Okay, today's lecture is banking and the business cycle.
So what I'll do is I'll devote some of the lecture to explaining the basic principles of banking
and then the rest to the Austrian theory of the business cycle.
Let's start with the distinction between two types of banking that have become mixed in the contemporary world,
and that is loan banking and deposit banking.
And what we'll do is use a double entry or T account as a device to explain the effects of banking and the difference between loan and deposit banking and between 100% reserve deposit banking and fractional reserve banking.
So, let's first look at loan banking. Loan banking goes back many years to really the middle ages, but with loan banking, the institution, the bank, is a pure financial intermediary.
makes genuine savings and it finds borrowers for those savings.
And I can give you an example of using a T-account of a simple loan bank.
A loan bank can be owned by a single proprietor, by a partnership or by a corporation.
And before I show you the illustration, I want to point out that what we use is the simple equation that assets are equal to liabilities plus equity.
Okay, and I'll explain that when I show you the illustration here.
Okay, let's assume, and this is from Rothbard's book, so he uses himself as an example of a single proprietor of this loan bank.
He saves up $10,000. Okay, Lunder always has to do savings prior to making any sort of a loan.
And he invests in setting up this loan bank, and he is the equity owner. He owns the bank. So equity is on the right side.
Now, the assets of the bank are the cash. The cash is what he intends to use to make interest-bearing loans.
and since this is a T-account, both sides have to equal, okay?
Any change in one side has to be reflected by an equal change in the other side of the account
or by a negative change, the same amount on the same side of the account.
So let's say he makes a loan.
He retains $1,000 in cash and he loans $9,900 to me, Joe, which is then used for an investment or for some other business activity.
So now both sides total $10,900. Their assets consist of the cash and the IOU from Joe.
from Joe. The equity consists of Rothbard's investment in the bank. Note a few things about this transaction.
Actually, before I do that, let me just show you one other transaction which we use a corporation as an example.
Okay, now let's say the bank expands, we have shareholders, make it a little bit more complicated.
In this case, the shareholders contribute $100,000, they buy stocks in this publicly traded corporation, loan bank.
And again, they make loans of $95,000 at their interest and on the other hand, they retain $5,000 in cash.
and both sides are equal and we can make it slightly more complicated because shareholders may also issue bonds and other types of instruments at the top there to increase the money they have to loan, the funds that they have to loan so what we see here then is not only the original shareholders of equity but they also issue bonds that they sell to people for $50,000
$50,000 and they promise to pay interest on those bonds, so that's $50,000 more in funds that they have that have been saved by the bondholders and that will be loaned out.
The bondholders in exchange, as I said, get an interest return.
They also issue shorter term debt, which is certificates of deposit of three, six, nine months, two years, and the holders of the certificates of deposit also receive an interest return.
So now there's a total of $170,000 in funds in this loan bank and $95,000 is loaned out initially and they have now accumulated $75,000 in cash from the bonds and the certificates of deposit that they have sold.
Now, obviously, they want to earn interest on this, so they loan most of that out, so they loan $70,000 of that cash out, and their IOUs, which are the loans that they have made and that they are in interest on, expand to $165,000.
The total remains the same on both sides. The shareholders get the difference between the interest that they pay to the bondholders and the certificate of deposit and the higher interest rate that they receive from those people to whom they have loaned.
That interest differential does have to cover the cost of administering the loans and so on.
So they receive a dividend on their investment.
Now, a few things about this loan operation, okay?
First of all, notice the maturities will equal the structure of maturities.
The assets will equal the structure of maturities of the liabilities, okay?
So let's say that the bonds that they've issued are five-year bonds, well then they can make five-year loans, okay?
Ensuring that the money is back when the bonds come due and they have to repay those bonds.
Then they might have, let's say, one year certificate of deposit so they make shorter term loans.
Once again ensuring that the loans, those funds are returned so that they can pay off the holders of the certificates of deposit.
So what we call the time structure of the maturities of the assets equal the time structure of the maturities of the liabilities.
All businesses operate in this way or, as we'll see, they go bankrupt.
If they can't pay their creditors, in this case the bondholders and the holders of the CD on time,
then they are effectively illiquid and possibly insolvent.
Now, the second thing to keep in mind is that no money has been created in these transactions.
The money that the shareholders have contributed and that the bondholders and the owners of the certificates of deposit are genuinely saved funds that they have given up for a period of time to match the money or the period of time during which the money is in the hands of those who have borrowed it.
So no new money has been created. The money that they have lent or invested in this loan bank is not, they are unable to use until the loans have been returned, so there's no increase in the money supply.
So as I mentioned, loan banking began in Venice actually in the late Middle Ages and also spread in England in the 17th century.
Now let's look at deposit banking, which is a totally different institution.
The essence of it, the central nature, economic nature, is different from loan banking.
It began with the goldsmith bankers, at least in Western Europe in the 17th century.
What happened with the goldsmith bankers was simply this.
People were looking for a place to store their gold.
They were on a gold standard. People had gold coins. They were very costly to store and they were inconvenient to carry around.
It was also costly to store them because you needed safes and so on.
So a division of labor grew up. That is that goldsmiths already had the various equipment necessary to keep gold safe and to store it.
So they began to specialize not only in using the gold to make various items, but also to use their premises and their equipment to store other people's gold.
So let's take a typical goldsmith and this is a deposit transaction. So the goldsmith engages in a deposit transaction.
Depositors come in, they see their gold, they give up control of their gold to the deposit bank.
The deposit bank agrees to store it, just like any warehouse would store something of yours.
If someone was going away for, let's say, one year for business reasons and wanted to store some furniture, they would then in return get receipts.
Now, this is not a loan. The gold is not being loaned to the goldsmith. In the case of a loan, the borrower is permitted to do whatever he or she wishes with the loan funds, as long as they have them back on time.
They don't have to be the exact same funds, they have to be the same quantity.
In the case of a deposit, it's what is called a bailment, okay?
The bailer is the person who gives over the property.
The bailee is the person who receives the property.
In the case of a bailment, the agreement is that the person who receives the property,
the warehouse, will only perform certain functions that have been agreed upon with that property.
They cannot, for example, if you store your furniture, or if a woman, for example, brings a fur coat in to be clean, and the cleaner knows that she's not going to come back for a month for it, let's say she's heavy cleaning in the summer or something, he can't rent that fur coat out, even if he has it back on time, nor can the furniture warehouse lease out the furniture for a year to someone to collect the rent, and collect the lease payments,
What if he has that furniture back in the same condition when the person comes in to claim his or her property?
