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NOTE XVII. Indirect Exchange (continued)

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6. CASH INDUCED AND GOODS INDUCED CHANGES IN PURCHASING POWER

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Changes in the purchasing power of money, that is, in the exchange ratio between money

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and the vendable goods and commodities, can originate either from the side of money or

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from the side of the vendable goods and commodities. The change in the data which provokes them

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can either occur in the demand for and supply of money, or in the demand for and supply

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of the other goods and services.

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We may accordingly distinguish between cash-induced and goods-induced changes in purchasing power.

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Goods-induced changes in purchasing power can be brought about by changes in the supply

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Let us now scrutinize the social and economic consequences of changes in the purchasing power of money under the following three assumptions.

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1. That the money in question can only be used as money, that is, as a medium of exchange, and can serve no other purpose.

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2. That there is only exchange of present goods, and no exchange of present goods against future goods.

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3. That we disregard the effects of changes in purchasing power on monetary calculation.

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Under these assumptions, all that cash-induced changes in purchasing power bring about are shifts in the disposition of wealth among different individuals.

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Some get richer, others poorer. Some are better supplied, others less.

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What some people gain is paid for by the loss of others.

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It would, however, be impermissible to interpret this fact by saying that total satisfaction

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remained unchanged, or that, while no changes have occurred in total supply, the state of

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total satisfaction, or of the sum of happiness, has been increased or decreased by changes

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in the distribution of wealth.

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The notions of total satisfaction, or total happiness, are empty.

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It is impossible to discover a standard for comparing the different degrees of satisfaction

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or happiness attained by various individuals.

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Cash-induced changes in purchasing power indirectly generate further changes by favoring

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either the accumulation of additional capital or the consumption of capital available.

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Whether and in what direction such secondary effects are brought about depends on the specific

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Data of each case.

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We shall deal with these important problems at a later point.

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Goods-induced changes in purchasing power are sometimes nothing else but consequences

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of a shift of demand from some goods to others.

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If they are brought about by an increase or a decrease in the supply of goods, they are

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not merely transfers from some people to other people.

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They do not mean that Peter gains what Paul has lost.

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Some people may become richer, although nobody is impoverished, and vice versa.

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We may describe this fact in the following way.

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Let A and B be two independent systems, which are in no way connected with each other.

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In both systems, the same kind of money is used, a money which cannot be used for any

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Money Non-Monetary Purpose.

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Now we assume, as case one, that A and B differ from each other only insofar as in B the total

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supply of money is N, M, M being the total supply of money in A, and that to every cash

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holding of C, and to every claim in terms of money, D, in A there corresponds a cash

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Push-holding of NC and a claim of ND in B. In every other respect, A equals B. Then we

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assume, as case 2, that A and B differ from each other only insofar as in B the total

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supply of a certain commodity R is NP, P being the total supply of this commodity in A, and

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In both cases, N is greater than 1. If we ask every individual of A whether he is ready to make the slightest sacrifice in order to exchange his position for the corresponding place in B, the answer will be unanimously in the negative, in case 1.

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But in case, too, all owners of R, and all those who do not own any R but are eager to

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acquire a quantity of it, that is, at least one individual, will answer in the affirmative.

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The services money renders are conditioned by the height of its purchasing power.

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Nobody wants to have in his cash holding a definite number of pieces of money, or a definite

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weight of money.

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He wants to keep a cash holding of a definite amount of purchasing power.

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As the operation of the market tends to determine the final state of money's purchasing power

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at a height at which the supply of and the demand for money coincide, there can never

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be an excess or a deficiency of money.

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Each individual and all individuals together always enjoy fully the advantages which they

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They can derive from indirect exchange and the use of money, no matter whether the total

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quantity of money is great or small.

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Changes in money's purchasing power generate changes in the disposition of wealth among

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the various members of society.

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From the point of view of people eager to be enriched by such changes, the supply of

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of Money may be called insufficient or excessive, and the appetite for such gains may result

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in policies designed to bring about cash-induced alterations in purchasing power.

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However, the services which money renders can be neither improved nor impaired by changing

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the supply of money.

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There may appear an excess or a deficiency of money in an individual's cash holding,

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But such a condition can be remedied by increasing or decreasing consumption or investment.

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Of course, one must not fall prey to the popular confusion between the demand for money for

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cash holding and the appetite for more wealth.

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The quantity of money available in the whole economy is always sufficient to secure for

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everybody all that money does and can do.

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From the point of view of this insight, one may call wasteful all expenditures incurred

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for increasing the quantity of money.

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The fact that things which could render some other useful services are employed as money,

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and thus withheld from these other employments, appears as a superfluous curtailment of limited

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opportunities for want satisfaction.

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It was this idea that led Adam Smith and Ricardo to the opinion that it was very beneficial

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to reduce the cost of producing money by resorting to the use of paper printed currency.

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However, things appear in a different light to the students of monetary history.

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If one looks at the catastrophic consequences of the great paper money inflations, one must

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should admit that the expensiveness of gold production is the minor evil.

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It would be futile to retort that these catastrophes were brought about by the improper use which

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the governments made of the powers that credit money and fiat money placed in their hands,

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and that wiser governments would have adopted sounder policies.

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As money can never be neutral and stable in purchasing power, a government's plans concerning

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Having the determination of the quantity of money can never be impartial and fair to all

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members of society.

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Whatever a government does in the pursuit of aims to influence the height of purchasing

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power depends necessarily upon the ruler's personal value judgments.

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It always furthers the interests of some groups of people at the expense of other groups.

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It never serves what is called the common wheel or the public welfare.

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In the field of monetary policies, too, there is no such thing as a scientific ought.

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The choice of the good to be employed as a medium of exchange and as money is never indifferent.

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It determines the course of the cash-induced changes in purchasing power.

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The question is only, who should make the choice?

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The People Buying and Selling on the Market or the Government?

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It was the market which, in a selective process going on for ages, finally assigned to the

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precious metals gold and silver the character of money.

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For 200 years the governments have interfered with the market's choice of the money medium.

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Even the most bigoted etatists do not venture to assert that this interference has proved

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Inflation and Deflation, Inflationism and Deflationism

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The notions of inflation and deflation are not praxeological concepts.

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They were not created by economists, but by the mundane speech of the public and of politicians.

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They implied the popular fallacy that there is such a thing as neutral money, or money

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Money of Stable Purchasing Power, and that sound money should be neutral and stable in

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purchasing power.

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From this point of view, the term inflation was applied to signify cash-induced changes

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resulting in a drop in purchasing power, and the term deflation to signify cash-induced

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changes resulting in a rise in purchasing power.

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However, those applying these terms are not aware of the fact that purchasing power never remains unchanged, and that consequently there is always either inflation or deflation.

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They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power.

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Since the question as to at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorical precision required for praxeological, economic and catallactic concepts.

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Their application is appropriate for history and politics.

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Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs.

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Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result

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and pedantic heaviness of expression can be avoided, but it is necessary never to forget that all that catallactic says with regard to inflation and deflation, that is, big cash-induced changes in purchasing power, is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.

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The terms inflationism and deflationism, inflationist and deflationist, signify the political programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power.

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The Semantic Revolution, which is one of the characteristic features of our day, has also changed the traditional connotation of the terms inflation and deflation.

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What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money,

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but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates.

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This innovation is by no means harmless.

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It plays an important role in fomenting the popular tendencies toward inflationism.

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First of all, there is no longer any term available to signify what inflation used to signify.

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It is impossible to fight a policy which you cannot name.

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Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public

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when they want to question the expediency of issuing huge amounts of additional money.

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They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject.

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As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.

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The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation, the rise in prices, are disguising their endeavors as a fight against inflation.

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While merely fighting symptoms, they pretend to fight the root causes of the evil.

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Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse.

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The best example was provided by the subsidies granted on the part of the governments of the United States, Canada and Great Britain to farmers.

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Price ceilings reduce the supply of the commodities concerned because production involves a loss for the marginal producers.

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To prevent this outcome, the governments granted subsidies to the farmers producing at the highest costs.

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These subsidies were financed out of additional increases in the quantity of money.

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If the consumers had had to pay higher prices for the products concerned,

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No further inflationary effects would have emerged.

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The consumers would have had to use for such surplus expenditure only money which had already

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been issued previously.

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Thus, the confusion of inflation and its consequences, in fact, can directly bring about more inflation.

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It is obvious that this new-fangled connotation of the terms inflation and deflation is utterly

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7. Monetary Calculation and Changes in Purchasing Power

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Monetary calculation reckons with the prices of commodities and services as they were determined

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or would have been determined or presumably will be determined on the market. It is eager

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are here to detect price discrepancies and to draw conclusions from such a detection.

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Cash-induced changes in purchasing power cannot be taken into account in such calculations.

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It is possible to put in the place of calculation based on a definite kind of money, A, a mode

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of calculating based on another kind of money, B. Then, the result of the calculation is

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is made safe against adulteration on the part of changes affected in the purchasing power

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of A. But it can still be adulterated by changes affected in the purchasing power of B. There

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is no means of freeing any mode of economic calculation from the influence of changes

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in the purchasing power of the definite kind of money on which it is based. All results

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Parts of economic calculation, and all conclusions derived from them, are conditioned by the

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vicissitudes of cash-induced changes in purchasing power.

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In accordance with the rise or fall in purchasing power, there emerge between items reflecting

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earlier prices, and those reflecting later prices, specific differences.

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The calculus shows profits or losses, which are merely produced by cash-induced changes

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affected in the purchasing power of money.

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If we compare such profits or losses with the result of a calculation accomplished on

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the basis of a kind of money whose purchasing power had been subject to less vehement changes,

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we can call them imaginary or apparent only.

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But one must not forget that such statements are only possible as a result of the comparison

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and of calculations carried out in different kinds of money.

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As there is no such thing as a money with stable purchasing power, such apparent profits

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and losses are present with every mode of economic calculation, no matter on what kind

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of money it may be based.

