WEBVTT

NOTE Banking and the Business Cycle

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One of the most difficult points to get across, probably the single most difficult point in

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all of monetary analysis and monetary economics, is that the banks create money fly out of

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thin air.

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Because everybody's been inured to thinking that the banks really simply borrow our money

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and re-lend it, it's very difficult to make the mind shift and realize that the banks

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are really engaging in a species, in a form of legalized counterfeiting, in other words

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for creating new money out of thin air, without having to sell goods and services, because

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usually on the market, the way to acquire money is to sell goods and services in exchange

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for it, or else convince people, I was just going to say con people, convince people into

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contributing money to your organization of some sort.

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In other words, either donation or purchasing goods and services.

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Also on the market, the only other way to get money is to dig it out of the ground,

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or to dig the gold out of the ground, which is also a hassle.

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Another way, of course, of getting income, acquiring money, is the governmental way of

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stealing it.

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Whereas this is taxation.

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Well, of course, you won't get a chance to analyze taxation in depth in these lectures,

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because it's not part of basic economics, basic economics really covering the market

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and various forms of interferences in it, rather than complete aberrations like taxation.

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Another way of acquiring money is to print it or create it out of thin air by some kind

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of trusted digitization.

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The major single lesson of the analysis of banking is this is what the banks do, this

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is what the commercial banks do, this is what so-called, it's known euphemistically as fractional

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reserve banking.

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Certain coin collectors sell coins to people and keep them for their clients as a service

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and then lend the money out or don't keep them or accept and don't have really the money

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there, this is a form of fractional reserve banking, creating fictitious claims or another

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way of putting it in the form of embezzlement, to use a harsher but I still think accurate

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term.

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Because it's really equivalent to the old movies of the 30s, the old movies of the 30s

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we have a typical bank manager, and the bank manager is scorned with some of the funds,

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but not to have scorned permanently, he has a great tip on a race, a sure bet on the sixth

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aqueduct or whatever, he can take this money, even though it's not his money, he's going

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to invest it in the tip, and it's a sure win, and then he'll be able to put the money back

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and pocket the interest, the pocket of the gain, before the bank examiner comes.

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And usually what happens is of course the bank examiner shows up unexpectedly early

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of Money and Nice Court and goes to jail.

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But the point is even if that doesn't happen, he's still a crook, it doesn't make any difference

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whether he's caught.

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Crookery is objective rather than whether, a function of whether he's caught or not.

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In the case of the bank, if you have a very similar situation, the bank feels, usually

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correctly of course, that they're able to issue one form or another uncovered bank notes

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or uncovered bank deposits or, looking another way, fake warehouse receipts, to issue them

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And because they know darn well, through experience on the market, through statistical experience

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or whatever, that not everybody is going to call for, because people have crossed this

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bank and they think their money is there, and so they're able to get away with it for

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some time.

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My contention, however, is that it's really a form of embezzlement, this issue of uncovered

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bank notes.

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Fake warehouse receipts, because usually if you have a warehouse receipt, there's supposed

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to be something behind it.

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If you have a certificate saying that we will redeem your 10,000 bushels of wheat at any

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time you ask for it, there's supposed to be 10,000 bushels of wheat there.

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There's a division of opinion within the sound money movement, let me put it that way, about

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fractional reserve banking.

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Some of us think that fractional reserve banking should be illegal as being fraudulent on the

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same basis as any other sort of fraud or embezzlement.

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Others believe that this is not fraud or embezzlement and it should not be illegal.

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They should be able to do this until the actual bankruptcy appears.

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In other words, the people claim their money and don't find it.

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I'm in the pro-fraud camp. In other words, the camp that says that this is fraud should

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be outlawed. Even if we assume this is legal, which of course it has been for many years,

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several centuries, even if we assume that fractional reserve banking is legal, even

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allowing this, there is on the market certain severe checks, certain severe limitations

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on the degree to which the banks can expand money out of the thin air. We now examine

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these limitations under a system of so-called free banking, free banking being defined technically

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as a system where the banks are allowed to engage in fractional reserve banking, are allowed to create money out of thin air, but of course have to pay up,

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people come and present the warehouse receipt, obviously that's the key, I mean nobody can deny it's an open contract promising the redeemment,

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and free banking is a situation where the banks have to redeem their pledge to pay up when the bank deposit or the bank note is presented to them,

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on the other hand, are allowed to engage in what I consider fraud, but other people consider not fraud.

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In this situation, in the situation of free banking, we would have a very hard money situation.

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We would not have too much bank credit expansion.

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There are three kinds of checks in the free market on this kind of activity.

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One check or one limitation on bank credit expansion in the free market is that the people

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just don't use bank credit.

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People don't trust the banks.

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They think they're a bunch of crooks and they don't use it.

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This is a very healthy situation.

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In most so-called primitive countries, it still exists people don't use banks.

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People worry about them.

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They feel something crooked about the whole thing and they're absolutely right.

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and so they don't use it, they don't accept bank credit.

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If you don't accept bank credit, if you're a seller or a lender or something, you don't

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accept bank credit or bank deposit, well, you don't accept the check, you tear it up

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and throw it in the guy's face, then the bank can't expand credit because nobody will accept

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it.

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It's like me printing a hundred Rothbards and trying to buy something with it.

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It would not get a good reception among the tradesmen of the neighborhood check.

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As a matter of fact, people do not get paid in checks.

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I mean, workers didn't get paid in checks until very recently, really until World War

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II.

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Before World War II, workers got paid in cash and paper money.

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Treasury...

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Most people didn't have bank accounts.

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The whole idea of bank accounts is what people worry of, correctly so.

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The whole idea of everybody having a checking account only comes in after World War II.

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I think in Europe workers still get paid in cash, at least until very recently.

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Banks only come in on a big scale fairly recently.

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They start, of course, with merchants and with industrialists, etc.

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The average person does not have a checking account until quite late.

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Of course, the establishment of the monetary establishment, the government and its allies

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and minions are trying to push the idea of banking all over them.

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They push the cultural idea that it's so primitive in the end, or so, if anybody can distrust

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the bank.

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We used to see movies again in the 30s when the old geezer had his money under the floorboards

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in the form of gold or cash, or something, and refused to use the bank, distrusted claims

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Bankers of the banks are fraudulent. Everybody laughs at them. Only intellectual liberals and solid citizens of the town laugh at them. Of course, he was right, and metaphysically at least.

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That's the sort of culture that gets spread around. It's silly not to put your money in a bank. Banks are really great. They're advanced. They're progressive. They're civilized.

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And anybody who doesn't do that is really sort of the same status as a Kuwaiti nomad. Of course, they were really right, and we were wrong.

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It's not like the Ethiopian natives and the Kuwaiti natives, not only don't they accept

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bank credit, they don't accept paper money either, they don't accept even their own beloved

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government's paper, they don't accept any of this stuff, they accept only gold and sometimes

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silver.

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As a result of which these countries cannot inflate, they can't have runaway inflation,

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because nobody will accept the stuff that they're printing.

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It's a beautiful and healthy situation, I commend the American citizenry.

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Okay, so that's one check on the bank, but of course this check has faded out, it's faded

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out under government cultural pressure, fading away of sound money ideas and money for the

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public and so forth and so on.

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As a matter of fact, even in the 1820s and 1830s, when money first got printed, paper

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money first comes in a large scale.

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In America, in those days they made paper money out of rags, it was very high quality

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paper.

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Now, of course, it's much cheaper paper.

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At any rate, they made it out of rag paper, and the hard money people would write in the

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newspapers, they'd say, don't accept ragged paper, it's filthy rag money, the only really

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The second limitation, which is my particular favorite, sort of God's angry man, the wrath

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of God type of thing, is the second choice, the second limitation.

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Unfortunately, most people don't see it that way, and those of us who favor bank runs,

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as they are called, considered hard-hearted monsters, I have a certain love for the bank

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run.

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The bank run is a situation where you have, the bank has cash or gold or whatever, let's

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take cash out including gold and paper, let's say cash is a thousand dollars, demand deposits

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or bank notes, five thousand dollars, IOUs, four thousand, this is known as fractional

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reserve banking, fifty percent reserves, the reserve to meet the demand deposit, five thousand

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dollars is outstanding out there in the field so to speak, it should be redeemed at any

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Any time people want to redeem it, the bank has $1,000 in their till to pay off.

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The other $4,000 is out there making profits for the bank out of the demand depositors'

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money.

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It was making profits out of other guys' money.

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The bank run occurs when the clients of the bank, the people who have already accepted

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the bank, are either accepting the bank's notes or demand deposits, lose confidence

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in the bank.

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For some reason feel the bank is really bankrupt.

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So as I read more of my stuff, I think there was a law, and I can't swear to this, I think

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I think there's a law on the books right now, a federal statute, that it's illegal to spread

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false rumors about the monetary health of a bank.

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It's illegal to spread false rumors about a bank being inherently bankrupt.

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Now, nobody spreads rumors about General Motors being bankrupt, but obviously they're not

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bankrupt.

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For any other business in a bank, the asset column and liability column, every business

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knows they have certain accounts payable.

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In other words, certain liabilities are due, say here's a corporation, it has a million

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dollars due in six months.

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So they make darn sure that six months from now, they'll have a million dollars coming in, so they'll be able to pay it.

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This is known as keeping the time structure of their assets proportionate to the time structure of their liabilities, even better.

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In other words, if your liabilities are coming in to pay off something in a year, before a year is up, you try to get the money in.

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So you try to keep your time structure, your assets.

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All corporations do this, and all businesses do this. You've taught this in every management course.

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Only with a commercial bank, not only don't they do it, but they can't do it because their liabilities are immediate.

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Their time structure is right now and their assets, of course, can't be immediate.

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They wouldn't be making any money on it.

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They'd be a 100% reserve bank instead of a fractional reserve bank.

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So, their assets are coming in, you know, six months, a year, two years, whatever it is,

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and their demand, their liabilities are right now.

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So, therefore, a bank is inherently bankrupt.

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A bank run occurs when the people begin to realize, the clients begin to realize

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that the bank is inherently bankrupt, they better get their money out fast,

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because since the bank only has a thousand bucks,

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five thousand bucks outstanding, you better be the first thousand to get it,

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otherwise you're not going to get anything at all.

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When this deep knowledge hits the consciousness of the public,

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a bank run occurs, and it's a beautiful thing to watch.

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It's just as triumphant.

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One of the reasons why it's especially illegal

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to force women about the inherent bankruptcies of a bank

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is because I'm really in a state of illegality right now,

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in the Bank of America, a free speech making this statement illegal.

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If they took me to court and said it's illegal you're spreading false rumors about the bankruptcy

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of the American banking system, I would say, no no, it's not false because they're inherently

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bankrupt.

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They would come out for their establishment of monetary theories claiming the bank is not

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inherently bankrupt.

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The judge will have to decide on the basis of high monetary theory, in which he's not

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very well equipped.

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So, the stacks are loaded against you. So, when the public finds out, the knowledge floods

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into their consciousness, their brain at this damn bank in which they've invested their

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life savings and bankrupt, then the run begins. Again, I go back to movies in the 1930s, classic

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movies about bank runs, usually the Prussian, and suddenly rumors spread that the bank is

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on sound, that they're losing money or whatever, they haven't got the money which people think

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they've got, and then people start flooding into the bank, I don't want to get my money

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They line up about five, six in the morning when the bank doors are open, they have lines

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around the block, so each person goes up to the teller and demands his money.

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The bank president or vice president is telling these people, these are false, wicked rumors

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spread by communists and Bolsheviks, the bank is sound, don't worry about it, lying through

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his teeth obviously, they have now seen through his prevarications and insisted on their money

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and of course the bank folds very quickly, maybe in a couple of hours.

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So many of the banks that have folded in this kind of situation, during the Great Depression

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In 1929 to 1933, there were thousands of bank runs, the banks collapsing.

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This, of course, is a beautiful check, a beautiful limitation, free market limitation on bank

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credit expansion, because the banks know down deep in their heart that if the ratio gets

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too low, people like myself will start spreading rumors and other people will start believing

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it and start calling for their money and the whole issue of cards will collapse, because

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it has to collapse.

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Once people realize what's going on, it's got to collapse, because they ain't got no

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money.

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In American economic history, even among American economic historians, there's a great myth

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of so-called wildcat banking.

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We hear that before 1913 and before 1865, banking was free in the United States and

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was wildcat.

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It was a runaway inflation.

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It was chaotic.

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Total chaos prevailed.

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Well, it's not quite true.

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On the other hand, the offenders of wildcat banking claim it's really great because inflation

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is important for economic development.

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That's even less true.

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Certainly, the reason why there were core wildcat banking is the Rothbard Bank had got

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I've got no money at all, no cash. I issue $20,000 in Rothbard dollars. It says dollar,

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redeemable in gold, you know, whatever, and here's the $20,000 bills and that sort of

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stuff. I haven't got anything. I've got nothing. I've got peanuts. First of all, why will people

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accept the money? Let's say they accept it. In the first place, I'm doing great as long

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as they accept it. I'm spending the money, I'm lending it to my brother-in-law, whatever

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it is, and everything is going great. The only problem is, what happens when people

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The idea is to make your headquarters inaccessible.

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If your headquarters or the bank offices are in New York City, Fifth Avenue or 42nd Street,

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they'll find you very quickly and you'll go bankrupt fast before you can try to spend

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this new money.

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If, however, you're up in the wilds of what was then northern Michigan, Michigan was all

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forest and jungle and all that in those days.

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If you're up there in the wild with no roads getting up there, but only wildcats around

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you and no people, then it takes months before the person can schlep his way to like your

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bank headquarters and demand redemption.

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That's why they were called wildcat banks.

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These guys would sandwich themselves in the wolf in the woods and would take days of backpacking

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to get there.

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So that was unfortunate.

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I think all these banks were fraudulent, but there was still a market check on them for

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this reason.

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First place, nobody really accepted.

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If I established a Rothbard bank up in northern Michigan, the sophisticated people in New

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in New York and Philadelphia, et cetera, wouldn't accept it.

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They accepted a very huge discount.

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In other words, one Rothbard dollar,

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the Rothbard bank in Michigan would go for 10 cents in New York.

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They would depreciate very rapidly,

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and oil banks and all large merchants had weekly tables that would come out

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listing the bank discount rate on the market.

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The Rothbard bank would keep depreciating very rapidly

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and finally go out of existence.

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So there was a market check in that sense.

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Secondly, they would circulate really at par right around northern Michigan,

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The government steps in and says, you don't have to pay up.

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This used to be called suspension of specie payments, which is a very highfalutin name

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for allowing for a monstrous situation, allowing the bank not to pay up, but at the same time

256
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the bank continues operations.

257
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The bank is printing new money, the bank is being able to force their own debtors, the

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guys who borrow money from the banks, they're still forced to pay money to the banks, but

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the banks themselves are now exempt from any payment.

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They're completely cut off from the legal contractual obligation of redeeming their

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money.

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Now, this situation has occurred in every depression in American history.

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It started, well, the first banks on a massive scale really begin the War of 1812.

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Before that, there were very few banks within the Mount of the Hill of Beans.

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The War of 1812 was a very unpopular war that was fought essentially by the western states.

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The New England states, which had most of the money, most of the capital, etc., were

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against the war, so they couldn't borrow from the New England capitalists.

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So the way the government financed the war effort was essentially by encouraging new

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New banks are coming with no money, sort of like Rothbard banks, and they print a lot

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of money and lend it to the government, buy government bonds, and the government would

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take the money and spend it.

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Now, unfortunately for the government, they had to spend it on manufactured products,

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munitions, etc. in New England, because New England has the center of most of the manufacturing,

274
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so the money found its way to the New England banks, who are non-exploitationary banks.

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The New England banks then call upon the upstart Pennsylvania and Kentucky banks for redemption.

276
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They didn't have the money, and then what was going to happen?

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They were going to go bankrupt.

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The Federal Government couldn't afford that because the whole war effort was being financed

279
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by these guys.

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On the Black Day of August 1814, the government issued a suspension of fee sheet payment as

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a wartime emergency measure, allowed the banks to continue operation and new banks to come

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in without paying anything.

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They didn't have to pay a nickel.

284
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This suspension of fee sheet payment continued long after the war was over.

285
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The war was over in February 1815.

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The suspension was allowed to continue until approximately March 1817, in other words, two

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In the last two and a half years, we had a banking situation where not only were the banks committed to engaging fractional reserve and wildcat banking, they didn't have to pay up.

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They could force their own debtors to pay up. They didn't have to pay a nickel.

289
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It was an unbelievable situation.

290
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There were then two schools of thought on how to solve this question.

291
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The minority school of thought, headed by one of my own particular favorites, John Randolph of Roanoke, a marvelous old geezer,

292
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And Daniel Webster, who at that time had to be pretty good on the question, kept changing his position in accordance with who bought him at the moment.

293
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At any rate, he was, some good guy bought him at this point.

294
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So Webster and Randolph gave great speeches in Congress saying, the only way to cure this is to force the banks to pay up.

295
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If they don't pay up, they're bankrupt. That's all. Smash them.

296
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And then you return it with sound specie currency.

297
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But instead of that, the government took the easy way, and they set up a simple bank for the first time.

298
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for the First Bank and the Second Bank of the United States, the Second Central Bank,

299
00:18:33.720 --> 00:18:38.400
to pump more money to the system to allow the banks to return the specie payments, pay

300
00:18:38.400 --> 00:18:43.240
them off, so to speak, and pump more money to the system so the banks can then use the

301
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Central Bank notes as money.

302
00:18:45.040 --> 00:18:48.680
And this could allow the inflation to not only continue, but they would even expand

303
00:18:48.680 --> 00:18:52.360
after that and cause the first Great Depression in the United States, the Panic of 1819 as

304
00:18:52.360 --> 00:18:53.360
a result.

