Holzman, to give you a sense of what you're missing out on by not reading him, so as to encourage you to seek out the work of Guido Holzman, and thereby get him off my case for not reviewing his book. That was just in parentheses. Now, of course, there's another book you might also feel like, you know, 18 00:02:39.100 --> 00:02:45.100 I want to be one of the cool kids you might read, and that of course is meltdown. We shouldn't neglect this book. 19 00:02:45.100 --> 00:02:50.100 My wife is with me today, and we are expecting our fourth child in February. 20 00:02:50.100 --> 00:03:01.100 So if you should wish to make an indirect contribution to the Woods Small Child Fund, this is, I think, the most discreet way of doing so, just buying your own copy. 21 00:03:01.100 --> 00:03:04.100 Right. Well, let's get right down to it. 22 00:03:04.100 --> 00:03:09.100 I'm going to start right from the beginning, again, from a point that will bore some of the veteran Austrians. 23 00:03:09.100 --> 00:03:13.100 But I want to start from the foundation and build my way up. 24 00:03:13.100 --> 00:03:18.100 And start off simply by talking about money and what it is and where it originates. 25 00:03:18.100 --> 00:03:21.100 And I can already see, I'm not even looking, I don't have my glasses on, so you're all a big blur. 26 00:03:21.100 --> 00:03:26.100 I can already see Bob Murphy rolling his eyes, saying, if I have to hear this explanation one more time. 27 00:03:26.100 --> 00:03:30.100 But, all right, Bob, you're stuck here. There's no getting out. 28 00:03:30.100 --> 00:04:00.100 The origins of money simply goes like this, so we all know that, you know, let's say way back in the old caveman days, before there was a medium of exchange, you know, if you've got a scrambled egg and you want to get a frisbee, you have to look for a frisbee-owning scrambled egg-wanter, and this is inconvenient and difficult, so eventually people realize just they don't need to be told this, they don't need to be regimented into doing it, they realize through the exercise of their own reason that they could facilitate their transactions better, 29 00:04:00.100 --> 00:04:07.900 If they found a highly marketable good, a good that they knew other people generally wanted, 30 00:04:07.900 --> 00:04:11.600 they exchanged their good for that good, and now they go looking to exchange, 31 00:04:11.600 --> 00:04:16.300 now they're much more likely to get a taker because they have a more marketable good in their hands. 32 00:04:16.300 --> 00:04:23.500 Well, very often, although by no means exclusively, precious metals such as gold and silver were chosen 33 00:04:23.500 --> 00:04:28.700 because of a variety of qualities that they happened to possess that we don't need to go into now, 34 00:04:28.700 --> 00:04:35.580 Now but that lent themselves to functioning as a medium of exchange to facilitate transactions. 35 00:04:35.580 --> 00:04:40.340 So the gold or the silver stands in between the frisbee and the scrambled egg and makes 36 00:04:40.340 --> 00:04:46.900 this transaction in effect possible even though it might be directly difficult to find a scrambled 37 00:04:46.900 --> 00:04:49.180 egg when you have a frisbee or vice versa. 38 00:04:49.180 --> 00:04:53.320 You can find the money commodity and then use the money commodity to acquire the good 39 00:04:53.320 --> 00:04:55.060 you want. 40 00:04:55.060 --> 00:05:01.940 Now what's significant about this description is that it's describing how money comes about 41 00:05:01.940 --> 00:05:07.340 and it's describing how money comes about in the only way it could have come about. 42 00:05:07.340 --> 00:05:12.100 And one of the arguments that Mises in effect makes and other Austrians have made is that 43 00:05:12.100 --> 00:05:14.580 money could not actually have emerged in any other way. 44 00:05:14.580 --> 00:05:19.620 The argument that I'm making here is that it emerges out of barter as one good gradually 45 00:05:19.620 --> 00:05:24.940 comes to be acknowledged as the most marketable and is being accepted more and more in exchange 46 00:05:24.940 --> 00:05:36.440 until finally it becomes in wide and in effect universal use as the money, the medium of exchange, the most marketable good is the money. 47 00:05:36.440 --> 00:05:41.440 This is the only way it could have come about and there are two reasons for this, at least two. 48 00:05:41.440 --> 00:05:48.940 One of them is a practical reason, imagine a society without money and then you're trying to describe money to these people. 49 00:05:48.940 --> 00:05:53.940 They've never seen this system work, they've never heard of it and you say to them, and here I borrow from Bob, 50 00:05:53.940 --> 00:05:57.940 You say to them, oh look, here I've got a bunch of totally useless stones. 51 00:05:57.940 --> 00:06:01.940 Why don't we all use these? I promise you everybody will accept them 52 00:06:01.940 --> 00:06:05.940 and this will facilitate our transactions. People would say, why don't we burn this guy at the stake? 53 00:06:05.940 --> 00:06:09.940 What a social nuisance this is. It would be very, very hard 54 00:06:09.940 --> 00:06:13.940 to persuade people of this who had never been exposed to money. 55 00:06:13.940 --> 00:06:17.940 But there's actually a more, really an insuperable obstacle 56 00:06:17.940 --> 00:06:21.940 to the introduction of money any other way. 57 00:06:21.940 --> 00:06:25.740 other than as originating as a useful commodity 58 00:06:25.740 --> 00:06:28.820 that people initially valued because it was a useful commodity and then they 59 00:06:28.820 --> 00:06:32.540 realized hey because it's a useful commodity everybody wants it and then 60 00:06:32.540 --> 00:06:36.620 once it begins to be used in exchange even if people don't want it they still 61 00:06:36.620 --> 00:06:40.500 want it because they at least they know they can exchange with it the difficulty 62 00:06:40.500 --> 00:06:45.420 here is that it let's say the government just suddenly said here's a piece of 63 00:06:45.420 --> 00:06:50.100 paper and I'm going to put in fact let's say I do this I just put a big old set 64 00:06:50.100 --> 00:07:06.100 What is society supposed to do with that? How in the world would you know what five woods were worth? 65 00:07:06.100 --> 00:07:11.100 How would you know if you were getting a good deal or really getting the short end of the stick? 66 00:07:11.100 --> 00:07:14.100 How could you know? You have no idea what this thing is worth. 67 00:07:14.100 --> 00:07:17.100 So the problem is nobody would know what the thing was worth. 68 00:07:17.100 --> 00:07:22.100 Certainly as a piece of paper, it's not worth a thing, other than a fraction of a cent. 69 00:07:22.100 --> 00:07:25.100 So how would you know how to make transactions if you were simply to say, 70 00:07:25.100 --> 00:07:30.100 okay, I think this is the thing we're going to use, so everybody go out there and try and use it. 71 00:07:30.100 --> 00:07:31.100 Where would you even begin? 72 00:07:31.100 --> 00:07:35.100 Whereas, when you have a money that emerges spontaneously, 73 00:07:35.100 --> 00:07:40.100 as you're coming out of the barter system and into a money system, 74 00:07:40.100 --> 00:07:44.100 that good that is gradually acquiring the qualities of money 75 00:07:44.100 --> 00:07:48.980 Money in that it is being used more and more as a medium of exchange, begins to acquire 76 00:07:48.980 --> 00:07:51.580 an array of prices in terms of itself. 77 00:07:51.580 --> 00:07:56.160 So as people start exchanging gold, let's say, for various goods, well, there becomes 78 00:07:56.160 --> 00:08:02.860 a gold hat price and a gold pants price and a gold bacon price, so that gradually, once 79 00:08:02.860 --> 00:08:06.660 you get to the point at which gold is being universally used, well, you've got a previously 80 00:08:06.660 --> 00:08:12.260 existing array of barter prices in terms of gold that you can then use to get a handle 81 00:08:12.260 --> 00:08:13.960 on how much the gold is worth. 