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It is impossible to distinguish precisely between genuine profits and losses and merely

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Apparent Profits and Losses.

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It is therefore possible to maintain that economic calculation is not perfect.

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However, nobody can suggest a method which could free economic calculation from these

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defects or design a monetary system which could remove this source of error entirely.

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It is an undeniable fact that the free market has succeeded in developing a currency system

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which well served all the requirements both of indirect exchange and of economic calculation.

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The aims of monetary calculation are such that they cannot be frustrated by the inaccuracies

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which stem from slow and comparatively slight movements in purchasing power.

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Cash-induced changes in purchasing power of the extent to which they occurred in the last

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In the last two centuries, with metallic money, especially with gold money, cannot influence the result of the businessman's economic calculations so considerably as to render such calculations useless.

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Historical experience shows that one could, for all practical purposes of the conduct of business, manage very well with these methods of calculation.

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Theoretical consideration shows that it is impossible to design, still less to realize, a better method.

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In view of these facts, it is vain to call monetary calculation imperfect.

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Man has not the power to change the categories of human action.

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He must adjust his conduct to them.

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Businessmen never deemed it necessary to free economic calculation in terms of gold from its dependence on the fluctuations in purchasing power.

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The proposals to improve the currency system by adopting a tabular standard based on index numbers or by adopting various methods of commodity standards

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were not advanced with regard to business transactions and to monetary calculation.

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Their aim was to provide a less fluctuating standard for long-run loan contracts.

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Businessmen did not even consider it expedient to modify their accounting methods in those regards in which it would have been easy to narrow down certain errors induced by fluctuations in purchasing power.

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It would, for instance, have been possible to discard the practice of writing off durable equipment by means of yearly depreciation quotas, invariably fixed in a percentage of the cost of its acquisition.

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In its place, one could resort to the device of laying aside in renewal funds as much as seems necessary to provide the full costs of the replacement at the time when it is required.

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8. The Anticipation of Expected Changes in Purchasing Power

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Banking Power.

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The deliberations of the individuals which determine their conduct with regard to money

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are based on their knowledge concerning the prices of the immediate past.

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If they lacked this knowledge, they would not be in a position to decide what the appropriate

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height of their cash holdings should be, and how much they should spend for the acquisition

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of various goods.

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A medium of exchange without a past is unthinkable.

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Nothing can enter into the function of a medium of exchange which was not already previously

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an economic good, and to which people assigned exchange value already, before it was demanded

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as such a medium.

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But the purchasing power handed down from the immediate past is modified by today's

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demand for and supply of money.

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Human action is always providing for the future, be it sometimes only the future of the impending

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hour.

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He who buys, buys for future consumption and production.

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As far as he believes that the future will differ from the present and the past, he modifies

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his valuation and appraisement.

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This is no less true with regard to money than it is with regard to all vendible goods.

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In this sense we may say that today's exchange value of money is an anticipation of tomorrow's

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exchange value.

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The basis of all judgments concerning money is its purchasing power, as it was in the

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immediate past.

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But as far as cash-induced changes in purchasing power are expected, a second factor enters

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the scene, the anticipation of these changes.

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He who believes that the prices of the goods in which he takes an interest will rise, buys

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more of them than he would have bought in the absence of this belief.

215
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Accordingly, he restricts his cash holding.

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He who believes that prices will drop restricts his purchases, and thus enlarges his cash

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00:24:52.720 --> 00:24:54.460
holding.

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As long as such speculative anticipations are limited to some commodities, they do not

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00:25:00.200 --> 00:25:05.560
bring about a general tendency toward changes in cash holding.

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But it is different if people believe that they are on the eve of big, cash-induced changes

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00:25:11.460 --> 00:25:13.800
in purchasing power.

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When they expect that the money prices of all goods will rise or fall, they expand or

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restrict their purchases.

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These attitudes strengthen and accelerate the expected tendencies considerably.

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This goes on until the point is reached beyond which no further changes in the purchasing

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power of money are expected.

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Only then does the inclination to buy or to sell stop, and do people begin again to increase

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00:25:44.360 --> 00:25:48.360
or to decrease their cash holdings.

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But if once public opinion is convinced that the increase in the quantity of money will

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will continue and never come to an end, and that consequently the prices of all commodities

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and services will not cease to rise.

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Everybody becomes eager to buy as much as possible and to restrict his cash holding

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to a minimum size.

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For under these circumstances, the regular costs incurred by holding cash are increased

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by the losses caused by the progressive fall in purchasing power.

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The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably

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burdensome.

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This phenomenon was, in the great European inflations of the 20s, called flight into

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real goods, or crack-up boom.

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The mathematical economists are at a loss to comprehend the causal relation between the

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00:26:47.540 --> 00:26:54.860
The Increase in the Quantity of Money and what they call Velocity of Circulation

242
00:26:54.860 --> 00:27:00.360
The characteristic mark of the phenomenon is that the increase in the quantity of money

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00:27:00.360 --> 00:27:04.580
causes a fall in the demand for money.

244
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The tendency toward a fall in purchasing power as generated by the increased supply of money

245
00:27:10.860 --> 00:27:17.540
is intensified by the general propensity to restrict cash holdings which it brings about.

246
00:27:17.540 --> 00:27:23.340
Eventually, a point is reached where the prices at which people would be prepared to part

247
00:27:23.340 --> 00:27:29.820
with real goods discount to such an extent the expected progress in the fall of purchasing

248
00:27:29.820 --> 00:27:36.020
power that nobody has a sufficient amount of cash at hand to pay them.

249
00:27:36.020 --> 00:27:43.560
The monetary system breaks down. All transactions in the money concerned cease. A panic makes

250
00:27:43.560 --> 00:27:50.340
its purchasing power vanish altogether. People return either to barter or to the use of another

251
00:27:50.340 --> 00:27:52.860
kind of money.

252
00:27:52.860 --> 00:27:58.760
The course of a progressing inflation is this. At the beginning, the inflow of additional

253
00:27:58.760 --> 00:28:03.960
Financial money makes the prices of some commodities and services rise.

254
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Other prices rise later.

255
00:28:06.540 --> 00:28:12.600
The price rise affects the various commodities and services, as has been shown, at different

256
00:28:12.600 --> 00:28:16.160
dates and to a different extent.

257
00:28:16.160 --> 00:28:21.600
This first stage of the inflationary process may last for many years.

258
00:28:21.600 --> 00:28:27.080
While it lasts, the prices of many goods and services are not yet adjusted to the altered

259
00:28:27.080 --> 00:28:29.080
Money Relation.

260
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There are still people in the country who have not yet become aware of the fact that

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00:28:33.480 --> 00:28:38.800
they are confronted with a price revolution which will finally result in a considerable

262
00:28:38.800 --> 00:28:45.160
rise of all prices, although the extent of this rise will not be the same in the various

263
00:28:45.160 --> 00:28:48.080
commodities and services.

264
00:28:48.080 --> 00:28:53.000
These people still believe that prices one day will drop.

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Waiting for this day they restrict their purchases and concomitantly increase their cash holdings.

266
00:29:00.720 --> 00:29:07.480
As long as such ideas are still held by public opinion, it is not yet too late for the government

267
00:29:07.480 --> 00:29:11.240
to abandon its inflationary policy.

268
00:29:11.240 --> 00:29:14.620
But then, finally, the masses wake up.

269
00:29:14.620 --> 00:29:19.640
They become suddenly aware of the fact that inflation is a deliberate policy and will

270
00:29:19.640 --> 00:29:21.680
go on endlessly.

271
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A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against

272
00:29:29.440 --> 00:29:34.960
real goods, no matter whether he needs them or not, no matter how much money he has to

273
00:29:34.960 --> 00:29:41.600
pay for them. Within a very short time, within a few weeks or even days, the things which

274
00:29:41.600 --> 00:29:48.980
were used as money are no longer used as media of exchange. They become scrap paper. Nobody

275
00:29:48.980 --> 00:29:52.980
He wants to give away anything against them.

276
00:29:52.980 --> 00:29:59.380
It was this that happened with the Continental Currency in America in 1781, with the French

277
00:29:59.380 --> 00:30:07.060
Monda Territorio in 1796, and with the German Mark in 1923.

278
00:30:07.060 --> 00:30:11.540
It will happen again whenever the same conditions appear.

279
00:30:11.540 --> 00:30:18.600
If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity

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00:30:18.600 --> 00:30:29.040
9.

281
00:30:29.040 --> 00:30:32.800
The Specific Value of Money

282
00:30:32.800 --> 00:30:38.780
As far as a good used as money is valued and appraised on account of the services it renders

283
00:30:38.780 --> 00:30:45.880
for non-monetary purposes, no problems are raised which would require special treatment.

284
00:30:45.880 --> 00:30:51.820
The task of the theory of money consists merely in dealing with that component in the valuation

285
00:30:51.820 --> 00:30:58.000
of money which is conditioned by its function as a medium of exchange.

286
00:30:58.000 --> 00:31:03.920
In the course of history, various commodities have been employed as media of exchange.

287
00:31:03.920 --> 00:31:11.080
A long evolution eliminated the greater part of these commodities from the monetary function.

288
00:31:11.080 --> 00:31:16.100
Only two, the precious metals, gold and silver, remained.

289
00:31:16.100 --> 00:31:21.460
In the second part of the nineteenth century, more and more governments deliberately turned

290
00:31:21.460 --> 00:31:25.200
toward the demonetization of silver.

291
00:31:25.200 --> 00:31:32.400
In all these cases, what is employed as money is a commodity which is used also for non-monetary

292
00:31:32.400 --> 00:31:34.320
purposes.

293
00:31:34.320 --> 00:31:39.260
Under the gold standard, gold is money, and money is gold.

294
00:31:39.260 --> 00:31:46.300
It is immaterial whether or not the laws assign legal tender quality only to gold coins minted

295
00:31:46.300 --> 00:31:48.140
by the government.