305
00:18:53.360 --> 00:18:57.960
So in every succeeding crisis, financial crisis, the government, state and federal governments

306
00:18:57.960 --> 00:19:01.800
have allowed the banks to suspend species payments for the duration of the depression.

307
00:19:01.800 --> 00:19:07.720
This happened in 1819, it happened in 1837, it happened in 1957, etc., etc., etc.

308
00:19:07.720 --> 00:19:12.960
All the way down to 1933 when Franklin Roosevelt declared a bank holiday as soon as he came

309
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in.

310
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Now here we had a great opportunity.

311
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Here was the last great opportunity we had in the United States to smash the fractional

312
00:19:17.800 --> 00:19:18.800
reserve banking system.

313
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It busted.

314
00:19:19.800 --> 00:19:21.600
The whole system was collapsing.

315
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The public had finally realized the banks were really bankrupt, so it runs on all the

316
00:19:25.320 --> 00:19:26.320
banks.

317
00:19:26.320 --> 00:19:27.320
All the banks were caving in.

318
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At that point, all the banks could have been smashed. We could have gone immediately without any real hassle.

319
00:19:32.120 --> 00:19:37.320
We could have gone right over to a pure gold standard system, 100% gold system, right then.

320
00:19:37.320 --> 00:19:40.820
Instead of that, Franklin Roosevelt comes in and saves the banks by declaring a bank holiday.

321
00:19:40.820 --> 00:19:44.720
In other words, allowing the banks to continue operation and to get money from their debtors,

322
00:19:44.720 --> 00:19:47.320
and yet they themselves don't have to pay a nickel.

323
00:19:47.320 --> 00:19:50.220
Hoover was going to do the same thing, so we can't blame it only on Roosevelt,

324
00:19:50.220 --> 00:19:55.920
since Hoover and Roosevelt were ideological twins, feeding them and feeding leaves.

325
00:19:55.920 --> 00:20:03.520
Mike Holliday saved them and then the thing that finally saved them permanently was one of the most monstrous acts of the new deal, which Milton Friedman is all in favor of.

326
00:20:03.520 --> 00:20:10.060
The Federal Deposit Insurance Corporation system, coming in 1933, which now underwrites all the banks.

327
00:20:10.060 --> 00:20:15.820
In other words, the FDIC guarantees that all demand are passed up to, I think, now $20,000.

328
00:20:15.820 --> 00:20:19.780
So if a bank goes bankrupt, the FDIC will pay you off.

329
00:20:19.780 --> 00:20:24.580
or even though the FDIC doesn't have the money, of the hundreds of billions of dollars in

330
00:20:24.580 --> 00:20:29.380
deposits outstanding, the FDIC maybe has a couple of billion and even that's not in cash.

331
00:20:29.380 --> 00:20:36.340
They don't have $605 billion, the FDIC has a couple of billions and that's mostly invested

332
00:20:36.340 --> 00:20:40.420
in government bonds, but even though they don't have the money, the wisdom of the public

333
00:20:40.420 --> 00:20:41.420
in a sense is correct.

334
00:20:41.420 --> 00:20:45.300
In other words, the inherent folk wisdom of the public is correct in that they don't have

335
00:20:45.300 --> 00:20:48.180
to have the money right now because the government, the Federal Reserve system can simply print

336
00:20:48.180 --> 00:21:04.620
The FDIC has now wiped out the bank run check on the free market bank run limitation on

337
00:21:04.620 --> 00:21:05.620
bank credit expansion.

338
00:21:05.620 --> 00:21:10.980
The FDIC has managed to eliminate that, even though some widows and orphans and bank depositors

339
00:21:10.980 --> 00:21:16.020
are salvaging the situation, this is at the core of wiping out, creating a system of potential

340
00:21:16.020 --> 00:21:19.020
and the Runway Inflation for the whole country.

341
00:21:19.020 --> 00:21:22.020
So now the government has managed to eliminate the runs on the banks because of the FDRC

342
00:21:22.020 --> 00:21:27.020
and also the whole bank holiday or suspension of the species payment tradition.

343
00:21:27.020 --> 00:21:30.020
Because you get to the point, you see the banks are about ready to collapse and the

344
00:21:30.020 --> 00:21:32.020
government says we can't let the banks collapse.

345
00:21:32.020 --> 00:21:33.020
There's too many depositors.

346
00:21:33.020 --> 00:21:34.020
They're too important.

347
00:21:34.020 --> 00:21:35.020
It's like the current tradition.

348
00:21:35.020 --> 00:21:39.020
We can't allow any large corporation to collapse for similar reasons.

349
00:21:39.020 --> 00:21:42.020
So when this tradition gets in, they have the end of the free enterprise system in the

350
00:21:42.020 --> 00:21:53.620
The Bank Run tradition is out, which leaves us with only one free market check remaining

351
00:21:53.620 --> 00:21:54.620
so far.

352
00:21:54.620 --> 00:21:58.840
The final free market check, the first two free market checks, people not using the bank

353
00:21:58.840 --> 00:22:00.580
credit at all.

354
00:22:00.580 --> 00:22:03.900
The second check is runs on the banks, in other words, where the clients themselves

355
00:22:03.900 --> 00:22:06.100
of the banks lose confidence.

356
00:22:06.100 --> 00:22:11.300
The third free market check is non-clients redeeming, clawing upon the bank for redemption.

357
00:22:11.300 --> 00:22:17.100
Here you have our hypothetical bank, Cash 1000, Manoposites 5000, IOU 4000, this is

358
00:22:17.100 --> 00:22:21.140
the Bank of Brooklyn or whatever, Bank of Northern Michigan, whatever it is, let's say

359
00:22:21.140 --> 00:22:25.020
the clients have perfect confidence in the bank, no problem about bank runs, the clients

360
00:22:25.020 --> 00:22:28.180
believe in the bank heart and soul, but what's the problem here is there are other people

361
00:22:28.180 --> 00:22:32.220
around who are not clients of this bank or clients of other banks, say this is the Bank

362
00:22:32.220 --> 00:22:37.780
of Brooklyn, here's the Bank of Queens, well, some guy might take his $2000 of his demand

363
00:22:37.780 --> 00:22:42.220
The bank deposits and write out a check for a car, pay it to somebody living in Queen's

364
00:22:42.220 --> 00:22:45.660
who happens to be a client of the Bank of Queen's.

365
00:22:45.660 --> 00:22:52.260
In that case, the Bank of Queen's will take this $2,000, call upon this bank here for

366
00:22:52.260 --> 00:22:53.260
redemption.

367
00:22:53.260 --> 00:22:54.260
You want the $2,000 in cash.

368
00:22:54.260 --> 00:22:56.300
And they have got the $2,000.

369
00:22:56.300 --> 00:22:58.420
They only have $1,000 and the bank goes bankrupt.

370
00:22:58.420 --> 00:23:04.700
So the final limitation, the most important limitation in practice was the fact that the

371
00:23:04.700 --> 00:23:06.420
bank doesn't have unlimited number of clients.

372
00:23:36.420 --> 00:23:42.140
as an international trade. International money, one country expands money too much, either

373
00:23:42.140 --> 00:23:47.020
bank money or paper money. If England, say, expands money a lot, and France has not expanded

374
00:23:47.020 --> 00:23:51.820
it, but money supply goes up in England, prices go up in England, money will then flow out

375
00:23:51.820 --> 00:23:55.180
because the French prices are now cheaper than English prices, money will start flowing

376
00:23:55.180 --> 00:23:59.660
from England to France. In other words, people will buy a lot more French goods and French

377
00:23:59.660 --> 00:24:04.900
will buy a lot less English goods because of the high prices. Money will flow out from

378
00:24:04.900 --> 00:24:08.620
of England and France, England will then have a so-called deficit in its balance of payments,

379
00:24:08.620 --> 00:24:12.300
France will have a so-called surplus in its balance of payments, and this flow will continue

380
00:24:12.300 --> 00:24:16.940
until the two prices are equalized, in other words, until English prices fall, French prices

381
00:24:16.940 --> 00:24:20.820
go up until the two prices are equal, in other words, the two price levels of the purchasing

382
00:24:20.820 --> 00:24:24.580
power of the gold ounce, let's say, in England and France are the same.

383
00:24:24.580 --> 00:24:30.300
So in other words, the check in international trade on any one country's inflation, the

384
00:24:30.300 --> 00:24:35.540
The big check is that gold will have to flow out of the banks to the other country, and

385
00:24:35.540 --> 00:24:36.540
then the banks have to contract.

386
00:24:36.540 --> 00:24:40.540
In other words, if you're building, you have a pyramid, the base of the pyramid is gold,

387
00:24:40.540 --> 00:24:45.660
on top of that is, say, paper money of the treasury, on top of that is bank credit, or

388
00:24:45.660 --> 00:24:46.660
bank deposits.

389
00:24:46.660 --> 00:24:52.340
As you expand more, as banks expand more and more, or as the government expands more and

390
00:24:52.340 --> 00:24:56.380
more, the top of the pyramid keeps going up, prices go up, and then the bottom of the pyramid

391
00:24:56.380 --> 00:24:58.700
starts declining as gold flows out.

392
00:24:58.700 --> 00:25:13.700
and so the ratio of unsoundness keeps increasing, in other words, 20% will go down to 10%, those demand deposits go up while cash reserves keep going down and the banks will finally have to stop this, otherwise they go bankrupt and they contract and then the whole thing is solved again.

393
00:25:13.700 --> 00:25:19.700
Gold flowing out is the method by which the equilibration process in international trade takes place.

394
00:25:19.700 --> 00:25:25.700
Eventually the deficits and balance of payments get cured, so to speak, and the price level is equalized.

395
00:25:25.700 --> 00:25:30.900
Well, it's a similar situation here with one bank, you see, this is like a David Hume species

396
00:25:30.900 --> 00:25:33.620
flow price mechanism within the country.

397
00:25:33.620 --> 00:25:38.900
One bank expands and immediately starts losing, can't lose gold so much because it's supposed

398
00:25:38.900 --> 00:25:42.940
to be on a paper currency, still lose paper, you're losing cash.

399
00:25:42.940 --> 00:25:46.740
This bank will start losing cash because its clients will take this new money and spend

400
00:25:46.740 --> 00:25:50.420
it on other clients of other banks, and if that happens, the other bank will fall upon

401
00:25:50.420 --> 00:25:52.500
this bank for redemption, this bank goes bankrupt.

402
00:25:52.500 --> 00:25:55.620
Consider, for example, a polar case here.

403
00:25:55.620 --> 00:26:00.940
A polar case would be when every bank has only one client, in other words, extreme competition

404
00:26:00.940 --> 00:26:01.940
among banks.

405
00:26:01.940 --> 00:26:02.940
Everybody's got his own bank.

406
00:26:02.940 --> 00:26:07.340
Of course, it's not very practical, but let's say it happens.

407
00:26:07.340 --> 00:26:10.140
I'm a client of one bank, each of you a client of some other bank.

408
00:26:10.140 --> 00:26:14.540
With each bank having only one client, no bank could really expand at all because as

409
00:26:14.540 --> 00:26:18.180
soon as I spent any money at all, the other guy would immediately call upon my bank for

410
00:26:18.180 --> 00:26:19.180
redemption.

411
00:26:19.180 --> 00:26:24.380
This bank expands. It expands its credit. It's at $4,000. I take this $5,000 check.

412
00:26:24.380 --> 00:26:28.180
As soon as I spend it, somebody will call upon my bank for redemption.

413
00:26:28.180 --> 00:26:34.180
And that's true. There could be a cartel of banks. The banks will all get together and agree to accept each other's notes and not call upon each other.

414
00:26:34.180 --> 00:26:41.180
That could happen, but it's a flimsy read for bank credit expansion to continue for any length of time.

415
00:26:41.180 --> 00:26:45.880
So what about this check? Well, this check, this limitation, having a lot of non-clients.

416
00:26:45.880 --> 00:26:48.980
Well, first place, this doesn't exist. Of course, we have only one bank.

417
00:26:48.980 --> 00:26:53.520
We have only one bank in the whole country, or better still, one bank in the whole world.

418
00:26:53.520 --> 00:26:57.260
Every bank, every local bank on the corner is a branch of the bank of the world, that's

419
00:26:57.260 --> 00:26:58.260
that.

420
00:26:58.260 --> 00:27:02.860
Then of course the bank can expand forever, I mean it can immediately multiply 5 to 1,

421
00:27:02.860 --> 00:27:08.500
10 to 1, 20 to 1, as long as there are no bank runs, which we have ruled out, the bank

422
00:27:08.500 --> 00:27:12.900
can just expand merrily forever because no other bank will call upon it for redemption,

423
00:27:12.900 --> 00:27:14.980
it's just one monopoly bank.

424
00:27:14.980 --> 00:27:19.980
So the more competition there is between banks, the better off we are in this situation.

425
00:27:19.980 --> 00:27:23.620
There's more of a check, a bank credit expansion.

426
00:27:23.620 --> 00:27:27.500
Knowing this, realizing this, the bankers themselves have gotten together, knowing also

427
00:27:27.500 --> 00:27:31.620
the cartels in the free market don't work too well anyway, have gotten together and

428
00:27:31.620 --> 00:27:37.340
put over upon us, just as big business put over upon us, government regulation, the guise

429
00:27:37.340 --> 00:27:41.340
of being anti-monopolistic, but actually in order to impose monopoly and cartelization

430
00:27:41.340 --> 00:27:42.340
in the Middle of the country.

431
00:27:42.340 --> 00:27:46.300
So in the same way the banks got together and imposed upon us the great progressive

432
00:27:46.300 --> 00:27:51.020
tradition or innovation of central banking, which has enabled us to arrive at a situation

433
00:27:51.020 --> 00:27:54.980
where the central bank can eliminate any bank required upon each other for redemption by

434
00:27:54.980 --> 00:28:00.300
getting every bank to expand together, uniformly and smoothly together.

435
00:28:00.300 --> 00:28:04.740
Supplying reserves and supplying cash so that no bank will get into trouble and everybody

436
00:28:04.740 --> 00:28:07.940
can sort of gently and smoothly tow and run away in flight.

437
00:28:07.940 --> 00:28:13.140
Just as the regulatory commissions, the ICC and the antitrust laws and all that were put

438
00:28:13.140 --> 00:28:19.140
in, in order to impose monopolization or cartelization under the guise of being anti-monopolistic,

439
00:28:19.140 --> 00:28:23.140
a great con-job of being anti-monopolistic, to sell it to the public.

440
00:28:23.140 --> 00:28:27.500
So in a similar way, several banks were sold to the public under the guise of restraining

441
00:28:27.500 --> 00:28:28.500
bank inflation.

442
00:28:28.500 --> 00:28:33.560
We need several banks, the story was, in order to restrict bank credit to keep these vicious

443
00:28:33.560 --> 00:28:36.180
private greedy small banks from inflating the currency.

444
00:28:36.180 --> 00:28:37.180
of Money.

445
00:28:37.180 --> 00:28:40.500
Therefore, we need a wise governor out there, a central bank, to stop it.

446
00:28:40.500 --> 00:28:43.300
So that was the way that central banking is sold to the public.

447
00:28:43.300 --> 00:28:46.780
An actual fact was, the other way around, they put in central banking in order to permit

448
00:28:46.780 --> 00:28:47.780
inflation.

449
00:28:47.780 --> 00:28:54.260
You know what, even they call in their own private writings, elasticity of the money supply.

450
00:28:54.260 --> 00:28:58.180
For the Federal Reserve system, for example, the money supply was not elastic enough.

451
00:28:58.180 --> 00:29:02.140
Elastic is a fancy word meaning it wasn't inflated enough.

452
00:29:02.140 --> 00:29:05.740
During the Depression, there was no way to stop pumping money in quickly.

453
00:29:05.740 --> 00:29:18.740
The Federal Reserve Bank could do that. Central Bank started with the Bank of England, one of the great racquets of all time, the Bank of England, therefore became immediately hallowed in English tradition as almost equivalent of the queen and the flag.

454
00:29:18.740 --> 00:29:32.740
The Bank of England started in the late 1690s, but we start pretty late in monetary history, when a Scottish crook named Wynion Patterson, a promoter with no money and that sort of stuff, comes to the king, the king's always in need of money, right?

455
00:29:32.740 --> 00:29:34.420
People don't like to be taxed.

456
00:29:34.420 --> 00:29:38.580
Those days, they had a lower boiling point on the tax question than we do now.

457
00:29:38.580 --> 00:29:41.340
So the king was very wary about imposing taxes.

458
00:29:41.340 --> 00:29:44.140
Here's a Scottish crook, William Paterson, comes to the king and he says,

459
00:29:44.140 --> 00:29:45.700
Look, here's the way to do it.

460
00:29:45.700 --> 00:29:50.100
Let me set up this bank, we'll call it Bank of England, make it a central bank.

461
00:29:50.100 --> 00:29:54.140
I haven't got any money, but I'll print bank notes, Bank of England notes,

462
00:29:54.140 --> 00:29:55.460
and you will accept it.

463
00:29:55.460 --> 00:29:58.500
I will give it to the king in exchange for government bonds.

464
00:29:58.500 --> 00:30:00.620
The king will write out, I'll use it.

465
00:30:00.620 --> 00:30:09.620
See, then, King, you can take the money and spend it. You can spend it on missiles or whatever the 17th century equivalent was, palaces and stuff like that.

466
00:30:09.620 --> 00:30:15.620
But King says it's a great idea. It's a great way to get money. As long as the public can accept, will be conned of accepting Bank of England notes, why not?