That's the difference between a bailment and a loan.
This was a bailment, but bailment law wasn't fully developed.
So there was a certain incentive, or there was a definite incentive that Goldsmiths faced for various reasons
Before we talk about those incentives, let's point out that in the case of a true deposit, there's 100% reserves, that is that every warehouse receipt that is held by the depositors is backed by a loan agreement.
Now, actually, there's an incentive for these warehouse receipts to be used as what we call money substitutes, to substitute for gold in exchange.
Now, why is that the case? Well, think about it in this way. Let's say you want to purchase a plow from someone.
And that plow costs you a certain number of ounces of gold. Let's say it's going to cost you five ounces of gold to purchase that plow.
Let's say it's going to cost you a certain number of ounces of gold. Let's say it's going to cost you five ounces of gold to purchase that plow.
You can do one of two things. You can pay for it as a purchaser by going to the bank, turning in five ounces of receipts, receiving the gold, then carrying the gold, which is inconvenient and also not necessarily safe, carrying the gold to the seller of the plow and handing it over to the seller.
If you have the seller and other people in the town have confidence in the goldsmith, it would be much easier and save time if you simply signed over the receipts, five ounces worth of receipts to the seller, okay?
So the warehouse receipts to gold began to be used as substitutes in exchange for the money.
they themselves were not money, they were merely substitutes for the gold in the bank
this did not change the money supply
because as i said they were substituting in circulation for the gold which was held
in the vaults of the goldsmith
or of the deposit bank
and so it reduced transactions costs
instead of the purchaser making the trip and getting the gold then
paying it to the seller who then
return the gold to his own account
at the goldsmith, he would just sign over these receipts. These receipts became known as
banknotes.
Also, what were called open book accounts were also
used here. People would put a sum of gold in the
bank, maybe businesses,
who made more transactions,
and instead of having receipts in exchange, they would have an open book account, in
effect, a checking account.
and they could draw on the gold by simply writing an order to the goldsmith to pay gold into the account of the person who received the check from the business.
Okay, once again there was no inflation involved in this.
It just changed the form of the money in circulation.
partially from gold coins to checks and fully-backed checks and banknotes.
Okay. Right now, here's where the incentives come in for the goldsmith to subtly transform this from a bailment to a loan.
Okay. Let's assume for a moment that the goldsmith recognizes that, and this is not an unrealistic assumption,
recognizes that on any given day, since people have confidence in the bank,
only very small amounts are taken out.
And over time, the amounts withdrawn are pretty much matched, more or less,
by the amounts that are deposited.
So he needs to keep only a little bit of the gold on hand
to use for his everyday functions.
That is to pay out gold when people come in to withdraw it.
He doesn't need more than let's say 10 or 20 percent, even that might be high.
So he can certainly loan out 50 percent.
So let's say now he secretly loans out 50 percent of the gold that's deposited with him.
Half of that $50,000 worth of gold, he loans that out.
So now he's not only earning a fee from the original depositors,
But he's also earning interest on the $25,000 worth of gold.
Now what has happened to the money supply in this case?
Now you have, let's say, $50,000. Let's say everybody put their gold in the bank to make it simple.
So you had $50,000 of warehouse receipts circulating with your claims on gold.
And then you have another $25,000 worth of gold coin that has been loaned out.
Another way of doing this, by the way, is to simply print up more warehouse receipts.
Not to loan out any of the gold, but to print out warehouse receipts that look just like the warehouse receipts that you've given to the genuine depositors and then loan them out at interest.
Then they circulate, they become mixed with the true warehouse receipts, we'll call them pseudo warehouse receipts, there's no distinction, and the money supply increases.
So let me give you an example of that.
Let's say that this goldsmith, recognizing that people accept his warehouse receipts
in exchange, loans out another, let's say, $80,000 worth of warehouse receipts.
He prints them up and he loans them out, makes a loan to someone who wants to invest in some
and now earns interest on them. So not only does he earn the fee from storing the $50,000 worth of gold, he earns interest on the $80,000 worth of pseudo warehouse receipts.
Now, Smith then pays those receipts out to laborers, to suppliers, to construction workers and so on, people that he's hiring and purchasing from in his business venture.
They then, some of them, may use another bank or they may need gold for various transactions, so they will then go and use those warehouse receipts to withdraw the gold.
So now the gold is being withdrawn by people who have not deposited it.
But look what has happened now to the money supply.
The money supply has increased by $80,000.
The prices in the area are bid up by the pseudo-warehouse receipts and the purchasing power of money begins to fall, so you get inflation, okay?
You also get a mismatching of the time structure of assets and liabilities, okay?
People have the right to claim $130,000 worth of gold, both the people who originally deposited the gold
and the people who have received the pseudo-warehouse receipts from the person who borrowed them from the deposit bank.
But yet, the goldsmith has on hand, so by the way, those liabilities are instantaneous. They must be paid on demand, okay?
And the only part of the assets are instantaneous. Only the $50,000 worth of gold in the vault is instantaneously available, okay?
The loan to Smith might be a one-year loan, a two-year loan, or a three-year loan.
So if everyone were to come in or to claim the gold to the full amount of the $130,000 worth of gold receipts out there, then what happens is the bank can't pay off and it goes bankrupt.
So, when it's suspected that the bank has loaned out more than it has in reserve, it would create the conditions for a bank run, for people lining up to get their gold, and only the people who get their first will get the gold out of the bank.
So in that sense of bank, when it's now a fractional reserve bank, keeping only a fraction of its liabilities in the form of reserves, cash reserves, in that case it's a fractional reserve bank, so the fraction is 5 thirteenths, and you can figure that out in decimal points.
Now, there were cases brought against this type of banking, but the courts ruled in favor of the banks and claimed that, well, in the case of money, it's not really a bailment, it is, in fact, a credit transaction or a loan.
Even though, for example, when grain warehouses, warehouses that store farmers' grain, some of them had engaged in this type of behavior in, I guess, the 1960s and 1970s.
They printed up more receipts to the grain that they had stored in the warehouses, pseudo receipts, and they used it to speculate on futures markets, and they were prosecuted for fraud, for embezzlement.
But over time, this was not seen as embezzlement, it was seen as a function of, a legitimate function of banking.
So now what you get is loan banking and deposit banking becoming mixed.
And they're certainly mixed together today.