82 00:08:13.960 --> 00:08:16.400 What can it actually command in exchange? 83 00:08:16.400 --> 00:08:20.200 If I just suddenly impose a paper on you, you have no idea what this paper can command 84 00:08:20.200 --> 00:08:21.200 or what it's worth. 85 00:08:21.200 --> 00:08:22.200 So it can't be done. 86 00:08:22.200 --> 00:08:24.480 It actually can't be done. 87 00:08:24.480 --> 00:08:30.480 Now, having said that, that point will become, I think, useful to us a little later in my 88 00:08:30.480 --> 00:08:31.480 presentation. 89 00:08:31.480 --> 00:08:35.920 But that is, that I think is the foundation point. 90 00:08:35.920 --> 00:08:39.980 Now it's true that, of course, we are using unbacked paper money now. 91 00:08:39.980 --> 00:08:41.680 So it almost sounds as if I'm lying to you. 92 00:08:41.680 --> 00:08:43.820 I'm telling you this can't be, and yet here it is. 93 00:08:43.820 --> 00:08:49.220 So how did it come about? Well, it did not come about directly. The government did not simply say, or the Federal Reserve, 94 00:08:49.220 --> 00:08:51.320 hey, here's some pieces of paper, everybody go use it. 95 00:08:51.320 --> 00:08:56.020 Initially, we had a precious metal money system in the U.S. 96 00:08:56.020 --> 00:09:00.320 And throughout the colonial period and into the early republic and through the 19th century, 97 00:09:00.320 --> 00:09:05.120 people were using gold and silver coins, depending on the time. 98 00:09:05.120 --> 00:09:07.120 They were using coins from other countries. 99 00:09:07.120 --> 00:09:13.720 They just used these, you know, money was just a good like any other good, and they used it in this way. 100 00:09:13.720 --> 00:09:19.360 And when paper began to be used as money, by and large, the paper was simply a money substitute. 101 00:09:19.360 --> 00:09:22.880 It was a more convenient mode of carrying your money. 102 00:09:22.880 --> 00:09:32.040 But the paper was just a money substitute that you could exchange for some fixed quantity of gold or silver. 103 00:09:32.040 --> 00:09:37.440 Well, eventually, what governments typically want to do is, they don't like this system because they want to be able to print up a lot of money 104 00:09:37.440 --> 00:09:42.160 and hand it out to their buddies or themselves, and you can't print up gold and silver. 105 00:09:42.160 --> 00:09:48.060 So what typically they'll do and what happened in the US in 1933 and then definitively in 1971 was that 106 00:09:48.060 --> 00:09:54.960 the gold backing was taken away from the paper so that now if you go and say I'd like to redeem my paper for money 107 00:09:54.960 --> 00:09:59.660 they'll give you a new piece of paper. They won't even know what you're asking. 108 00:09:59.660 --> 00:10:04.460 So in 1933 the gold backing was taken away and so that all you had left really was just the paper. 109 00:10:04.460 --> 00:10:08.560 And then particularly in 1971 the situation is intensified and completed. 110 00:10:08.560 --> 00:10:12.240 All you have is pieces of paper, but notice they didn't start off that way. 111 00:10:12.240 --> 00:10:18.480 The paper now circulates sort of out of habit, and because the paper has an array of prices 112 00:10:18.480 --> 00:10:22.160 in terms of itself, it makes it possible for us to use it, but we couldn't have started 113 00:10:22.160 --> 00:10:23.220 that way. 114 00:10:23.220 --> 00:10:27.760 It goes through this evolutionary process, and Rothbard I think makes an important contribution 115 00:10:27.760 --> 00:10:31.640 in what has government done to our money by pointing out this step-by-step process. 116 00:10:31.640 --> 00:10:37.960 How you go from spontaneously emerging money on the market, what Guido calls natural money, 117 00:10:37.960 --> 00:10:43.640 as it occurs without coercion, to the system we have now, totally unbacked paper money. 118 00:10:43.640 --> 00:10:50.240 The system we have now, very much different from the precious metal system that emerges 119 00:10:50.240 --> 00:10:56.960 spontaneously on the market through the transition from a barter system to a money economy. 120 00:10:56.960 --> 00:11:01.960 That system occurs spontaneously without any need for any government intervention whatsoever. 121 00:11:01.960 --> 00:11:06.760 However, to the contrary, when you look at paper money, fiat paper money, in other words, 122 00:11:06.760 --> 00:11:12.440 Money that the government can reproduce and that is not convertible into anything else, 123 00:11:12.440 --> 00:11:17.580 that that is it, it's just the paper, that system has never been introduced voluntarily 124 00:11:17.580 --> 00:11:22.860 and spontaneously by society, never, no such thing. It has always been introduced by means 125 00:11:22.860 --> 00:11:28.020 of violence and with the use of the police to suppress alternatives, so that's the glorious 126 00:11:28.020 --> 00:11:35.020 system we have now whose merits are praised all the time, it has never come about spontaneously. 127 00:11:36.760 --> 00:11:42.240 Now I want to proceed to the disadvantages of the current system because by implication 128 00:11:42.240 --> 00:11:45.440 they suggest the advantages of an alternative. 129 00:11:45.440 --> 00:11:51.180 And incidentally, let me pause to note that it never ceases to amaze me how often people 130 00:11:51.180 --> 00:11:56.360 look at the position that we hold on money and say, boy, that's just a crankish thing. 131 00:11:56.360 --> 00:11:59.360 That Ron Paul, what a crank he is. 132 00:11:59.360 --> 00:12:05.800 And suggesting that sound money is something that really belongs in the province of cranks 133 00:12:05.800 --> 00:12:07.400 and Weirdos. 134 00:12:07.400 --> 00:12:10.440 And I sort of feel like saying, you obviously don't know us very well. 135 00:12:10.440 --> 00:12:13.440 I mean, we have a lot weirder positions than this. 136 00:12:13.440 --> 00:12:19.480 I mean, I actually think to the contrary, our position on money is probably the most 137 00:12:19.480 --> 00:12:24.280 easily defensible and obviously persuasive of all the things we believe. 138 00:12:24.280 --> 00:12:29.400 And yet it's most consistently singled out as being, well, out of bounds and whatever. 139 00:12:29.400 --> 00:12:34.260 And I'll leave it to the student as an exercise as to why the establishment would want to 140 00:12:34.260 --> 00:12:44.260 Now, what we normally hear about what happens when governments increase the supply of paper money is that consumer prices rise and this hurts people on fixed incomes. 141 00:12:44.260 --> 00:12:49.260 Now, that is true. That is true. But there are far more consequences. 142 00:12:49.260 --> 00:12:55.260 I will at least, though, first mention that if you look at the history of the world, 143 00:12:55.260 --> 00:13:00.260 That is true, but there are far more consequences. 144 00:13:00.260 --> 00:13:09.260 I will at least though first mention that if you look at the history of England and its silver coinage, 145 00:13:09.260 --> 00:13:16.260 the silver pound in England from 1066 to the beginning of the 1600s 146 00:13:16.260 --> 00:13:23.260 was debased by the government by about one third over the course of more than 500 years. 147 00:13:23.260 --> 00:13:30.760 We're talking about inflating the money supply by a factor of about 0.3 or so. 148 00:13:30.760 --> 00:13:36.760 But then, in the next 200-year period after that, when modern banking comes into existence, 149 00:13:36.760 --> 00:13:45.260 we see that the supply is increased by a factor of 16, not 0.3. 150 00:13:45.260 --> 00:13:51.260 And then in the case of the US dollar, in just the 30-year period from 1973 to 2003, 151 00:13:51.260 --> 00:13:58.260 The U.S. money supply, M1, increased by a factor of five in just 30 years. 