467
00:30:15.620 --> 00:30:18.620
Make new steps forward.

468
00:30:18.620 --> 00:30:20.620
Because it didn't look like paper money.

469
00:30:20.620 --> 00:30:25.620
Because the banks sounded more respectable. Banks, after all, were around a lot earlier than paper money.

470
00:30:25.620 --> 00:30:29.260
And this looks like a pretty respectable thing. It looks like a bank note and all that sort of stuff.

471
00:30:29.260 --> 00:30:31.100
The public have been a newer to it.

472
00:30:31.100 --> 00:30:33.540
The King gave the Bank of England all of his business.

473
00:30:33.540 --> 00:30:36.540
He deposited all of his funds with the bank.

474
00:30:36.540 --> 00:30:40.660
Let's say the Bank of England starts off with no money, which is not so far wrong.

475
00:30:40.660 --> 00:30:43.780
The bank quote buys, unquote, government bonds.

476
00:30:43.780 --> 00:30:47.300
The King issues a whole bunch of government bonds. No one can issue a bond.

477
00:30:47.300 --> 00:30:49.060
It's Rothbard bonds.

478
00:30:49.060 --> 00:30:54.940
The King issues government bonds. The bank quote buys it, unquote, let's say 10,000 pounds worth.

479
00:30:54.940 --> 00:31:00.940
So now the Bank of England has £10,000 of government bonds and its assets, its laws,

480
00:31:00.940 --> 00:31:06.940
a return for which the Bank of England graciously gives to the King $10,000 of new paper money printed by the Bank of England.

481
00:31:06.940 --> 00:31:13.940
Now we have $10,000 and we have bank notes, which is an equivalent of demand deposits.

482
00:31:13.940 --> 00:31:18.940
The King goes out and spends it. This is new money. I mean, the money created out of thin air again.

483
00:31:18.940 --> 00:31:21.940
So let's assume that both the King and William Patterson start with no money at all.

484
00:31:21.940 --> 00:31:32.020
The King gives Leon Paterson his bonds, Leon Paterson gives the Prince a new banknote, the

485
00:31:32.020 --> 00:31:35.620
King goes out and spends it, and his inflation is inflationary, and the King uses the method

486
00:31:35.620 --> 00:31:37.620
of taxation and so forth.

487
00:31:37.620 --> 00:31:39.620
All the evils of inflation then follow.

488
00:31:39.620 --> 00:31:42.900
The point I'm trying to make here is of course that the Central Bank, this has always been

489
00:31:42.900 --> 00:31:45.940
what the Central Bank is doing, and this con job is still continuing.

490
00:31:45.940 --> 00:31:51.700
As a matter of fact, you know, and one more thing the King did for the Bank of England,

491
00:31:51.700 --> 00:31:55.740
The King gave to the Bank of England a monopoly of all banknotes within a certain area of

492
00:31:55.740 --> 00:31:59.220
London, something like a 50-mile radius or something in London, which means that in the

493
00:31:59.220 --> 00:32:03.220
real area where all the trade and finance goes on, only the Bank of England could print

494
00:32:03.220 --> 00:32:04.220
banknotes.

495
00:32:04.220 --> 00:32:09.100
This is the key to the Bank of England's power, except for banking control, because this method

496
00:32:09.100 --> 00:32:14.260
for Lloyd's Bank, Barclay's Bank, or whatever other bank, to no longer issue banknotes near

497
00:32:14.260 --> 00:32:17.740
London, they could, let's say, issue deposits.

498
00:32:17.740 --> 00:32:24.740
In order that the customers want cash, they're not allowed to give them cash. They're not allowed to print banknotes.

499
00:32:24.740 --> 00:32:27.740
They have to go to the Bank of England to get the banknotes.

500
00:32:27.740 --> 00:32:32.740
And this gives the Bank of England its hole on the other banks. We'll see how that works in a minute.

501
00:32:32.740 --> 00:32:34.740
So this starts a great central banking tradition.

502
00:32:34.740 --> 00:32:39.740
One of the real tragedies is that during the 19th century when English classical liberalism was triumphant in England,

503
00:32:39.740 --> 00:32:43.740
and laissez-faire was coming in, and even hard money theory was coming in,

504
00:32:43.740 --> 00:32:46.220
They even record how it was pretty good on the money question.

505
00:32:46.220 --> 00:32:49.620
Never really leveled the land, never really smashed the Bank of England, never really was,

506
00:32:49.620 --> 00:32:53.300
didn't have the guts, it didn't have the, didn't want to break the tradition and all that.

507
00:32:53.300 --> 00:32:57.420
Refused to really do what the Maoists call, carry the thing through to its completion,

508
00:32:57.420 --> 00:33:03.740
refused to really smash the Bank of England, left it as a great symbol of national unity or whatever nonsense.

509
00:33:03.740 --> 00:33:07.340
The point is they kept the Bank of England intact, which is of course disastrous.

510
00:33:07.340 --> 00:33:12.820
The United States had our first, Alexander Hamilton, who this is of course extremely tangential.

511
00:33:12.820 --> 00:33:18.980
Alexander Hamilton, I consider the Mephistophenean figure in American history, the evil genius

512
00:33:18.980 --> 00:33:23.060
American history, put through the first bank in the United States, plus a lot of other

513
00:33:23.060 --> 00:33:29.100
things, the tariff and paper money and god knows what else, public debt, federal taxes

514
00:33:29.100 --> 00:33:32.900
and the whole business, and the Constitution itself as a matter of fact, the general welfare

515
00:33:32.900 --> 00:33:37.100
clause and the whole business going on and on about Alexander Hamilton.

516
00:33:37.100 --> 00:33:42.260
Anyway, first Bank of the United States comes in, that's the first central bank, but when

517
00:33:42.260 --> 00:33:45.460
the Jeffersonians come in, after all the Jeffersonians were pledged to eliminate the Bank of the United

518
00:33:45.460 --> 00:33:46.460
States and they did so.

519
00:33:46.460 --> 00:33:48.460
It was eliminated in the Jefferson administration.

520
00:33:48.460 --> 00:33:53.460
Then, however, we enter the War of 1812, which the Achilles heel in the Jeffersonian program

521
00:33:53.460 --> 00:33:57.100
because as the Jeffersonians were marching on the road to liberty, they suddenly detour

522
00:33:57.100 --> 00:34:01.020
on the war and of course all the Federalist stuff, all the status collective stuff comes

523
00:34:01.020 --> 00:34:02.020
back in.

524
00:34:02.020 --> 00:34:05.540
And part of the thing that comes back in is the second Bank of the United States takes

525
00:34:05.540 --> 00:34:10.620
It takes, then, Andrew Jackson a huge amount of turmoil to get rid of it, and Jackson finally

526
00:34:10.620 --> 00:34:13.980
does get rid of it as part of his program, by the way, to get rid of all his fractional

527
00:34:13.980 --> 00:34:14.980
reserve banking.

528
00:34:14.980 --> 00:34:19.780
Jackson, and particularly Jacksonian theoreticians, were brilliant monetary theorists who knew

529
00:34:19.780 --> 00:34:22.820
exactly what the banks were about already, and they were out to smash them.

530
00:34:22.820 --> 00:34:26.940
For one reason or another, they were largely a slavery question, and they didn't do it.

531
00:34:26.940 --> 00:34:32.500
At any rate, the Second Central Bank Attempt, smashed by Jackson after a huge fight, then

532
00:34:32.500 --> 00:34:38.300
During the Civil War, the Republicans used the Civil War as a method by which they put

533
00:34:38.300 --> 00:34:44.420
in the Hamiltonian program, and part of that program was taxing the state banknotes out

534
00:34:44.420 --> 00:34:45.420
of existence.

535
00:34:45.420 --> 00:34:48.180
So what they essentially did was they put a prohibitory tax on all state banknotes.

536
00:34:48.180 --> 00:34:52.660
In other words, all banknotes chartered by the states, which meant that only nationally

537
00:34:52.660 --> 00:34:56.020
chartered banks could now issue paper money, which was a very small number of banks.

538
00:34:56.020 --> 00:34:59.540
So that was the road to perdition, and then the Federal Reserve system was finally put

539
00:34:59.540 --> 00:35:02.380
in from 1913.

540
00:35:02.380 --> 00:35:05.100
Since the Federal Reserve System, we now are caught up with other countries, we now have

541
00:35:05.100 --> 00:35:09.060
this beloved central banking system, which we were told by the entire establishment would

542
00:35:09.060 --> 00:35:13.660
eliminate inflation, depression, stabilize the price level, etc.

543
00:35:13.660 --> 00:35:17.980
Of course, as Friedman has pointed out in his historical book, the fluctuations, the

544
00:35:17.980 --> 00:35:20.860
inflations of depression have been much worse since the Federal Reserve System came in than

545
00:35:20.860 --> 00:35:21.860
they were before.

546
00:35:21.860 --> 00:35:22.860
There's no question about that.

547
00:35:22.860 --> 00:35:27.860
During the 1920s, it was supposed to be the new era, where no more depression, there weren't

548
00:35:27.860 --> 00:35:32.100
going to be any more depressions anymore, they all said in the 1920s, because the Federal

549
00:35:32.100 --> 00:35:35.460
The Federal Reserve banks are out there stabilizing everything and wisely planning a system and

550
00:35:35.460 --> 00:35:39.620
of course comes a big collapse and you don't hear any more of those people for quite a

551
00:35:39.620 --> 00:35:40.620
while.

552
00:35:40.620 --> 00:35:46.340
So we now have the federal bank working and manipulating so as to eliminate these individual

553
00:35:46.340 --> 00:35:50.940
checks from one bank to another and that means that the only check left are no more free

554
00:35:50.940 --> 00:35:54.540
market checks or free market limitations on bank credit expansion.

555
00:35:54.540 --> 00:35:58.180
The only limitation now is the Federal Reserve system itself and it's wisdom, in other words

556
00:35:58.180 --> 00:36:03.100
and Legal or Administrative Regulations, which means we have to put all of our trust in the

557
00:36:03.100 --> 00:36:07.180
government itself, which is, of course, something which I'm never eager to do.

558
00:36:07.180 --> 00:36:13.140
Well, here's the mechanism I wish the control comes about currently, since the Federal Reserve

559
00:36:13.140 --> 00:36:16.140
system.

560
00:36:16.140 --> 00:36:20.780
Cash is now, or reserves are now only, of course, paper, since the gold standard has

561
00:36:20.780 --> 00:36:22.780
been abolished in 1933.

562
00:36:22.780 --> 00:36:25.180
We now have two sets of banks, basically.

563
00:36:25.180 --> 00:36:29.020
The Federal Reserve Bank is a commercial bank with its assets and liabilities column and

564
00:36:29.020 --> 00:36:33.340
then underneath it we should have the Federal Reserve Bank with their assets and liabilities

565
00:36:33.340 --> 00:36:34.340
column.

566
00:36:34.340 --> 00:36:39.100
The Federal Reserve Banks are bankers' banks, so the Federal Reserve Banks are compulsory

567
00:36:39.100 --> 00:36:40.620
banks without commercial banks.

568
00:36:40.620 --> 00:36:44.340
Every commercial bank, first of all every nationally chartered commercial bank, every

569
00:36:44.340 --> 00:36:47.620
state bank over a certain amount has to be a member of the Federal Reserve System.

570
00:36:47.620 --> 00:36:48.620
They don't mind that.

571
00:36:48.620 --> 00:36:52.540
I mean the banks love the Federal Reserve System, the sweet compulsion so to speak.

572
00:36:52.540 --> 00:36:57.500
As a matter of fact, the banks put in the Federal Reserve System, it was a large bank.

573
00:36:57.500 --> 00:37:01.020
And then the other key thing is the Federal Reserve System, the Federal Reserve Banks

574
00:37:01.020 --> 00:37:05.940
now have a monopoly on old paper money, in other words, whereas before 1913 Chase National

575
00:37:05.940 --> 00:37:10.060
Bank and National City Bank issued their own bank notes, if you wanted cash, if you had

576
00:37:10.060 --> 00:37:13.900
a checking account in Chase Bank then, you wanted cash for some reason, you know, you

577
00:37:13.900 --> 00:37:18.300
want to pay people in cash, you could go to the Chase Bank and get the Chase Bank bank

578
00:37:18.300 --> 00:37:24.140
bank notes, dollar bills with a Chase bank stamp on it, Chase bank insignia, etc.

579
00:37:24.140 --> 00:37:27.580
And most people didn't care whether they had Chase bank notes or federal paper.

580
00:37:27.580 --> 00:37:29.900
In 1913, this was made illegal.

581
00:37:29.900 --> 00:37:33.660
The only institution that could supply paper and money to anybody is the Federal Reserve

582
00:37:33.660 --> 00:37:34.660
Bank itself.

583
00:37:34.660 --> 00:37:39.620
So that means when somebody wants to cash in their bank notes, the man deposits, the

584
00:37:39.620 --> 00:37:44.940
checking account is the only liability left since bank notes have been prohibited.

585
00:37:44.940 --> 00:37:49.260
The bank has to go to the Federal Reserve Bank to buy banknotes, basically.

586
00:37:49.260 --> 00:37:52.340
This becomes the key to Federal Reserve control.

587
00:37:52.340 --> 00:37:56.060
One of the banks has to join up, of course, with the Federal Reserve system, but two even

588
00:37:56.060 --> 00:37:59.740
more so, that since they can't issue banknotes on their own hook, they have to go to the

589
00:37:59.740 --> 00:38:04.780
Federal Reserve Bank to get banknotes, to buy banknotes by going down their own deposits.

590
00:38:04.780 --> 00:38:09.580
So what we have is we have people, individual people in the public, with demand deposits,

591
00:38:09.580 --> 00:38:10.580
checking accounts for the bank.

592
00:38:10.580 --> 00:38:11.580
and so on.

593
00:38:11.580 --> 00:38:14.580
Leave aside savings accounts as being a complication, we can't go into it here.

594
00:38:14.580 --> 00:38:21.060
Well, then there's IOUs and then there's cash, which now is not so much paper money,

595
00:38:21.060 --> 00:38:24.980
but demand deposits by the bank at the Federal Reserve Bank.

596
00:38:24.980 --> 00:38:28.540
Think of the Federal Reserve Bank as a banker's bank, as a bank which only commercial banks

597
00:38:28.540 --> 00:38:30.740
can have accounts in.

598
00:38:30.740 --> 00:38:37.700
So we have reserves which are demand deposits at the Federal Reserve Bank.

599
00:38:37.700 --> 00:38:40.620
The bank itself, I mean, commercial bank, Chase Bank and Hand Bank has very little cash

600
00:38:40.620 --> 00:38:44.620
on hand, just enough to pay out, you know, hour-to-hour stuff.

601
00:38:44.620 --> 00:38:47.620
Their deposits at the Federal Reserve Bank, their claims aren't cash.

602
00:38:47.620 --> 00:38:52.740
If they have, in other words, let's say the bank has a million dollars reserves of the

603
00:38:52.740 --> 00:38:55.460
Federal Reserve Bank, this means that the bank, if they wanted to, the Chase Bank, they

604
00:38:55.460 --> 00:38:57.900
could go to the Federal Reserve Bank and get a million dollars' worth of cash and paper

605
00:38:57.900 --> 00:38:58.900
money if they wanted to.

606
00:38:58.900 --> 00:39:03.940
Basically, the money is in the reserve account, and then there's IOUs and demand deposits.

607
00:39:03.940 --> 00:39:12.460
The Chase Bank has reserves of $1 million, demand deposits of $5 million, and IOUs of

608
00:39:12.460 --> 00:39:13.460
$4 million.

609
00:39:13.460 --> 00:39:18.460
So we have the Chase Bank multiply the money supplied by fivefold.

610
00:39:18.460 --> 00:39:24.500
Cash or demand on cash is $1 million, issues $4 million worth of IOUs, runs out $4 million,

611
00:39:24.500 --> 00:39:28.860
has $5 million and outstanding, which means it is a pyramid of money supplied by 5.1 on

612
00:39:28.860 --> 00:39:29.860
its own hook.

613
00:39:29.860 --> 00:39:33.500
I'm trying to look at a balance sheet of the bank on a paper because they have to have

614
00:39:33.500 --> 00:39:34.820
quarterly or something balance sheets.

615
00:39:34.820 --> 00:39:40.140
See what the reserves are of a cash or reserves in relation to the man deposit and also the

616
00:39:40.140 --> 00:39:42.820
prime deposit and you see the story.

617
00:39:42.820 --> 00:39:44.540
Fractional reserve banking has worked.

618
00:39:44.540 --> 00:39:50.700
So essentially the commercial bank has three major items in its balance sheet, IOUs, reserves

619
00:39:50.700 --> 00:39:53.300
and demand deposits and liabilities.

620
00:39:53.300 --> 00:39:57.420
The Federal Reserve Bank has demand deposits owed to the bank.

621
00:39:57.420 --> 00:40:01.340
Bank, in this case it will be the same one million, in other words, let's say they have

622
00:40:01.340 --> 00:40:06.220
the Chase account, these two will be equal, whereas the reserve account of the commercial

623
00:40:06.220 --> 00:40:10.740
bank will be exactly equal to the demand deposit liability account of the Federal Reserve Bank,

624
00:40:10.740 --> 00:40:11.740
the same thing.

625
00:40:11.740 --> 00:40:15.860
It's the checking account which the banks have of the Federal Reserve Bank.

626
00:40:15.860 --> 00:40:19.260
The other big Federal Reserve Bank liability is Federal Reserve notes, in other words paper

627
00:40:19.260 --> 00:40:20.260
money.