What's loaned out is not only the genuine savings that people who put money in the bank, for example, by buying certificates of deposit,
It's not only genuine savings by the shareholders and people who are loaning to the bank, but also there's a deposit component which is not real savings, that is where people will put money in the bank which they can withdraw at any time, either from their savings account or their checking accounts.
Those accounts promise or come with a promise to pay on demand and yet they're loaned out for greater or lesser periods of time.
And of course, that increases the money supply.
Okay, now let's talk about what we call multiple bank credit expansion.
Okay, the bank that loans out funds to another bank, another fraction or to an individual,
in a system where there are many fractional reserve banks operating,
It will result in a multiplication of the original loan, in terms of addition to the money supply.
I'll give you a simple example of this.
Let's say that you get a graduation present from your aunt, let's say $10,000.
A rich aunt gives you a graduation present, and you put it in your bank.
And let's start here.
I'm going to draw a very simple t-account, assets and liabilities, and we're only going to record the changes, okay?
So you go to the first national bank, which is your bank, and you add that $10,000 to your checking account, okay?
your demand deposit, DD. So the bank's liabilities go up by $10,000, but they have, it was a cash gift, let's assume, so you put the cash into the bank, now they have an addition to their reserves, their cash reserves of $10,000, so it's plus $10,000.
But they're not going to keep all of that cash in the vault, because it's not earning interest.
I'll just focus on it a little bit more.
It's not earning interest. What they're going to do, and in today's world they're permitted by law to loan out about 90% of their checking deposit.
So they loan out 90 percent, so the addition to reserves ultimately is really only $1,000.
The other 90 percent, I'll use alpha loans, goes to loans.
So they make an automobile loan to someone.
That individual takes the money, purges the car with it, so this is the loan, say auto loan, and the person who receives the money, who sold the car, will then re-deposit that money in their own checking account or in his own checking account in another bank, so the second whatever bank.
and assets and liabilities and so you see what happens is that the there's a
$9,000 increase in demand deposits and the reserves I'll just take us a few
steps the reserves of the bank go up by okay 8100 because they're really I'm
sorry what by um not $900 they only keep $900 in reserves and they loan out the
The other 90 percent, which is $8,100, $8,100, so these should all be pluses, both sides balanced.
And that loan, now notice what has happened, there's no change in the money supply when the first person puts $10,000 worth of cash into the bank and gets a check account for $10,000, okay?
That's a pure deposit. All that has happened is that the form of the money supply has changed from cash to checks.
But now when that $9,000 is loaned out and deposited in another bank, you now have another $9,000 checking account created.
So the money supply is increased by $9,000. Similarly, when the $8,100 is loaned out,
You have it being redeposited by whoever receives it from the borrower in another bank, okay, third bank, third whatever bank, and you have the assets and liabilities, and I'll just take it to this round, okay.
That increases checking accounts by $8,100, so there's another $8,100 in the money supply.
The Money Supply basically equals the amount of currency in the economy plus the amount of checking account money in the economy.
And I would add in a few other things.
But for simplicity, we'll just keep it to that.
And in that particular case, then you have $720 being loaned out and $7,200 being loaned out and $810 being kept in reserve.
You only need to keep 10% to back up the checking account.
So that goes up by 810 reserves.
Loans go up by the difference, which is 7200-something.
And it keeps going.
So now, just in the first three rounds,
There is a $9,000 addition to the money supply, then $8,100, then around $7,200, and so on.
Now, this process will stop, okay, there's a simple mathematical formula to tell us the maximum amount by which the amount of checking account money in the economy can be increased.
and that formula is known as the money multiplier, called MM, money multiplier is equal to, or simply it's actually the deposit multiplier, deposit multiplier is equal to 1 over the reserve requirement, if the reserve requirement, before central banking the banks were permitted to determine their own reserve requirements, according to their level or degree of prudence,
After central banking, after the Fed, for example, was created in 1914, they legally, they had the power to legally determine reserve requirements.
So the reserve requirements today are approximately 10%.
So every $10 of new check account money, or every $10 of check account money is backed up by $1 of reserves.
Or to put it another way, every additional dollar of reserves in the banking system can support 10 new dollars of money in the economy.
So when you deposit money, if you deposit $100 in currency in your bank account, ultimately it is multiplied 10 times because the deposit multiplier which is equal to 1 over RR is equal to 1 over 0.10 which is equal to 10.
So what I'm telling you here is that when you deposit $10,000 in currency, there's going to be a change in the money supply, delta means change, equal to the change in currency in the economy plus the change in demand deposits, which is checking accounts.
So in that case, checking accounts will go up, okay, we can figure out the change in checking accounts or demand deposits, will always be equal to 1 over the reserve requirement times whatever the amount of new reserves in the banking system are, or is.
So if the amount of new reserves in the banking system is the $10,000 that has been deposited in the checking account, that's the currency that's been put into the banking system,
System, that currency is going to be able to be multiplied 10 times to give us an increase of $100,000, okay, is equal to 10 times $10,000.
So $100,000 of new checking account money will be created out of thin air by that deposit of $10,000 of currency.
Now, so you get $100,000 more of demand deposits, but if you take currency out of circulation and put it in the bank, we do reduce the amount of currency by $10,000.
So overall, the money supply increases by $90,000 net.
There's $10,000 more of checking account money in the economy, but there's $100,000 more of checking account money in the economy, but there's $10,000 less of currency.
of Currency, because that's now in the vaults of the banks. Yes?
We'll call that the deposit multiplier.
Or simply the...
Demand deposits.
DD is demand deposits.
Demand deposits refer to any deposit that can be withdrawn on-demand,
or that can be withdrawn instantaneously.
So even our savings deposits in today's economy are demand deposits.
You can ship them immediately through your ATM to your checking accounts
or you can withdraw them. Even if you can't write checks on them, they are still
demand deposits in effect,
or in essence.
Yes, Alex.
You take another check and deposit it?
Yeah, for instance, if I give you a check for my bank, but it's a lot, like 90% of it is actually inflated.
So then you put it in your bank, does that increase, is it like inflated on credit?
No, the question is, what happens if someone deposits a check from someone else in his own bank?
Money that's been created elsewhere.
No, what happens is that all that happens is that the reserves shift from one bank to the next,
But the total amount of money in the economy stays the same.
Now, during Christmas, people, for example, will want to walk around with more cash because they make small purchases.
It's the shopping season, during the holiday season at the end of the year.
Okay, beginning probably before Thanksgiving and lasting through the new year.
