WEBVTT NOTE Monetary Control Planning and the Federal Reserve System: A Misesian Critique 1 00:00:00.000 --> 00:00:08.540 Classical liberals who had lived part of their lives before 1914 would often emphasize the 2 00:00:08.540 --> 00:00:14.720 stark contrast in the nature of the political and economic orders preceding and following 3 00:00:14.720 --> 00:00:17.140 the First World War. 4 00:00:17.140 --> 00:00:21.880 One of these classical liberals who did so in one of his books was a German liberal named 5 00:00:21.880 --> 00:00:22.880 Gustav Stolper. 6 00:00:22.880 --> 00:00:30.880 And I'd like to read a passage from his book, published in 1942, called This Age of Fable. 7 00:00:30.880 --> 00:00:35.880 We have difficulties in remembering how it was before August 1914. 8 00:00:35.880 --> 00:00:40.880 How it was to live in a world where everything was safe, certain, secure. 9 00:00:40.880 --> 00:00:47.880 How it was to live in a world where institutions, systems, customs, political frontiers and economic forces 10 00:00:47.880 --> 00:00:52.880 were so much taken for granted that few people troubled to give critical thought to them. 11 00:00:52.880 --> 00:00:56.880 How it was to live in a world where progress was a matter of course, 12 00:00:56.880 --> 00:01:03.880 moral standards were not seriously questioned, and economic rules were immutable and general. 13 00:01:03.880 --> 00:01:12.880 Stauffer reminded his readers that this pre-World War I era was based on what he called the three freedoms. 14 00:01:12.880 --> 00:01:15.880 And let me give you his account of this. 15 00:01:15.880 --> 00:01:23.160 This economic and social system in Europe was predicated on a few axiomatic principles. 16 00:01:23.160 --> 00:01:30.480 They were freedom of movement for men, for goods, and for money. 17 00:01:30.480 --> 00:01:35.280 Everyone could leave his country when he wanted and travel or migrate wherever he pleased 18 00:01:35.280 --> 00:01:37.120 without a passport. 19 00:01:37.120 --> 00:01:42.120 The only European country that demanded passports, not even visas, was Russia. 20 00:01:42.120 --> 00:01:44.920 Who wanted to travel to Russia anyway? 21 00:01:44.920 --> 00:01:50.560 was not yet the mecca for millions of dreamers from all over the world. 22 00:01:50.560 --> 00:01:55.640 The trend of migration was westward, within Europe from the thinly populated agricultural 23 00:01:55.640 --> 00:02:01.920 east to the rapidly industrializing center and west, and above all from Europe to the 24 00:02:01.920 --> 00:02:05.360 wide open Americas. 25 00:02:05.360 --> 00:02:10.600 There were still customs barriers on the European continent, it is true, but the vast British 26 00:02:10.600 --> 00:02:22.600 The British Empire was free trade territory, open to all and free competition, and several other European countries such as Netherlands, Belgium, Scandinavia came close to free trade. 27 00:02:22.600 --> 00:02:29.600 In the 60s of the 19th century, the conviction was general that international free trade was the future. 28 00:02:29.600 --> 00:02:33.600 The subsequent decades did not quite fulfill that promise. 29 00:02:33.600 --> 00:02:37.600 In the late 70s, reactionary trends set in. 30 00:02:37.600 --> 00:02:46.200 But looking back at the methods and the degree of protectionism built up at that time, we are seized with nostalgic envy. 31 00:02:46.200 --> 00:02:52.000 And the most natural of all was the freedom of movement for money. 32 00:02:52.000 --> 00:02:58.000 Year in, year out, billions were invested by the great industrial European powers in foreign countries. 33 00:02:58.000 --> 00:03:03.200 European and non-European. England and France held the lead. 34 00:03:03.200 --> 00:03:07.760 Germany joined them at a rapidly growing pace after the 1880s. 35 00:03:07.760 --> 00:03:12.320 These billions were regarded as safe investments with attractive yields, desirable for creditors 36 00:03:12.320 --> 00:03:19.020 as well as debtors, with no doubts about the eventual return of both interest and principal. 