628
00:40:20.260 --> 00:40:23.260
Almost every dollar of paper money is now Federal Reserve notes, virtually 100 percent.

629
00:40:23.260 --> 00:40:28.700
The Federal Reserve notes are legal tender.

630
00:40:28.700 --> 00:40:33.500
We have to accept them by law for payment of debts and dollars.

631
00:40:33.500 --> 00:40:36.820
They have a name, dollar, so to speak.

632
00:40:36.820 --> 00:40:43.380
The Federal Reserve bank is the only institution in the country which every time it creates

633
00:40:43.380 --> 00:40:46.620
a new liability, a new debt, so to speak, it prints new money.

634
00:40:46.620 --> 00:40:50.820
In other words, it adds its own money supply at the same time it creates debt.

635
00:40:50.820 --> 00:40:51.820
We can't do that of course.

636
00:40:51.820 --> 00:40:56.020
When we issue a debt notice, we issue an IOU, we borrow money or something, we don't print

637
00:40:56.020 --> 00:40:59.820
new money at the same time along with it, but the Federal Reserve does.

638
00:40:59.820 --> 00:41:02.340
So these are the two basic liabilities.

639
00:41:02.340 --> 00:41:07.300
The man deposits to the banks, in other words bank reserves and Federal Reserve notes.

640
00:41:07.300 --> 00:41:12.180
The asset side, Federal Reserve banks have gold, virtually all the gold in the country,

641
00:41:12.180 --> 00:41:16.100
a rather gold certificate for the treasury owning the gold, that's really formality.

642
00:41:16.100 --> 00:41:21.100
And the rest of it is IOUs, and these are the two basic assets side.

643
00:41:21.100 --> 00:41:27.300
In this situation, supposing $800,000, supposing Christmas time comes and every year at Christmas

644
00:41:27.300 --> 00:41:31.900
people want more cash, they draw down their demand deposit, get more cash, give tips and

645
00:41:31.900 --> 00:41:33.420
presents and all that kind of stuff.

646
00:41:33.420 --> 00:41:38.700
Well in that situation, here if people want $800,000 worth of cash from a chase bank at

647
00:41:38.700 --> 00:41:43.780
this point, the reserves are drawn down at $200,000 and the demand deposit will be down

648
00:41:43.780 --> 00:42:11.300
The Federal Reserve now steps in with its own governmental check, namely the so-called

649
00:42:11.300 --> 00:42:15.620
The minimum reserve ratio, in other words, the Congress fixes a certain range of reserve

650
00:42:15.620 --> 00:42:19.500
rate, minimum reserve requirement by every bank, and the Federal Reserve can change it

651
00:42:19.500 --> 00:42:20.980
at will within that range.

652
00:42:20.980 --> 00:42:26.140
In other words, this is the same thing as the maximum ratio of deposits to reserves.

653
00:42:26.140 --> 00:42:29.540
Minimum ratio of reserves to deposits, maximum ratio of deposits to reserves.

654
00:42:29.540 --> 00:42:36.140
This situation here, if the Chase Bank has reserves of $1 million, and if say the maximum

655
00:42:36.140 --> 00:42:41.980
The minimum deposit ratio is 5 to 1, the minimum reserve ratio is 20%, and therefore the maximum

656
00:42:41.980 --> 00:42:47.340
deposit ratio is 5 to 1, and it cannot have more than $5 million on a $1 million base.

657
00:42:47.340 --> 00:42:51.740
It's prevented by law and by administrative requirement from expanding the money supply

658
00:42:51.740 --> 00:42:54.340
beyond that amount, beyond this 5 to 1.

659
00:42:54.340 --> 00:42:57.740
See, now it's troubled because it's even deeper if we look at it.

660
00:42:57.740 --> 00:43:01.540
People demand cash, if reserves go down to $200 million, it still has, however, demand

661
00:43:01.540 --> 00:43:06.100
The Federal Reserve has a deposit of 4.2 million, which is 20 to 1, but if the reserve ratio

662
00:43:06.100 --> 00:43:09.920
remains at 5 to 1, this bank is bankrupt, this bank has had it.

663
00:43:09.920 --> 00:43:15.460
We have the Federal Reserve controlling banking system by minimum reserve ratio or maximum

664
00:43:15.460 --> 00:43:17.220
deposit ratio.

665
00:43:17.220 --> 00:43:21.340
During the Great Depression, the phenomenon of excess reserves came up, which meant the

666
00:43:21.340 --> 00:43:25.300
banks were so afraid, because the industries were going bankrupt all over the place, firms

667
00:43:25.300 --> 00:43:28.900
were going bankrupt, banks were so afraid to expand, they didn't even expand whatever,

668
00:43:28.900 --> 00:43:32.020
They didn't perform the legalized counterfeiting that they could perform, and they allowed

669
00:43:32.020 --> 00:43:35.180
the reserves to pile up, because they were scared, I mean, they were afraid if they lend

670
00:43:35.180 --> 00:43:38.620
the money out, the firm would go bankrupt, they bought bonds, the bonds would become

671
00:43:38.620 --> 00:43:42.780
worthless, so then they really go bankrupt, so the reserves pile up, of course the Hoover

672
00:43:42.780 --> 00:43:46.100
administration, Roosevelt administration, bitterly attack the banks for somehow selling

673
00:43:46.100 --> 00:43:50.940
out, for treason, for not lending out money, banks love to lend out money, the point was

674
00:43:50.940 --> 00:43:54.940
that they were, there was a bad depression situation, it was obvious they were, in this

675
00:43:54.940 --> 00:43:59.020
," and this is probably a unique situation. They didn't... they piled up excess reserves. They were literally attacked for it.

676
00:43:59.020 --> 00:44:03.980
But barring that, this happens very rarely, most banks are quote, fully loaned up unquote.

677
00:44:03.980 --> 00:44:07.700
In other words, they will create new money up to the limit that they're legally allowed to.

678
00:44:07.700 --> 00:44:11.100
This is generally the situation, aside from deep depression.

679
00:44:11.100 --> 00:44:16.860
One method of control, if the Federal Reserve System wants to say, put more money in the system,

680
00:44:16.860 --> 00:44:20.160
they want to create more inflation, which they almost always do, one way they could do it,

681
00:44:20.160 --> 00:44:27.160
The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy

682
00:44:50.160 --> 00:44:54.620
In fact, we had during the 30s, something which has not been recognized really, the phenomenon

683
00:44:54.620 --> 00:44:56.040
of inflationary recession.

684
00:44:56.040 --> 00:44:59.800
We had a recession, deep depression, lots of unemployment, yet we had an inflationary

685
00:44:59.800 --> 00:45:02.080
boom going on from 1933 to 1937.

686
00:45:02.080 --> 00:45:05.960
It was a weird situation, the first time officially it had happened.

687
00:45:05.960 --> 00:45:10.280
As a result of that, the Federal Reserve system got scared and suddenly double reserve requirements.

688
00:45:10.280 --> 00:45:11.880
They nowadays would be unheard of.

689
00:45:11.880 --> 00:45:16.400
It's like the Bazaar or the Supreme Market and Post Office, things like that.

690
00:45:16.400 --> 00:45:17.400
Unheard of situation.

691
00:45:17.400 --> 00:45:21.100
They just doubled, I think, from 10% to 20%, just like that, and of course the banks went

692
00:45:21.100 --> 00:45:25.300
mad and they had to contract their loans very, very fast, because most banks were fairly

693
00:45:25.300 --> 00:45:30.120
well fully loaned up, not completely, but in a bad state of shortage of reserves, which

694
00:45:30.120 --> 00:45:34.920
meant they had to contract very quickly, sell their bonds, call in their loans, etc., etc.,

695
00:45:34.920 --> 00:45:38.280
and this precipitated a big depression of 38.

696
00:45:38.280 --> 00:45:42.720
After that, the Federal Reserve has been too scared to use this instrument by any kind

697
00:45:42.720 --> 00:45:43.720
of enthusiast.

698
00:45:43.720 --> 00:45:47.880
Nowadays, they change the minimum reserve requirements in very, very teeny steps, almost

699
00:45:47.880 --> 00:45:50.720
ludicrous degrees, like one quarter of one percent.

700
00:45:50.720 --> 00:45:53.880
It's sort of like a psychological thing more than anything else, the Federal Reserve wants

701
00:45:53.880 --> 00:45:57.400
to announce to the world they really want to check inflation, they raise the reserve

702
00:45:57.400 --> 00:46:00.200
requirement by a quarter of one percent, it's really, boy, it's really terrific.

703
00:46:00.200 --> 00:46:05.080
I'd much rather see them double the reserve requirement, then I figure they're serious.

704
00:46:05.080 --> 00:46:07.560
So really, this instrument has fallen into disuse.

705
00:46:07.560 --> 00:46:11.600
It's sort of like, I suppose they consider it overkill, you know, it's like atom bombing

706
00:46:11.600 --> 00:46:39.200
Bank of the United States, the Bank of the United States, the Bank of the United States,

707
00:46:39.200 --> 00:46:54.520
The Federal Reserve Bank imposes a 20% reserve requirement on it, while supposing its reserves

708
00:46:54.520 --> 00:47:01.640
are $1 billion, the man deposits $5 billion, the man deposits outstanding reserve bank would

709
00:47:01.640 --> 00:47:05.960
be $1 billion, and its IOUs would be $4 billion.

710
00:47:05.960 --> 00:47:09.120
Total money supply is $5 billion in the whole country.

711
00:47:09.120 --> 00:47:12.620
Let's say the Federal Reserve wants to expand, wants to inflate, as they almost always do.

712
00:47:12.620 --> 00:47:16.620
Let's say that by some means they increase, and I'm going into that a little later, how

713
00:47:16.620 --> 00:47:18.120
they can control total reserves.

714
00:47:18.120 --> 00:47:19.620
By some means they increase total reserves.

715
00:47:19.620 --> 00:47:22.620
They get more reserves into the hands of the commercial bank.

716
00:47:22.620 --> 00:47:24.620
I don't know if that goes up to two billion.

717
00:47:24.620 --> 00:47:26.120
That would make it really rugged.

718
00:47:26.120 --> 00:47:27.620
We'll see what happens.

719
00:47:27.620 --> 00:47:31.620
Take the unusual hypothesis that the Federal Reserve prints more money out, prints cash,

720
00:47:31.620 --> 00:47:34.120
and gives it to the bank of the United States.

721
00:47:34.120 --> 00:47:35.620
One billion dollars more.

722
00:47:35.620 --> 00:47:42.500
Unmarked Bills by Herbert Kumbach or somebody. Dead of Night. They get a billion dollars. What are they going to do with it?

723
00:47:42.500 --> 00:47:50.180
Boy, oh boy, the financial reserve requirements are only 20 percent. They now have 40 percent. What they do is they simply go out and they create more demand deposits.

724
00:47:50.180 --> 00:47:58.180
They go out and they say, hey, they go to General Motors, they go to John Blow. They say, I'd like some more loans to give you a really cheap credit because now they can create more money again.

725
00:47:58.180 --> 00:48:03.140
They no longer fully loaned up. And they say, hey, that's terrific. Only 4 percent instead of 8 percent. Great. And whatever.

726
00:48:03.140 --> 00:48:08.940
They now shovel out increased demand deposits of $10 billion out of thin air, create new

727
00:48:08.940 --> 00:48:13.460
money out of thin air, new fraudulent demand deposits, warehouses, and now have $8 billion

728
00:48:13.460 --> 00:48:14.460
in IOUs.

729
00:48:14.460 --> 00:48:15.460
And everything is hunky-dory.

730
00:48:15.460 --> 00:48:16.460
They're now fully loaned up.

731
00:48:16.460 --> 00:48:17.460
This is an immediate situation.

732
00:48:17.460 --> 00:48:22.460
Actually, this would be, the status would be a healthier situation than there is now,

733
00:48:22.460 --> 00:48:24.300
but it's easy to understand.

734
00:48:24.300 --> 00:48:27.700
Even the bankers themselves couldn't calm themselves into believing they weren't really

735
00:48:27.700 --> 00:48:28.700
creating new money.

736
00:48:28.700 --> 00:48:29.700
It's pretty obvious what they were doing.

737
00:48:29.700 --> 00:48:41.060
The current situation, however, when you have competing banks, more cloudy, more complicated,

738
00:48:41.060 --> 00:48:44.860
and every banker can caught himself into thinking he's not really extending money to buy, he's

739
00:48:44.860 --> 00:48:48.700
really only borrowing money from one set of people and lending it out to another set.

740
00:48:48.700 --> 00:48:54.580
It works something like this, we have a bunch of banks, A, B, C, D, they're all fully loaned

741
00:48:54.580 --> 00:49:09.140
The Federal Reserve goes into debt at night, gives a new billion dollar bag to Bank A and

742
00:49:09.140 --> 00:49:10.140
they have a billion dollars more in reserves.

743
00:49:10.140 --> 00:49:11.140
It's now up to two billion.

744
00:49:11.140 --> 00:49:16.100
They now have two billion dollars, let's say, plus a billion, one billion dollar more in

745
00:49:16.100 --> 00:49:17.100
reserves.

746
00:49:17.100 --> 00:49:20.780
Say, they give us a band deposit, they give Combox, or whatever, a billion dollars on

747
00:49:20.780 --> 00:49:31.700
Bank A can't do that exactly all at once.

748
00:49:31.700 --> 00:49:35.620
They can't just create a $4 billion new or more demand deposit and lend it out to General

749
00:49:35.620 --> 00:49:36.620
Motors or John Blow.

750
00:49:36.620 --> 00:49:41.420
If they do that, Bank B or Bank C, etc., I mean General Motors or John Blow will buy

751
00:49:41.420 --> 00:49:45.060
equipment or pay workers or something, they'll be clients of different banks and they'll

752
00:49:45.060 --> 00:49:49.620
call upon Bank A for redemption, they'd be going bankrupt because if they print $4 billion

753
00:49:49.620 --> 00:49:55.580
more, quote, and they now have five billion dollars of more demand deposits.

754
00:49:55.580 --> 00:49:58.620
What happens if the banks, VC&D, call upon them for the four billion, they only have one

755
00:49:58.620 --> 00:49:59.620
billion.

756
00:49:59.620 --> 00:50:00.620
They will go bankrupt.

757
00:50:00.620 --> 00:50:01.620
So they can't do that.

758
00:50:01.620 --> 00:50:05.660
They can't expand, in other words, by the full four billion right away, or by the full

759
00:50:05.660 --> 00:50:06.660
five billion demand deposits.

760
00:50:06.660 --> 00:50:11.900
What they can do, and let's assume it's a 20 percent reserve requirement, instead of

761
00:50:11.900 --> 00:50:17.180
expanding by five to one right away, they expand by 80 percent, instead of creating

762
00:50:47.180 --> 00:50:51.940
Bank B, they call upon Bank A for redeeming the 800 million, they have the 800 million,

763
00:50:51.940 --> 00:50:56.580
they have enough, because they have two reserves of a billion, they can pay out the billion,

764
00:50:56.580 --> 00:51:02.100
they now have, the reserves are now increased by only 200 million, and they're now all set,

765
00:51:02.100 --> 00:51:06.520
they have demand deposits, this goes down also by 800 million, because that's the Joe

766
00:51:06.520 --> 00:51:10.940
Blow's or whatever, you know, supplier's bank, and now the demand deposits are again

767
00:51:10.940 --> 00:51:16.120
up by a billion, and the reserves are up by 200 million, they're all set, they've expanded

768
00:51:16.120 --> 00:51:33.880
Bank A is out of the picture, however, what it has done is it has contributed $800 million

769
00:51:33.880 --> 00:51:37.000
in more reserves which will now go into Bank B's pocket.

770
00:51:37.000 --> 00:51:40.920
Bank B now has cash of $800 million, has reserves of the Federal Reserve of $800 million.

771
00:51:40.920 --> 00:51:45.600
So, its reserves are now going up by $800 million, and if the man deposits the supplier

772
00:51:45.600 --> 00:51:50.400
of General Motors has a man-aposite checking account, 800 million.

773
00:51:50.400 --> 00:51:54.240
So, it's plus 800 million now, and plus 800 million demand-aposites.

774
00:51:54.240 --> 00:51:56.280
What we have here, notice what's happened.

775
00:51:56.280 --> 00:51:59.960
Bank A started with plus a billion reserves, plus a billion demand-aposites, it winds up,

776
00:51:59.960 --> 00:52:04.040
it's plus a billion demand-aposites, plus 200 million reserves, and the other 800 million

777
00:52:04.040 --> 00:52:08.040
reserves have been spread out, spread the reserves, it's shifted the reserves to another

778
00:52:08.040 --> 00:52:09.040
bank.

779
00:52:09.040 --> 00:52:12.560
Okay, the same thing happens to the other bank, except with 80% of the previous one,

780
00:52:12.560 --> 00:52:14.240
20% less now.

781
00:52:14.240 --> 00:52:19.520
It lends out $640 million, in other words, it can create, not five times as much money,

782
00:52:19.520 --> 00:52:21.560
but 80% more money than it has.

783
00:52:21.560 --> 00:52:25.600
Yet, it caused itself in the thinking it's only lending at 80% of the money it took in,

784
00:52:25.600 --> 00:52:29.880
except the point is the money it took in is permitting on top of the other money.

785
00:52:29.880 --> 00:52:32.000
It's really increasing its money by 80%.

786
00:52:32.000 --> 00:52:36.760
It's in a situation now of 100% reserve banking, at least for the new money, and now it lends

787
00:52:36.760 --> 00:52:43.400
out $640 to John Smith, grocer, and now has an IOU of $640.

788
00:52:43.400 --> 00:52:52.160
This increases the man deposits from 800 to 1,440, 1,440 million, 600 million, 640 million

789
00:52:52.160 --> 00:52:57.040
has been created out of thin air, and now has an IOU of 640, which charges interest.