What happens is that people withdraw billions of dollars from their checking accounts.
And that would tend to reduce the money supply.
So if you take a billion dollars out, let's say, let's say a billion dollars is taken out in currency,
so that people can have more cash with which to make smaller expenditures and so on.
What will happen is we'll have a reverse or contraction, a multiple contraction going on.
What's going on? So the money supply will ultimately decrease by ten billion dollars, ten times that. That's the maximum.
The Fed, as we'll see in a moment, can offset that and will offset that with what are called open market purchases.
It will recreate that money during that period, that checking account money, and then later on drain it out when people redeposit, when the businesses redeposit these funds in the checking account.
Change in the Money Supply. Change in Currency. Currency and demand deposits, widely construed demand deposits, meaning any deposit of bank that can be instantaneously withdrawn or redeemed in cash, that is included on the demand deposit.
How is the currency able to be in circulation?
and the supply of money, which we call your cash balance, okay?
By the way, about 80% of U.S., between 60 and 80% has been estimates of U.S. currency is not in our country.
It's not in the U.S. It's outside the country, financing transactions in illegal drugs
or being held by people that are afraid of inflation in their own countries,
Eastern Europe, Latin America and so on,
And then China has the most U.S. banks?
Well, when foreign central banks hold U.S. dollars, they don't actually hold the paper dollars, okay?
They'll hold those dollars in the form of either government securities, short-term, you know, Treasury bills and so on,
or they'll hold it in American banks here. In other words, the Bank of China, the Central Bank of China has accounts.
I'll tell you about the breakdowns. I believe at the Federal Reserve Bank as well as at commercial banks here in the U.S.
and they earn interest on those accounts.
So they don't actually hold dollars, it's the citizens that will hold the paper currency.
Yes?
I'll follow up on that. I was wondering if the cash, is that going to be...
I'm not sure of the breakdown, but again, the governments, Middle Eastern governments may very well hold U.S. dollar-denominated assets.
In other words, the dollars that their central banks get are invested in interest-bearing U.S. assets.
So they don't necessarily hold U.S. currency for governments.
Curtis.
Is there some benefit to bankers if they can use a debit card as an institution of trust?
It's much more convenient, in fact, when I make food purchases at grocery stores around here, I just use my debit card.
I wouldn't use a check. If there were no debit cards, I think I would use cash to make some of these small purchases.
So it causes more reserves to go into the bank as people put more money in their checking accounts because they can draw on that not only with paper checks,
which have some transactions cost, but with the debit cards, which are easier to use.
Can I ask a follow-up to one more question? Can I ask a follow-up to one more question?
Can I ask a follow-up to one more question?
In other words, the banks have invested in assets of different maturities, some being much more liquid than others.
But they're still not instantaneous, in the sense that they can immediately call them in when someone comes into demand cash.
Going back to the center line, 100% of the money is in the ______ ______ ______ ______
I don't think that's necessarily the case. No. The bank would be split into two departments where one department was simply a loan bank or a genuine savings bank where you put money for periods of time and they could do that by issuing certificates
of Deposit, and other sorts of instruments, and then loan that money out, match the loans
to the maturities of the deposit that they have gotten in these instruments, or the savings.
And then the other part would be simply a warehousing function.
The other part of the bank would engage in a warehousing function in which they would
charge for administering checking accounts.
not only would you not earn interest on checking accounts, but you would have to pay a fee to have your checking accounts held at a certain bank
because there are costs of administering those checking accounts
so that argument has been brought up, but it's really a question of knowing what the law is and the law clearly defining what is permissible and what is not permissible
I don't want to get into the ethics of fractional reserve banking.
I just want to stick to the economics of it.
But it is enough to know that it was conceived in fraud or an embezzlement, as people at the time understood that.
So that's how money is created.
Now, let me just mention very quickly that as central banks came in, if one bank were to expand its bank notes and checking accounts very rapidly and to a much greater extent than surrounding banks, then prices would begin to go up in the area of that bank.
Bank. So what would happen is that as prices rose in the region in which that bank was located, people would begin to use the bank's notes to buy things from other regions where prices were lower because the other banks weren't as inflationary, which would mean that those bank notes would then begin to be redeposited in other banks and so the amount of notes that the other banks
had of the bank that was inflating would exceed the amount of notes of the less inflationary banks that the bank, the inflationary bank was holding.
So when they went to clear their notes and their deposits, the bank that was inflating would lose gold, because the other banks ultimately want gold.
They don't want to hold the bank's notes, especially if the bank is inflating.
So there's a mechanism that operated under what was called free banking
to keep strict limits on a particular bank
from inflating too much more than surrounding banks.
Because if they did, once again,
the exports in their areas would fall because the prices were higher as people
spent their notes
and imports from other areas would go up, so other banks would receive more and more
of their notes and they'd want to exchange those notes for gold, so the bank would begin losing its
reserves and it would reduce,
would have an incentive to reduce the expansion of its own notes and deposits.
When central banking came in, it removed these limits. There's a
number of limits that
free banking
had provided
against inflation. I mean, there was still local inflation and it was
still inflationary to an extent,
fractional reserve banking.
But before central banks
there were these limits.
The limits were, for example, the extent to which people used banks. When you had central banking, people began to trust central banks as lenders of last resort.
That is that if the bank, if a particular bank failed, the central bank would bail that bank out by loaning to the bank.
So people began to use banks more and more, put more money into banks.
Each individual bank, you had that limit being removed because as central banks came in, what they did was they centralized gold reserves.
For example, in 1917, a few years after the Federal Reserve Bank was created, a law was passed that mandated that all gold reserves be held at the local or at the regional Federal Reserve banks.
So in exchange for these reserves, what did they get? They got Federal Reserve notes.
So when people came in to ask for the cash checks and so on, they got Federal Reserve notes rather than their gold.
Now they could still demand the gold because the Federal Reserve notes themselves were payable in gold.
But the key point was that people became familiar with these central bank notes
and they began to look on the paper dollars issued by the central bank as money.
So the use of gold was discouraged by the fact that they trusted the central bank notes and everyone accepted them.
They had a much broader acceptance than the individual private bank notes.
And confidence in banks was bolstered by the central bank.
There was trust that if the banks got in trouble, they would be bailed out by the central bank.
and so there was a reduction in bank runs. Now, ultimately, this did not prevent a rash of bank runs during the Great Depression, at the beginning of the Great Depression, from 1931 to 1933.