296
00:31:48.140 --> 00:31:54.740
What counts is that these coins really contain a fixed weight of gold, and every quantity

297
00:31:54.740 --> 00:32:00.020
of bullion can freely be transformed into coins.

298
00:32:00.020 --> 00:32:05.460
Under the gold standard, the dollar and the pound sterling were merely names for a definite

299
00:32:05.460 --> 00:32:12.140
weight of gold within very narrow margins precisely determined by the laws.

300
00:32:12.140 --> 00:32:16.740
We may call such a sort of money commodity money.

301
00:32:16.740 --> 00:32:20.720
A second sort of money is credit money.

302
00:32:20.720 --> 00:32:24.980
Credit money evolved out of the use of money substitutes.

303
00:32:24.980 --> 00:32:31.880
It was customary to use claims, payable on demand and absolutely secure, as substitutes

304
00:32:31.880 --> 00:32:36.000
for the Sum of Money to which they gave a claim.

305
00:32:36.000 --> 00:32:41.280
We shall deal with the features and problems of money substitutes in the next section.

306
00:32:41.280 --> 00:32:47.680
The market did not stop using such claims when one day their prompt redemption was suspended

307
00:32:47.680 --> 00:32:54.040
and thereby doubts about their safety and the solvency of the obligi were raised.

308
00:32:54.040 --> 00:33:00.840
As long as these claims had been daily maturing claims against a debtor of undisputed solvency

309
00:33:00.840 --> 00:33:06.480
and could be collected without notice and free of expense, their exchange value was

310
00:33:06.480 --> 00:33:08.960
equal to their face value.

311
00:33:08.960 --> 00:33:14.680
It was this perfect equivalence which assigned to them the character of money substitutes.

312
00:33:14.680 --> 00:33:22.400
Now, as redemption was suspended, the maturity date postponed to an undetermined day, and

313
00:33:22.400 --> 00:33:27.840
consequently doubts about the solvency of the debtor, or at least about his willingness

314
00:33:57.840 --> 00:34:04.160
Money could remain in use as a medium of exchange even if it were to lose its character as a

315
00:34:04.160 --> 00:34:10.760
claim against a bank or a treasury and thus would become fiat money.

316
00:34:10.760 --> 00:34:16.640
Fiat money is a money consisting of mere tokens which can neither be employed for any industrial

317
00:34:16.640 --> 00:34:21.520
purposes nor convey a claim against anybody.

318
00:34:21.520 --> 00:34:27.560
It is not a task of catallactics but of economic history to investigate whether there appeared

319
00:34:27.560 --> 00:34:34.200
in the past, specimens of fiat money, or whether all the sorts of money which were not commodity

320
00:34:34.200 --> 00:34:36.740
money were credit money.

321
00:34:36.740 --> 00:34:42.460
The only thing that catallactics has to establish is that the possibility of the existence of

322
00:34:42.460 --> 00:34:46.020
fiat money must be admitted.

323
00:34:46.020 --> 00:34:51.980
The important thing to be remembered is that with every sort of money, demonetization,

324
00:34:51.980 --> 00:34:58.300
That is, the abandonment of its use as a medium of exchange must result in a serious fall

325
00:34:58.300 --> 00:35:00.940
of its exchange value.

326
00:35:00.940 --> 00:35:07.160
What this practically means has become manifest when, in the last 80 years, the use of silver

327
00:35:07.160 --> 00:35:12.060
as commodity money has been progressively restricted.

328
00:35:12.060 --> 00:35:18.700
There are specimens of credit money and fiat money which are embodied in metallic coins.

329
00:35:18.700 --> 00:35:23.980
Such money is printed, as it were, on silver, nickel or copper.

330
00:35:23.980 --> 00:35:30.420
If such a piece of fiat money is demonetized, it still retains exchange value as a piece

331
00:35:30.420 --> 00:35:31.820
of metal.

332
00:35:31.820 --> 00:35:36.180
But this is only a very small indemnification of the owner.

333
00:35:36.180 --> 00:35:39.340
It has no practical importance.

334
00:35:39.340 --> 00:35:43.540
The keeping of cash holding requires sacrifices.

335
00:35:43.540 --> 00:35:49.140
To the extent that a man keeps money in his pockets or in his balance with a bank, he

336
00:35:49.140 --> 00:35:56.820
forsakes the instantaneous acquisition of goods he could consume or employ for production.

337
00:35:56.820 --> 00:36:03.140
In the market economy, these sacrifices can be precisely determined by calculation.

338
00:36:03.140 --> 00:36:08.020
They are equal to the amount of originary interest he would have earned by investing

339
00:36:08.020 --> 00:36:09.660
the sum.

340
00:36:09.660 --> 00:36:15.220
The fact that a man takes this falling off into account is proof that he prefers the

341
00:36:15.220 --> 00:36:20.720
advantages of cash holding to the loss in interest yield.

342
00:36:20.720 --> 00:36:26.560
It is possible to specify the advantages which people expect from keeping a definite amount

343
00:36:26.560 --> 00:36:28.220
of cash.

344
00:36:28.220 --> 00:36:34.420
But it is a delusion to assume that an analysis of these motives could provide us with a theory

345
00:36:34.420 --> 00:36:39.660
Theory of the Determination of Purchasing Power, which could do without the notions

346
00:36:39.660 --> 00:36:45.100
of cash holding and demand for and supply of money.

347
00:36:45.100 --> 00:36:51.620
The advantages and disadvantages derived from cash holding are not objective factors which

348
00:36:51.620 --> 00:36:56.100
could directly influence the size of cash holdings.

349
00:36:56.100 --> 00:37:01.780
They are put on the scales by each individual and weighed against one another.

350
00:37:01.780 --> 00:37:09.020
The result is a subjective judgment of value, colored by the individual's personality.

351
00:37:09.020 --> 00:37:14.700
Different people and the same people at different times value the same objective facts in a

352
00:37:14.700 --> 00:37:16.620
different way.

353
00:37:16.620 --> 00:37:21.980
Just as knowledge of a man's wealth and his physical condition does not tell us how much

354
00:37:21.980 --> 00:37:28.380
he would be prepared to spend for food of a certain nutritive power, so knowledge about

355
00:37:28.380 --> 00:37:34.740
Data concerning a man's material situation does not enable us to make definite assertions

356
00:37:34.740 --> 00:37:39.020
with regard to the size of his cash holding.

357
00:37:39.020 --> 00:37:40.820
10.

358
00:37:40.820 --> 00:37:44.680
The Import of the Money Relation.

359
00:37:44.680 --> 00:37:51.380
The money relation, that is, the relation between demand for and supply of money, uniquely

360
00:37:51.380 --> 00:37:57.460
determines the price structure as far as the reciprocal exchange ratio between money and

361
00:37:57.460 --> 00:38:09.340
If the money relation remains unchanged, neither an inflationary expansionist nor a deflationary

362
00:38:09.340 --> 00:38:16.060
contractionist pressure on trade, business, production, consumption and employment can

363
00:38:16.060 --> 00:38:17.560
emerge.

364
00:38:17.560 --> 00:38:22.900
The assertions to the contrary reflect the grievances of people reluctant to adjust their

365
00:38:22.900 --> 00:38:28.900
and their activities to the demands of their fellow men as manifested on the market.

366
00:38:28.900 --> 00:38:42.900
However, it is not an account of an alleged scarcity of money that prices of agricultural products are too low to secure to the sub-marginal farmers proceeds of the amount they would like to earn.

367
00:38:42.900 --> 00:38:48.900
The cause of these farmers' distress is that other farmers are producing at lower costs.

368
00:38:48.900 --> 00:39:07.900
What is wrong with British manufacturing is not that the level of prices is too low, but the fact that they did not succeed in raising the productivity of the capital invested and the men employed to a height that would provide all the goods the British want to consume.

369
00:39:07.900 --> 00:39:17.900
An increase in the quantity of goods produced, other things being unchanged, must bring about an improvement in people's conditions.

370
00:39:17.900 --> 00:39:24.400
Its consequence is a fall in the money prices of the goods the production of which has been increased.

371
00:39:24.900 --> 00:39:32.900
But such a fall in money prices does not in the least impair the benefits derived from the additional wealth produced.

372
00:39:33.400 --> 00:39:40.900
One may consider as unfair the increase in the share of the additional wealth which goes to the creditors,

373
00:39:40.900 --> 00:39:52.900
Although such criticisms are questionable as far as the rise in purchasing power has been correctly anticipated and adequately taken into account by a negative price premium.

374
00:39:52.900 --> 00:40:08.900
But one must not say that a fall in prices caused by an increase in the production of the goods concerned is the proof of some disequilibrium which cannot be eliminated otherwise than by increasing the quantity of money.

375
00:40:08.900 --> 00:40:17.460
Of course, as a rule, every increase in production of some or of all commodities requires a new

376
00:40:17.460 --> 00:40:23.040
allocation of factors of production to the various branches of business.

377
00:40:23.040 --> 00:40:28.960
If the quantity of money remains unchanged, the necessity of such a reallocation becomes

378
00:40:28.960 --> 00:40:31.900
visible in the price structure.

379
00:40:31.900 --> 00:40:38.860
Some lines of production become more profitable, while in others profits drop or losses appear.

380
00:40:38.860 --> 00:40:46.380
Thus, the operation of the market tends to eliminate these much discussed disequilibria.

381
00:40:46.380 --> 00:40:52.320
It is possible by means of an increase in the quantity of money to delay or to interrupt

382
00:40:52.320 --> 00:40:54.800
this process of adjustment.

383
00:40:54.800 --> 00:41:01.620
It is impossible either to make it superfluous or less painful for those concerned.

384
00:41:01.620 --> 00:41:07.460
If the government made cash-induced changes in the purchasing power of money resulted

385
00:41:07.460 --> 00:41:13.260
only in shifts of wealth from some people to other people, it would not be permissible

386
00:41:13.260 --> 00:41:19.180
to condemn them from the point of view of catalactics' scientific neutrality.