790
00:52:57.040 --> 00:53:01.200
640, however, as soon as it gets shifted around to somebody else, let's say the guy who produces

791
00:53:01.200 --> 00:53:05.760
the counters, cash registers, say, from Joe Smith's grocery store, he's, let's say, a

792
00:53:05.760 --> 00:53:09.560
client of Bank C. Of course, it could be a client of Bank A, that'd be better for the

793
00:53:09.560 --> 00:53:10.560
bank.

794
00:53:10.560 --> 00:53:13.360
Bank C calls upon Bank B for the $640 million.

795
00:53:13.360 --> 00:53:17.520
Bank B pays up and has the money because it's only expanded by 80%, so he's been prudent

796
00:53:17.520 --> 00:53:19.720
enough to expand the money to probably by only 80%.

797
00:53:19.720 --> 00:53:25.560
Reserves are now going up by $160, demand deposits are going up by $800, and Bank B

798
00:53:25.560 --> 00:53:32.200
is out of the picture with, and now Bank C again has $640 new reserves, and it increases

799
00:53:32.200 --> 00:53:36.720
some more by 80% of that, which is something like $512 or something, et cetera, et cetera.

800
00:53:36.720 --> 00:53:41.040
The result of this whole process is $1 billion more in demand of property of the bank A,

801
00:53:41.040 --> 00:53:46.040
$800 million more in bank B, $640 million in bank C, etc., etc., continue to wind up

802
00:53:46.040 --> 00:53:48.640
with $5 billion altogether in new money.

803
00:53:48.640 --> 00:53:53.200
It takes longer, but the final effect is the same, because due to the reserve system, the

804
00:53:53.200 --> 00:53:55.960
fact that all these banks, members of the Federal Reserve system are all regulated by

805
00:53:55.960 --> 00:53:59.520
it, we have a system whereby competing banks don't really mean anything anymore, because

806
00:53:59.520 --> 00:54:03.320
this is all going to be one bank, and even better, because then we can see clearly that

807
00:54:03.320 --> 00:54:05.760
the bank is expanding the money to find out it's in there.

808
00:54:05.760 --> 00:54:09.800
This process is so arcane and so confusing that even the bankers themselves often don't

809
00:54:09.800 --> 00:54:10.800
know what they're doing.

810
00:54:10.800 --> 00:54:15.760
And when I first studied economics, my first class in economics in college, a professor

811
00:54:15.760 --> 00:54:19.040
said that bankers know less about money than anybody else in the system, in economy.

812
00:54:19.040 --> 00:54:22.600
I thought he was crazy at the time, and I now see that he is really right.

813
00:54:22.600 --> 00:54:25.560
Either that, of course, or they're totally evil.

814
00:54:25.560 --> 00:54:29.320
This arcane process, you work it out yourself as a diagram, how this thing works, the final

815
00:54:29.320 --> 00:54:30.320
result of this five-for-one.

816
00:54:30.320 --> 00:54:34.760
Total demand of process is going up by five billion, reserves are going up by one billion.

817
00:54:34.760 --> 00:54:39.560
So therefore the key, since the reserve requirement thing isn't changing anymore, the key to

818
00:54:39.560 --> 00:54:45.240
Federal Reserve control of the banks is controlling total reserves, this item here, total reserves

819
00:54:45.240 --> 00:54:46.240
in the bank.

820
00:54:46.240 --> 00:54:48.200
The Federal Reserve can manipulate total reserves.

821
00:54:48.200 --> 00:54:52.240
If total reserves go up by one billion, demand deposits, checking account goes up by five

822
00:54:52.240 --> 00:54:53.240
billion.

823
00:54:53.240 --> 00:54:57.760
The ratio right now ranges from fourteen or something to seventeen percent for different

824
00:54:57.760 --> 00:55:01.320
classes of banks, something like six to one, but the principle is the same.

825
00:55:01.320 --> 00:55:04.680
So therefore, the key instrument by which the Federal Reserve system manipulates the

826
00:55:04.680 --> 00:55:09.760
money supply, usually of course increasing it, is by increasing total bank reserves.

827
00:55:09.760 --> 00:55:11.840
How about the Federal Reserve reserves?

828
00:55:11.840 --> 00:55:16.960
Is there any limitation on the Federal Reserve system, increasing total reserve?

829
00:55:16.960 --> 00:55:17.960
Not anymore.

830
00:55:17.960 --> 00:55:18.960
It used to be.

831
00:55:18.960 --> 00:55:24.760
If we go back again to these two diagrams of the commercial banks, the top assets and

832
00:55:24.760 --> 00:55:30.840
liabilities, and the Federal Reserve bank, the bottom assets and liabilities, supposedly

833
00:55:30.840 --> 00:55:34.200
We have our billion and five billion to use as a useful amount.

834
00:55:34.200 --> 00:55:40.200
Those consumer commercial banks have reserves of one billion, that's their demand deposits

835
00:55:40.200 --> 00:55:41.920
of the Federal Reserve Bank.

836
00:55:41.920 --> 00:55:47.560
Demand deposits of five billion and IOUs of four billion, they're in great shape, they've

837
00:55:47.560 --> 00:55:52.360
inflated by five times their amount, but they're in great shape financially because they're

838
00:55:52.360 --> 00:55:54.760
within the 20% ratio, legal ratio.

839
00:55:54.760 --> 00:56:00.160
Meantime, the Federal Reserve System now has demand deposits owed to Federal Reserve Banks

840
00:56:00.160 --> 00:56:30.160
1 billion, 1.8 billion

841
00:57:00.160 --> 00:57:03.460
and commercial banking on top of that, each one is related to the other.

842
00:57:03.460 --> 00:57:08.400
It seems to be a fairly severe three to one, two and a half to one requirement on the Federal

843
00:57:08.400 --> 00:57:09.400
Reserve System.

844
00:57:09.400 --> 00:57:12.880
It was progressively weakened over the years by Congress, and now there's no requirements

845
00:57:12.880 --> 00:57:13.880
whatsoever.

846
00:57:13.880 --> 00:57:14.880
It's zilch.

847
00:57:14.880 --> 00:57:18.120
The Federal Reserve can inflate 200 million times on top of the gold supply, there's nothing

848
00:57:18.120 --> 00:57:19.120
to stop it.

849
00:57:19.120 --> 00:57:23.680
So we're now totally in the hands of the Federal Reserve Governors, the wisdom and brilliance

850
00:57:23.680 --> 00:57:27.640
of the Federal Reserve System now running us all.

851
00:57:27.640 --> 00:57:30.560
So what does the Federal Reserve, what instruments does the Federal Reserve have to manipulate

852
00:57:30.560 --> 00:57:31.560
total reserve?

853
00:57:31.560 --> 00:57:34.400
First place, there are other influences on total reserve, one of them I mentioned already,

854
00:57:34.400 --> 00:57:39.840
people who are demanding cash, this can embarrass total reserve, it can decrease it.

855
00:57:39.840 --> 00:57:43.920
The Federal Reserve, however, has the instrument to offset that and also add more on top of

856
00:57:43.920 --> 00:57:44.920
it.

857
00:57:44.920 --> 00:57:45.920
What are these instruments?

858
00:57:45.920 --> 00:57:49.100
Well, two basic ones I've been talking about in the past.

859
00:57:49.100 --> 00:57:52.600
One is lending money, you know, lending reserves for the banks, very simple, something like

860
00:57:52.600 --> 00:57:56.240
the giving the money in a paperback, but we lend them the money in a paperback, lend them

861
00:57:56.240 --> 00:58:01.560
The Federal Reserve is in trouble here. It needs $200 million reserves fast. People are

862
00:58:01.560 --> 00:58:04.520
calling upon the banks for redemption. People can still call upon the banks for redemption

863
00:58:04.520 --> 00:58:10.080
now. So they can do that. It embarrasses the banks. They need $200 million more, and the

864
00:58:10.080 --> 00:58:14.040
Federal Reserve simply lends them. The reserves are now up to $1.2 billion. They can expand

865
00:58:14.040 --> 00:58:18.320
another billion on top of that in a great shape. Then, of course, they have to pay back

866
00:58:18.320 --> 00:58:22.720
the Federal Reserve when their profile is over, but that can work that out. That's simply

867
00:58:22.720 --> 00:58:38.680
In the 19th century, banks were collapsing a lot, and it was a real pleasure.

868
00:58:38.680 --> 00:58:43.080
Walter Badgett, probably one of the most overrated political theorists and economists in the history

869
00:58:43.080 --> 00:58:47.280
of the world, was beloved by almost every historian.

870
00:58:47.280 --> 00:59:08.080
The Central Bank is morally obligated to bail out old banks and turn them into public, a

871
00:59:08.080 --> 00:59:12.200
very convenient pronunciamento, and the banks, of course, took to it like a duck took to water,

872
00:59:12.200 --> 00:59:16.560
and it's been established in monetary theory ever since, that the banks are somehow a God-given

873
00:59:16.560 --> 00:59:19.480
The Federal Reserve Bank must bail out the banks.

874
00:59:19.480 --> 00:59:23.360
This is called the theory of the bank as a lender of last resort.

875
00:59:23.360 --> 00:59:26.680
In other words, when the banks are really in trouble, there's always the Godfather

876
00:59:26.680 --> 00:59:27.680
over there.

877
00:59:27.680 --> 00:59:29.760
The Federal Reserve Bank would come in and bail the banks out.

878
00:59:29.760 --> 00:59:31.240
Okay, so that was established.

879
00:59:31.240 --> 00:59:35.040
It was established then, the Federal Reserve had to always bail out the banks.

880
00:59:35.040 --> 00:59:39.220
They always had to stand ready to lend money to any bank, regardless of what bad shape

881
00:59:39.220 --> 00:59:41.880
and how crooked or whatever the bank was.

882
00:59:41.880 --> 00:59:44.800
But however the Federal Reserve Bank could charge interest, they could change the interest

883
00:59:44.800 --> 00:59:45.800
rate.

884
00:59:45.800 --> 00:59:49.400
They can stand ready to lend because lending is a punitively high interest rate.

885
00:59:49.400 --> 00:59:53.760
So, a lot of publicity has been focused on the financial pages on the, on the re-discount

886
00:59:53.760 --> 00:59:54.760
rate as it's called.

887
00:59:54.760 --> 00:59:58.360
In other words, the rates that the Federal Reserve banks charge the commercial banks

888
00:59:58.360 --> 01:00:00.880
for lending them reserve interest rates.

889
01:00:00.880 --> 01:00:02.600
It's called the re-discount rate.

890
01:00:02.600 --> 01:00:05.560
Every once in a while when the Federal Reserve wants to announce that it's really against

891
01:00:05.560 --> 01:00:08.760
inflation, it raises the re-discount rate by a quarter of one percent, a big deal.

892
01:00:08.760 --> 01:00:12.200
It wants to inflate it, lowers it, but really this is, again, this is really baloney.

893
01:00:12.200 --> 01:00:14.760
It's really a psychological value rather than anything important.

894
01:00:14.760 --> 01:00:18.120
First place, the banks aren't that much in debt to the Federal Reserve Bank.

895
01:00:18.120 --> 01:00:21.080
That's not really a very important mechanism anymore.

896
01:00:21.080 --> 01:00:26.000
Also, the banks have created a very typical sort of way the market pops up in different

897
01:00:26.000 --> 01:00:27.000
areas.

898
01:00:27.000 --> 01:00:30.400
The banks have created by themselves a market in bank reserves.

899
01:00:30.400 --> 01:00:34.600
If one bank is out of line, it's below 20%, let's say, and another bank is a little bit

900
01:00:34.600 --> 01:00:38.920
above 20%, the below bank borrows reserves for a couple of months from the third-plus

901
01:00:38.920 --> 01:00:39.920
bank.

902
01:00:39.920 --> 01:00:42.880
It's called the Federal Funds Market, and they borrow at a certain interest rate.

903
01:00:42.880 --> 01:00:47.920
This is almost wiped out, Federal Reserve loans to the banks, so that instrument is

904
01:00:47.920 --> 01:00:48.920
really out.

905
01:00:48.920 --> 01:00:51.560
It gets a lot of publicity, but it's really not worth anything.

906
01:00:51.560 --> 01:00:55.560
The real mechanism by which the Federal Reserve banks manipulate total reserves and thereby

907
01:00:55.560 --> 01:00:59.640
manipulate money supply is as follows.

908
01:00:59.640 --> 01:01:07.760
Here's the Federal Reserve Bank, here we have the 1.4, you know, 1.2, 1.4, 5, 7, and here

909
01:01:07.760 --> 01:01:08.760
we have the Federal Reserve Bank.

910
01:01:08.760 --> 01:01:12.200
Federal Reserve Bank, let's say, wants to inflate, wants badly to inflate, wants to

911
01:01:42.200 --> 01:01:46.200
And they can buy old houses, they can buy paper clips for a billion dollars, they can

912
01:01:46.200 --> 01:01:49.700
buy old dirt, it doesn't really make a difference, all they have to do is go out and buy something

913
01:01:49.700 --> 01:01:52.040
and pay a check on it, that's all that's necessary.

914
01:01:52.040 --> 01:01:56.160
Say if I buy my old portfolio for a billion dollars, let's take a really bizarre example

915
01:01:56.160 --> 01:01:57.160
like that.

916
01:01:57.160 --> 01:02:02.560
In that situation, they buy me out, sell out the portfolio for a billion dollars, sell

917
01:02:02.560 --> 01:02:06.160
my portfolio for about a quarter, a billion dollars.

918
01:02:06.160 --> 01:02:13.920
The Federal Reserve Asset Column, Portfolio, $1 billion, they valued it a billion, I mean

919
01:02:13.920 --> 01:02:18.720
they bought it at a billion, who was anybody to say the name, alright, I'm not challenging

920
01:02:18.720 --> 01:02:21.360
them, it could really be a billion dollars worth of money, and they pay for that by writing

921
01:02:21.360 --> 01:02:26.080
out a check of a billion dollars, no I can't do anything with a check, a check says pay

922
01:02:26.080 --> 01:02:29.600
to the order of Murray and Rothbard, $1 billion for my Federal Reserve Bank in New York, what

923
01:02:29.600 --> 01:02:32.400
can I do with it, I ain't got an account of Federal Reserve Bank in New York, I go to

924
01:02:32.400 --> 01:02:36.280
From my bank, my commercial bank, let's say Chase Manhattan, I deposit it with great glee

925
01:02:36.280 --> 01:02:38.440
at Chase Manhattan.

926
01:02:38.440 --> 01:02:42.320
My bank account goes up, in other words, demand deposits by Chase Manhattan go up from five

927
01:02:42.320 --> 01:02:43.320
billion to six billion.

928
01:02:43.320 --> 01:02:47.000
The demand deposits of the banking system go up from five to six.

929
01:02:47.000 --> 01:02:49.160
But Chase Manhattan is even more gleeful about it than I am.

930
01:02:49.160 --> 01:02:50.400
I'm only getting a billion dollars.

931
01:02:50.400 --> 01:02:54.000
Chase is getting a billion dollars worth of reserves on which the banking system can pyramid

932
01:02:54.000 --> 01:02:55.000
five to one.

933
01:02:55.000 --> 01:02:56.480
Five billion, never mind the one billion.

934
01:02:56.480 --> 01:03:00.160
So, Chase Manhattan runs as fast as their little ladies can carry them to the Federal

935
01:03:00.160 --> 01:03:01.160
Reserve Bank in New York.

936
01:03:01.160 --> 01:03:03.560
The Federal Reserve Bank posits a check on the Federal Reserve Bank of New York, gets

937
01:03:03.560 --> 01:03:07.720
an increase in its reserves, because that's what the Federal Reserve Bank is, the bankers

938
01:03:07.720 --> 01:03:13.880
bank, they have now 2 billion dollars of reserves, the man that posits outstanding of the Federal

939
01:03:13.880 --> 01:03:14.880
Reserve Bank is now 2 billion.

940
01:03:14.880 --> 01:03:21.000
Notice that it all balances, we now have the first set of balance here, we have a commercial

941
01:03:21.000 --> 01:03:27.440
bank, IOUs 4 billion, reserves 2 billion, the man that posits 6 billion, and that balances,

942
01:03:27.440 --> 01:03:32.080
In the Federal Reserve account, we have portfolio now, we've added portfolio of $1 billion to

943
01:03:32.080 --> 01:03:38.120
the assets, and portfolio means not that bonds, it means my portfolio of $1 billion, so we've

944
01:03:38.120 --> 01:03:42.720
added another billion dollars to demand deposits over the commercial banks.

945
01:03:42.720 --> 01:03:47.040
It's not the end of it of course, what happens now is the banks go into a complete cap fit

946
01:03:47.040 --> 01:03:52.600
here of joy, and they expand by five to one, either if Chase is a monopoly they expand

947
01:03:52.600 --> 01:03:56.800
right away, if the competing bank as it is now takes a little bit more time, but we wind

948
01:03:56.800 --> 01:04:02.800
And we wind up then, $2 billion of reserves, we wind up with demand deposits not of $6 billion, but of $10 billion,

949
01:04:02.800 --> 01:04:08.800
and IOUs of $8 billion, and we now have expanded the money to be double the money supply from $5 to $10 billion.

950
01:04:08.800 --> 01:04:12.800
Just by the Federal Reserve Bank buying my old portfolio for $1 billion.

951
01:04:12.800 --> 01:04:16.800
I say, it doesn't matter what they buy. What they buy is unimportant. The important thing is what they pay out.