Hundreds, thousands of U.S. banks collapsed and eventually to restore confidence in the banking system, as people were pulling their cash out of the banking system,
To restore confidence, the Federal Deposit Insurance Act was passed, which set up the Federal Deposit Insurance Corporation, the FDIC.
And that restored confidence.
And finally, this removed the limit on inflation on any given bank, because now all banks received injections of new reserves.
Each bank did not hold its own gold. The gold was held in the central bank and the reserves that the banks held were in the form of cash or central bank notes and reserves or deposit, reserve deposits at the central bank.
So as a central bank, and I'll show you in a moment, as they expanded the money supply or they expanded bank reserves by creating more bank reserves through open market operations and so on, all banks got some of these new reserves.
So all banks in effect inflated together because the central bank was able to create reserves out of thin air.
Okay, so let's now, and eventually when we don't run off the gold standard, after 1933 and certainly after 1971, there was really no more, there's no limit on how much the Federal Reserve can increase the money supply. Patrick?
If you're going to have a central bank in the same place, wouldn't your job necessarily be going to interfere with that when you're back to work with things that haven't been done yet, but the bank that's been run by a central bank?
Why didn't the Fed act as a lender of last resort in the early 1930s?
Is that what you're saying? They were trying to. They were increasing reserves.
But people were pulling their currency out so rapidly that the fall in currency more than offset the increase in bank reserves.
Okay, now what type of control does the central bank exercise over the money supply?
Well, the most, the tool that we can call it or a policy tool that they use most frequently and they use really on a daily basis that allows them to manipulate the money supply is called open market operations.
And that's the purchase or sale of government securities on the private market, either to commercial banks or to individual bond dealers, okay?
Any time the central bank purchases anything, any time the Fed purchases anything, it increases the money supply, okay?
Let's assume that you have a used car for sale for $5,000. Let's take a simple example.
And by the way, since 1980, the Feds permitted to buy almost any asset.
They used to be restricted to certain assets, government securities, short-term government securities.
But now they can purchase not only U.S. government securities, they can purchase securities from foreign governments.
from foreign governments, they're permitted to do that, they can purchase private securities from corporations and so on, so they can purchase, you know, they can buy up the whole economy in effect, if they wish to, but let's say they purchase your used car, okay, they write out a check, say for $5,000 for your used car, they sign it to Fed, okay, you deposit that check in your checking account, and what happens?
All of a sudden, where there was no money before, there's $5,000 new dollars in checking account money.
Now your bank loans out 90% of that, and the deposit multiplier process kicks in,
and over time, that can reach a maximum of $50,000 new dollars in checking accounts throughout the economy.
Where does that $5,000 come from that the Fed pays you with?
Finair. They just, you know, just ink. I mean, they're just literally out of finair.
Yes?
That's also in front of your office, right? The policy of the central bankers to authorize some kind of bank to do the paper.
Well, I mean, when the governments run a deficit, governments run a deficit, they can have the central bank indirectly finance
to finance this deficit by increasing its purchase of bonds, okay?
Now, what the Fed usually purchases, and then every day between 9 and 11 o'clock,
it's called Fed time at the New York Federal Reserve System,
they deal with about 30 privileged bond dealers in New York City.
What they can do then is they can buy large sums of bonds from these bond dealers.
Let's say that they purchase $10 million or $100 million worth of bonds from these bond dealers on a given day, and again, they sign it to Fed, well, I mean, it's all done electronically now, it's not even done with paper checks, they'll just shift funds to the bank that the bond dealer uses.
So now there's a hundred million dollars more in reserves in the banking system.
The banks can loan them out, the initial banks that receive the deposits of this new money that has been paid for the bonds from the bond dealers and it's multiplied ten times.
So over time that will increase the money supplied by up to a billion, one billion dollars.
There are reasons why the maximum amount is never reached, okay?
People will keep some of that money out in the form of currency and will not redeposit it.
To the extent that they do that, the money supply doesn't...
The increase in the money supply is less than $1 billion in this case, okay?
There's also, in certain situations, banks may not loan out all the money they're legally permitted to loan out, okay?
So they can hold what we call excess reserves.
So it might be two and a half or three times the original increase in reserves.
The money multiplier might be. It may not be the full ten times.
Alright, that's open market operating. So if the government wants to decrease the money supply, it does the reverse.
It takes drains reserves out, it sells, it has a huge stock of government reserves.
The Fed earns an enormous income from government securities that it has purchased in the past.
I forget the figures, I meant to bring the article on it, but it's a huge amount.
Most of it is rebated to the Treasury, it's given to the Treasury.
The rest of it is used by the Fed itself to pay its expenses.
And all the regional Federal Reserve banks, the 12 regional Federal Reserve banks, are very, very lush
They used to have a fleet of helicopters. They may have sold them off. The salaries are very, very high. So they're a bureaucracy that does very well for themselves.
In any case, that is the tool that is the most effective tool and the most generally used tool for changing the money supply.
Something else that the Fed is permitted to do and does on occasion is to change the reserve requirement.
Change the reserve requirement, okay?
If it changed the reserve requirement from, let's say, 10%, if it lowered it to 5%, they would never do this because it's an extreme action, okay?
And let's assume for the moment we have about, let's say we have about $600 billion, it's near enough true, in checking account money.
And we have six, so this is equal to total demand deposits in the U.S. system, and we have about $60 billion, let's say, in reserves.
Most of that money is not in cash, most of that money is held in checking accounts at the Federal Reserve Bank.
So the bank's reserves are held as checking accounts at the Federal Reserve.
The Federal Reserve Banks are the banker's bank.
Now suddenly, if they can, they only need to hold 5% to back up the checking accounts rather than 10%,
All banks find that they have in total 30 billion dollars in excess reserves.
30 of that 60 billion does not have to be held. What can they do? They can loan it out.
And as they loan it out, it will be multiplied, as it goes through the multiplier process.
And over time, what's going to happen is that the money supply will double.
Okay, you'll have 60, the reserves don't disappear, the 60 billion dollars in reserves will support 1 trillion, 200 billion dollars in checking account money, okay?
So they can double the money supply at the stroke of a pen.
Now, they don't do that, when they change the reserve requirement, they change it very, very slowly, okay?
They lowered it from 13%, you know, at the end of the 70s sometime, they lowered it slowly to 10%.
Or if they raised it to 20%, all banks would be in violation of the law, all banks would have only 10% in the reserves for the checking account money,
and so they would be all deficient, they would have to call in their loans and it would be a chaotic situation in the banking system.