387
00:41:19.180 --> 00:41:24.660
It is obviously fraudulent to justify them under the pretext of the common-wheel or public

388
00:41:24.660 --> 00:41:30.820
welfare, but one could still consider them as political measures suitable to promote

389
00:41:30.820 --> 00:41:36.820
the interests of some groups of people at the expense of others without further detriment.

390
00:41:36.820 --> 00:41:40.820
However, there are still other things involved.

391
00:41:40.820 --> 00:41:48.820
It is not necessary to point out the consequences to which a continued deflationary policy must lead.

392
00:41:48.820 --> 00:41:51.820
Nobody advocates such a policy.

393
00:41:51.820 --> 00:41:58.820
The favor of the masses and of the writers and politicians eager for applause goes to inflation.

394
00:41:58.820 --> 00:42:03.820
With regard to these endeavors, we must emphasize three points.

395
00:42:03.820 --> 00:42:13.820
First, inflationary or expansionist policy must result in overconsumption on the one hand and in malinvestment on the other.

396
00:42:13.820 --> 00:42:19.820
It thus squanders capital and impairs the future state of want satisfaction.

397
00:42:19.820 --> 00:42:28.820
Second, the inflationary process does not remove the necessity of adjusting production and reallocating resources.

398
00:42:28.820 --> 00:42:45.820
3. Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.

399
00:42:45.820 --> 00:42:57.820
A retailer or innkeeper can easily fall prey to the illusion that all that is needed to make him and his colleagues more prosperous is more spending on the part of the public.

400
00:42:57.820 --> 00:43:03.860
In his eyes, the main thing is to impel people to spend more.

401
00:43:03.860 --> 00:43:10.420
But it is amazing that this belief could be presented to the world as a new social philosophy.

402
00:43:10.420 --> 00:43:16.220
Lord Keynes and his disciples make the lack of the propensity to consume responsible for

403
00:43:16.220 --> 00:43:21.100
what they deem unsatisfactory in economic conditions.

404
00:43:21.100 --> 00:43:27.440
What is needed in their eyes to make men more prosperous is not an increase in production,

405
00:43:27.440 --> 00:43:34.440
and Increase in Spending. In order to make it possible for people to spend more, an expansionist

406
00:43:34.440 --> 00:43:42.660
policy is recommended. This doctrine is as old as it is bad. Its analysis and refutation

407
00:43:42.660 --> 00:43:47.360
will be undertaken in the chapter dealing with the trade cycle.

408
00:43:47.360 --> 00:43:52.400
11. The Money Substitutes

409
00:43:52.400 --> 00:43:58.080
is to a definite amount of money, payable and redeemable on demand, against a debtor

410
00:43:58.080 --> 00:44:04.360
about whose solvency and willingness to pay there does not prevail the slightest doubt,

411
00:44:04.360 --> 00:44:10.140
render to the individual all the services money can render, provided that all parties

412
00:44:10.140 --> 00:44:15.580
with whom he could possibly transact business are perfectly familiar with these essential

413
00:44:15.580 --> 00:44:19.040
qualities of the claims concerned.

414
00:44:19.040 --> 00:44:25.800
Fully maturity and undoubted solvency and willingness to pay on the part of the debtor.

415
00:44:25.800 --> 00:44:32.400
We may call such claims money substitutes as they can fully replace money in an individual's

416
00:44:32.400 --> 00:44:35.280
or a firm's cash holding.

417
00:44:35.280 --> 00:44:41.240
The technical and legal features of the money substitutes do not concern catallactics.

418
00:44:41.240 --> 00:44:46.760
A money substitute can be embodied either in a bank note or in a demand deposit with

419
00:44:46.760 --> 00:44:53.500
The Bank, subject to check, checkbook money or deposit currency, provided the bank is

420
00:44:53.500 --> 00:45:01.480
prepared to exchange the note or the deposit daily free of charge against money proper.

421
00:45:01.480 --> 00:45:07.600
Token coins are also money substitutes, provided the owner is in a position to exchange them

422
00:45:07.600 --> 00:45:13.000
at need against money free of expense and without delay.

423
00:45:13.000 --> 00:45:19.040
To achieve this, it is not required that the government be bound by law to redeem them.

424
00:45:19.040 --> 00:45:24.840
What counts is the fact that these tokens can be really converted free of expense and

425
00:45:24.840 --> 00:45:27.040
without delay.

426
00:45:27.040 --> 00:45:32.720
If the total amount of token coins issued is kept within reasonable limits, no special

427
00:45:32.720 --> 00:45:37.560
provisions on the part of the government are necessary to keep their exchange value at

428
00:45:37.560 --> 00:45:40.340
par with their face value.

429
00:45:40.340 --> 00:45:45.820
The demand of the public for small change gives everybody the opportunity to exchange

430
00:45:45.820 --> 00:45:49.220
them easily against pieces of money.

431
00:45:49.220 --> 00:45:55.600
The main thing is that every owner of a money substitute is perfectly certain that it can,

432
00:45:55.600 --> 00:46:01.500
at every instant and free of expense, be exchanged against money.

433
00:46:01.500 --> 00:46:07.420
If the debtor, the government or a bank, keeps against the whole amount of money substitutes

434
00:46:07.420 --> 00:46:14.000
A Reserve of Money Proper We call the money substitute a money certificate.

435
00:46:14.000 --> 00:46:20.500
The individual money certificate is, not necessarily in a legal sense, but always in the catallactic

436
00:46:20.500 --> 00:46:27.160
sense, a representative of a corresponding amount of money kept in the reserve.

437
00:46:27.160 --> 00:46:32.280
The issuing of money certificates does not increase the quantity of things suitable to

438
00:46:32.280 --> 00:46:37.220
satisfy the demand for money for cash holding.

439
00:46:37.220 --> 00:46:42.420
Those in the quantity of money certificates therefore do not alter the supply of money

440
00:46:42.420 --> 00:46:44.620
and the money relation.

441
00:46:44.620 --> 00:46:50.900
They do not play any role in the determination of the purchasing power of money.

442
00:46:50.900 --> 00:46:56.420
If the money reserve kept by the debtor against the money substitutes issued is less than

443
00:46:56.420 --> 00:47:02.220
the total amount of such substitutes, we call that amount of substitutes which exceeds the

444
00:47:02.220 --> 00:47:05.900
reserve fiduciary media.

445
00:47:05.900 --> 00:47:12.280
As a rule, it is not possible to ascertain whether a concrete specimen of money substitutes

446
00:47:12.280 --> 00:47:16.420
is a money certificate or a fiduciary medium.

447
00:47:16.420 --> 00:47:22.540
A part of the total amount of money substitutes issued is usually covered by a money reserve

448
00:47:22.540 --> 00:47:23.540
held.

449
00:47:23.540 --> 00:47:29.660
Thus, a part of the total amount of money substitutes issued is money certificates,

450
00:47:29.660 --> 00:47:32.540
the rest fiduciary media.

451
00:47:32.540 --> 00:47:38.660
But this fact can only be recognized by those familiar with the bank's balance sheets.

452
00:47:38.660 --> 00:47:46.700
The individual banknote, deposit or token coin does not indicate its catalactic character.

453
00:47:46.700 --> 00:47:52.040
The issue of money certificates does not increase the funds which the bank can employ in the

454
00:47:52.040 --> 00:47:54.740
conduct of its lending business.

455
00:47:54.740 --> 00:48:01.860
A bank which does not issue fiduciary media can only grant commodity credit, that is,

456
00:48:01.860 --> 00:48:07.180
Credit can only lend its own funds and the amount of money which its customers have entrusted

457
00:48:07.180 --> 00:48:08.700
to it.

458
00:48:08.700 --> 00:48:14.580
The issue of fiduciary media enlarges the bank's funds available for lending beyond

459
00:48:14.580 --> 00:48:16.240
these limits.

460
00:48:16.240 --> 00:48:23.240
It can now not only grant commodity credit but also circulation credit, that is, credit

461
00:48:23.240 --> 00:48:27.540
granted out of the issue of fiduciary media.

462
00:48:27.540 --> 00:48:33.140
While the quantity of money certificates is indifferent, the quantity of fiduciary media

463
00:48:33.140 --> 00:48:34.700
is not.

464
00:48:34.700 --> 00:48:40.900
The fiduciary media affect the market phenomena in the same way as money does.

465
00:48:40.900 --> 00:48:47.420
Changes in their quantity influence the determination of money's purchasing power, and of prices,

466
00:48:47.420 --> 00:48:51.740
and temporarily also of the rate of interest.

467
00:48:51.740 --> 00:48:55.460
Earlier economists applied a different terminology.

468
00:48:55.460 --> 00:49:00.760
Many were prepared to call the money substitutes simply money, as they are fit to render the

469
00:49:00.760 --> 00:49:02.780
services money renders.

470
00:49:02.780 --> 00:49:06.800
However, this terminology is not expedient.

471
00:49:06.800 --> 00:49:12.660
The first purpose of a scientific terminology is to facilitate the analysis of the problems

472
00:49:12.660 --> 00:49:14.140
involved.

473
00:49:14.140 --> 00:49:19.860
The task of the catalactic theory of money, as differentiated from the legal theory and

474
00:49:19.860 --> 00:49:25.600
from the technical disciplines of bank management and accountancy is the study of the problems

475
00:49:25.600 --> 00:49:32.360
of the determination of prices and interest rates. This task requires a sharp distinction

476
00:49:32.360 --> 00:49:41.360
between money certificates and fiduciary media. The term credit expansion has often been misinterpreted.

477
00:49:41.360 --> 00:49:48.000
It is important to realize that commodity credit cannot be expanded. The only vehicle

478
00:49:48.000 --> 00:49:51.840
One example of credit expansion is circulation credit.

479
00:49:51.840 --> 00:49:57.600
But the granting of circulation credit does not always mean credit expansion.