952
01:04:16.800 --> 01:04:22.800
They pay out a check. As soon as they pay out a check, this mechanism goes into effect of quintupling the money supply.

953
01:04:22.800 --> 01:04:52.800
In practice, of course, they don't buy my old gold, yeah, too blatant, too blatant, and they don't buy old houses and all that, what they buy is government bonds, U.S. government bonds, they buy old government bonds, every now and then there's a drive on to allow them to buy new ones, they buy old government bonds, it's not important that they buy old government bonds, it's important for the bond market, but it's not that crucial, the crucial thing here is, they buy a billion dollars worth of government bonds, the bond dealers rush out, take the check,

954
01:04:52.800 --> 01:04:56.400
The Federal Reserve Bank deposits them in their commercial bank, Chase Bank, let's say.

955
01:04:56.400 --> 01:05:00.120
They get an increase in their demand of deposits, Chase gets an increase in reserves, and they

956
01:05:00.120 --> 01:05:01.720
can now quintuple their money supply.

957
01:05:01.720 --> 01:05:04.040
That's the process by which we have it.

958
01:05:04.040 --> 01:05:10.240
Process is called open market operations by Federal Reserve Banks, or open market purchases.

959
01:05:10.240 --> 01:05:12.560
Usually the sales are very few and far between.

960
01:05:12.560 --> 01:05:18.000
Sales is when the Federal Reserve sells bonds, then of course you have the reverse situation.

961
01:05:18.000 --> 01:05:23.880
When the Federal Reserve Bank disgorges some of these bonds, then people buy it.

962
01:05:23.880 --> 01:05:24.880
I ran out of check.

963
01:05:24.880 --> 01:05:27.480
Let's say I buy a government bond of a billion dollars.

964
01:05:27.480 --> 01:05:28.760
I ran out of check on my bank.

965
01:05:28.760 --> 01:05:31.840
My bank loses reserves, and the banking system has to contract.

966
01:05:31.840 --> 01:05:32.840
That's the other side of the coin.

967
01:05:32.840 --> 01:05:33.840
It's called the market fails.

968
01:05:33.840 --> 01:05:39.640
So, in other words, in practice, instead of this portfolio thing, the IOUs here, the 1.8

969
01:05:39.640 --> 01:05:42.400
billion, are U.S. government securities.

970
01:05:42.400 --> 01:05:45.280
Over the years, of course, the Federal Reserve, which started with zero government securities,

971
01:05:45.280 --> 01:05:47.080
now has billions and billions of them.

972
01:05:47.080 --> 01:05:50.160
I don't know what the figures are, but they're enormous, because every year they're piling

973
01:05:50.160 --> 01:05:51.160
on more.

974
01:05:51.160 --> 01:05:54.560
In other words, the way in which the federal government increases money supply year after

975
01:05:54.560 --> 01:05:59.040
year by approximately 10%, give or take a bit, is by the Federal Reserve banks going

976
01:05:59.040 --> 01:06:04.160
out on the open market and buying government bonds, seemingly harmless operations, done

977
01:06:04.160 --> 01:06:08.800
continually with almost no publicity, financial pages are not, you know, publicized every

978
01:06:08.800 --> 01:06:13.720
time the Federal Reserve buys bonds, it's like a normal thing every day, and as a federal

979
01:06:13.720 --> 01:06:16.960
open market committee, which meets, I think, once a week and decides how much to buy, all

980
01:06:16.960 --> 01:06:22.640
The point is that the upshot of all these things is this is the way in which money supplies

981
01:06:22.640 --> 01:06:24.600
regulate it and inflate it.

982
01:06:24.600 --> 01:06:28.320
The Federal Reserve feels that New York is inflating too much beyond Boston.

983
01:06:28.320 --> 01:06:31.760
There might be some harmless Boston banks calling upon New York banks for redemption.

984
01:06:31.760 --> 01:06:37.000
They just shovel all bond buying at the Boston market and equalizing the situation.

985
01:06:37.000 --> 01:06:41.600
So the whole economy, all the banks can inflate beautifully together, but not too much calling

986
01:06:41.600 --> 01:06:46.520
upon redemption of one bank upon another bank, because if everybody's inflating together,

987
01:06:46.520 --> 01:06:50.280
The amount that Chase calls upon National City for redemption will be more or less offset

988
01:06:50.280 --> 01:06:53.160
by the amount that National City holds on Chase for redemption.

989
01:06:53.160 --> 01:06:56.480
They can clear it and nothing happens.

990
01:06:56.480 --> 01:07:01.320
The one check here, the one limitation on the Federal Reserve in this balance sheet,

991
01:07:01.320 --> 01:07:05.200
the Federal Reserve expansion, of course, gold, the fact that the Federal Reserve used

992
01:07:05.200 --> 01:07:08.560
to have to pay their liabilities in gold on the gold standard.

993
01:07:08.560 --> 01:07:13.200
Well, that of course was eliminated, first it was eliminated very gradually by the government

994
01:07:13.200 --> 01:07:17.440
by establishment, by spreading the cultural value around it, really like the old geezer

995
01:07:17.440 --> 01:07:20.400
who didn't want to have his money in the bank, because the other old geezer, or the same

996
01:07:20.400 --> 01:07:24.240
old geezer, doesn't want to have his money in gold, you know, carry gold around.

997
01:07:24.240 --> 01:07:28.880
This is considered neanderthal, it's considered ridiculous, it's considered lots of stories

998
01:07:28.880 --> 01:07:31.560
about crazy old geezer who wants to have his money in gold, why doesn't he have his money

999
01:07:31.560 --> 01:07:36.560
in paper or bank credits, it's more comfortable, it's lighter in weight and all that sort of

1000
01:07:36.560 --> 01:07:37.560
stuff.

1001
01:07:37.560 --> 01:07:41.520
And so, the idea of people actually using gold coins in day-to-day transactions gradually

1002
01:08:41.520 --> 01:08:45.800
The Depression was over several years thereafter, and of course the gold has not yet been siphoned

1003
01:08:45.800 --> 01:08:48.200
back on public coffers.

1004
01:08:48.200 --> 01:08:52.160
Here we are 35 years approximately since the Depression, there ain't no gold anymore,

1005
01:08:52.160 --> 01:08:55.600
and the gold has not been paid back to us by our government.

1006
01:08:55.600 --> 01:08:58.240
In other words, government confiscated the gold.

1007
01:08:58.240 --> 01:09:02.440
Incidentally, just as sort of a pecan note here, favorite character of American history

1008
01:09:02.440 --> 01:09:07.960
is Samuel Chase, who was the secretary, was a Jacksonian hard money man, was the secretary

1009
01:09:07.960 --> 01:09:13.280
Treasury during the Civil War, the Union side, Prince of the Greenbacks, which later deflated,

1010
01:09:13.280 --> 01:09:16.760
and then several years after the Civil War, the case comes before the Supreme Court, were

1011
01:09:16.760 --> 01:09:17.760
these Greenbacks constitutional?

1012
01:09:17.760 --> 01:09:20.680
Was it legal for the Federal Government to issue paper money at all?

1013
01:09:20.680 --> 01:09:24.440
Not even talking about irredeemable paper after them, talking about just paper money

1014
01:09:24.440 --> 01:09:27.760
irredeemable at the time, even, Greenback, was it legal?

1015
01:09:27.760 --> 01:09:31.600
And the Supreme Court decided four to three, I believe, there were two vacancies on the

1016
01:09:31.600 --> 01:09:36.480
court, four to three, it was unconstitutional, so for a few glorious years, paper money,

1017
01:09:36.480 --> 01:09:39.280
and the Third Evil Paper Money was unconstitutional.

1018
01:09:39.280 --> 01:09:43.080
Chief Justice Chase wrote the decision, which made his own actions as Secretary of the Treasury

1019
01:09:43.080 --> 01:09:44.080
illegal and unconstitutional.

1020
01:09:44.080 --> 01:09:50.920
It's a beautiful, probably unique act on the history of the world, denouncing himself for

1021
01:09:50.920 --> 01:09:53.280
evil paper money, inflationary paper money.

1022
01:09:53.280 --> 01:09:59.720
Okay, what happened was, and I think Pecan's interesting note, is that the President Grant

1023
01:09:59.720 --> 01:10:06.120
who was in the pay of the Watergate types at the time, the inflationary government subsidized

1024
01:10:06.120 --> 01:10:07.120
types.

1025
01:10:07.120 --> 01:10:11.080
Then I pointed to the two vagacies of the Supreme Court, two gentlemen, I think Bradley

1026
01:10:11.080 --> 01:10:15.840
and somebody else, both of whom turned out to be lawyers for the big railroads, and both

1027
01:10:15.840 --> 01:10:20.280
of whom then, when the decision was re-argued a couple of years later, argued on the pro-paper

1028
01:10:20.280 --> 01:10:23.040
money side and the decision was reversed by five to four.

1029
01:10:23.040 --> 01:10:26.800
The reason why the railroad lawyer thing becomes important is because the railroads are heavily

1030
01:10:26.800 --> 01:10:27.800
in debt.

1031
01:10:27.800 --> 01:10:32.240
Railroads were great bond issuers at the time, and of course bondholders, debtors, the bond

1032
01:10:32.240 --> 01:10:36.040
issuers, rather, like to have inflation because this wipes out the purchasing power of the

1033
01:10:36.040 --> 01:10:53.840
The way by which this legalized money counterfeiting takes place now is through this Federal Reserve

1034
01:10:53.840 --> 01:10:55.840
purchase of the bond.

1035
01:10:55.840 --> 01:10:58.840
Another pecan touch, remember I talked about the Bank of England and William Patterson,

1036
01:10:58.840 --> 01:11:01.840
they have a similar thing with government deficits.

1037
01:11:01.840 --> 01:11:05.840
The Government has a deficit of $10 billion.

1038
01:11:05.840 --> 01:11:07.840
How does it finance it?

1039
01:11:07.840 --> 01:11:11.840
Well, there are three ways it can finance it, or any combination of these three ways.

1040
01:11:11.840 --> 01:11:16.840
One way is to just print the $10 billion, the old-fashioned method, printing the paper money and spending it.

1041
01:11:16.840 --> 01:11:20.840
Now, this would mean we have a $10 billion deficit.

1042
01:11:20.840 --> 01:11:28.840
If it simply finances the deficit, let's say its revenue is $30 billion and its expenditures are $40 billion, whatever, however it gets to the $10 billion.

1043
01:11:28.840 --> 01:11:34.320
Method number one of financing the deficit is by printing the money.

1044
01:11:34.320 --> 01:11:38.800
Print the old greenbacks, the Continentals, and you print the 10 billion, spend it.

1045
01:11:38.800 --> 01:11:42.720
Now of course this is inflationary, we can say there's a 10 billion dollars worth of

1046
01:11:42.720 --> 01:11:47.920
inflation has been injected into the system, prices will go up accordingly.

1047
01:11:47.920 --> 01:11:50.840
The other hand, there's something sort of lovable about this method because it's clear

1048
01:11:50.840 --> 01:11:51.840
and honest.

1049
01:11:51.840 --> 01:11:55.320
I mean, in the sense that there it is, everybody knows, you printed the 10 billion, everybody

1050
01:11:55.320 --> 01:11:57.600
knows that's inflationary, and that's it.

1051
01:11:57.600 --> 01:12:02.920
Ok, that's one method. The second method, financing the deficit, is borrowing money

1052
01:12:02.920 --> 01:12:08.920
from the public. So the government issues bonds and sells it to you and I and Nelson Rockefeller

1053
01:12:08.920 --> 01:12:15.120
or whoever else buys them. So, borrowing from the public. Now this method of selling ten

1054
01:12:15.120 --> 01:12:18.880
billion dollars worth of bonds to the public is not inflationary at all, because it doesn't

1055
01:12:18.880 --> 01:12:22.280
increase the money supply at all. The first method increased the money supply by ten billion

1056
01:12:22.280 --> 01:12:27.440
dollars, so that's inflationary, that's bad. The second method is not inflationary, because

1057
01:12:27.440 --> 01:12:32.440
We reduce our bank deposits, UI and us in Rockefeller reduce our bank deposits by ten

1058
01:12:32.440 --> 01:12:36.560
billion and the bank deposits get turned over to the Treasury Department and the Treasury

1059
01:12:36.560 --> 01:12:40.800
takes the money and spends it on missiles, paper clips and other productive things.

1060
01:12:40.800 --> 01:12:41.800
And that's it.

1061
01:12:41.800 --> 01:12:46.840
The money circulates and the resources get shifted from high prices of paper clips and

1062
01:12:46.840 --> 01:12:48.320
missiles but it's not inflationary.

1063
01:12:48.320 --> 01:12:50.560
There's other bad things wrong with it.

1064
01:12:50.560 --> 01:12:54.440
It shifts money from private hands to public hands but at least it's not inflationary.

1065
01:12:54.440 --> 01:13:00.000
The bad thing here, aside from this shift of resources, is that then, the government

1066
01:13:00.000 --> 01:13:05.920
has to pay back the 10 billion to bondholders, plus interest, depending on what the interest

1067
01:13:05.920 --> 01:13:07.400
is, we now have a lot more.

1068
01:13:07.400 --> 01:13:11.120
In other words, over the years, the government, let's say, has to pay back 20 billion, so

1069
01:13:11.120 --> 01:13:15.760
we have taxes go up by 20 billion, so the second method of borrowing from the public

1070
01:13:15.760 --> 01:13:16.760
is lovably non-inflationary.

1071
01:13:16.760 --> 01:13:21.720
On the other hand, it's not so lovable that taxes go up by approximately twice the amount

1072
01:13:21.720 --> 01:13:24.240
of the previous inflation.

1073
01:13:24.240 --> 01:13:26.440
And the fact is that the taxpayers have to pay now and in the future, on and on, for

1074
01:13:26.440 --> 01:13:29.440
the next 20 years or so for this debt.

1075
01:13:29.440 --> 01:13:33.120
Now we have a third method, which is a method generally used, and a method most sophisticated,

1076
01:13:33.120 --> 01:13:38.360
most beloved by sophisticated establishment economics, that is, you finance the deficit

1077
01:13:38.360 --> 01:13:40.240
by borrowing money from the banking system.

1078
01:13:40.240 --> 01:13:45.840
Now this is the equivalent of the king financing his deficit, his personal deficit, by borrowing

1079
01:13:45.840 --> 01:13:50.720
money from William Paterson, borrowing money from the banking system.

1080
01:13:50.720 --> 01:13:55.600
When you do that, you increase the money supply by $10 billion the same way because what happens

1081
01:13:55.600 --> 01:14:02.640
is we now have, we look at the banks, commercial banks, assets and liabilities, you now have

1082
01:14:02.640 --> 01:14:06.520
demand deposits go up by $10 billion, in other words the banks create $10 billion of new

1083
01:14:06.520 --> 01:14:09.240
money, new demand deposit.

1084
01:14:09.240 --> 01:14:12.720
They hand over to the government, treasury, department, and it spends the money on paper

1085
01:14:12.720 --> 01:14:20.880
In return for that, the banks get, the IOUs now, government bonds in short, $10 billion.

1086
01:14:20.880 --> 01:14:25.760
So, in other words, the money supply is going up by $10 billion through the issuers of more

1087
01:14:25.760 --> 01:14:26.760
bank money.

1088
01:14:26.760 --> 01:14:30.960
So, we have inflation, $10 billion worth of inflation on method three.

1089
01:14:30.960 --> 01:14:34.840
However, in addition to the $10 billion worth of inflation which we suffer from printing

1090
01:14:34.840 --> 01:14:40.160
press, the old-fashioned printing press method, we now have to pay the banks back, in quotes,

1091
01:14:40.160 --> 01:14:42.160
to the tune of $20 billion.

1092
01:14:42.160 --> 01:14:45.480
In other words, taxes go up by 20 billion in order to pay off the principal and the

1093
01:14:45.480 --> 01:14:48.000
interest of government bonds in the next 20 years.

1094
01:14:48.000 --> 01:14:52.520
Method 3, which is the dominant method, of course, is a method which we suffer the worst

1095
01:14:52.520 --> 01:14:53.520
of both worlds.

1096
01:14:53.520 --> 01:14:59.640
We both have inflation and increased taxes, so taxes go up, taxes increase by 20 billion.

1097
01:14:59.640 --> 01:15:05.840
I know this is sort of a moral situation here, or the moral dimension of this system.

1098
01:15:05.840 --> 01:15:10.280
We the taxpayer, we the American taxpayer, are paying the banks both the principal and

1099
01:15:10.280 --> 01:15:15.440
and the Hefty Interest Rate, for the dubious service of inflating the money supply which

1100
01:15:15.440 --> 01:15:19.600
they themselves benefit from, to look at from any ethical system, or ethical principles is

1101
01:15:19.600 --> 01:15:20.600
kind of a bizarre system.

1102
01:15:20.600 --> 01:15:25.000
It's bad enough to have the banks inflating, it's even worth to have the taxpayer gratefully

1103
01:15:25.000 --> 01:15:26.720
paying them back, in quotes.

1104
01:15:26.720 --> 01:15:31.160
People comfortable with paying them back assume that they save their own money up, or they

1105
01:15:31.160 --> 01:15:35.560
borrow money from other people and have these, the money, the capital saved up by the small

1106
01:15:35.560 --> 01:15:39.200
savers over the country, this is invested in government bonds and the commitment to pay

1107
01:15:39.200 --> 01:15:40.200
them back.

1108
01:15:40.200 --> 01:15:44.520
The banks, remember, created new money and then bought the bonds with the newly created

1109
01:15:44.520 --> 01:15:45.520
checkbook money.

1110
01:15:45.520 --> 01:15:48.120
All right, we're borrowing from the banking system.