152 00:13:59.260 --> 00:14:06.260 So even with governments attempting to debase the precious metal money, it still actually holds up quite well. 153 00:14:07.260 --> 00:14:12.260 Well, also related to this, there are unjust redistribution effects, known as Cantillon effects, 154 00:14:12.260 --> 00:14:17.260 because when the money is created out of thin air, who gets it first? 155 00:14:17.260 --> 00:14:24.260 Well, typically government's friends, government contractors, big banks, government officials with their salaries, they get the money first. 156 00:14:24.260 --> 00:14:31.260 And so this new money not having yet trickled through the whole system, well, prices have not yet commensurately risen. 157 00:14:31.260 --> 00:14:35.260 So those people enjoy a windfall. They get to spend new money at the old price level. 158 00:14:35.260 --> 00:14:40.260 By the time the average person gets the new money, he's been paying the higher prices all that time. 159 00:14:40.260 --> 00:14:46.060 So the favored constituencies' windfall comes at the direct expense of the average person 160 00:14:46.060 --> 00:14:51.100 who typically lacks their political connections. 161 00:14:51.100 --> 00:14:56.820 Paper money and paper money inflation artificially encourage consumption over saving, artificially 162 00:14:56.820 --> 00:14:59.660 encourage consumption over saving. 163 00:14:59.660 --> 00:15:03.300 Hyperinflation is merely an extreme example of this. 164 00:15:03.300 --> 00:15:10.220 Now we sort of arbitrarily define hyperinflation as a case of a 50 percent increase in, let's 165 00:15:10.220 --> 00:15:16.220 and, say, the price level per month, and it could be more than that, and it sometimes has been. 166 00:15:16.220 --> 00:15:19.220 Well, in that case, who in his right mind would save? 167 00:15:19.220 --> 00:15:25.220 Who would say, you know, I think the thing to do now is to save up some German marks and just wait this thing out? 168 00:15:25.220 --> 00:15:28.220 No, to the contrary, you want to rush out and spend like crazy, right? 169 00:15:28.220 --> 00:15:33.220 You've got to get rid of this stuff, so it encourages you to blow all your money now. 170 00:15:33.220 --> 00:15:40.220 So lesser cases of inflation are going to have the same effect, although at a lesser rate. 171 00:15:40.220 --> 00:15:44.220 But you're going to want toside your money more quickly than you otherwise would, 172 00:15:44.220 --> 00:15:48.220 because you anticipate it's going to lose its purchasing power. 173 00:15:48.220 --> 00:15:54.220 In addition, the ability to create money out of thin air, depending on how it's carried out, 174 00:15:54.220 --> 00:15:58.220 can in fact carry in its train the business cycle. 175 00:15:58.220 --> 00:16:05.220 And here, for the sake of completeness, because I want this to be as complete and comprehensive an overview as I can possibly make it, 176 00:16:05.220 --> 00:16:11.220 I want to see if I can do, in three or four minutes, if I can give a reasonable overview of what we mean by this. 177 00:16:11.220 --> 00:16:18.220 And it so happens, we'll start as follows, and then I'll show how this follows from creation of paper money. 178 00:16:18.220 --> 00:16:27.220 It so happens that when interest rates go down, this happens to be the time that businesses are most likely to invest in long-term projects. 179 00:16:27.220 --> 00:16:33.220 and it shouldn't require the drawing of a diagram to see why that would be. 180 00:16:33.220 --> 00:16:38.220 The longer term the project is, the more heavily the interest payment is going to weigh on you. 181 00:16:38.220 --> 00:16:42.220 So as the interest rate comes down, even sometimes very slightly, 182 00:16:42.220 --> 00:16:45.220 it can have a very substantial effect on the amount of your loan payment. 183 00:16:45.220 --> 00:16:50.220 So the longer term your investment, the more interest rate sensitive it will be. 184 00:16:50.220 --> 00:16:55.220 So the Austrians typically speak of higher order and lower order stages of production. 185 00:16:55.220 --> 00:16:58.660 Higher order stages are the ones that are most remote from the consumer. 186 00:16:58.660 --> 00:17:02.440 So research and development, for example, is a very high order stage because that might 187 00:17:02.440 --> 00:17:07.100 not bear fruits for the consumer for 20 years or more in some cases. 188 00:17:07.100 --> 00:17:13.820 Or increasing, expanding mining capacity, which by the way helps on the predictability 189 00:17:13.820 --> 00:17:18.540 of money supply increases under a gold standard because the increase in mining capacity is 190 00:17:18.540 --> 00:17:19.540 such a slow process. 191 00:17:19.540 --> 00:17:23.880 It gives everybody years and years of time to anticipate it. 192 00:17:23.880 --> 00:17:28.820 But then beyond that you can think of manufacturing, construction, machine tools. 193 00:17:28.820 --> 00:17:35.220 These things are far from a bagel in a bagel shop, which is immediately usable by the consumer. 194 00:17:35.220 --> 00:17:42.260 So the lower order stages would be retail, stores, services, things of that nature. 195 00:17:42.260 --> 00:17:46.700 So the higher order stages, because they're far, relatively speaking, from finished consumer 196 00:17:46.700 --> 00:17:50.640 goods, and they are longer term, are going to be the ones that are going to get the most 197 00:17:50.640 --> 00:17:53.080 stimulus from lower interest rates. 198 00:17:53.080 --> 00:18:00.080 So this is fine, this is good, and the reason it's good that businesses invest when interest rates have gone low is twofold. 199 00:18:00.080 --> 00:18:07.080 First, how did the interest rates get low? Let's imagine this is a free society, not one with a Soviet Commissar dictating money and interest rates. 200 00:18:07.080 --> 00:18:12.080 Let's imagine we've got a free monetary system and interest rates have gone low. How did that happen? 201 00:18:12.080 --> 00:18:17.080 It happened because the public is saving more, and that leads to lower interest rates. 202 00:18:17.080 --> 00:18:24.080 Now, when the public is saving more, it is implicitly saying we're not going to go out and blow our entire paychecks on consumption right away. 203 00:18:24.080 --> 00:18:27.080 We're going to defer some of our purchasing power for the future. 204 00:18:27.080 --> 00:18:32.080 Well, that aligns very well with businesses' production processes, which are future-oriented, right? 205 00:18:32.080 --> 00:18:34.080 They're engaged in long-term processes. 206 00:18:34.080 --> 00:18:38.080 Well, people are deferring some of their purchases, so there's a match-up here time-wise. 207 00:18:38.080 --> 00:18:46.080 But secondly, if we save more, we are in fact constricting how much we're blowing immediately of our paycheck. 208 00:18:46.080 --> 00:18:51.240 Paycheck. So we're not spending as much, let's say, in retail stores. So relatively 209 00:18:51.240 --> 00:18:57.000 speaking, that sector may start to contract. And when it contracts, it doesn't need as 210 00:18:57.000 --> 00:19:01.400 many trucks anymore. It doesn't need as much labor anymore. It doesn't need as much steel. 211 00:19:01.400 --> 00:19:06.220 These factors of production are now released from the lower order stages and amazingly 212 00:19:06.220 --> 00:19:11.960 now they happen to be available for use by these higher order stages that are expanding. 213 00:19:11.960 --> 00:19:15.920 So again, there's a coordination that the structure of interest rates makes possible. 214 00:19:15.920 --> 00:19:20.160 Now contrast that with what happens if the interest rate is interfered with artificially 215 00:19:20.160 --> 00:19:22.240 and is forced down artificially. 216 00:19:22.240 --> 00:19:26.800 Well in this case again, businesses will engage in expanding long-term projects in the higher 217 00:19:26.800 --> 00:19:27.920 order stages. 