So they wouldn't do that.
So they only change this very slowly and very infrequently, okay?
Again, it's open market operations that are the most important tool.
And finally, they can change the discount rate.
The discount rate is the rate at which the Fed will loan to banks.
Not many banks will borrow from the Fed, okay?
The reason being that when you, there's an overnight, if banks need reserves, they can borrow from one another.
There's an overnight market called the Fed Funds Rate.
Banks that have x reserves at the end of the day,
okay, reserves that are not earning interest,
but that they don't need to back up their checking account money,
those reserves will be loaned out overnight
to banks that don't have enough reserves.
So it's called the Fed Funds Market.
And banks, if they need reserves,
can get reserves for the short term from each other.
If a bank goes to the Fed, or by the way, if they need longer-term funds, they can issue certificates of deposit and pay interest to people who want to invest their money in the bank for shorter or longer periods.
However, if they go to the Fed to ask for a loan, the Fed will assume that it's having problems.
There's all these funds out there that they can get on the private market. Why are they coming to the Fed?
And usually they wouldn't be having problems. That is, no one will loan to them at a reasonable interest rate because they're in bad shape.
So to make a long story short, the discount rate, when the discount rate is lowered, the bank will, the money supply will increase.
But not many banks are in debt to the Fed and there is maybe an incentive to increase your indebtedness to the Fed, to borrow more from the Fed.
When the discount rate falls, that increases the money supply, as we'll see, and I'll show you why in a moment.
And when the discount rate goes up, banks will tend to pay back their loans to the Fed.
Now, what happens when the Fed loans money to a bank?
Let's say a bank wants to borrow, is having liquidity problems.
And people are withdrawing funds from the bank for various reasons, and their reserves are shrinking.
And they have to pay high interest rates on the private market to get more reserves, so they turn to the Fed.
So they go to the Fed, they call the Fed loan officer and they ask for a loan, let's say, of $100 million.
And at the end of the day, the loan officer calls back and says, you have the loan.
Now, where does the money come from that the Fed loans?
Simply, it's just a blip in a computer.
What the Fed does, it goes to the bank's account at the Fed, which is its reserves,
and it simply credits its account with $100 million.
And then it calls up the bank and says, you now have $100 million that you can loan out.
So just at a key stroke on a computer, bank reserves increase by $100 million,
and that will be then multiplied and expand the money supply by a maximum of 10 times that or $1 billion.
So those are the tools. Now, the key here is to get to the business cycle and we don't have that much time to talk about the business cycle,
We have enough to outline it. Most of the money that is deposited in banks, most bank loans, let's put it that way, most of the bank assets, are loans to businesses.
So what happens when a business gets a loan, a loan that's created out of thin air, a loan that's not based on genuine savings that have been deposited in the bank for a period of time,
of Time, when it's not based on genuine savings, there is a, in order to, let's say the following way, let's say the Fed increases the bank reserves, right, so banks now have more money to loan out, okay.
In order to make additional loans, given that the supply and demand for money is equal at the going loan rate, there's going to have to be a lowering of the interest rate.
If you want to induce businesses and others to borrow more money, the additional reserves that have been created by the Fed out of thin air,
what you have to do then is to induce them by lowering the interest rate.
So what it looks like is the following graphically.
It looks like there has been an increase in genuine savings in the system.
If you look at the top graph here, let's say the going interest rate is 10%, the Fed increases reserves in the banking system through open market operations, loans, loanable funds that the banks have increase, so the banks want to loan more out at 10%, they want to loan this much out.
However, there are no borrowers there at 10 percent.
At 10 percent, borrowers are borrowing this amount, S1, that's how much they want to borrow at 10 percent.
So the banks have to lower their interest rates. So as interest rates are reduced to 7.5 percent, the quantity demanded of loanable funds increases.
So now businesses have more money to invest.
So, the increase in the money supply that goes through the credit markets and winds up in the hands of businesses are then spent on capital goods, and that drives up the price of capital goods, okay?
However, when those new capital goods are, when there's an increase in the production of capital goods to meet this increased demand,
that money is paid out to the construction workers that are building new factories to the factory workers that are producing more machines and so on
the laborers
they're spending money in the same old proportions, in the same old consumption saving ratio
they're going to spend, or spend most of that money on consumption
they're not going to save it, they're not going to reinvest it in the loanable funds market
so what's going to occur
is that
After a little while, the supply of loanable funds will shift back, the interest rate will rise, and the businesses will find out that those investments that they made in the belief that the 7.5% rate was going to continue as the rate on the loan market, that rate is going to rise to 10% and suddenly investment is going to be cut back.
Now, what happens is that the Fed has the power to prevent the interest rate from rising.
That's why they're always saying, they never talk in terms of increasing the money supply, ever since the Greenspan era, the end of the 80s.
Greenspan began to say, we cannot measure the money, not only can't we measure the money supply, or not only can't we control the money supply, we can't even measure it.
So from that point onward, the Fed began to talk about setting interest rates, setting the Fed funds rate, the rate at which banks loan to one another overnight.
But of course, in order to do that, in order to change interest rates, you have to create more money.
But they shifted the focus from changes in the money supply to changes in the interest rate.
So the Fed can prevent this rebounding of the interest rate back to its old level and that level reflects people's true time preferences as expressed in their saving consumption decisions.
The Fed can prevent that from happening and therefore prevent a recession, prevent people from getting laid off in the capital goods industry by continually injecting new money into the system day after day to prevent the rise in interest rates and that's what they're doing today.
In fact, let me show you then, symbolically, how true economic growth differs from what seems to be economic growth that is precipitated by a fall in interest rates that has been orchestrated by the Fed.
So if we start from the Fed increasing bank reserves, so we have open market operations here.
So open market purchases, the Fed's buying securities on the open market.
There's been no change in people's time preferences.
Time preferences haven't fallen.
What that does is to increase bank reserves. And when bank reserves are increased, you get a fall in the interest rate, so the fall in the interest rate.
Businesses borrow more, so we're going to see the effects on two sets of industries here, the consumer goods industries at the top and capital goods industries at the bottom.
As the interest rate falls, there's an increase in investment, which leads to an increase in the demand for capital goods. D sub k represents capital goods.
So the price of capital goods begin to go up now as this new money is spent on capital goods.
The price goes up, leads to an increase in profit, pi sub k, leads to an increase in wages, demand for labor increases,
I should also put that there, demand for labor increases, get higher in capital goods industry, so let's say DL here.