37 00:03:19.020 --> 00:03:23.520 Most of the money flowed into the United States and Canada, a great deal into South America, 38 00:03:23.520 --> 00:03:27.160 billions into Russia, hundreds of millions into the Balkan countries, minor amounts into 39 00:03:27.160 --> 00:03:29.440 India and the Far East. 40 00:03:29.440 --> 00:03:33.080 The interest paid on these foreign investments became an integral part of the national income 41 00:03:33.080 --> 00:03:53.080 and the system of the great industrial powers, protected not only by their political and military might, but, and more strongly, by the general unquestionable acceptance of the fundamental capitalist principles, sanctity of treaties, abidance by internal law, and restraint of governments from interference in business. 42 00:03:53.080 --> 00:04:08.080 Writing after the Second World War, another German liberal, Wilhelm Repke, explained that what enabled this international monetary order to evolve was the fact that it also had developed an international monetary system. 43 00:04:08.080 --> 00:04:11.080 And this is what Repke said. 44 00:04:11.080 --> 00:04:20.080 This international monetary system was not dependent upon a world monetary authority, nor a world monetary union or any other international pact. 45 00:04:20.080 --> 00:04:24.080 It rested on the contrary, entirely on the law of the individual state. 46 00:04:24.080 --> 00:04:28.080 Since the validity of the individual currencies depended upon gold, 47 00:04:28.080 --> 00:04:35.080 the fact that money equaled gold not only affected a fixed and free coupling of national currencies, 48 00:04:35.080 --> 00:04:40.080 but also compelled national governments by means of their national currency regulations 49 00:04:40.080 --> 00:04:45.080 to behave in manners of monetary and credit policy in such a way that this fixed and free coupling 50 00:04:45.080 --> 00:04:52.980 Every coupling remained an undisputed permanent institution, irrespective of all trade fluctuations. 51 00:04:52.980 --> 00:04:58.660 And finally, Repker emphasized the moral element in this system. 52 00:04:58.660 --> 00:05:03.600 But at the same time, it was a phenomena with a moral foundation. 53 00:05:03.600 --> 00:05:08.020 The obligations, namely, which are conscientious conformity with the rules of the gold standard 54 00:05:08.020 --> 00:05:12.960 imposed upon all the participating countries, formed at the same time a part of that system 55 00:05:12.960 --> 00:05:20.180 System of Written and Unwritten Standards, which comprise the International Liberal Order. 56 00:05:20.180 --> 00:05:25.560 This international economic order came crashing down with the First World War. In a matter 57 00:05:25.560 --> 00:05:30.400 of weeks after the war's beginning in August 1914, the world was converted into a system 58 00:05:30.400 --> 00:05:37.400 of national economies. Free immigration was halted and passport requirements were established. 59 00:05:37.400 --> 00:05:41.480 Trade among the warring nations was halted. Economic relationships, in other words, were 60 00:05:41.480 --> 00:05:44.880 were nationalized and politicized by the war. 61 00:05:44.880 --> 00:05:47.280 Economic affairs became affairs of state, 62 00:05:47.280 --> 00:05:51.160 rather than trading arrangements among private individuals. 63 00:05:51.160 --> 00:05:53.300 And in turn, and as a consequence, 64 00:05:53.300 --> 00:05:54.680 the individual and his affairs were 65 00:05:54.680 --> 00:05:57.080 made subordinate to the state while the state now 66 00:05:57.080 --> 00:06:00.080 took responsibility for an increasing share 67 00:06:00.080 --> 00:06:02.820 of the affairs of the individual. 