218 00:19:27.920 --> 00:19:31.720 But in this case, number one, people have not indicated that they're deferring their 219 00:19:31.720 --> 00:19:34.880 purchases for the future, they're purchasing right now. 220 00:19:34.880 --> 00:19:39.140 So businesses are engaged in long-term product development at a time when people want more 221 00:19:39.140 --> 00:19:42.820 of existing goods in the present, so there's a time mismatch. 222 00:19:42.820 --> 00:19:49.780 But secondly, because in this case the interest rate decline is artificial, it doesn't follow 223 00:19:49.780 --> 00:19:53.820 from people's restriction of consumption. 224 00:19:53.820 --> 00:19:57.700 The retail sector isn't constricting in any way, so no additional trucking services have 225 00:19:57.700 --> 00:20:01.540 been made available, no additional labor has been made available, no additional factors 226 00:20:01.540 --> 00:20:05.960 of production have been made available that could now be used in the higher stages. 227 00:20:05.960 --> 00:20:11.980 So instead of there being a smooth, elegant transition from one structure of production 228 00:20:11.980 --> 00:20:17.860 to another, instead we have a tug of war in the economy between the higher and the lower 229 00:20:17.860 --> 00:20:19.220 order stages. 230 00:20:19.220 --> 00:20:23.280 And this discombobulates the economy, this threatens the profitability of the higher 231 00:20:23.280 --> 00:20:29.000 stages because these factors of production are scarcer than the higher order stages realized 232 00:20:29.000 --> 00:20:37.060 and their costs are going to go up and ultimately this will be shown to have been unsustainable. 233 00:20:37.060 --> 00:20:41.780 Now in doing that, in engaging in long-term projects at a time when they shouldn't have, 234 00:20:41.780 --> 00:20:47.780 Because the central bank, by making interest rates artificially low, has misled them, they've wasted resources. 235 00:20:47.780 --> 00:20:52.780 They've started projects that won't be able to be finished because the physical stuff to complete them, 236 00:20:52.780 --> 00:20:55.780 to see them through to completion, does not exist. 237 00:20:55.780 --> 00:20:58.780 Well, they're going to have half-finished things, one-third finished things, 238 00:20:58.780 --> 00:21:02.780 or they'll have finished things that the complementary factors of production won't be finished for. 239 00:21:02.780 --> 00:21:06.780 So they will have blown a lot of resources. They will have wasted stuff. 240 00:21:06.780 --> 00:21:10.780 So we will be the poorer for this. 241 00:21:10.780 --> 00:21:26.780 This follows from the fact that, particularly under either a fractional reserve type system with hard money or under a system of fiat money where the central bank can just create all the money it wants, this is how it leads to lower interest rates. 242 00:21:26.780 --> 00:21:33.780 It creates all this money. It pumps it into the banking system. The banks now have all this additional money at their disposal. They want to lend it out. 243 00:21:33.780 --> 00:21:38.780 And how are they going to do that, if not by making the terms of the lending more attractive and lowering interest rates? 244 00:21:38.780 --> 00:21:50.780 So this is all an artificial process that is amplified and made possible to the extent that it is in the modern world precisely by fiat paper unbacked by anything. 245 00:21:50.780 --> 00:21:57.780 Now to the contrary, by the way, I'll get to the contrary later, let's continue. 246 00:21:57.780 --> 00:22:01.780 That was a Thomistic thing with his to the contrary and then so on and on. 247 00:22:01.780 --> 00:22:04.780 I'll get to my I answer that in a few minutes. 248 00:22:04.780 --> 00:22:12.780 Other problems with fiat paper money, well, they lead to massive increases in the power of government and the banking system. 249 00:22:12.780 --> 00:22:15.780 It should be obvious how it leads to the increase in the power of government. 250 00:22:15.780 --> 00:22:23.780 If the government has recourse to a printing press, it's going to be able to commandeer more resources from the voluntary or competitive sector, 251 00:22:23.780 --> 00:22:29.780 which I actually prefer that to private sector because everybody's been brainwashed into thinking private is evil, you know, whatever. 252 00:22:29.780 --> 00:22:32.480 You know, whatever, and people think of when they were seven years old 253 00:22:32.480 --> 00:22:34.780 and they wanted to throw that ball against that wall, 254 00:22:34.780 --> 00:22:36.480 but the sign said private property, 255 00:22:36.480 --> 00:22:39.680 so everybody's got this sort of sense that they hate private things. 256 00:22:39.680 --> 00:22:43.280 So how about voluntary or competitive sector? 257 00:22:43.280 --> 00:22:49.080 So the private sector loses resources more readily 258 00:22:49.080 --> 00:22:52.980 when they can be siphoned off through artificially created money. 259 00:22:52.980 --> 00:22:57.480 But also the banking system itself is artificially enriched. 260 00:22:57.480 --> 00:23:00.680 And here I quote Guido directly. He writes, 261 00:23:00.680 --> 00:23:07.680 The market economy can be understood as a great organism that caters to the needs of consumers as expressed in money payments. 262 00:23:07.680 --> 00:23:11.680 When the economy is flooded with legal tender fractional reserve notes, 263 00:23:11.680 --> 00:23:18.680 the whole economic body of society begins to cater excessively to the needs of those who control the banking industry. 264 00:23:18.680 --> 00:23:26.280 The American economist, Frank Fetter, once observed that the unhampered market economy resembles a grassroots democratic process. 265 00:23:26.280 --> 00:23:30.380 Don't hold that against the market economy, but this is a real democratic process. 266 00:23:30.380 --> 00:23:32.680 One penny, one market vote. 267 00:23:32.680 --> 00:23:37.380 From this point of view, the imposition of fractional reserve notes through legal tender laws 268 00:23:37.380 --> 00:23:40.280 creates market votes out of nothing. 269 00:23:40.280 --> 00:23:43.980 The bankers and their clients, usually the government in the first place, 270 00:23:43.980 --> 00:23:49.580 have many more votes than they would have had in a free society. 271 00:23:49.580 --> 00:23:54.380 Unlike a commodity money, fiat money's value can fall to zero. 272 00:23:54.380 --> 00:23:58.220 A commodity money will still have some value as a commodity. 273 00:23:58.220 --> 00:24:01.860 You still use gold for industrial and ornamental purposes. 274 00:24:01.860 --> 00:24:08.940 You don't use green pieces of paper with smelly disgusting ink for any use other than exchange. 275 00:24:08.940 --> 00:24:14.580 So if the exchange use goes, if they inflate it so much that people flee from it and it has no value, 276 00:24:14.580 --> 00:24:16.100 it can go to zero. 277 00:24:16.100 --> 00:24:18.740 Commodity money is not going to go to zero. 278 00:24:18.740 --> 00:24:23.620 But worse than that, the fiat money, once it goes to zero, can never be revived. 279 00:24:23.620 --> 00:24:29.620 Because once it goes to zero and it stops being used by people then you're back to the initial problem 280 00:24:29.620 --> 00:24:33.620 of a government trying to introduce a fiat paper money completely from scratch. 281 00:24:33.620 --> 00:24:35.620 As we've seen, that can't be done. 282 00:24:35.620 --> 00:24:40.620 So once the fiat paper money goes out of use, you'd have to start the whole thing up again. 283 00:24:40.620 --> 00:24:45.620 You'd have to start up through the spontaneous adoption of a commodity as a medium of exchange. 284 00:24:45.620 --> 00:24:49.620 You would not simply be able to force that paper back on the people. 