So the demand for labor goes up, and you get an increase in your production.
So you get an increase in the output of capital goods, a beginning of an increase in the output of capital goods, so capital goods go up.
So there's more capital goods being produced in the economy.
But on the other hand, have people cut back on their consumption? No. People do not want more future consumption goods.
The consumption saving ratio stays the same. The Fed has caused the decrease in the interest rate.
It has not been caused by the voluntary actions of individuals who are now saving more and consuming less.
So what's interesting is that there is no change in the demand for consumer goods. That stays the same.
The demand for or the price of consumer goods stays the same as does profits in the consumer goods industry, and wages stays the same.
Now, what happens, because wages are rising in the capital goods industry, workers will leave the consumer goods industry, go into the capital goods industry,
We will have fewer consumer goods produced for a while, and more capital goods produced, as labor leaves here, to get the higher wages that are being offered in the production of capital goods.
What happens, however, is that eventually when those laborers get that new money that has been injected into the system,
when the laborers that are working in the capital goods industry and have received higher wages,
and workers that have transferred from consumer goods industries, from, let's say, making McDonald's hamburgers to producing ovens,
or from working in retail stores to producing more factories and machines that will produce more clothing in the future,
When they begin to make that transition, you get a fall in consumer goods and a rise in the amount of capital goods.
However, at some point, these workers, when they get the new money, they begin spending it, guess where?
On consumer goods. That new money is spent back here on consumer goods.
So the demand for consumer goods goes up and from this angle, all the prices go up, profits go up, demand goes up,
We already said demand for consumer goods go up because the new money is coming into the system.
Now this has an effect of drawing the workers back away from capital goods industries.
If the government stopped, if the Fed stopped increasing the money supply at that point,
it just increased at once, eventually after a few months we would find out that the demand for capital goods,
since there's no more extra funds being loaned out,
The demand for capital goods would fall, wages would tend to fall, and so on, but on the other hand, consumer goods prices would be going up, and profits would be going up, and wages would be going up in the consumer goods industry.
So the economy would, on its own, reallocate labor back to consumer goods, which is what people wanted, because they've never changed their preferences between consumer goods and capital goods.
When that happens, some of the firms that have expanded in the capital goods industry go bankrupt.
Others contract, you get a recession.
The recession would not be very big if it occurred right away after the Fed increased the money supply once, let's say.
But the Fed knows that this is going to happen, it has experience, it knows that once it's lowered the interest rate,
If the interest rate, if it allows the interest rate to go back up, it's going to result in a recession.
So the Fed has the power and the will to continue to increase the money supply day after day.
Now, what eventually undermines the will of the Fed to continue that, increase the money supply and continue maintaining a lower interest rate?
and the fact that eventually the continued increase in the money supply will bring about greater and greater increases in the prices of consumer goods, okay?
So the Fed will want to put a cap on inflation.
This happened in the 70s, okay?
The Fed slammed on the brakes in 1979 when inflation was threatening to get out of hand.
It was up to, you know, 16% on a per annum basis at the end of the court administration.
and that's when they reduced the rate of growth in the money supply.
It was growing very, very rapidly, over 10 percent.
And then they reduced it pretty rapidly, actually.
And the economy was plunged into a deep recession.
Now, during the recession, what businesses go out, what industries are affected the most?
Do you see Walmarts going out of business or Sears or McDonald's?
No.
I mean, they're hurt.
There's a destruction of capital during recession, and people are less wealthy, so you have some effect in consumer goods industries,
but you don't see massive declines in consumer goods industries.
Where do you see the declines? In the construction industry, in the steel industry, in public utilities, in exploring for oil, in mining, all higher order goods.
So what has happened is that the structure of production, if we want to use that terminology, has been artificially lengthened as people began to build more capital goods as a result of the fall in the interest rate.
And it snaps back to its original and correct length when the recession occurs.
So, during the recession, Austrians believe that the recession is the adjustment period, it's a recession adjustment process.
The sooner it happens, the better it is for the economy.
According to the Austrians, recession can only be postponed.
Recessions cannot be abolished.
You plant the seeds of the recession when the Fed begins to inflate.
So the Austrian policy remedy for recession, if you want to prevent recessions,
you don't engage in inflating bank credit or expanding bank credit to begin with.
And that will prevent recessions. However, once you are in a recession,
Don't try to keep the recession from occurring or to get out of the recession by printing new money
because all that does is it causes more maladjustments in the economy,
more labor is being misallocated to capital goods industries,
which will only postpone the recession and make it more intense at some point in the future.
So, it's the inflation that causes the misallocation of resources and the destruction of wealth, okay?
The recession is the adjustment, okay? The inflation causes the maladjustment.
And eventually, the inflation has to come to an end and result in recession
This is because prices begin to rise at rates that are politically unpopular, so the Fed responds to that by slamming on the brakes.
This is why central bankers talk of overheated economy as a means to, because they know that it's going to happen.
Exactly. That's a very good point. The point being that central bankers use the terminology of an overheated economy.
When we have growth, somehow that's going to cause inflation.
But genuine growth, as we saw when we talked about the structure of production, does not cause inflation.
It causes increases in supplies of goods, which causes deflation.
What we might call a growth deflation.
What causes inflation is the fact that the Fed is increasing the money supply.
And it appears as if there's growth going on at the same time because capital goods industries have been stimulated artificially by the lowering of the interest rate and the more ready availability of these funds, which are not really truly saved funds, okay?
So it appears as if growth and inflation goes together because that's an artifact of central banking itself, which attempts to artificially stimulate the economy.
So that's why, and that allows essential bankers to position themselves as people who fight inflation.
They say things like, you know, the economy is overheated.
So we have to respond to that by raising interest rates slightly.
But we don't want to raise them too much.
In other words, they don't want to allow the full recession adjustment process.
But eventually as inflation gets worse and worse, they have to do that.
Milton Friedman thinks that the money goes to 3% per year, or 3% to 5% per year?
He advocates that the money supply grows by about the same rate of growth of the real output in the economy.
So if real output is growing by about 3 percent, and if you increase the money supply by about 3 percent per year, you should have zero inflation.
It should hover around zero. And that's what he advocates.
and he does not believe in the Austrian theory of the business cycle, so he believes that recessions are inherent in the free market economy, which is really a Marxist view,
but that they would end very quickly and they wouldn't turn into anything like the Great Depression if the Fed just maintained a steady course, just kept increasing the money supply at the same rate,
and that inflation and recession are actually due to the Fed following the raw monetary policy.