1111
01:15:48.120 --> 01:15:53.520
We're combining the worst of both methods and I say this is the dominant, this is the

1112
01:15:53.520 --> 01:15:57.200
modern sophisticated equivalent of the, of the king borrowing from William Patterson

1113
01:15:57.200 --> 01:15:59.960
and both are making this deal and William Patterson hasn't got any money, King hasn't

1114
01:15:59.960 --> 01:16:02.000
got any money, they both wind up with lots of money.

1115
01:16:02.000 --> 01:16:05.680
It's the same way here with the government and the banks.

1116
01:16:05.680 --> 01:16:10.120
You might ask the question, how, how did the banks get the 10 billion to buy the government

1117
01:16:10.120 --> 01:16:24.840
The Federal Reserve banks help out by pumping $1 billion worth of reserves and thereby giving

1118
01:16:24.840 --> 01:16:29.960
the banks the $10 billion to spend, enabling them to increase by $8 billion more.

1119
01:16:29.960 --> 01:16:34.440
So, we have reserves going up by $2 billion, this is done by the Federal Reserve banks

1120
01:16:34.440 --> 01:16:38.640
buying $2 billion worth of old bonds in the open market, this completes this complicated

1121
01:16:38.640 --> 01:16:39.640
chain.

1122
01:16:39.640 --> 01:16:44.720
The Treasury wants to borrow $10 billion on inflate, to finance the deficit.

1123
01:16:44.720 --> 01:16:48.280
The Federal Reserve banks go into the open market, buy $2 billion worth of old government

1124
01:16:48.280 --> 01:16:53.280
bonds, old existing government bonds, thereby increasingly paying out checks, $2 billion

1125
01:16:53.280 --> 01:16:57.880
worth of checks, which old bond dealers get, and the old bond dealers take this money and

1126
01:16:57.880 --> 01:17:02.360
they profit in their banks, their banks get $2 billion worth of more reserves, banks inflate

1127
01:17:02.360 --> 01:17:08.400
$10 billion on top of that, and they inflate by buying $10 billion worth of new bonds issued

1128
01:17:08.400 --> 01:17:11.040
by the Government of the Treasury to Finance their Deficit.

1129
01:17:11.040 --> 01:17:14.960
In this complicated process, we wind up with $10 billion worth of inflation and something

1130
01:17:14.960 --> 01:17:19.200
like $20 billion worth of new taxes over the years.

1131
01:17:19.200 --> 01:17:24.920
Okay, so this more or less is the monetary inflationary mechanism going on.

1132
01:17:24.920 --> 01:17:30.520
Now the question is, the final point of the course is to talk about one of the effects

1133
01:17:30.520 --> 01:17:35.000
of this inflationary process, which we don't think much about, in addition to the increase

1134
01:17:35.000 --> 01:17:41.480
In addition to the possible and probable runaway inflation eventually, there's another effect

1135
01:17:41.480 --> 01:17:46.120
of increase in bank credit, which is to generate the dread and famous business cycle.

1136
01:17:46.120 --> 01:17:49.040
It brings us to our final topic, the business cycle.

1137
01:17:49.040 --> 01:17:53.720
And obviously, it's sort of ludicrous to go through the entire business cycle process

1138
01:17:53.720 --> 01:17:58.160
in about a half hour, but I'll try to do my best.

1139
01:17:58.160 --> 01:18:02.680
In the old days, in other words, in the day before approximately 1750, unless I mean right

1140
01:18:32.680 --> 01:18:37.400
is pretty obvious, or a specific event or a war would take place, and credit would get

1141
01:18:37.400 --> 01:18:38.400
shut off.

1142
01:18:38.400 --> 01:18:43.400
One of the last famous cases of this was during the Civil War, American Civil War, Britain's

1143
01:18:43.400 --> 01:18:47.040
major industry was cotton textiles, and they were dependent, and their major supplier of

1144
01:18:47.040 --> 01:18:51.680
cotton was the American South, and comes the Civil War, and the cotton supply was cut off,

1145
01:18:51.680 --> 01:18:54.800
so the British cotton industry goes into depression, Britain goes into depression.

1146
01:18:54.800 --> 01:18:55.800
It's obvious why.

1147
01:18:55.800 --> 01:18:58.800
I don't mean any sophisticated business cycle theory to figure it out.

1148
01:18:58.800 --> 01:19:04.000
This is the sort of depressionism that takes place before approximately 1750, where you

1149
01:19:04.000 --> 01:19:05.960
can easily pinpoint the cause.

1150
01:19:05.960 --> 01:19:10.400
Anybody who has any sense and knows the scene, knows what the score was, and usually it's

1151
01:19:10.400 --> 01:19:11.400
the government.

1152
01:19:11.400 --> 01:19:12.400
All right.

1153
01:19:12.400 --> 01:19:17.920
Then what happens is that approximately 1750, there occurs a phenomenon in the Western world

1154
01:19:17.920 --> 01:19:24.020
and any sort of developed market economy, a dread phenomenon whereby you have a seemingly

1155
01:19:24.020 --> 01:19:29.540
and the regular alternation of booms and busts, the so-called business cycle or trade cycle,

1156
01:19:29.540 --> 01:19:34.180
where business will sort of go up and then collapse suddenly and go up again and so forth

1157
01:19:34.180 --> 01:19:35.180
and so on.

1158
01:19:35.180 --> 01:19:38.180
You have some kind of a cycle, a phenomenon.

1159
01:19:38.180 --> 01:19:44.380
So as this became evident, an economist began to force himself to explore it as economists

1160
01:19:44.380 --> 01:19:49.180
as a profession of economics comes up, or as people think about economic problems, to

1161
01:19:49.180 --> 01:19:52.860
try to figure out what the cause of this whole thing was, because it's certainly not obvious.

1162
01:19:52.860 --> 01:19:57.260
It shouldn't happen. If you look at it from the point of view of micro-theory, everything

1163
01:19:57.260 --> 01:20:01.260
should be sort of hunky-dory. The market's always clear, there's always full employment,

1164
01:20:01.260 --> 01:20:05.460
all the tendency toward it. So what's the matter? What's this boom and bust business?

1165
01:20:05.460 --> 01:20:12.860
As a matter of fact, Ford Keynes in probably the worst chapter of that book, General Theory,

1166
01:20:12.860 --> 01:20:17.300
wrote a historical chapter of about five pages or something. He said that for him, nobody

1167
01:20:17.300 --> 01:20:21.620
ever thought about business cycles. The people he called the classical economists didn't

1168
01:20:21.620 --> 01:20:51.620
The Theory of Money and Credit

1169
01:20:51.620 --> 01:20:56.220
Bank Collapses and Banks Collapse, the so-called panic or so-called crisis is the most ever

1170
01:20:56.220 --> 01:21:01.460
dramatic and disturbing event and for a while there it so happened about every ten years

1171
01:21:01.460 --> 01:21:06.580
there was a big crisis so there was a theory of periodicity where the idea was it was some

1172
01:21:06.580 --> 01:21:12.500
kind of periodic cycle every 9.8 years and some economists attributed a sunspot and the

1173
01:21:12.500 --> 01:21:13.500
whole thing on that.

1174
01:21:13.500 --> 01:21:14.500
This has fortunately been forgotten.

1175
01:21:14.500 --> 01:21:18.820
So anyway and it turned out it wasn't periodic, it wasn't 9.8 years and that's what's going

1176
01:21:18.820 --> 01:21:19.820
down in the drain.

1177
01:21:19.820 --> 01:21:24.860
and what you have is a series of booms and busts which are not periodic but keep going

1178
01:21:24.860 --> 01:21:27.340
anyway before they're mating.

1179
01:21:27.340 --> 01:21:32.980
Now there have been two kinds of explanations of the cause of this business cycle.

1180
01:21:32.980 --> 01:21:38.500
One is the dominant explanation now for many years is the idea that, well, a dominant type

1181
01:21:38.500 --> 01:21:42.780
of explanation is that the cause is somehow deep within the Industrial Revolution.

1182
01:21:42.780 --> 01:21:45.820
All comes about because of the Industrial Revolution and the market economy.

1183
01:21:45.820 --> 01:21:50.420
There's something within the processes of the industrial system that bring about a boom-and-buff

1184
01:21:50.420 --> 01:21:51.420
cycle.

1185
01:21:51.420 --> 01:21:55.220
Most people don't like a boom-and-buff cycle and consider it evil, therefore there's something

1186
01:21:55.220 --> 01:21:59.020
evil about the market or something evil about the industrial system.

1187
01:21:59.020 --> 01:22:03.220
In one way or the other, the Keynesian system, the Marxian system, etc., etc., all come under

1188
01:22:03.220 --> 01:22:08.780
this rubric of blaming the industrial revolution or blaming the market, even if they don't

1189
01:22:08.780 --> 01:22:10.580
have any specific causal explanation.

1190
01:22:10.580 --> 01:22:14.220
It's like, well, it's something within the market or something in the industrial revolution.

1191
01:22:14.220 --> 01:22:19.100
And therefore, usually it includes the government has to step in and do something about it.

1192
01:22:19.100 --> 01:22:22.460
Either abolish the market or regulate it or whatever.

1193
01:22:22.460 --> 01:22:27.220
Another system, another group of theories of explaining the business cycle, which has

1194
01:22:27.220 --> 01:22:32.700
been almost forgotten until fairly recently, which used to be dominant in the 19th century,

1195
01:22:32.700 --> 01:22:35.780
which essentially says, no, it's not the free market, it's not the Industrial Revolution,

1196
01:22:35.780 --> 01:22:38.020
which comes about around the mid-18th century.

1197
01:22:38.020 --> 01:22:42.780
Something else which came about in the mid-18th century, which is the real cause, comes about

1198
01:22:42.780 --> 01:22:46.180
In other words, at the same time, approximately the Industrial Revolution, that's the rise

1199
01:22:46.180 --> 01:22:49.380
of commercial banking, the rise, in other words, of fractional reserve banking.

1200
01:22:49.380 --> 01:22:54.380
This process, which is obviously not a market process, which intervenes in the market, either

1201
01:22:54.380 --> 01:22:58.220
by the banks themselves or by the government or a combination, that this is the worm and

1202
01:22:58.220 --> 01:22:59.220
the apple.

1203
01:22:59.220 --> 01:23:03.820
Without the monetary intervention in the market, without the fractional reserve banking, we

1204
01:23:03.820 --> 01:23:06.340
wouldn't have the movement bus cycle.

1205
01:23:06.340 --> 01:23:12.220
Basically, as Ludwig von Mises, I think, was the first one to really point out, the Xavier

1206
01:23:12.220 --> 01:23:16.580
and Human Species Flow Price Mechanism is really the first primitive business cycle

1207
01:23:16.580 --> 01:23:17.580
model.

1208
01:23:17.580 --> 01:23:21.340
In other words, if you look at it, remember I talked about England and France and England

1209
01:23:21.340 --> 01:23:25.380
inflates and so forth and England and the English banks, with the behest of the English

1210
01:23:25.380 --> 01:23:31.980
government inflate, English prices go up and then what happens is that gold flows out from

1211
01:23:31.980 --> 01:23:35.780
France to England as a deficit in the English balance of payments and a surplus in the French

1212
01:23:35.780 --> 01:23:40.700
balance of payments and then finally the the pyramiding effect of the bank notes or bank

1213
01:23:40.700 --> 01:23:44.660
Deposit on top of gold becomes so top-heavy and the banks are obviously in such a bad shape,

1214
01:23:44.660 --> 01:23:51.460
they have to contract and as they contract, there's a recession, prices fall and bankruptcies

1215
01:23:51.460 --> 01:23:54.300
and gold starts falling out and starts falling back again.

1216
01:23:54.300 --> 01:23:59.340
This is a one-shot model of the business cycle, in other words, there's an inflation brought

1217
01:23:59.340 --> 01:24:03.900
about by the bank, bank credit expansion, prices go up, there's a feeling of prosperity

1218
01:24:03.900 --> 01:24:07.420
and exhilaration and such and such, and finally there's a contraction because gold has been

1219
01:24:07.420 --> 01:24:10.220
falling out and then the banks collapse and such and such.

1220
01:24:10.220 --> 01:24:12.220
and the Boehm-Bawerk cycle.

1221
01:24:12.220 --> 01:24:16.220
The next question is, of course, why does the Boehm start up again?

1222
01:24:16.220 --> 01:24:18.220
Why isn't it just a one shot thing?

1223
01:24:18.220 --> 01:24:20.220
And the reason, of course, that Mises pointed out,

1224
01:24:20.220 --> 01:24:22.220
is because the banks are inherently inflationary,

1225
01:24:22.220 --> 01:24:25.220
inherently want to create money, and the government joins them.

1226
01:24:25.220 --> 01:24:27.220
As soon as they get the chance, they start inflating again.

1227
01:24:27.220 --> 01:24:32.220
As soon as the banks have re-established their credibility, as we now say,

1228
01:24:32.220 --> 01:24:37.220
and they're off again on the other cycle, and the Boehm-Bawerk cycle continues on.

1229
01:24:37.220 --> 01:24:39.220
Now, that, I think, is a pretty good explanation.

1230
01:24:39.220 --> 01:24:40.220
It's not sufficient.

1231
01:24:40.220 --> 01:24:44.940
It became known as the purely monetary theory of the business cycle, which the Friedmanites

1232
01:24:44.940 --> 01:24:47.940
have essentially brought back in a kind of weird kind of way.

1233
01:24:47.940 --> 01:24:54.220
Weird in the sense that the Ricardians, Ricardo and his school have the initial theory of

1234
01:24:54.220 --> 01:24:56.780
the monetary theory of the business cycle.

1235
01:24:56.780 --> 01:24:59.780
Their view was therefore you shouldn't inflate, therefore you should have hard money, a pure

1236
01:24:59.780 --> 01:25:04.180
gold standard, whatever, and don't inflate, because what they want to do is not to have

1237
01:25:04.180 --> 01:25:05.180
the boom-bust cycle.

1238
01:25:05.180 --> 01:25:10.100
On the other hand, Friedman and I are interested largely in stabilizing the price level and

1239
01:25:10.100 --> 01:25:14.620
realizing that prices will tend to fall as the supply of business services increases

1240
01:25:14.620 --> 01:25:15.620
with productivity.

1241
01:25:15.620 --> 01:25:19.020
Therefore, we want to pump in more money in order to offset the general tendency toward

1242
01:25:19.020 --> 01:25:20.020
a falling price level.

1243
01:25:20.020 --> 01:25:23.020
It's a very different kind of situation.

1244
01:25:23.020 --> 01:25:27.220
But the emphasis on a purely monetary explanation of the business cycle is still there.

1245
01:25:27.220 --> 01:25:31.740
When Mises contributed, Mises and Hayek, following him, contributed to the theory of business

1246
01:25:31.740 --> 01:25:40.740
The Austrian business cycle is joining with this another strand of this monetary explanation.

1247
01:25:40.740 --> 01:25:46.300
Namely, when the banks expand credit and expand the money supply, they're also doing something

1248
01:25:46.300 --> 01:25:48.300
else in addition to being inflationary.

1249
01:25:48.300 --> 01:25:52.940
They're also lowering the interest rate below the free market level and pouring that new

1250
01:25:52.940 --> 01:25:55.260
money into basically the new business loans.

1251
01:25:55.260 --> 01:25:58.980
In other words, they're mostly lending money not to the consumers but the businessmen to

1252
01:25:58.980 --> 01:25:59.980
invest more.

1253
01:25:59.980 --> 01:26:05.260
And in doing that, they're causing over-investment in the so-called higher orders of production

1254
01:26:05.260 --> 01:26:09.100
and so-called, in the remote orders of capital goods.

1255
01:26:09.100 --> 01:26:12.980
And they're causing, in other words, an over-investment in capital goods, an under-investment in consumer

1256
01:26:12.980 --> 01:26:13.980
goods.

1257
01:26:13.980 --> 01:26:19.140
They're causing too much resources to be invested in, say, nails and cement and construction.

1258
01:26:19.140 --> 01:26:22.740
They're too little in clothing and hi-fi sets and whatever.

1259
01:26:22.740 --> 01:26:25.580
And the result just distorts the production structure.

1260
01:26:25.580 --> 01:26:30.740
As the inflationary process continues, as the credit expansion continues, the distortion

1261
01:26:30.740 --> 01:26:38.220
piles up more and more, necessitating a final reshift, a shifting back of resources, and

1262
01:26:38.220 --> 01:26:42.380
this shifting back is essentially the impression of the recession.

1263
01:26:42.380 --> 01:26:48.220
For example, it's going to be very rough if I explain in a few minutes, this is the

1264
01:26:48.220 --> 01:26:53.500
magnificent Austrian theory of the structure of production, essentially I guess, in this

1265
01:26:53.500 --> 01:27:05.500
hinted at by Carl Menger, the founder of the Austrian School, developed in great detail by Boehm-Bawerk, the great leader of the Austrian School, and finally by Hayek, applied to the business cycles by Hayek, the students of Ludwig von Mises.

1266
01:27:05.500 --> 01:27:18.500
Essentially what you have, consider the consumers are spending a certain amount of money, a bar, the length of the bar being the amount they spend. I'd say the consumers spend $200 billion a year on retail products.

1267
01:27:18.500 --> 01:27:25.000
So, this is consumption. So, money is going from consumers to retail sellers, retailers.

1268
01:27:25.000 --> 01:27:28.000
So, here's two billion, two hundred billion going from the consumers to the retailer.

1269
01:27:28.000 --> 01:27:30.000
Let's take a hundred billion and make it simpler.

1270
01:27:30.000 --> 01:27:34.000
A hundred billion dollars is going from consumers to retailers over, let's say, over a year or a month.