285 00:24:49.620 --> 00:24:55.620 All known hyperinflations involve paper money. Not hard to see that. 286 00:24:55.620 --> 00:25:01.620 We have one of my favorite stories, favorite in sort of a macabre sense, 287 00:25:01.620 --> 00:25:07.620 but involves a gentleman in Germany in 1923 where they had the terrible hyperinflation, 288 00:25:07.620 --> 00:25:11.620 prices were going up tremendously, and he got a letter from his bank. 289 00:25:11.620 --> 00:25:16.620 He had 68,000 marks in a bank account, which was comfortable fortune. 290 00:25:16.620 --> 00:25:18.620 You've got a letter from his bank saying, 291 00:25:18.620 --> 00:25:23.620 we have to close your account and unfortunately we can't return your money 292 00:25:23.620 --> 00:25:28.620 because the smallest denomination bill in circulation now is a million marks. 293 00:25:28.620 --> 00:25:33.620 So you'll be happy to know we've rounded up your deposit from 68,000 to a million. 294 00:25:33.620 --> 00:25:38.620 So he closes your check for a million marks and this was sent to him in an envelope 295 00:25:38.620 --> 00:25:42.620 whose stamp cost five million marks. 296 00:25:42.620 --> 00:25:47.620 So, the guy is completely wiped out. 297 00:25:47.620 --> 00:25:54.620 It's hard to save for the future under a fiat system where government, again, can create all this money. 298 00:25:54.620 --> 00:26:00.620 It was the case in the 19th century that to save for the future you could simply acquire precious metal coins. 299 00:26:00.620 --> 00:26:02.620 Just acquire them. 300 00:26:02.620 --> 00:26:04.620 Now, of course, you could save them, you could invest them. 301 00:26:04.620 --> 00:26:07.620 I mean, that's true, but the point is you didn't have to. 302 00:26:07.620 --> 00:26:09.620 You didn't have to be a speculator. 303 00:26:09.620 --> 00:26:12.620 You didn't have to go into the stock market. 304 00:26:12.620 --> 00:26:16.620 You didn't have to say, well, gee, where can I put my money so that it will at least hold on to its value? 305 00:26:16.620 --> 00:26:19.620 You didn't have to worry about that because it held its value. 306 00:26:19.620 --> 00:26:24.620 When these metals served as money, they held their value or increased their value over time. 307 00:26:24.620 --> 00:26:29.620 And any graph you look at and set of statistics you look at will bear this out. 308 00:26:29.620 --> 00:26:35.620 Whereas today, only a fool would save for the future by piling up Federal Reserve notes. 309 00:26:35.620 --> 00:26:40.620 You would have to factor in a depreciation factor of at least three, at least. 310 00:26:40.620 --> 00:26:42.620 So you'd have to save an enormous amount. 311 00:26:42.620 --> 00:26:47.620 So in other words, it makes it harder to save because now, just to hold on to the purchasing power you've earned, 312 00:26:47.620 --> 00:26:48.620 you have to become a speculator. 313 00:26:48.620 --> 00:26:51.620 And most people, myself included, are not fit to be speculators. 314 00:26:51.620 --> 00:26:52.620 We don't belong in the stock market. 315 00:26:52.620 --> 00:26:55.620 We don't belong in some of these financial instruments. 316 00:26:55.620 --> 00:26:59.620 But we feel like we have to do that as a self-defense mechanism. 317 00:26:59.620 --> 00:27:02.620 And that was not the case under hard money. 318 00:27:02.620 --> 00:27:06.620 So, so much for, you know, the paper money system helps the little guy. 319 00:27:06.620 --> 00:27:08.620 Yeah, right, yeah, it helps the little guy. 320 00:27:08.620 --> 00:27:12.620 That's why it was all little guys who drafted the Federal Reserve Act of 1913, right? 321 00:27:12.620 --> 00:27:14.620 It's all little people. 322 00:27:14.620 --> 00:27:18.620 Joe Blow down the street drafted that. 323 00:27:18.620 --> 00:27:20.620 Then we have the problem of moral hazard. 324 00:27:20.620 --> 00:27:21.620 We hear a lot about moral hazard. 325 00:27:21.620 --> 00:27:26.620 Moral hazard is the phenomenon by which people are willing to act 326 00:27:26.620 --> 00:27:29.620 with an artificially elevated level of risk tolerance 327 00:27:29.620 --> 00:27:34.660 of Risk Tolerance because they believe that any gains they make will be kept by themselves 328 00:27:34.660 --> 00:27:40.020 but any losses they might incur will be shared with a bunch of other suckers. 329 00:27:40.020 --> 00:27:45.340 Well, think about the incentives that are created by the existence of a monopoly paper 330 00:27:45.340 --> 00:27:47.160 money producer. 331 00:27:47.160 --> 00:27:51.380 You know that there is no physical limitation on how much money they can create because 332 00:27:51.380 --> 00:27:54.220 as Bob says, they don't even need to use paper. 333 00:27:54.220 --> 00:27:57.620 They can use a couple of computer keystrokes to create the money and even if they lose 334 00:27:57.620 --> 00:28:03.620 If you use the electricity and they have to even churn it out using an old-timey printing press, let's say, 335 00:28:03.620 --> 00:28:07.620 they can always just pencil in a few extra zeros on the note. 336 00:28:07.620 --> 00:28:10.620 So there's no limit on how much money it can create. 337 00:28:10.620 --> 00:28:18.620 So therefore, there is likewise no physical limitation on how much money can be created out of thin air to bail you out 338 00:28:18.620 --> 00:28:23.620 if you happen to be politically well connected and viewed as being too big to fail, 339 00:28:23.620 --> 00:28:26.620 which is the subject of a whole other talk on another day. 340 00:28:26.620 --> 00:28:31.620 Well, what in fact happens? Well, in fact, this is precisely what happens. 341 00:28:31.620 --> 00:28:37.620 You get the major financial firms, well, you know, look, we're in kind of a bind here. 342 00:28:37.620 --> 00:28:42.620 Can you bail us out? And in fact, although it's not quite the same point, nevertheless, 343 00:28:42.620 --> 00:28:46.620 the International Monetary Fund, early last year, issued a report saying, you know, it's funny, 344 00:28:46.620 --> 00:28:52.620 it seems like major financial firms are relying excessively on the World Central Banks 345 00:28:52.620 --> 00:28:55.620 to relieve them of their liquidity problems. 346 00:28:55.620 --> 00:28:58.620 Oh, you don't say. I wonder why they would do that. 347 00:28:58.620 --> 00:29:03.620 Or I wonder why, again, why would their equity ratios be so much lower than in all other industries? 348 00:29:03.620 --> 00:29:09.620 Because no other industry has some sugar daddy sitting in the wings waiting to bail them out. 349 00:29:09.620 --> 00:29:18.620 So this problem is accentuated when there's no physical limitation on the amount of money that can be created. 350 00:29:18.620 --> 00:29:26.620 All right, now then there are some myths that we might deal with. 351 00:29:26.620 --> 00:29:29.620 One myth would be, well, you know, what you're saying is all well and good, 352 00:29:29.620 --> 00:29:34.620 but how can you respond to the fact that we had booms and busts and monetary discombobulation 353 00:29:34.620 --> 00:29:39.620 in the 19th century before there was a Federal Reserve system that we're so critical of, 354 00:29:39.620 --> 00:29:43.620 so how do you answer that, ho, ho, ho, and they think that's the end of the argument. 355 00:29:43.620 --> 00:29:47.620 Oh, no, no, my friend, that's just the beginning. 356 00:29:47.620 --> 00:29:57.620 Richard Timberlake, whom somebody mentioned, is not actually an Austrian, but nevertheless made an interesting point in an article not too long ago, a couple of years ago. 357 00:29:57.620 --> 00:30:14.620 He says, as monetary histories confirm, most of the monetary turbulence, bank panics and suspensions in the 19th century, resulted from excessive issues of legal tender paper money, and they were abated by the working gold standards of the times. 358 00:30:14.620 --> 00:30:29.620 Well, in fact, there is a section in my book Meltdown that does deal, albeit briefly, with the major financial panics of the 19th century, 1819, 1837, 1857, 1873. 359 00:30:29.620 --> 00:30:36.620 And I think just through an oversight of mine, there's not 1893, but there's a YouTube where I talk about these at a Mises Institute event. 