480
00:49:57.600 --> 00:50:03.500
If the amount of fiduciary media previously issued has consummated all its effects upon

481
00:50:03.500 --> 00:50:10.280
the market, if prices, wage rates and interest rates have been adjusted to the total supply

482
00:50:10.280 --> 00:50:17.160
of money proper plus fiduciary media, supply of money in the broader sense, granting of

483
00:50:17.160 --> 00:50:23.640
Of circulation credit without a further increase in the quantity of fiduciary media is no longer

484
00:50:23.640 --> 00:50:26.000
credit expansion.

485
00:50:26.000 --> 00:50:31.720
Credit expansion is present only if credit is granted by the issue of an additional amount

486
00:50:31.720 --> 00:50:39.240
of fiduciary media, not if banks lend a new fiduciary media paid back to them by the old

487
00:50:39.240 --> 00:50:41.240
debtors.

488
00:50:41.240 --> 00:50:42.760
12.

489
00:50:42.760 --> 00:50:48.060
The Limitation on the Issuance of Fiduciary Media

490
00:50:48.060 --> 00:50:53.120
People deal with money substitutes as if they were money because they are fully confident

491
00:50:53.120 --> 00:50:59.100
that it will be possible to exchange them at any time without delay and without cost

492
00:50:59.100 --> 00:51:01.240
against money.

493
00:51:01.240 --> 00:51:06.220
We may call those who share in this confidence and are therefore ready to deal with money

494
00:51:06.220 --> 00:51:13.740
Money Substitutes as if they were money, the clients of the issuing banker, bank or authority.

495
00:51:13.740 --> 00:51:18.580
It does not matter whether or not this issuing establishment is operated according to the

496
00:51:18.580 --> 00:51:23.400
patterns of conduct customary in the banking business.

497
00:51:23.400 --> 00:51:29.360
Token coins issued by a country's treasury are money substitutes too, although the treasury

498
00:51:29.360 --> 00:51:35.140
as a rule does not enter the amount issued into its accounts as a liability and does

499
00:51:35.140 --> 00:51:39.340
does not consider this amount a part of the national debt.

500
00:51:39.340 --> 00:51:44.900
It is no less immaterial whether or not the owner of a money substitute has an actionable

501
00:51:44.900 --> 00:51:47.300
claim to redemption.

502
00:51:47.300 --> 00:51:53.220
What counts is whether the money substitute can really be exchanged against money without

503
00:51:53.220 --> 00:51:56.500
delay and cost.

504
00:51:56.500 --> 00:52:01.640
It is furthermore immaterial whether or not the laws assigned to the money substitute's

505
00:52:01.640 --> 00:52:04.340
legal tender quality.

506
00:52:04.340 --> 00:52:10.500
If these things are really dealt with by people as money substitutes, and are therefore money

507
00:52:10.500 --> 00:52:16.360
substitutes and equal in purchasing power to the respective amount of money, the only

508
00:52:16.360 --> 00:52:22.720
effect of the legal tender quality is to prevent malicious people from resorting to chicanery

509
00:52:22.720 --> 00:52:26.580
for the mere sake of annoying their fellow men.

510
00:52:26.580 --> 00:52:32.500
If, however, the things concerned are not money substitutes, and are traded at a discount

511
00:52:32.500 --> 00:52:39.500
below their face value, the assignment of legal tender quality is tantamount to an authoritarian

512
00:52:39.500 --> 00:52:46.560
price ceiling, the fixing of a maximum price for gold and for an exchange, and of a minimum

513
00:52:46.560 --> 00:52:52.720
price for the things which are no longer money substitutes, but either credit money or fiat

514
00:52:52.720 --> 00:52:54.460
money.

515
00:52:54.460 --> 00:52:59.620
Then the effects appear, which Gresham's law describes.

516
00:52:59.620 --> 00:53:05.220
Cheating money certificates is an expensive venture. The banknotes must be printed, the

517
00:53:05.220 --> 00:53:11.620
token coins minted, a complicated accounting system for the deposits must be organized,

518
00:53:11.620 --> 00:53:17.660
the reserves must be kept in safety. Then there is the risk of being cheated by counterfeit

519
00:53:17.660 --> 00:53:25.180
banknotes and checks. Against all these expenses stands only the slight chance that some of

520
00:53:25.180 --> 00:53:31.080
of the banknotes issued may be destroyed, and the still slighter chance that some depositors

521
00:53:31.080 --> 00:53:34.340
may forget their deposits.

522
00:53:34.340 --> 00:53:41.220
Issuing money certificates is a ruinous business, if not connected with issuing fiduciary media.

523
00:53:41.220 --> 00:53:46.600
In the early history of banking, there were banks whose only operation consisted in issuing

524
00:53:46.600 --> 00:53:48.600
money certificates.

525
00:53:48.600 --> 00:53:53.940
But these banks were indemnified by their clients for the costs incurred.

526
00:53:53.940 --> 00:53:59.380
At any rate, catallactics is not interested in the purely technical problems of banks

527
00:53:59.380 --> 00:54:02.460
not issuing fiduciary media.

528
00:54:02.460 --> 00:54:07.820
The only interest that catallactics takes in money certificates is the connection between

529
00:54:07.820 --> 00:54:12.960
issuing them and the issuing of fiduciary media.

530
00:54:12.960 --> 00:54:18.560
While the quantity of money certificates is catallactically unimportant, an increase or

531
00:54:18.560 --> 00:54:24.700
or decrease in the quantity of fiduciary media affects the determination of money's purchasing

532
00:54:24.700 --> 00:54:29.960
power in the same way as do changes in the quantity of money.

533
00:54:29.960 --> 00:54:35.800
Hence the question of whether there are or are not limits to the increase in the quantity

534
00:54:35.800 --> 00:54:40.860
of fiduciary media has fundamental importance.

535
00:54:40.860 --> 00:54:46.320
If the clientele of the bank includes all members of the market economy, the limit to

536
00:54:46.320 --> 00:54:51.900
to the issue of fiduciary media is the same as that drawn to the increase in the quantity

537
00:54:51.900 --> 00:54:52.900
of money.

538
00:54:52.900 --> 00:54:59.980
A bank which is, in an isolated country or in the whole world, the only institution issuing

539
00:54:59.980 --> 00:55:07.400
fiduciary media, and the clientele of which comprises all individuals and firms, is bound

540
00:55:07.400 --> 00:55:11.920
to comply in its conduct of affairs with two rules.

541
00:55:11.920 --> 00:55:20.280
First, it must avoid any action which could make the clients, that is, the public, suspicious.

542
00:55:20.280 --> 00:55:25.200
As soon as the clients begin to lose confidence, they will ask for the redemption of the bank

543
00:55:25.200 --> 00:55:28.520
notes and withdraw their deposits.

544
00:55:28.520 --> 00:55:34.400
How far the bank can go on increasing its issues of fiduciary media without arousing

545
00:55:34.400 --> 00:55:38.680
distrust depends on psychological conditions.

546
00:55:38.680 --> 00:55:53.680
Second, it must not increase the amount of fiduciary media at such a rate and with such speed that the clients get the conviction that the rise in prices will continue endlessly at an accelerated pace.

547
00:55:53.680 --> 00:56:03.680
For if the public believes that this is the case, they will reduce their cash holdings, flee into real values and bring about the crack-up boom.

548
00:56:03.680 --> 00:56:13.680
It is impossible to imagine the approach of this catastrophe without assuming that its first manifestation consists in the evanescence of confidence.

549
00:56:13.680 --> 00:56:26.680
The public will certainly prefer exchanging the fiduciary media against money to fleeing into real values, that is, to the indiscriminate buying of various commodities.

550
00:56:26.680 --> 00:56:34.340
Then, the bank must go bankrupt. If the government interferes by freeing the bank from the obligation

551
00:56:34.340 --> 00:56:39.780
of redeeming its banknotes and of paying back the deposits in compliance with the terms

552
00:56:39.780 --> 00:56:47.300
of the contract, the fiduciary media become either credit money or fiat money. The suspension

553
00:56:47.300 --> 00:56:54.120
of specie payments entirely changes the state of affairs. There is no longer any question

554
00:56:54.120 --> 00:57:00.420
In addition of fiduciary media, of money certificates and of money substitutes, the government enters

555
00:57:00.420 --> 00:57:05.060
the scene with its government-made legal tender laws.

556
00:57:05.060 --> 00:57:08.000
The bank loses its independent existence.

557
00:57:08.000 --> 00:57:14.420
It becomes a tool of government policies, a subordinate office of the Treasury.

558
00:57:14.420 --> 00:57:19.640
The catallactically most important problems of the issuance of fiduciary media on the

559
00:57:19.640 --> 00:57:26.120
are part of a single bank, or of banks acting in concert, the clientele of which comprehends

560
00:57:26.120 --> 00:57:33.360
all individuals, are not those of the limitations drawn to the amount of their issuance.

561
00:57:33.360 --> 00:57:39.160
We will deal with them in Chapter 20, devoted to the relations between the quantity of money

562
00:57:39.160 --> 00:57:41.760
and the rate of interest.

563
00:57:41.760 --> 00:57:46.760
At this point of our investigations, we have to scrutinize the problem of the coexistence

564
00:57:46.760 --> 00:57:51.160
Coexistence of a Multiplicity of Independent Banks

565
00:57:51.160 --> 00:57:57.140
Independence means that every bank in issuing fiduciary media follows its own course and

566
00:57:57.140 --> 00:58:01.700
does not act in concert with other banks.

567
00:58:01.700 --> 00:58:07.360
Coexistence means that every bank has a clientele which does not include all members of the

568
00:58:07.360 --> 00:58:09.400
market system.

569
00:58:09.400 --> 00:58:14.680
For the sake of simplicity, we will assume that no individual or firm is a client of

570
00:58:14.680 --> 00:58:17.040
of More Than One Bank.

571
00:58:17.040 --> 00:58:22.440
It would not affect the result of our demonstration if we were to assume that there are also people

572
00:58:22.440 --> 00:58:29.240
who are clients of more than one bank, and people who are not clients of any bank.