68 00:06:02.820 --> 00:06:05.120 The same nationalizing and politicizing process 69 00:06:05.120 --> 00:06:08.760 occurred in monetary affairs in all of the belligerent nations 70 00:06:08.760 --> 00:06:10.640 as well. 71 00:06:10.640 --> 00:06:14.880 Within a few months of the beginning of the First World War, all the governments involved 72 00:06:14.880 --> 00:06:20.040 restricted their citizens' use and ownership of gold. Individuals were no longer legally 73 00:06:20.040 --> 00:06:25.920 permitted to demand payments in gold for banknotes. The exportation and importation of gold was 74 00:06:25.920 --> 00:06:32.320 strictly controlled and regulated by their respective governments. It soon became clear 75 00:06:32.320 --> 00:06:35.880 to all the governments involved in the war that the costs of the conflict were going 76 00:06:35.880 --> 00:06:41.880 are going to impose severe financial burdens upon all of them to cover their war expenditures. 77 00:06:41.880 --> 00:06:47.880 And as a consequence, all the European belligerents resorted to the printing press to finance the war. 78 00:06:47.880 --> 00:06:52.880 And the United States did not escape these monetary sinews of war. 79 00:06:52.880 --> 00:06:58.880 Between the establishment of the Federal Reserve system in 1913 and 1919, when the war boom ended, 80 00:06:58.880 --> 00:07:04.400 The money supply in the U.S. increased by over 70 percent, while wholesale prices rose 81 00:07:04.400 --> 00:07:08.400 more than 100 percent. 82 00:07:08.400 --> 00:07:15.240 What the First World War brought about was the triumph of political and economic collectivism. 83 00:07:15.240 --> 00:07:19.680 The ideological currents that had begun to shift back towards statism in the 19th century 84 00:07:19.680 --> 00:07:24.000 had their opportunity to be brought into practice in the war. 85 00:07:24.000 --> 00:07:29.640 And when the war ended in 1918, collectivism, though making moderate retreats, dominated 86 00:07:29.640 --> 00:07:33.760 the political, cultural and economic landscape. 87 00:07:33.760 --> 00:07:38.940 And the advent of the Great Depression in 1929 only accelerated the process, with either 88 00:07:38.940 --> 00:07:48.460 total planning or extensive intervention being the hallmark of government policies everywhere. 89 00:07:48.460 --> 00:07:55.780 When Mises wrote his treatise on socialism and was published in 1922, he began his book 90 00:07:55.780 --> 00:08:03.220 with the following, socialism is the watchword of our day, the socialist idea dominates the 91 00:08:03.220 --> 00:08:12.020 modern spirit, it expresses the thoughts and feelings of all, it has a seal upon our time. 92 00:08:12.020 --> 00:08:19.500 When history comes to tell our story, it will write above the chapter the epic of socialism. 93 00:08:19.500 --> 00:08:25.540 Now the liberal idea and ideal had come under attack a good half century almost before the 94 00:08:25.540 --> 00:08:28.020 beginning of the First World War. 95 00:08:28.020 --> 00:08:32.280 In fact, at the turn of the century, a German historian named Hermann Levy, in a book called 96 00:08:32.280 --> 00:08:37.240 Economic Liberalism, observed, the Manchester School of Economic laissez-faire has of recent 97 00:08:37.240 --> 00:08:41.820 years been brought face to face with two very momentous phenomenon. 98 00:08:41.820 --> 00:08:48.980 Liberalism and Neomercantilism. Both agree that industry should be organized by the state. 99 00:08:48.980 --> 00:08:55.180 Manchester liberalism has been undermined bit by bit by the union of these two forces. 100 00:08:55.180 --> 00:08:59.340 Now the focal point for this emergence of an anti-liberal spirit, I'm not wishing to 101 00:08:59.340 --> 00:09:04.780 sound too much like an anti-German basher, was in fact in Germany. It was in Germany 102 00:09:04.780 --> 00:09:10.260 that there first arose the neomercantilist spirit under Bismarck. It was in Germany that 103 00:09:10.260 --> 00:09:15.300 that there arose the modern welfare state where Bismarck attempted to preempt the growing 104 00:09:15.300 --> 00:09:20.100 strength of the social democratic party by co-opting their program of social security, 105 00:09:20.100 --> 00:09:26.540 unemployment compensation, welfare retirement programs, and basically setting up a welfare 106 00:09:26.540 --> 00:09:30.860 state through protectionist and other regulatory systems, a welfare state for both labor and 107 00:09:30.860 --> 00:09:32.860 business. 