360 00:30:36.620 --> 00:30:41.620 I think it's called Monetary Lessons from America's Past, in which I do briefly get to 1893. 361 00:30:41.620 --> 00:30:49.120 But, to make a long story short, if you look through all these examples, they are in fact caused by, by and large, the same factors. 362 00:30:49.120 --> 00:30:56.120 It's not, okay, there is no Alan Greenspan at that time, so I'll admit I am slightly disappointed that I can't blame him for those. 363 00:30:56.120 --> 00:31:08.120 But nevertheless, in each case you've got either, you've got banks getting special privileges that encourage them to engage in fractional reserve banking, 364 00:31:08.120 --> 00:31:16.120 In one way or another they'll get special legal privileges that will bail them out of their normal obligations or at least temporarily. 365 00:31:16.120 --> 00:31:23.120 There's the fact that there were national banks involved, 1819, 1837 in particular, that were very inflationary. 366 00:31:23.120 --> 00:31:29.120 And so people at the time, as Rothbard shows in his book, The Panic of 1819, recognized the causal relation here. 367 00:31:29.120 --> 00:31:37.120 There was an artificial boom that was abetted by and in some ways led by the Bank of the United States. 368 00:31:37.120 --> 00:31:43.120 in the United States. And Rothbard's book, by the way, The Panic of 1819, was published by Columbia University Press. 369 00:31:43.120 --> 00:31:50.120 And if you look at all the historical journals, it gets excellent reviews. So this is not a crankish take. 370 00:31:50.120 --> 00:31:57.120 To the contrary, this is widely viewed. I read a book on Jacksonian America in grad school, and I was very gratified to see 371 00:31:57.120 --> 00:32:04.120 in the bibliographical essay, the author, who is not a libertarian or an Austrian, saying Rothbard's book on The Panic of 1819 372 00:32:04.120 --> 00:32:07.120 18 is unlikely to be superseded. Very interesting. 373 00:32:07.120 --> 00:32:12.120 Well, I want to share with you a passage from 1837, which I've shared at one or two other Mises Institute events, 374 00:32:12.120 --> 00:32:15.120 but I hope you'll agree with me that this one's worth hearing again. 375 00:32:15.120 --> 00:32:21.120 This is a guy writing, this is William Leggett, New York editorial writer, who was a supporter of Andrew Jackson. 376 00:32:21.120 --> 00:32:27.120 Here he is describing the consequences of the massive inflation brought about by the Second Bank of the United States. 377 00:32:27.120 --> 00:32:32.000 and see if you don't hear some sort of family resemblance to Austrian business 378 00:32:32.000 --> 00:32:37.000 cycle theory in this 1837 commentary. I'm reading directly from Meltdown here. 379 00:32:37.000 --> 00:32:42.040 So here's December 1837. Any person who has soberly observed the course of events 380 00:32:42.040 --> 00:32:45.200 for the last three years must have foreseen the very state of things which 381 00:32:45.200 --> 00:32:49.080 now exists. He will see that the banks have been striving with all their might, 382 00:32:49.080 --> 00:32:54.000 each emulating the other, to force their issues, their paper money, into circulation 383 00:32:54.000 --> 00:32:55.740 and Flood the Land. 384 00:32:55.740 --> 00:32:59.520 He will see that they have used every art of cajolery and allurement to entice men to 385 00:32:59.520 --> 00:33:05.000 accept their proffered aid, that in this way they gradually excited a thirst for speculation, 386 00:33:05.000 --> 00:33:09.920 which they sensuously stimulated until it increased to a delirious fever, and men in 387 00:33:09.920 --> 00:33:15.420 the epidemic frenzy of the hour wildly rushed upon all sorts of desperate adventures. 388 00:33:15.420 --> 00:33:20.040 They dug canals where no commerce asked for the means of transportation. 389 00:33:20.040 --> 00:33:24.280 They opened roads where no travelers desired to penetrate, and they built cities where 390 00:33:24.280 --> 00:33:26.720 there were none to inhabit. 391 00:33:26.720 --> 00:33:30.500 Well then he says, what has been, whatever must be, the consequences of such a sudden 392 00:33:30.500 --> 00:33:32.440 and prodigious inflation of the currency? 393 00:33:32.440 --> 00:33:38.240 And among those consequences, he says, a vast amount of speculation in property of every 394 00:33:38.240 --> 00:33:42.120 kind and name at fictitious values. 395 00:33:42.120 --> 00:33:44.240 We wouldn't know anything about that, right? 396 00:33:44.240 --> 00:33:49.320 And finally, a vast and terrific crash when the treacherous and unsustainable basis crumbles 397 00:33:49.320 --> 00:33:53.880 beneath the stupendous fabric of credit and the structure falls to the ground and he goes 398 00:33:53.880 --> 00:33:55.680 on and on from there. 399 00:33:55.680 --> 00:33:58.700 Well, very significant, I think, that we hear that. 400 00:33:58.700 --> 00:34:03.920 In the interest of time, I won't talk about the 1870s, other than to say you should Google 401 00:34:03.920 --> 00:34:06.920 Charles Morris writing for the New York Times. 402 00:34:06.920 --> 00:34:11.200 Two years ago, the New York Times admitted there was no long depression of the 1870s. 403 00:34:11.200 --> 00:34:12.600 Economists have been all wrong about that. 404 00:34:12.600 --> 00:34:14.780 1870s were actually pretty prosperous. 405 00:34:14.780 --> 00:34:18.680 They thought it was a depression because the price level was falling so hard and we all 406 00:34:18.680 --> 00:34:25.680 And we all know that if the price level falls, there's no way you can be prosperous, right, even though almost all of American history saw prices fall. 407 00:34:25.680 --> 00:34:29.680 Who are you going to believe? These people are your own eyes, but that's their argument. 408 00:34:29.680 --> 00:34:35.680 But yeah, that there really was, this is actually a myth, and Rothbard anticipated this years and years earlier. 409 00:34:35.680 --> 00:34:43.680 But as usual, when the Austrians either predicted something or anticipated some recent discovery in scholarship, 410 00:34:43.680 --> 00:34:50.680 The people who discover it or talk about it later are of course always going to tell you that no one could have known this, 411 00:34:50.680 --> 00:34:52.680 no one could have imagined this, no one could have predicted it. 412 00:34:52.680 --> 00:34:55.680 Okay, I think we're getting pretty used to that. 413 00:34:55.680 --> 00:35:00.680 We need fiat money so governments and central banks can prevent deflation. 414 00:35:00.680 --> 00:35:03.680 Deflation defined as falling prices. 415 00:35:03.680 --> 00:35:09.680 If prices fall in society, this is bad. How can businesses make profits with falling prices? 416 00:35:09.680 --> 00:35:13.680 So we need to pump money in to keep prices up and make profitability possible. 417 00:35:13.680 --> 00:35:17.680 Well, to make a long story extremely short here, first of all, you should read 418 00:35:17.680 --> 00:35:22.680 Guido's booklet that's maybe 40, 50 pages called Deflation and Liberty. 419 00:35:22.680 --> 00:35:25.680 And the whole thing is available as a PDF online. 420 00:35:25.680 --> 00:35:29.680 And it's read also by Dr. Floyd Lilly, our friend. 421 00:35:29.680 --> 00:35:33.680 But just to give you just a quick answer to this, for one thing, 422 00:35:33.680 --> 00:35:36.680 there's just the empirical fact that, as I've said, prices did fall 423 00:35:36.680 --> 00:35:42.180 did fall throughout American history, and there are people still here in America. 424 00:35:42.180 --> 00:35:45.180 It did not result in the deaths of all the people. 425 00:35:45.180 --> 00:35:46.680 People, in fact, seemed to prosper. 426 00:35:46.680 --> 00:35:50.680 We had tremendous economic growth, particularly in the last quarter of the century, 427 00:35:50.680 --> 00:35:53.180 when the prices were falling the fastest. 