573
00:58:29.240 --> 00:58:34.640
The question to be raised is not whether or not there are limits to the issuance of fiduciary

574
00:58:34.640 --> 00:58:41.960
media on the part of such independently coexisting banks, as there are even limits to the issuance

575
00:58:41.960 --> 00:58:47.560
The limits of fiduciary media on the part of a unique bank, the clientele of which comprises

576
00:58:47.560 --> 00:58:53.600
all people, it is obvious that there are such limits for a multiplicity of independently

577
00:58:53.600 --> 00:58:56.540
coexisting banks too.

578
00:58:56.540 --> 00:59:03.140
What we want to show is that for such a multiplicity of independently coexisting banks, the limits

579
00:59:03.140 --> 00:59:09.460
are narrower than those drawn for a single bank with an unlimited clientele.

580
00:59:09.460 --> 00:59:14.660
We assume that within a market system several independent banks have been established in

581
00:59:14.660 --> 00:59:16.340
the past.

582
00:59:16.340 --> 00:59:22.860
While previously only money was in use, these banks have introduced the use of money substitutes,

583
00:59:22.860 --> 00:59:26.300
a part of which are fiduciary media.

584
00:59:26.300 --> 00:59:31.820
Each bank has a clientele and has issued a certain quantity of fiduciary media which

585
00:59:31.820 --> 00:59:37.240
are kept as money substitutes in the cash holdings of various clients.

586
00:59:37.240 --> 00:59:42.880
The total quantity of the fiduciary media, as issued by the banks and absorbed by the

587
00:59:42.880 --> 00:59:48.920
cash holdings of their clients, has altered the structure of prices and the monetary unit's

588
00:59:48.920 --> 00:59:50.960
purchasing power.

589
00:59:50.960 --> 00:59:56.700
But these effects have already been consummated, and at present, the market is no longer stirred

590
00:59:56.700 --> 01:00:02.040
by any movements generated from this past credit expansion.

591
01:00:02.040 --> 01:00:08.480
But now, we assume further, one bank alone embarks upon an additional issue of fiduciary

592
01:00:08.480 --> 01:00:12.760
media while the other banks do not follow suit.

593
01:00:12.760 --> 01:00:18.320
The clients of the expanding bank, whether its old clients or new ones acquired on account

594
01:00:18.320 --> 01:00:21.980
of the expansion, receive additional credits.

595
01:00:21.980 --> 01:00:24.520
They expand their business activities.

596
01:00:24.520 --> 01:00:29.120
They appear on the market with an additional demand for goods and services.

597
01:00:29.120 --> 01:00:31.520
They bid up prices.

598
01:00:31.520 --> 01:00:37.000
Those people who are not clients of the expanding bank are not in a position to afford these

599
01:00:37.000 --> 01:00:38.700
higher prices.

600
01:00:38.700 --> 01:00:42.240
They are forced to restrict their purchases.

601
01:00:42.240 --> 01:00:47.760
Thus there prevails on the market a shifting of goods from the non-clients to the clients

602
01:00:47.760 --> 01:00:50.240
of the expanding bank.

603
01:00:50.240 --> 01:00:54.560
The clients buy more from the non-clients than they sell to them.

604
01:00:54.560 --> 01:00:59.340
They have more to pay to the non-clients than they receive from them.

605
01:00:59.340 --> 01:01:06.540
Fiat money substitutes issued by the expanding bank are not suitable for payments to non-clients,

606
01:01:06.540 --> 01:01:11.780
as these people do not assign to them the character of money substitutes.

607
01:01:11.780 --> 01:01:17.540
In order to settle the payments due to non-clients, the clients must first exchange the money

608
01:01:17.540 --> 01:01:24.260
substitutes issued by their own, namely the expanding bank, against money.

609
01:01:24.260 --> 01:01:30.060
The expanding bank must redeem its banknotes and pay out its deposits.

610
01:01:30.060 --> 01:01:35.620
Its reserve, we suppose that only a part of the money substitutes it had issued had the

611
01:01:35.620 --> 01:01:39.480
character of fiduciary media, dwindles.

612
01:01:39.480 --> 01:01:45.160
The instant approaches in which the bank will, after the exhaustion of its money reserve,

613
01:01:45.160 --> 01:01:50.660
no longer be in a position to redeem the money substitutes still current.

614
01:01:50.660 --> 01:01:56.900
In order to avoid insolvency, it must as soon as possible return to a policy of strengthening

615
01:01:56.900 --> 01:01:58.900
its money reserve.

616
01:01:58.900 --> 01:02:02.820
It must abandon its expansionist methods.

617
01:02:02.820 --> 01:02:08.740
This reaction of the market to a credit expansion on the part of a bank with a limited clientele

618
01:02:08.740 --> 01:02:13.100
has been brilliantly described by the currency school.

619
01:02:13.100 --> 01:02:18.340
The special case dealt with by the currency school referred to the coincidence of credit

620
01:02:18.340 --> 01:02:26.000
Expansion on the part of one country's privileged central bank, or of all banks of one country,

621
01:02:26.000 --> 01:02:31.440
and of a non-expansionist policy on the part of the banks of other countries.

622
01:02:31.440 --> 01:02:36.300
Our demonstration covers the more general case of the coexistence of a multiplicity

623
01:02:36.300 --> 01:02:42.200
of banks with different clientele, as well as the most general case of the existence

624
01:02:42.200 --> 01:02:47.680
of one bank with a limited clientele, in a system in which the rest of the people do

625
01:02:47.680 --> 01:02:54.280
do not patronize any bank and do not consider any claims as money substitutes.

626
01:02:54.280 --> 01:02:59.360
It does not matter, of course, whether one assumes that the clients of a bank live neatly

627
01:02:59.360 --> 01:03:04.780
separated from those of the other banks in a definite district or country, or whether

628
01:03:04.780 --> 01:03:08.240
they live together with those of the other banks.

629
01:03:08.240 --> 01:03:14.880
These are merely differences in the data not affecting the catallactic problems involved.

630
01:03:14.880 --> 01:03:22.140
A bank can never issue more money substitutes than its clients can keep in their cash holdings.

631
01:03:22.140 --> 01:03:27.680
The individual client can never keep a larger portion of his total cash holding in money

632
01:03:27.680 --> 01:03:33.580
substitutes than that corresponding to the proportion of his turnover with other clients

633
01:03:33.580 --> 01:03:36.940
of his bank to his total turnover.

634
01:03:36.940 --> 01:03:44.820
For considerations of convenience, he will, as a rule, remain far below this maximum proportion.

635
01:03:44.820 --> 01:03:49.340
Thus a limit is drawn to the issue of fiduciary media.

636
01:03:49.340 --> 01:03:56.060
We may admit that everybody is ready to accept in his current transactions, indiscriminately,

637
01:03:56.060 --> 01:04:01.420
banknotes issued by any bank, and checks drawn upon any bank.

638
01:04:01.420 --> 01:04:07.700
But he deposits without delay with his own bank not only the checks, but also the banknotes

639
01:04:07.700 --> 01:04:11.580
of banks of which he is not himself a client.

640
01:04:11.580 --> 01:04:17.940
In the further course, his bank settles its accounts with the bank engaged, thus the process

641
01:04:17.940 --> 01:04:21.720
described above comes into motion.

642
01:04:21.720 --> 01:04:26.780
A lot of nonsense has been written about a perverse predilection of the public for bank

643
01:04:26.780 --> 01:04:29.960
notes issued by dubious banks.

644
01:04:29.960 --> 01:04:34.820
The truth is that except for small groups of businessmen who were able to distinguish

645
01:04:34.820 --> 01:04:41.720
Banknotes were always looked upon with distrust.

646
01:04:41.720 --> 01:04:47.420
It was the special charters which the governments granted to privileged banks that slowly made

647
01:04:47.420 --> 01:04:50.340
these suspicions disappear.

648
01:04:50.340 --> 01:04:56.500
The often advanced argument that small banknotes come into the hands of poor and ignorant people

649
01:04:56.500 --> 01:05:02.660
who cannot distinguish between good and bad notes cannot be taken seriously.

650
01:05:02.660 --> 01:05:08.660
The poorer the recipient of a bank note is, and the less familiar he is with bank affairs,

651
01:05:08.660 --> 01:05:13.420
the more quickly will he spend the note, and the more quickly will it return, by way of

652
01:05:13.420 --> 01:05:19.540
retail and wholesale trade, to the issuing bank, or to people conversant with banking

653
01:05:19.540 --> 01:05:21.300
conditions.

654
01:05:21.300 --> 01:05:26.660
It is very easy for a bank to increase the number of people who are ready to accept loans

655
01:05:26.660 --> 01:05:32.500
granted by credit expansion, and paid out in an amount of money substitutes.

656
01:05:32.500 --> 01:05:38.800
But it is very difficult for any bank to enlarge its clientele, that is, the number of people

657
01:05:38.800 --> 01:05:44.360
who are ready to consider these claims as money substitutes and to keep them as such

658
01:05:44.360 --> 01:05:46.780
in their cash holdings.

659
01:05:46.780 --> 01:05:53.280
To enlarge this clientele is a troublesome and slow process, as is the acquisition of

660
01:05:53.280 --> 01:05:55.740
any kind of goodwill.

661
01:05:55.740 --> 01:06:00.440
On the other hand, a bank can lose its clientele very quickly.

662
01:06:00.440 --> 01:06:05.800
If it wants to preserve it, it must never permit any doubt about its ability and readiness

663
01:06:05.800 --> 01:06:12.360
to discharge all its liabilities in due compliance with the terms of the contract.

664
01:06:12.360 --> 01:06:18.480
A reserve must be kept large enough to redeem all banknotes which a holder may submit for

665
01:06:18.480 --> 01:06:19.480
redemption.

666
01:06:19.480 --> 01:06:26.100
Therefore, no bank can content itself with issuing fiduciary media only.