108 00:09:32.860 --> 00:09:37.380 But what was worse about this is that the German experience set off a rippling effect 109 00:09:37.380 --> 00:09:38.940 throughout the rest of the world. 110 00:09:38.940 --> 00:09:42.140 In England, it took the form of the Fabian Socialists. 111 00:09:42.140 --> 00:09:44.340 In the United States, what we experienced 112 00:09:44.340 --> 00:09:47.260 was two or three generations of American scholars, 113 00:09:47.260 --> 00:09:50.520 as Professor Rothbard mentioned last night, 114 00:09:50.520 --> 00:09:52.500 who went off to Germany to have a capstone 115 00:09:52.500 --> 00:09:53.860 of their educational experience 116 00:09:53.860 --> 00:09:56.060 in the land of philosophers and poets, 117 00:09:56.060 --> 00:09:58.700 came back with their PhDs after studying with members 118 00:09:58.700 --> 00:10:01.620 of what were known as the German Historical School, 119 00:10:01.620 --> 00:10:04.580 particularly American studying economics, sociology, 120 00:10:04.580 --> 00:10:09.220 and Political Science, and came to institute what in the United States became known as 121 00:10:09.220 --> 00:10:13.160 the Progressive Era and the movement known as institutionalism. 122 00:10:13.160 --> 00:10:16.820 They first had their high watermark during the First World War where they had the opportunity 123 00:10:16.820 --> 00:10:24.580 to institute a planned economy and their second high watermark with the New Deal. 124 00:10:24.580 --> 00:10:29.980 But what's important to realize, and which is what I want to partly talk about, among 125 00:10:29.980 --> 00:10:35.180 among a number of other things is that when this momentum towards political and economic 126 00:10:35.180 --> 00:10:42.500 collectivism started gaining greater and greater force in the 20th century, there was one crucial 127 00:10:42.500 --> 00:10:49.380 part of the economy in which government control and management was taken for granted and in 128 00:10:49.380 --> 00:10:58.540 fact for 100 years had been the main focus of the most perverse form of government management 129 00:10:58.540 --> 00:11:00.880 and the economic order as a whole. 130 00:11:00.880 --> 00:11:06.820 And that has to do with government management of money and central banking. 131 00:11:06.820 --> 00:11:12.180 In her study, the rationale of central banking, Vera Smith, says the following, 132 00:11:12.180 --> 00:11:16.840 In the present century, centralized banking systems have come to be regarded as the usual 133 00:11:16.840 --> 00:11:21.300 arrangement, if not the one of the conditions of the attainment of an advanced stage of 134 00:11:21.300 --> 00:11:23.580 economic development. 135 00:11:23.580 --> 00:11:28.500 The belief in the desirability of central bank organization is universal. 136 00:11:28.500 --> 00:11:38.500 It is notable that when laissez-faire theories and politics were at their height, so far as other industries were concerned, banking was already regarded in another category. 137 00:11:38.500 --> 00:11:45.500 Even the most doctrinaire free traders were unwilling to apply their principles to the business of banking. 138 00:11:45.500 --> 00:11:56.500 It was widely contended that banking must be the subject of special regulation, although what precise form these regulations should take remained an open question for several decades. 139 00:11:56.500 --> 00:12:01.500 This was during the decades of the gold standard in the 19th and early 20th century. 140 00:12:01.500 --> 00:12:06.500 The international monetary system, of which people like Wilhelm Röpke and others spoke in such glowing terms, 141 00:12:06.500 --> 00:12:16.500 was itself a creation of a planning mentality and was a state-managed monetary order, even during the zenith of classical liberal domination. 