428 00:35:53.180 --> 00:35:54.680 So something doesn't quite work here. 429 00:35:54.680 --> 00:35:59.680 China's had prices falling, and again, they also seem to be alive. 430 00:35:59.680 --> 00:36:02.180 And then there's been recent empirical research looking at, 431 00:36:02.180 --> 00:36:06.620 Is there even a correlation between deflation and depression? 432 00:36:06.620 --> 00:36:08.140 There just isn't. 433 00:36:08.140 --> 00:36:10.700 The American Economic Review had an article about this in 2004. 434 00:36:10.700 --> 00:36:12.860 I cite that in Meltdown as well. 435 00:36:12.860 --> 00:36:16.940 But just think theoretically, and again, I'm going to do this very briefly. 436 00:36:16.940 --> 00:36:20.500 It's true that businesses want to make profits. 437 00:36:20.500 --> 00:36:23.820 But here's how they do it if prices are falling. 438 00:36:23.820 --> 00:36:28.940 Entrepreneurs simply anticipate the falling prices in the same way that today they anticipate 439 00:36:28.940 --> 00:36:30.420 rising prices. 440 00:36:30.420 --> 00:36:35.860 They factor these anticipations into the bids they offer for the factors of production. 441 00:36:35.860 --> 00:36:39.980 So they lower their bids for the factors of production because they know they're only 442 00:36:39.980 --> 00:36:44.660 going to be able to fetch X number of dollars for the finished goods in the future. 443 00:36:44.660 --> 00:36:45.940 Problem solved. 444 00:36:45.940 --> 00:36:52.380 So if the price deflation is anticipated, then it's already been factored into the prices 445 00:36:52.380 --> 00:36:54.080 of the factors of production. 446 00:36:54.080 --> 00:36:55.700 So there's no problem with profitability. 447 00:36:55.700 --> 00:36:59.540 There's still a price spread and entrepreneurs are doing fine. 448 00:36:59.540 --> 00:37:04.540 There's no problem. What if the fall in prices is unanticipated? 449 00:37:04.540 --> 00:37:09.540 Well, then in that case, businesses may in fact find, yeah, they can't sell their product 450 00:37:09.540 --> 00:37:13.540 at a point where they could actually turn a profit. 451 00:37:13.540 --> 00:37:16.540 Okay, they may even go bankrupt at that point. 452 00:37:16.540 --> 00:37:21.540 All right, well, entrepreneurs go bankrupt when they make bad anticipations 453 00:37:21.540 --> 00:37:24.540 of the future state of prices. So what does that mean? 454 00:37:24.540 --> 00:37:27.540 It means new owners take over. The creditors take over. 455 00:37:27.540 --> 00:37:39.540 And so the business just continues to run with new owners. Now it's bad for that individual owner, but from an aggregate point of view this is not relevant to the economy, from an aggregate point of view. 456 00:37:39.540 --> 00:37:53.540 The worst you might have is a series of hiccups as ownership changes hands. But where it differs from inflation is that with inflation through the banking system you get all this waste of capital that we saw, talking about Austrian business cycle theory. 457 00:37:53.540 --> 00:37:58.540 Here you don't have any waste of capital. You might have capital temporarily underutilized 458 00:37:58.540 --> 00:38:02.140 while bankruptcy courts sort things out, but that's it. 459 00:38:02.140 --> 00:38:05.660 And then the question of what if the people are in debt and they've contracted the debt 460 00:38:05.660 --> 00:38:11.460 in nominal dollars? How are they going to deal with that? 461 00:38:11.460 --> 00:38:15.500 And there are two possible answers. One, the debt can be renegotiated in light of the changed 462 00:38:15.500 --> 00:38:20.300 purchasing power of the money. That happens. Or the creditor could simply demand the money 463 00:38:20.300 --> 00:38:24.620 in full, in which case, again, the business owner goes bankrupt. 464 00:38:24.620 --> 00:38:27.900 But again, this simply entails a change in ownership. 465 00:38:27.900 --> 00:38:33.520 This does not lead to a fall in production or harm to the economy in the aggregate. 466 00:38:33.520 --> 00:38:38.460 But as I say, there is no reason entrepreneurs can fail to have trouble anticipating this. 467 00:38:38.460 --> 00:38:39.460 That's their job. 468 00:38:39.460 --> 00:38:40.460 They're entrepreneurs. 469 00:38:40.460 --> 00:38:41.460 They can anticipate this. 470 00:38:41.460 --> 00:38:45.660 So the reasons for the hysteria about deflation are a subject for another day. 471 00:38:45.660 --> 00:38:50.660 I refer you to Guido on this, but the real reasons are not economic. 472 00:38:50.660 --> 00:38:55.660 Finally, there isn't enough gold to facilitate all our transactions. 473 00:38:55.660 --> 00:38:58.660 Well, the answer is yes, there is. I mean, there's enough there. 474 00:38:58.660 --> 00:39:02.660 But it could well be that gold, let's say we redefine the dollar 475 00:39:02.660 --> 00:39:05.660 so that the gold could cover all the dollars that we have. 476 00:39:05.660 --> 00:39:08.660 It could be that gold would be like $12,000 an ounce or something, 477 00:39:08.660 --> 00:39:12.660 in which case it would be impractical perhaps to use gold 478 00:39:12.660 --> 00:39:14.660 unless you're making super big purchases. 479 00:39:14.660 --> 00:39:18.360 So maybe you'd use silver or whatever, but this is actually a fallacy. 480 00:39:18.360 --> 00:39:22.260 Any supply of money is perfectly adequate to facilitate our transactions. 481 00:39:22.260 --> 00:39:23.760 You will sometimes hear on the Internet... 482 00:39:23.760 --> 00:39:25.260 Now, I'm thinking I can go till ten after. 483 00:39:25.260 --> 00:39:29.060 I'm not going to look at Doug so he can't overrule me if I don't see him. 484 00:39:29.060 --> 00:39:32.360 Because I think I started ten minutes after, so I think he's not there if you don't... 485 00:39:32.360 --> 00:39:36.560 If Doug French makes a noise in the forest, no one's there. 486 00:39:36.560 --> 00:39:43.760 But in any case, on this gold thing, sometimes on the Internet you'll hear this type of argument that, 487 00:39:43.760 --> 00:39:48.400 Well, if you add up the value of all the gold in the world, it's X number of dollars, 488 00:39:48.400 --> 00:39:51.480 and look at the value of all the goods in the world, it's Y number of dollars, how 489 00:39:51.480 --> 00:39:54.600 could the gold possibly facilitate all these transactions? 490 00:39:54.600 --> 00:39:59.320 You get that sort of like third level kind of criticism, and that just totally misconceives 491 00:39:59.320 --> 00:40:00.320 the problem. 492 00:40:00.320 --> 00:40:04.400 I mean, just on the surface of it, for one thing, if gold were money again, it would 493 00:40:04.400 --> 00:40:09.160 be exchanging in every single market, hats for gold, cigarettes for gold, so its value 494 00:40:09.160 --> 00:40:10.160 would go way up. 495 00:40:10.160 --> 00:40:14.060 Secondly, it's not like we get one shot with all the stock of gold. 496 00:40:14.060 --> 00:40:18.460 We get to buy one thing with it, we get to use it once, and then that's it. 497 00:40:18.460 --> 00:40:23.060 You can use the gold again and again, right, and get many transactions out of it, 498 00:40:23.060 --> 00:40:26.360 and then so it actually can make possible many more transactions, 499 00:40:26.360 --> 00:40:28.560 but this is actually even beside the point. 500 00:40:28.560 --> 00:40:30.060 The gold is simply an intermediary. 501 00:40:30.060 --> 00:40:32.860 What we're actually doing in the economy is exchanging goods against goods, 502 00:40:32.860 --> 00:40:35.960 just like in barter, except with the intermediary of money. 503 00:40:35.960 --> 00:40:37.160 So gold is just in between. 504 00:40:37.160 --> 00:40:43.160 It doesn't matter how much the gold is worth now as a mere non-monetary commodity, that's totally irrelevant. 