667
01:06:26.100 --> 01:06:32.540
must keep a reserve against the total amount of money substitutes issued, and thus combine

668
01:06:32.540 --> 01:06:37.280
issuing fiduciary media and money certificates.

669
01:06:37.280 --> 01:06:42.540
It was a serious blunder to believe that the reserve's task is to provide the means for

670
01:06:42.540 --> 01:06:49.060
the redemption of those banknotes, the holders of which have lost confidence in the bank.

671
01:06:49.060 --> 01:06:55.400
The confidence which a bank and the money substitutes it has issued enjoy is indivisible.

672
01:06:55.400 --> 01:07:00.720
It is either present with all its clients or it vanishes entirely.

673
01:07:00.720 --> 01:07:05.660
If some of the clients lose confidence, the rest of them lose it too.

674
01:07:05.660 --> 01:07:12.140
No bank issuing fiduciary media and granting circulation credit can fulfill the obligations

675
01:07:12.140 --> 01:07:18.940
which it has taken over in issuing money substitutes if all clients are losing confidence and want

676
01:07:18.940 --> 01:07:24.160
to have their banknotes redeemed and their deposits paid back.

677
01:07:24.160 --> 01:07:29.880
This is an essential feature or weakness of the business of issuing fiduciary media and

678
01:07:29.880 --> 01:07:32.580
granting circulation credit.

679
01:07:32.580 --> 01:07:39.480
No system of reserve policy and no reserve requirements as enforced by the laws can remedy

680
01:07:39.480 --> 01:07:40.480
it.

681
01:07:40.480 --> 01:07:46.420
All that a reserve can do is to make it possible for the bank to withdraw from the market an

682
01:07:46.420 --> 01:07:50.160
excessive amount of fiduciary media issued.

683
01:07:50.160 --> 01:07:55.120
If the bank has issued more banknotes than its clients can use in doing business with

684
01:07:55.120 --> 01:07:59.960
other clients, it must redeem such an excess.

685
01:07:59.960 --> 01:08:05.120
The laws which compelled the banks to keep a reserve in a definite ratio of the total

686
01:08:05.120 --> 01:08:11.320
amount of deposits and of banknotes issued were effective insofar as they restricted

687
01:08:11.320 --> 01:08:17.080
the increase in the amount of fiduciary media and of circulation credit.

688
01:08:17.080 --> 01:08:22.880
They were futile, as far as they aimed at safeguarding in the event of a loss of confidence,

689
01:08:22.880 --> 01:08:28.760
the prompt redemption of the banknotes and the prompt payment of deposits.

690
01:08:28.760 --> 01:08:33.720
The banking school failed entirely in dealing with these problems.

691
01:08:33.720 --> 01:08:39.760
It was confused by a spurious idea according to which the requirements of business rigidly

692
01:08:39.760 --> 01:08:45.400
limit the maximum amount of convertible banknotes that a bank can issue.

693
01:08:45.400 --> 01:08:51.360
They did not see that the demand of the public for credit is a magnitude dependent on the

694
01:08:51.360 --> 01:08:57.000
bank's readiness to lend, and that banks which do not bother about their own solvency are

695
01:08:57.000 --> 01:09:02.520
in a position to expand circulation credit by lowering the rate of interest below the

696
01:09:02.520 --> 01:09:04.420
market rate.

697
01:09:04.420 --> 01:09:09.800
It is not true that the maximum amount which a bank can lend if it limits its lending to

698
01:09:09.800 --> 01:09:15.220
to discounting short-term bills of exchange resulting from the sale and purchase of raw

699
01:09:15.220 --> 01:09:21.700
materials and half-manufactured goods is a quantity uniquely determined by the state

700
01:09:21.700 --> 01:09:26.020
of business and independent of the bank's policies.

701
01:09:26.020 --> 01:09:32.960
This quantity expands or shrinks with the lowering or raising of the rate of discount.

702
01:09:32.960 --> 01:09:37.960
Lowering the rate of interest is tantamount to increasing the quantity of what is mistakenly

703
01:09:37.960 --> 01:09:43.080
be considered as the fair and normal requirements of business.

704
01:09:43.080 --> 01:09:49.440
The currency school gave a quite correct explanation of the recurring crises as they upset English

705
01:09:49.440 --> 01:09:54.440
business conditions in the 30s and 40s of the 19th century.

706
01:09:54.440 --> 01:09:58.400
There was credit expansion on the part of the Bank of England and the other British

707
01:09:58.400 --> 01:10:04.920
banks and bankers, while there was no credit expansion, or at least not to the same degree,

708
01:10:04.920 --> 01:10:08.320
in the countries with which Great Britain traded.

709
01:10:08.320 --> 01:10:14.640
The external drain occurred as the necessary consequence of this state of affairs.

710
01:10:14.640 --> 01:10:20.120
Everything that the banking school advanced in order to refute this theory was vain.

711
01:10:20.120 --> 01:10:24.840
Unfortunately, the currency school erred in two respects.

712
01:10:24.840 --> 01:10:31.160
It never realized that the remedy it suggested, namely strict legal limitation of the amount

713
01:10:31.160 --> 01:10:38.440
of Banknotes issued beyond the specie reserve was not the only one. It never gave a thought

714
01:10:38.440 --> 01:10:44.260
to the idea of free banking. The second fault of the currency school was that it failed

715
01:10:44.260 --> 01:10:51.080
to recognize that deposits subject to check are money substitutes, and as far as their

716
01:10:51.080 --> 01:10:57.480
amount exceeds the reserve kept, fiduciary media, and consequently no less a vehicle

717
01:10:57.480 --> 01:11:00.640
of Credit Expansion than our banknotes.

718
01:11:00.640 --> 01:11:06.480
It was the only merit of the banking school that it recognized that what is called deposit

719
01:11:06.480 --> 01:11:11.480
currency is a money substitute, no less than banknotes.

720
01:11:11.480 --> 01:11:17.300
But except for this point, all the doctrines of the banking school were spurious.

721
01:11:17.300 --> 01:11:22.520
It was guided by contradictory ideas concerning money's neutrality.

722
01:11:22.520 --> 01:11:28.420
It tried to refute the quantity theory of money by referring to a deus ex machina, the

723
01:11:28.420 --> 01:11:36.100
much talked about hordes, and it misconstrued entirely the problems of the rate of interest.

724
01:11:36.100 --> 01:11:41.340
It must be emphasized that the problem of legal restrictions upon the issue of fiduciary

725
01:11:41.340 --> 01:11:48.460
media could emerge only because governments had granted special privileges to one or several

726
01:11:48.460 --> 01:11:53.300
Banks, and had thus prevented the free evolution of banking.

727
01:11:53.300 --> 01:11:58.100
If the governments had never interfered for the benefit of special banks, if they had

728
01:11:58.100 --> 01:12:04.460
never released some banks from the obligation incumbent upon all individuals and firms in

729
01:12:04.460 --> 01:12:11.360
the market economy to settle their liabilities in full compliance with the terms of the contract,

730
01:12:11.360 --> 01:12:14.660
no bank problem would have come into being.

731
01:12:14.660 --> 01:12:20.140
The limits which are drawn to credit expansion would have worked effectively.

732
01:12:20.140 --> 01:12:25.820
Considerations of its own solvency would have forced every bank to cautious restraint in

733
01:12:25.820 --> 01:12:28.740
issuing fiduciary media.

734
01:12:28.740 --> 01:12:33.580
Those banks which would not have observed these indispensable rules would have gone

735
01:12:33.580 --> 01:12:41.580
bankrupt, and the public, warned through damage, would have become doubly suspicious and reserved.

736
01:12:41.580 --> 01:12:46.760
The attitudes of the European governments and their satellites with regard to banking were

737
01:12:46.760 --> 01:12:51.000
from the beginning insincere and mendacious.

738
01:12:51.000 --> 01:12:56.280
The pretended solicitude for the nation's welfare, for the public in general, and for

739
01:12:56.280 --> 01:13:00.960
the poor ignorant masses in particular, was a mere blind.

740
01:13:00.960 --> 01:13:04.800
The governments wanted inflation and credit expansion.

741
01:13:04.800 --> 01:13:08.120
They wanted booms and easy money.

742
01:13:08.120 --> 01:13:13.560
Those Americans who twice succeeded in doing away with a central bank were aware of the

743
01:13:13.560 --> 01:13:16.060
dangers of such institutions.

744
01:13:16.060 --> 01:13:21.400
It was only too bad that they failed to see that the evils they fought were present in

745
01:13:21.400 --> 01:13:25.160
every kind of government interference with banking.

746
01:13:25.160 --> 01:13:32.480
Today, even the most bigoted etatists cannot deny that all the alleged evils of free banking

747
01:13:32.480 --> 01:13:37.960
Banking count little when compared with the disastrous effects of the tremendous inflations

748
01:13:37.960 --> 01:13:43.120
which the privileged and government-controlled banks have brought about.

749
01:13:43.120 --> 01:13:48.000
It is a fable that governments interfered with banking in order to restrict the issue

750
01:13:48.000 --> 01:13:52.560
of fiduciary media and to prevent credit expansion.

751
01:13:52.560 --> 01:13:58.520
The idea that guided governments was, on the contrary, the lust for inflation and credit

752
01:13:58.520 --> 01:14:00.060
expansion.

753
01:14:00.060 --> 01:14:05.660
They privileged banks because they wanted to widen the limits drawn to credit expansion

754
01:14:05.660 --> 01:14:11.260
by conditions prevailing on the unhampered market, or because they were eager to open

755
01:14:11.260 --> 01:14:14.420
to the Treasury a source of revenue.

756
01:14:14.420 --> 01:14:19.380
For the most part, both of these considerations motivated the authorities.

757
01:14:19.380 --> 01:14:24.260
They were convinced that the fiduciary media are an efficient means of lowering the rate

758
01:14:24.260 --> 01:14:29.780
of Interest, and asked the banks to expand credit for the benefit of both business and

759
01:14:29.780 --> 01:14:31.740
the treasury.