142 00:12:16.500 --> 00:12:23.500 The decision to officially go on the gold standard in the 19th century in each of the major nations was a matter of state policy 143 00:12:23.500 --> 00:12:53.500 And a central banking structure for the management and control of the gold-backed currency was established in each of these countries, either in the form of giving a private bank the monopoly control over gold reserves, in the issuance of bank notes such as in England, or in the form of a state institution assigned the task of managing the monetary system within its borders, that the monetary central planners have been guided by different policy goals in the 20th century than in the 19th century should not blind the analysts 144 00:12:53.500 --> 00:13:17.540 Now, the classical liberals were extremely suspicious of government abuse and mismanagement 145 00:13:17.540 --> 00:13:18.540 of money. 146 00:13:18.540 --> 00:13:23.340 In England, the particular event that brought about a change were the experiences during 147 00:13:23.340 --> 00:13:27.700 during the Napoleonic War, where basically the British government had immense financial 148 00:13:27.700 --> 00:13:29.740 costs to fight Napoleon. 149 00:13:29.740 --> 00:13:34.500 They found it difficult to float loans at what they considered attractive rates of interest. 150 00:13:34.500 --> 00:13:37.100 They went to the Bank of England and cut a deal. 151 00:13:37.100 --> 00:13:42.140 The Bank of England would supply them with low-interest loans provided through the issuance 152 00:13:42.140 --> 00:13:46.280 of additional banknotes, and so the bank's solvency would not be threatened. 153 00:13:46.280 --> 00:13:50.260 They instituted a restriction act which said the Bank of England did not have to redeem 154 00:13:50.260 --> 00:13:52.660 its notes for gold. 155 00:13:52.660 --> 00:14:01.820 Now this situation created an inflationary bias in the British economy during the 1790s 156 00:14:01.820 --> 00:14:04.540 and the first decade of the 19th century. 157 00:14:04.540 --> 00:14:08.540 And when the war ended, many British economists and classical liberals said this system could 158 00:14:08.540 --> 00:14:11.180 not be allowed to remain. 159 00:14:11.180 --> 00:14:14.880 Perhaps the classic statement of this was made by David Ricardo. 160 00:14:14.880 --> 00:14:18.580 It may be questioned whether a bank lending many millions more to government than its 161 00:14:18.580 --> 00:14:22.640 capital and savings can be called independent of that government. 162 00:14:22.640 --> 00:14:27.160 It was then owing to the intimate connection between the bank and government that the restriction 163 00:14:27.160 --> 00:14:31.100 on bank note redemption became necessary. 164 00:14:31.100 --> 00:14:34.800 The only legitimate security which the public can possess against the indiscretion of the 165 00:14:34.800 --> 00:14:42.120 bank is to oblige them to pay their notes on demand in specie. 166 00:14:42.120 --> 00:14:47.060 But unfortunately these advocates of a gold-backed currency believe that the issuance of such 167 00:14:47.060 --> 00:14:51.500 Such species-backed banknotes should be a monopoly privilege issue to a central banking 168 00:14:51.500 --> 00:14:56.620 organization, and as I said in the case of England, the Bank of England. 169 00:14:56.620 --> 00:15:02.100 Money and the monetary system, in fact, was a nationalized industry even during the era 170 00:15:02.100 --> 00:15:06.300 of free trade. 171 00:15:06.300 --> 00:15:10.780 And it was a manipulated and managed system. 172 00:15:10.780 --> 00:15:16.340 A German economist named Malchior Paulyi in his book, The Twilight of Gold, points this 173 00:15:16.340 --> 00:15:17.340 out. 174 00:15:17.340 --> 00:15:22.060 A new approach developed under the leadership of the Bank of England in the late 1860s and 175 00:15:22.060 --> 00:15:24.580 the early 1870s. 176 00:15:24.580 --> 00:15:28.500 The self-correcting mechanism of international payments remained the foundation of the gold 177 00:15:28.500 --> 00:15:34.460 standard gain, with the gold reserve ratio the ultimate guidepost, but the practice of 178 00:15:34.460 --> 00:15:39.580 central banking had now evolved to the use of discretionary measures. 