505 00:40:43.160 --> 00:40:46.160 Once it's used as money, you've got some supply of gold, 506 00:40:46.160 --> 00:40:53.160 and then you simply need some slice, some proportional slice of it to make possible this exchanging for that. 507 00:40:53.160 --> 00:40:58.160 That's what the gold does, and any supply would be able to do that. 508 00:40:58.160 --> 00:41:02.160 Depending on the supply of gold, you need more to facilitate a particular transaction, 509 00:41:02.160 --> 00:41:04.160 or you need less of it to facilitate it. 510 00:41:04.160 --> 00:41:09.760 And I will not address the supply of money needs to grow along with the increase in business activity argument 511 00:41:09.760 --> 00:41:12.060 because I think that's implied in what's gone before. 512 00:41:12.060 --> 00:41:14.260 There's no need to increase the supply of money. 513 00:41:14.260 --> 00:41:17.560 We can simply have the purchasing power of the money increase. 514 00:41:17.560 --> 00:41:23.560 That, okay, you get more and more goods being produced, supply of money is increasing not as fast. 515 00:41:23.560 --> 00:41:26.760 So that means the dollars people hold become worth more. 516 00:41:26.760 --> 00:41:27.960 This is not the end of the world. 517 00:41:27.960 --> 00:41:30.460 People might actually like this for a change. 518 00:41:30.460 --> 00:41:33.060 Now, let me leave you with a few statements here. 519 00:41:33.060 --> 00:41:38.260 This is from Mises writing in the 1953 edition of The Theory of Money and Credit in English. 520 00:41:38.260 --> 00:41:38.960 He writes, 521 00:41:38.960 --> 00:41:41.960 The eminence of the gold standard consists in the fact 522 00:41:41.960 --> 00:41:45.360 that it makes the determination of the monetary units purchasing power 523 00:41:45.360 --> 00:41:47.760 independent of the measures of governments. 524 00:41:47.760 --> 00:41:52.160 It rests from the hands of the economic czars their most redoubtable instrument. 525 00:41:52.160 --> 00:41:54.660 It makes it impossible for them to inflate. 526 00:41:54.660 --> 00:41:57.660 This is why the gold standard is furiously attacked 527 00:41:57.660 --> 00:42:01.060 by all those who expect that they will be benefited by bounties 528 00:42:01.060 --> 00:42:03.860 from the seemingly inexhaustible government purse. 529 00:42:03.960 --> 00:42:07.660 What is needed, first of all, is to force the rulers to spend only what, 530 00:42:07.760 --> 00:42:12.260 by virtue of duly promulgated laws, they have collected as taxes. 531 00:42:12.360 --> 00:42:15.860 Whether governments should borrow from the public at all, and if so, to what extent, 532 00:42:15.960 --> 00:42:20.460 are questions that are irrelevant to the treatment of monetary problems. 533 00:42:20.560 --> 00:42:23.060 The main thing is that the government should no longer be in a position 534 00:42:23.160 --> 00:42:25.560 to increase the quantity of money in circulation 535 00:42:25.660 --> 00:42:29.360 and the amount of checkbook money not fully, that is 100% covered, 536 00:42:29.360 --> 00:42:31.360 by deposits paid in by the public. 537 00:42:31.360 --> 00:42:33.360 No back door must be left open 538 00:42:33.360 --> 00:42:35.360 where inflation can slip in. 539 00:42:35.360 --> 00:42:38.360 No emergency can justify a return to inflation. 540 00:42:38.360 --> 00:42:40.360 Inflation can provide neither the weapons 541 00:42:40.360 --> 00:42:42.360 a nation needs to defend its independence 542 00:42:42.360 --> 00:42:45.360 nor the capital goods required for any project. 543 00:42:45.360 --> 00:42:48.360 It does not cure unsatisfactory conditions. 544 00:42:48.360 --> 00:42:50.360 It merely helps the rulers whose policies 545 00:42:50.360 --> 00:42:52.360 brought about the catastrophe 546 00:42:52.360 --> 00:42:54.360 to exculpate themselves. 547 00:42:54.360 --> 00:42:56.360 One of the goals of the reform suggested 548 00:42:56.360 --> 00:42:58.360 is to explode and to kill forever 549 00:42:58.360 --> 00:43:07.360 There is a superstitious belief that governments and banks have the power to make the nation or individual citizens richer out of nothing and without making anybody poorer. 550 00:43:07.360 --> 00:43:13.360 The short-sighted observer sees only the things the government has accomplished by spending newly created money. 551 00:43:13.360 --> 00:43:18.360 He does not see the things the non-performance of which provided the means for the government's success. 552 00:43:18.360 --> 00:43:27.360 He fails to realize that inflation does not create additional goods but merely shifts wealth and income from some groups of people to others. 553 00:43:27.360 --> 00:43:31.760 Joseph Schumpeter, one of the great economists of the 20th century, writes as follows, 554 00:43:57.360 --> 00:44:04.360 is convinced of the validity of all that has ever been urged against it on economic grounds, and so on. 555 00:44:04.360 --> 00:44:08.360 Now this is the heart of it. Now I realize there are people who say we should forget this 556 00:44:08.360 --> 00:44:13.360 and focus on what's more practical, what's more immediately doable, but money is the foundational issue. 557 00:44:13.360 --> 00:44:19.360 The Federal Reserve system is a central planning agency that is given the task of manipulating the money supply 558 00:44:19.360 --> 00:44:23.360 in such a way as to maximize employment and minimize price inflation. 559 00:44:23.360 --> 00:44:27.360 This is the rankest superstition. But it's worse than that. 560 00:44:27.360 --> 00:44:31.960 The destruction of a free monetary system and its replacement by monopoly fiat paper 561 00:44:31.960 --> 00:44:37.960 is the great enabler of the leviathan that grows more voracious and destructive every day. 562 00:44:37.960 --> 00:44:41.960 The state is not the indispensable support of our monetary system. 563 00:44:41.960 --> 00:44:46.560 It is an interloper. It gives us discoordination and chaos. 564 00:44:46.560 --> 00:44:49.560 It enriches a favored few at the expense of the many. 565 00:44:49.560 --> 00:44:52.360 It is morally and economically indefensible. 566 00:44:52.360 --> 00:45:00.360 This is not a side issue we can safely neglect, that we might focus instead on matters that might be considered more fashionable, more politically viable. 567 00:45:00.360 --> 00:45:04.360 In fact, on the politically viable point, F. A. Hayek said, 568 00:45:22.360 --> 00:45:24.000 as politically possible. 569 00:45:24.000 --> 00:45:27.480 We need intellectual leaders who are willing to work for an ideal, 570 00:45:27.480 --> 00:45:31.040 however small may be the prospects of its early realization. 571 00:45:31.040 --> 00:45:33.600 They must be men who are willing to stick to principles 572 00:45:33.600 --> 00:45:36.640 and to fight for their full realization, however remote. 573 00:45:36.640 --> 00:45:39.600 And those who have concerned themselves exclusively 574 00:45:39.600 --> 00:45:42.920 with what seemed practicable in the existing state of opinion 575 00:45:42.920 --> 00:45:45.160 have constantly found that even this 576 00:45:45.160 --> 00:45:47.640 had rapidly become politically impossible 577 00:45:47.640 --> 00:45:50.120 as a result of changes in a public opinion 578 00:45:50.120 --> 00:45:53.120 which they have done nothing to guide. 579 00:45:53.120 --> 00:45:56.120 This fight can be won. 580 00:45:56.120 --> 00:46:00.120 Public opinion is shifting for the first time in decades. 581 00:46:00.120 --> 00:46:03.120 And so I urge you to join the Mises Institute today. 582 00:46:03.120 --> 00:46:07.120 Become a member. Use these cards on your tables. 583 00:46:07.120 --> 00:46:09.120 Become a member before you leave. 584 00:46:09.120 --> 00:46:12.120 Make a donation. Help us. 585 00:46:12.120 --> 00:46:16.120 Because together we can strike down the falsehoods, the fallacies. 586 00:46:16.120 --> 00:46:18.120 We can kill the monster. 587 00:46:18.120 --> 00:46:25.120 and we can restore to America and the world the indispensable foundations of lasting prosperity. 588 00:46:25.120 --> 00:46:27.120 Thank you very much.