760
01:14:31.740 --> 01:14:37.260
Only when the undesired effects of credit expansion became visible were laws enacted

761
01:14:37.260 --> 01:14:45.180
to restrict the issue of banknotes, and sometimes also of deposits, not covered by specie.

762
01:14:45.180 --> 01:14:50.820
The establishment of free banking was never seriously considered, precisely because it

763
01:14:50.820 --> 01:14:55.780
would have been too efficient in restricting credit expansion.

764
01:14:55.780 --> 01:15:01.940
For rulers, writers and the public were unanimous in the belief that business has a fair claim

765
01:15:01.940 --> 01:15:08.080
to a normal and necessary amount of circulation credit, and that this amount could not be

766
01:15:08.080 --> 01:15:11.540
attained under free banking.

767
01:15:11.540 --> 01:15:15.940
The notion of normal credit expansion is absurd.

768
01:15:15.940 --> 01:15:21.820
The use of additional fiduciary media, no matter what its quantity may be, always sets

769
01:15:21.820 --> 01:15:27.060
in motion those changes in the price structure, the description of which is the task of the

770
01:15:27.060 --> 01:15:29.480
theory of the trade cycle.

771
01:15:29.480 --> 01:15:35.360
Of course, if the additional amount issued is not large, neither are the inevitable effects

772
01:15:35.360 --> 01:15:37.720
of the expansion.

773
01:15:37.720 --> 01:15:42.880
Many governments never looked upon the issuance of fiduciary media from a point of view other

774
01:15:42.880 --> 01:15:45.740
than that of fiscal concerns.

775
01:15:45.740 --> 01:15:51.580
In their eyes, the foremost task of the banks was to lend money to the Treasury.

776
01:15:51.580 --> 01:15:56.900
The money substitutes were pacemakers for government-issued paper money.

777
01:15:56.900 --> 01:16:03.700
The convertible banknote was merely a first step on the way to the non-redeemable banknote.

778
01:16:03.700 --> 01:16:09.260
With the progress of statolatry and the policy of interventionism, these ideas have become

779
01:16:09.260 --> 01:16:13.240
general and are no longer questioned by anybody.

780
01:16:13.240 --> 01:16:18.640
No government is willing today to give any thought to the program of free banking, because

781
01:16:18.640 --> 01:16:24.240
no government wants to renounce what it considers a handy source of revenue.

782
01:16:24.240 --> 01:16:30.460
What is called today financial war preparedness is merely the ability to procure by means

783
01:16:30.460 --> 01:16:37.860
of privileged and government-controlled banks all the money a warring nation may need.

784
01:16:37.860 --> 01:16:42.780
Financial inflationism, although not admitted explicitly, is an essential feature of the

785
01:16:42.780 --> 01:16:46.620
economic ideology of our age.

786
01:16:46.620 --> 01:16:51.980
But even at the time liberalism enjoyed its highest prestige, and governments were more

787
01:16:51.980 --> 01:16:58.980
eager to preserve peace and well-being than to foment war, death, destruction and misery,

788
01:16:58.980 --> 01:17:03.340
people were biased in dealing with the problems of banking.

789
01:17:03.340 --> 01:17:07.980
State of the Anglo-Saxon countries, public opinion was convinced that it is one of the

790
01:17:07.980 --> 01:17:13.700
main tasks of good government to lower the rate of interest, and that credit expansion

791
01:17:13.700 --> 01:17:18.300
is the appropriate means for the attainment of this end.

792
01:17:18.300 --> 01:17:24.980
Great Britain was free from these errors when in 1844 it reformed its bank laws.

793
01:17:24.980 --> 01:17:30.340
But the two shortcomings of the currency school vitiated this famous act.

794
01:17:30.340 --> 01:17:35.620
On one hand, the system of government interference with banking was preserved.

795
01:17:35.620 --> 01:17:41.300
On the other hand, limits were placed only on the issuance of banknotes not covered by

796
01:17:41.300 --> 01:17:42.540
specie.

797
01:17:42.540 --> 01:17:47.540
The fiduciary media were suppressed only in the shape of banknotes.

798
01:17:47.540 --> 01:17:50.860
They could thrive as deposit currency.

799
01:17:50.860 --> 01:17:57.580
In carrying the idea implied in the currency theory to its full logical conclusion, one

800
01:17:57.580 --> 01:18:03.740
One could suggest that all banks be forced by law to keep against the total amount of

801
01:18:03.740 --> 01:18:12.480
money substitutes, banknotes plus demand deposits, a 100% money reserve.

802
01:18:12.480 --> 01:18:17.460
This is the core of Professor Irving Fisher's 100% plan.

803
01:18:17.460 --> 01:18:22.780
But Professor Fisher combined his plan with his proposals concerning the adoption of an

804
01:18:22.780 --> 01:18:25.240
index number standard.

805
01:18:25.240 --> 01:18:30.760
It has been pointed out already why such a scheme is illusory and tantamount to open

806
01:18:30.760 --> 01:18:36.160
approval of the government's power to manipulate purchasing power according to the appetites

807
01:18:36.160 --> 01:18:39.000
of powerful pressure groups.

808
01:18:39.000 --> 01:18:45.200
But even if the 100% reserve plan were to be adopted on the basis of the unadulterated

809
01:18:45.200 --> 01:18:52.200
gold standard, it would not entirely remove the drawbacks inherent in every kind of government

810
01:18:52.200 --> 01:18:54.800
interference with banking.

811
01:18:54.800 --> 01:19:00.020
What is needed to prevent any further credit expansion is to place the banking business

812
01:19:00.020 --> 01:19:05.800
under the general rules of commercial and civil laws, compelling every individual and

813
01:19:05.800 --> 01:19:13.180
firm to fulfill all obligations in full compliance with the terms of the contract.

814
01:19:13.180 --> 01:19:20.000
If banks are preserved as privileged establishments, subject to special legislative provisions,

815
01:19:20.000 --> 01:19:25.200
The tool remains that governments can use for fiscal purposes.

816
01:19:25.200 --> 01:19:31.480
Then every restriction imposed upon the issuance of fiduciary media depends upon the government's

817
01:19:31.480 --> 01:19:34.480
and the parliament's good intentions.

818
01:19:34.480 --> 01:19:38.520
They may limit the issuance for periods which are called normal.

819
01:19:38.520 --> 01:19:43.640
The restriction will be withdrawn whenever a government deems that an emergency justifies

820
01:19:43.640 --> 01:19:46.720
resorting to extraordinary measures.

821
01:19:46.720 --> 01:19:52.620
If an administration and the party backing it want to increase expenditure without jeopardizing

822
01:19:52.620 --> 01:19:58.160
their popularity through the imposition of higher taxes, they will always be ready to

823
01:19:58.160 --> 01:20:01.840
call their impasse an emergency.

824
01:20:01.840 --> 01:20:06.880
Recourse to the printing press and to the obsequiousness of bank managers willing to

825
01:20:06.880 --> 01:20:13.520
oblige the authorities regulating their conduct of affairs is the foremost means of governments

826
01:20:13.520 --> 01:20:26.520
Free banking is the only method available for the prevention of the dangers inherent

827
01:20:26.520 --> 01:20:28.860
in credit expansion.

828
01:20:28.860 --> 01:20:35.620
It would, it is true, not hinder a slow credit expansion, kept within very narrow limits

829
01:20:35.620 --> 01:20:41.160
on the part of cautious banks which provide the public with all information required about

830
01:20:41.160 --> 01:20:43.560
without their financial status.

831
01:20:43.560 --> 01:20:48.360
But under free banking, it would have been impossible for credit expansion, with all

832
01:20:48.360 --> 01:20:55.000
its inevitable consequences, to have developed into a regular, one is tempted to say, normal

833
01:20:55.000 --> 01:20:58.120
feature of the economic system.

834
01:20:58.120 --> 01:21:05.680
Only free banking would have rendered the market economy secure against crises and depressions.

835
01:21:05.680 --> 01:21:10.920
Looking backward upon the history of the last hundred years, one cannot help realizing that

836
01:21:10.920 --> 01:21:16.440
But the blunders committed by liberalism in handling the problems of banking were a deadly

837
01:21:16.440 --> 01:21:19.320
blow to the market economy.

838
01:21:19.320 --> 01:21:24.120
There was no reason whatever to abandon the principle of free enterprise in the field

839
01:21:24.120 --> 01:21:25.660
of banking.

840
01:21:25.660 --> 01:21:31.260
The majority of liberal politicians simply surrendered to the popular hostility against

841
01:21:31.260 --> 01:21:34.060
money lending and interest taking.

842
01:21:34.060 --> 01:21:40.180
They failed to realize that the rate of interest is a market phenomenon which cannot be manipulated

843
01:21:40.180 --> 01:21:47.180
Ad Libitum by the authorities or by any other agency. They adopted the superstition that

844
01:21:47.180 --> 01:21:52.860
lowering the rate of interest is beneficial and that credit expansion is the right means

845
01:21:52.860 --> 01:21:59.780
of attaining such cheap money. Nothing harmed the cause of liberalism more than the almost

846
01:21:59.780 --> 01:22:06.040
regular return of feverish booms and of the dramatic breakdown of bull markets followed

847
01:22:06.040 --> 01:22:08.840
by Lingering Slumps.

848
01:22:08.840 --> 01:22:13.980
Public opinion has become convinced that such happenings are inevitable in the unhampered

849
01:22:13.980 --> 01:22:16.220
market economy.

850
01:22:16.220 --> 01:22:22.280
People did not conceive that what they lamented was the necessary outcome of policies directed

851
01:22:22.280 --> 01:22:27.680
toward a lowering of the rate of interest by means of credit expansion.

852
01:22:27.680 --> 01:22:34.560
They stubbornly kept to these policies and tried in vain to fight their undesired consequences

853
01:22:34.560 --> 01:22:37.640
by more and more government interference.