179 00:15:39.580 --> 00:15:44.500 That is as far as control over short-run fluctuations in the issuance of payments and in the domestic 180 00:15:44.500 --> 00:15:47.620 current conditions were concerned. 181 00:15:47.620 --> 00:15:52.020 Managerial discretion was essential to decide, for example, when and how to intervene in 182 00:15:52.020 --> 00:15:58.080 a panic by granting liberal credit at high interest rates in order to foresee all forced 183 00:15:58.080 --> 00:16:00.700 liquidation of otherwise sound investment. 184 00:16:00.700 --> 00:16:05.140 Yet the basic objective of discretionary policy was to try to prevent panic and the dangerous 185 00:16:05.140 --> 00:16:09.260 gold drains and to be able to counteract them if they occurred. 186 00:16:09.260 --> 00:16:14.300 When an active policy line was chosen, it became mandatory to induce the financial community, 187 00:16:14.300 --> 00:16:18.860 the commercial banks in particular, to coordinate their credit practices with those of the central 188 00:16:18.860 --> 00:16:20.180 bank. 189 00:16:20.180 --> 00:16:25.180 Central bankers had to learn their profession, not only the quasi-mechanical rules of the 190 00:16:25.180 --> 00:16:34.860 gold standard game, but also the techniques of adapting them to immediate control objectives. 191 00:16:34.860 --> 00:16:41.660 Now all that happened in the 20th century was that the purposes and directions and desired 192 00:16:41.660 --> 00:16:46.800 targets of the central bank changed, but not the conception that it needed to be a central 193 00:16:46.800 --> 00:16:50.660 bank that undertook this approach. 194 00:16:50.660 --> 00:16:55.660 In the 1920s, the major focus of this change came through Irving Fisher and John Maynard 195 00:16:55.660 --> 00:16:56.660 Keynes. 196 00:16:56.660 --> 00:17:00.380 Professor Salerno touched upon both of those. 197 00:17:00.380 --> 00:17:05.260 In the 1920s Irving Fisher believed that now economics had the capacity to scientifically 198 00:17:05.260 --> 00:17:07.980 manage a monetary system. 199 00:17:07.980 --> 00:17:12.380 It had the capacity to scientifically manage a monetary system because he believed that 200 00:17:12.380 --> 00:17:18.260 through quantitative techniques the economic statistician could both collect sufficient 201 00:17:18.260 --> 00:17:23.540 data and construct such targets and goals as a price level and then have the Federal 202 00:17:23.540 --> 00:17:29.420 Reserve manage the monetary system to assure some stability in that target. 203 00:17:29.420 --> 00:17:35.100 In the 19th century, the goal of the monetary central planners was to assure international 204 00:17:35.100 --> 00:17:37.100 monetary stability. 205 00:17:37.100 --> 00:17:43.540 That is, the foreign exchange rate of that country's currency, vis-a-vis other nations, 206 00:17:43.540 --> 00:17:48.500 in terms of gold stability. 207 00:17:48.500 --> 00:17:54.180 Now the target would be not the external exchange rate, but basically certain internal policy 208 00:17:54.180 --> 00:18:08.500 And in the case of John Maynard Keynes, following the First World War, his arguments were is 209 00:18:08.500 --> 00:18:14.420 that now gold had become a barbarous relic and that it was necessary for the British 210 00:18:14.420 --> 00:18:23.240 government to focus on domestic targets such as unemployment, price stability as the solutions. 