1271
01:27:34.000 --> 01:27:36.000
It doesn't really matter with time period.

1272
01:27:36.000 --> 01:27:40.000
And goods and services are going from the retailer to the people, consumers.

1273
01:27:40.000 --> 01:27:44.000
Okay, retailers take a certain amount of that. They take a certain amount of that hundred billion

1274
01:27:44.000 --> 01:27:50.440
and spend it on our own payment of wages to people working in the retail industry, rents

1275
01:27:50.440 --> 01:27:53.400
to landlords in the retail industry and profits, an interest rate.

1276
01:27:53.400 --> 01:27:57.200
So there's a certain amount of payments to factors of production in that industry, let's

1277
01:27:57.200 --> 01:27:58.200
say 10 billion worth.

1278
01:27:58.200 --> 01:28:03.400
So 10 billion goes up the ceiling here where there's factor payments.

1279
01:28:03.400 --> 01:28:11.560
90 billion, let's say, goes to the wholesalers, and 10 billion goes up to the factors of production

1280
01:28:11.560 --> 01:28:12.560
in that industry.

1281
01:28:12.560 --> 01:28:15.760
Another 80 billion goes to the wholesalers, and the same thing happens to the wholesalers.

1282
01:28:15.760 --> 01:28:19.960
10 billion, let's say, gets paid out to the land, labor, and capital, and entrepreneurs

1283
01:28:19.960 --> 01:28:22.080
in the wholesale industry.

1284
01:28:22.080 --> 01:28:26.920
Another 80 billion goes to the jobbers, another 10 billion up here, and 80 billion goes to

1285
01:28:26.920 --> 01:28:30.520
the jobbers, and 70 billion to the manufacturers, etc., etc.

1286
01:28:30.520 --> 01:28:32.520
So what you have in other words is the structure of production.

1287
01:28:32.520 --> 01:28:36.300
At each stage of production, every time the money is turned over, every time you're going

1288
01:28:36.300 --> 01:28:40.320
up the stage of production, more money gets hived off, you wind up with something like

1289
01:29:10.320 --> 01:29:14.660
When the number of stages of production increases, so you have what Hayek calls a lengthening

1290
01:29:14.660 --> 01:29:18.920
of the structure of production, as saving and investment increase, when I say the number

1291
01:29:18.920 --> 01:29:23.920
of stages of the structure of production lengthens, and without going into the whole analysis

1292
01:29:23.920 --> 01:29:29.720
of all the triangles, under credit expansion, too much gets invested in the higher orders

1293
01:29:29.720 --> 01:29:30.720
of production.

1294
01:29:30.720 --> 01:29:33.960
There's too much stuff for construction, these are called the higher orders, these are consumer

1295
01:29:33.960 --> 01:29:34.960
goods of lower orders.

1296
01:29:34.960 --> 01:29:37.920
Too much gets invested up here, not enough down here.

1297
01:29:37.920 --> 01:29:50.300
And then, what happens is, let's say people build new dams and new construction projects,

1298
01:29:50.300 --> 01:29:55.560
and the businessmen get the money for construction projects, pay them out to the workers, these

1299
01:29:55.560 --> 01:29:58.040
workers take the money and they spend it on consumer goods.

1300
01:29:58.040 --> 01:30:00.080
They haven't increased their savings at all.

1301
01:30:00.080 --> 01:30:03.960
Their savings is still, let's say, the old proportion, the old 10% of their income.

1302
01:30:03.960 --> 01:30:09.200
If not 20% as it would have to be to validate the new investments, they reestablish their

1303
01:30:09.200 --> 01:30:14.440
oil consumption proportions and as they do that, these industries out here collapse.

1304
01:30:14.440 --> 01:30:17.600
These industries in the higher orders of production collapse.

1305
01:30:17.600 --> 01:30:20.960
The structure of production shortens again in order to satisfy the consumers in the best

1306
01:30:20.960 --> 01:30:21.960
possible way.

1307
01:30:21.960 --> 01:30:24.520
In other words, in order to satisfy the time preference of consumers.

1308
01:30:24.520 --> 01:30:27.440
So what the credit expansion does, it violates the time preference of consumers.

1309
01:30:27.440 --> 01:30:29.960
In other words, consumers have a certain time preference structure.

1310
01:30:29.960 --> 01:30:32.960
They assume a certain amount of current goods.

1311
01:30:32.960 --> 01:30:36.340
They save and invest a certain amount for future goods.

1312
01:30:36.340 --> 01:30:41.060
Credit expansion, bank credit expansion, inflationary money supply into the business loan makes

1313
01:30:41.060 --> 01:30:45.080
it appear as if there's a lot more savings available for future investment, I mean, there

1314
01:30:45.080 --> 01:30:46.080
really isn't.

1315
01:30:46.080 --> 01:30:49.880
Makes it appear that time preference is a lot lower than it really is, and too much

1316
01:30:49.880 --> 01:30:52.680
is invested in these remote orders of production.

1317
01:30:52.680 --> 01:30:57.080
So then the question is, okay, if consumers then reestablish the role proportion, why

1318
01:30:57.080 --> 01:30:59.040
doesn't the business cycle come to an end in a couple of months?

1319
01:30:59.040 --> 01:31:03.480
You know, as soon as the producers, the businessmen pay out the money and the workers start spending

1320
01:31:03.480 --> 01:31:05.480
it, the whole thing should be over in a couple of months.

1321
01:31:05.480 --> 01:31:09.600
Why does the business cycle last about several years, four, five, six, seven, eight years?

1322
01:31:09.600 --> 01:31:13.600
Well, the reason is, the reason why the boom continues is precisely because more bank credit

1323
01:31:13.600 --> 01:31:14.600
is being poured in.

1324
01:31:14.600 --> 01:31:17.600
In other words, the bank credit expansion is not a one-shot thing, it's a continuous

1325
01:31:17.600 --> 01:31:18.600
thing.

1326
01:31:18.600 --> 01:31:23.080
And it's a process by which the business system is allowed to remain one step ahead

1327
01:31:23.080 --> 01:31:24.080
of retribution.

1328
01:31:24.080 --> 01:31:28.360
In other words, the overinvestment, the calling to account, the calling to judgment of overinvestment

1329
01:31:28.360 --> 01:31:36.860
is constantly being postponed by the fact that new bank credit has been poured in, and so this thing is one step ahead of the workers' reestablishment of their own proportions.

1330
01:31:36.860 --> 01:31:42.860
This is now often called a liquidity crisis, a liquidity crunch, which turns out businessmen don't have enough money anymore.

1331
01:31:42.860 --> 01:31:49.860
And this simply means that bank credit isn't expanding fast enough in these situations to validate this over-investment.

1332
01:31:49.860 --> 01:31:55.860
When bank credit expansion stops, then this whole process goes into effect, the shortening process,

1333
01:31:55.860 --> 01:32:01.580
and workers get unemployed in these areas or the poor on prices in the capitalist industry

1334
01:32:01.580 --> 01:32:04.940
as a re-establishment of the old orders of production.

1335
01:32:04.940 --> 01:32:09.980
So according to the Austrian theory of business cycle, recession is not simply a result of

1336
01:32:09.980 --> 01:32:11.740
contraction of the money supply.

1337
01:32:11.740 --> 01:32:14.060
Recession becomes inevitable and healthy once there's a boom.

1338
01:32:14.060 --> 01:32:16.020
In other words, the boom is a bad thing.

1339
01:32:16.020 --> 01:32:20.900
The boom distorts production process in ways different from what the consumers want and

1340
01:32:20.900 --> 01:32:24.540
the recession is the process by which, the painful but necessary process by which the

1341
01:32:24.540 --> 01:32:30.540
and the theme market restores the proper production structure in relation to the time preference of consumers.

1342
01:32:30.540 --> 01:32:35.540
Session then becomes inevitable and a good thing, in quotes, in relation to the boom.

1343
01:32:35.540 --> 01:32:42.540
Therefore, the policy conclusion, of course, is the exact opposite of the current Keynesian and post-Keynesian policy conclusion.

1344
01:32:42.540 --> 01:32:47.540
Keynesian policy conclusion is, for various reasons, if you haven't got a chance to know more about the Keynesian theory,

1345
01:32:47.540 --> 01:32:53.540
for various reasons it is, if there's a recession, pump more money in, put more spending in, inflate, secure it.

1346
01:32:53.540 --> 01:32:58.820
The Austrian theory, first of all if there's an inflation, stop inflating, stop increasing

1347
01:32:58.820 --> 01:33:03.580
money supply, stop pouring more bank credit in, and then if there's a recession, don't

1348
01:33:03.580 --> 01:33:08.420
do anything about it, keep the government's hands off, thus allowing the adjustment process

1349
01:33:08.420 --> 01:33:12.420
to proceed as fast as possible and wipe this whole thing out, because the government interferes

1350
01:33:12.420 --> 01:33:16.660
in their adjustment process by pumping up wage rates or pumping up, lending money to

1351
01:33:16.660 --> 01:33:17.660
unsound businesses, etc.

1352
01:33:17.660 --> 01:33:22.420
All it does is it postpones the business cycle, lengthens the depression, postpones the adjustment

1353
01:33:22.420 --> 01:33:27.420
Process and keeps the economy, the state of sort of chronic depression as it did in the 1930s.

1354
01:33:27.420 --> 01:33:31.420
The thing that it was to leave the process alone and not let it adjust as fast as possible.

1355
01:33:31.420 --> 01:33:34.420
Usually these recessions are very fast, even if they're very deep.

1356
01:33:34.420 --> 01:33:40.420
For example, in 1921, there was a recession in response to the big post-war boom, 1914,

1357
01:33:40.420 --> 01:33:42.420
and it was a very sharp recession.

1358
01:33:42.420 --> 01:33:45.420
Prices fell about a third or 40% or something like that.

1359
01:33:45.420 --> 01:33:48.420
But the recession, the whole recession was over in about nine months.

1360
01:33:48.420 --> 01:33:53.420
When the government leaves them alone, there's a free market attitude toward recessions, in other words.

1361
01:33:53.420 --> 01:33:56.420
They're over very, very quickly. You can hardly know that they're there.

1362
01:33:56.420 --> 01:34:02.420
It's only when the government steps in to, quote, cure them, unquote, that they're promoted and almost rendered permanent.

1363
01:34:02.420 --> 01:34:08.420
And the only other thing that culture can do, so to speak, to speed up the adjustment process and alleviate the depression,

1364
01:34:08.420 --> 01:34:14.420
is in contrast to the Keynesian system of trying to get people to spend more, you know, spend more and thereby pump the, find the pump.

1365
01:34:14.420 --> 01:34:18.420
The culture should be doing it to alleviate the pressures and encourage people to save more.

1366
01:34:18.420 --> 01:34:23.420
The more they save and the less they consume during recessions, the faster the recession will be cured,

1367
01:34:23.420 --> 01:34:29.420
because the more these investments will no longer be excessive and will now be validated by genuine shifts in time preference.

1368
01:34:29.420 --> 01:34:31.420
If these are genuine shifts, of course.

1369
01:34:31.420 --> 01:34:37.420
The more you get people to save and invest, the more thrifty you get them to be, the less painful the recession will be.

1370
01:34:37.420 --> 01:34:40.420
And, of course, the more capitalized the structure will be.

1371
01:34:40.420 --> 01:34:44.420
Just the exact reverse of the Keynesian prescription.

1372
01:34:44.420 --> 01:34:48.420
This explanation, by the way, accounts for every boom-bust cycle

1373
01:34:48.420 --> 01:34:52.420
since 1750 and even before that and localized cases.

1374
01:34:52.420 --> 01:34:56.420
The 1929 Depression is a beautiful example of Austrian theory at work,

1375
01:34:56.420 --> 01:34:59.420
Austrian analysis of the situation at work.

1376
01:34:59.420 --> 01:35:02.420
Most people think of the 1920s as a great era of laissez-faire in the United States.

1377
01:35:02.420 --> 01:35:05.420
It was not an era of laissez-faire, especially in the area of money and banking

1378
01:35:05.420 --> 01:35:07.420
where the Federal Reserve System had been established.

1379
01:35:07.420 --> 01:35:16.420
The Federal Reserve System is deliberately inflating the money supply and expanding bank credit for various reasons in order to help Britain with the usual argument.

1380
01:35:16.420 --> 01:35:20.420
Because Britain wasn't fighting rapidly in those days as usual.

1381
01:35:20.420 --> 01:35:26.420
We had to fight in order not to allow Britain, not put the pressure on Britain on losing a lot of gold to us.

1382
01:35:26.420 --> 01:35:31.420
Because if we were to fight about the same proportions Britain did, they wouldn't lose much gold to us.

1383
01:35:31.420 --> 01:35:34.420
Actually the situation is even more sinister than that.

1384
01:35:34.420 --> 01:35:45.420
Since both the Federal Reserve System in the 20s and the Bank of England was essentially run by the Morgan interests, but that's really another story.

1385
01:35:45.420 --> 01:35:57.420
And then we have the phenomenon of inflationary recession, as explained by the Western theory, because during the Depression period, what happens is that prices of capital goods, prices of construction goods, wage rates in these industries are supposed to fall,

1386
01:35:57.420 --> 01:36:00.420
and prices of consumer goods industry is supposed to rise,

1387
01:36:00.420 --> 01:36:06.420
thereby inducing resources to shift back from the construction of capital goods to consumer goods.

1388
01:36:06.420 --> 01:36:09.420
So there always is a rise in consumer goods industry during depression.

1389
01:36:09.420 --> 01:36:13.420
In other words, say during the 1929 Depression, all prices fell,

1390
01:36:13.420 --> 01:36:17.420
but the prices of capital goods, the prices of construction of machine tools,

1391
01:36:17.420 --> 01:36:20.420
fell much faster than the prices of consumer goods, much more rather.

1392
01:36:20.420 --> 01:36:25.420
They would fall, let's say, by 50% in the construction industry and by 20% in the retail industry.

1393
01:36:25.420 --> 01:36:31.180
What happened in old depressions, classic depressions was, old prices would fall, and

1394
01:36:31.180 --> 01:36:36.140
then capital goods would fall a lot more than consumer goods, so this meant that consumer

1395
01:36:36.140 --> 01:36:40.740
goods really went up relative in price relative to other products, but nobody cared about

1396
01:36:40.740 --> 01:36:43.940
that because the consumers, because the one good thing about an old-fashioned depression

1397
01:36:43.940 --> 01:36:47.540
is one good thing, one good thing alone, and that is you can enjoy a nice fall in your

1398
01:36:47.540 --> 01:36:48.540
consumer prices.

1399
01:36:48.540 --> 01:36:52.380
My parents were best off their whole lives in the Great Depression, because since they

1400
01:36:52.380 --> 01:36:57.100
They were employed, and most people I've heard were employed, everything was a great bargain.

1401
01:36:57.100 --> 01:37:00.500
Furniture was very cheap, houses were cheap, everything was terrific.

1402
01:37:00.500 --> 01:37:02.180
So that was the one good thing about an impression.

1403
01:37:02.180 --> 01:37:06.700
Now they've taken that away from us because they've, instead of allowing a deflation of

1404
01:37:06.700 --> 01:37:12.180
bank credit, because in every classic depression banks have to contract their credit and all

1405
01:37:12.180 --> 01:37:14.020
prices would fall as a result.

1406
01:37:14.020 --> 01:37:17.100
Now of course they don't allow any bank credit contraction ever so prices are never allowed

1407
01:37:17.100 --> 01:37:22.360
to fall again and therefore this healthy deflation is eliminated and we now have all we have

1408
01:37:22.360 --> 01:37:26.300
We have a rise in consumer goods prices relative to other prices, which means that the prices

1409
01:37:26.300 --> 01:37:30.200
are going up, money supply is inflating, a lot of deflating.

1410
01:37:30.200 --> 01:37:34.000
We now suffer, during a recession, from a rise in consumer goods prices.

1411
01:37:34.000 --> 01:37:36.120
In other words, we now have the worst of both worlds.

1412
01:37:36.120 --> 01:37:40.520
We have the bankruptcy, unemployment, and all the rest of it is associated with recession.

1413
01:37:40.520 --> 01:37:44.400
We also have what's classically associated with an inflation, which is a rise in prices.

1414
01:37:44.400 --> 01:37:48.640
Now, the Keynesians can't meet this thing, because the Keynesians' whole theory rests

1415
01:37:48.640 --> 01:37:49.640
on the dichotomy.

1416
01:37:49.640 --> 01:37:56.640
And once you have two abysses, it's a function of the government to steer the car, so to speak, across this tightrope of an abyss on either side.

1417
01:37:56.640 --> 01:37:59.640
One of the abyss of inflation, the other is the abyss of unemployment.

1418
01:37:59.640 --> 01:38:01.640
And since we're having both, and what do you do?

1419
01:38:01.640 --> 01:38:03.640
Of course, the Keynesians have no answer whatsoever for this.

1420
01:38:03.640 --> 01:38:05.640
The feminists don't have any answer either.

1421
01:38:05.640 --> 01:38:10.640
And so we wind up with none of the establishment economists knowing what to do about the current situation

1422
01:38:10.640 --> 01:38:14.640
when there's this whole series of inflationary recessions punctuated by runaway inflation in between,

1423
01:38:14.640 --> 01:38:16.640
or increasingly runaway inflation in between.

1424
01:38:16.640 --> 01:38:21.340
in between. Only the Austrian theory really can explain the solution and explain the situation

1425
01:38:21.340 --> 01:38:24.680
and also come up with a solution. Solution essentially being get the government out of

1426
01:38:24.680 --> 01:38:31.680
the whole business, which is really I guess the lesson in the middle of the whole course.