That is, they either increase the money supply too quickly and too late after the recession has already ended and that brings about a boom.
And then when they respond to the boom, they choke off the increase in the money supply too rapidly and that brings about a recession.
So for Milton Friedman, the worst inflations and recessions result from the Fed.
You would have minor recessions and minor increases in prices as a result of people changing their demand for money, for example.
So Milton Friedman then does not see that even a small increase in the money supply will cause a recession somewhere down the line.
Even one that does not raise prices. We saw in the 1920s, prices did not rise despite the fact that the money supply was increasing at a very rapid rate, somewhere between six and seven percent, according to a definition of the money supply that I believe is the correct definition.
but yet prices hardly rose and the reason why was because
there was tremendous economic growth that occurred during the 1920s
new consumer appliances, electricity,
mass production of automobiles
and so on
and that happened in the 1990s
we had a recession in 2000-2001 prices didn't rise much because again
we had
we had tremendous amount of growth now part of that growth was
artificially stimulated by the lower interest rates.
We did, however, have the collapse of the high-tech bubble,
bubble of financial markets.
And that reflected the fact that the money, just as in the 1920s,
we had a huge boom in the stock market and in certain real estate markets in the 1920s,
just as we did in the 1990s.
So the new money that was being created was causing some distortions in the economy.
It just was hidden by the fact that the increase in the supplies of goods kept prices from rising.
Yes, Alex.
Okay, so the point is that there were only recessions during the periods when we had a quasi-central bank, the first and second banks of the United States, and that during the free banking era there were no recessions.
Well, I think we had minor recessions in the 1850s, but you're right, to the extent that the recession of the 1830s was caused by the previous inflation stimulated or orchestrated by the Second Bank of the United States, which was eventually abolished or not renewed through the efforts of Andrew Jackson.
I just wanted to point out that because it's inherent to the market economy, it's kind of strange because the real recessions, the big ones, really happen on the central bank.
Well, most economists would believe, and certainly Keynesians do, that recessions are inherent in the market economy and that view was really pushed by Karl Marx.
Now, Friedman, to his credit, believes that the worst recessions are caused by bad government policies, including central bank policies.
But he still believes that there are minor recessions that will occur in the economy and that you shouldn't try to fine-tune the economy out of those recessions through fiscal policy and monetary policy.
Just keep a steady growth in the money supply.
Which I certainly am opposed to, and most Austrians would see it as causing recessions of its own.
Which Austrian turn up with it, and what is high theory about it?
Well, this theory was originally outlined by Ludwig von Mises, based on the British currency school, some of the writings of the British currency school.
He put that together with Boehm-Bawerk's capital theory and with Vicksel's theory of the effect of changing the money supply on the interest rate.
So there were four runners, but he was the first one really to outline this theory of the business cycle, which is known as the Austrian theory of the business cycle.
Hayek elaborated it even further and cast it in terms of the structure of production.
So, Hayek was, his exposition is very, very good, I highly recommend it.
Mises first outlined the theory in The Theory of Money and Credit in 1912, elaborated it more in 1928.
Hayek wrote a book, Monetary Theory and the Trade Cycle, came out in 1928, that elaborated parts of this theory,
theory, but then fully elaborated it in a series of lectures that became prices and production.
Those lectures were given at the London School of Economics in 1930.
So it's sometimes with the Mises-Hayek theory of the trade cycle.
Hayek did make important contributions to this theory.
So it is Mises's, Mises originated the theory.
And Rothbard added some refinements and accepts this theory.
What is Hayek's Triangle?
Hayek's Triangles are a way of representing the structure of production and the effects of injections of money through credit markets,
and the creation of credit by the Fed, the effects of that on distorting the structure of production and bringing about the business cycle.
I don't know what Dr. Block's criticism of the triangles are. I'll have to take a look at that. Curtis?
In Europe, the question is, in Europe there is inflation targeting, where central banks aim at a certain rate of inflation, a deliberate rate of price increase, not just an increase in the money supply, but they want to increase prices in a certain range, let's say 2 to 4 percent.
And our current chairman of the Federal Reserve, Ben Bernanke, is also an advocate or has written on the inflation targeting.
What's interesting is, this is certainly not based on the Austrian theory by any means, the rates that people are looking at, 3, 4%, whatever it is,
because older Keynesians like Paul Samuelson call that, year after year, increase the price level, they call that a disease, okay?
So people's mentalities have changed since we've had experience with inflation, high inflation in the 70s and 80s, okay?
It's certainly against it and it certainly will cause a business cycle and in fact, as people begin to expect this inflation to continue, there may be an effect on their demand for money.
People may reduce their demand for money causing inflation to go above the range and then the central bank might be frightened to stop that inflation for fear of a recession.
So there are real problems with this inflation targeting approach. There are other problems. I'm not going to get into now. Any other questions? Alex?
Yes, I want to address, there's been a lot of people saying that a revert back to the gold standard would be correct, or it would be feasible, because the amount of transactions going on in the United States and the world is not sufficient to supply gold, or in the world is not sufficient to supply the transactions.
I mean, so the objection of going back to the gold standard is that there isn't sufficient amount of gold in the world to support the transactions that are occurring, okay?
Well, the simple answer to that is that at the right price is always enough gold, okay?
So if gold was $2,000 an ounce, there would be enough gold to back up or $5,000 an ounce.
There would be enough gold in the world to serve as a medium of exchange, okay?
Now, there are real problems with the transition back to a gold standard.
It doesn't mean that they can't be solved, but we have to be very careful in planning how to get gold back into circulation as money.
The gold that was stolen from the American people in 1933 by President Roosevelt is all held now by the government.
One way of getting back to a gold standard is to redefine the dollar in terms of gold, but the price of gold will be very, very high in order to back demand deposits and currency with gold, 100% for example.
Do you agree with creating legal tender, practice metals as legal tender, not backing the U.S. dollar with practice metals, making practice metals also legal tender?
so that as paper money depreciates or starts to depreciate very rapidly, people will then have the alternative to begin to use gold as a medium of exchange.
I think there's problems with that, but I'm certainly in favor of going back to or getting rid of the legal tender laws that force people to accept paper money for payment of debt, for discharge of debts that are incurred.
and Kirk. But I don't know if that plan will get us back to a gold standard. I
think this is a frontier of Austrian economics where we have to have more
research done. Okay, any other questions? Okay, thank you.