211 00:18:23.240 --> 00:18:28.000 In truth, the gold standard is already a barbarous relic. All of us from the governor, I'm quoting 212 00:18:28.000 --> 00:18:31.720 Keynes, all of us from the governor of the Bank of England downwards are now primarily 213 00:18:31.720 --> 00:18:36.640 interested in preserving the stability of business, prices and employment. Advocates 214 00:18:36.640 --> 00:18:40.840 of the ancient standard, notice the way he tries to set rhetoric with the concept, the 215 00:18:40.840 --> 00:18:45.180 ancient standard, something out of date. Advocates of the ancient standard do not observe how 216 00:18:45.180 --> 00:18:50.680 remote it now is from the spirit and the requirements of the age. Our conclusions up to this point 217 00:18:50.680 --> 00:18:55.600 are therefore that when stability of the internal price level and stability of the external 218 00:18:55.600 --> 00:19:02.080 exchanges are incompatible, the former, that is, stability of the internal price level, 219 00:19:02.080 --> 00:19:03.280 is preferred. 220 00:19:03.280 --> 00:19:09.240 In the nineteenth century, the ruling idea had been liberty. 221 00:19:09.240 --> 00:19:15.440 The spirit of the age was captured in Richard Cobden's slogan, free trade, peace and goodwill 222 00:19:15.440 --> 00:19:17.520 among nations. 223 00:19:17.520 --> 00:19:21.480 The wealth of nations was seen as arising from individual freedom and the social order 224 00:19:21.480 --> 00:19:24.720 respecting private property and the means of production. 225 00:19:24.720 --> 00:19:28.040 And this was extended to the international order as well. 226 00:19:28.040 --> 00:19:32.720 Gold was considered the commodity most proven through the ages to serve the internationalization 227 00:19:32.720 --> 00:19:34.120 of trade. 228 00:19:34.120 --> 00:19:37.480 And preservation of a gold standard was given a prominent place among the limited duties 229 00:19:37.480 --> 00:19:41.240 assigned to the limited state of the last century. 230 00:19:41.240 --> 00:19:45.880 But as Ludwig von Mises pointed out in one of the essays that is included in that volume 231 00:19:45.880 --> 00:19:49.280 that I edited for the Mises Institute. 232 00:19:49.280 --> 00:19:52.960 A nation's policy forms an integral whole. 233 00:19:52.960 --> 00:19:54.640 Foreign policy and domestic policy 234 00:19:54.640 --> 00:19:57.000 are closely linked together. 235 00:19:57.000 --> 00:19:58.800 They condition each other. 236 00:19:58.800 --> 00:20:01.040 Economic nationalism is the corollary 237 00:20:01.040 --> 00:20:02.720 of the present-day domestic policies 238 00:20:02.720 --> 00:20:04.240 of government interference with business 239 00:20:04.240 --> 00:20:06.800 and of national planning, as free trade 240 00:20:06.800 --> 00:20:09.920 was the complement of domestic economic freedom. 241 00:20:11.740 --> 00:20:13.760 And that is the dilemma that we have had 242 00:20:13.760 --> 00:20:15.640 in the 20th century. 243 00:20:15.640 --> 00:20:21.760 The classical liberals left the residue of a crucial matter of planning untouched by 244 00:20:21.760 --> 00:20:26.600 their revolution against mercantilism in the 18th and early 19th century. 245 00:20:26.600 --> 00:20:31.000 The residue of planning that they left was the belief that it was necessary to separate 246 00:20:31.000 --> 00:20:36.960 money from other aspects of the economy, for there to be central planning of money, monetary 247 00:20:36.960 --> 00:20:38.200 management. 248 00:20:38.200 --> 00:20:43.760 And all that happened is that the institution that they had created was taken over by different 249 00:20:43.760 --> 00:20:51.800 Managers of the 20th Century. Now one has to say this for the 19th Century gold standard. 250 00:20:51.800 --> 00:20:58.840 The 19th Century advocates of monetary planning had a greater degree of humility. They believed 251 00:20:58.840 --> 00:21:03.680 that governments couldn't control and manage, oversee and direct an economy better than 252 00:21:03.680 --> 00:21:09.200 basically leading those affairs to the individuals of the society themselves. And therefore they 253 00:21:09.200 --> 00:21:14.120 They assigned a very simple target in general for the monetary managers. 254 00:21:14.120 --> 00:21:15.960 Stay on the gold standard. 255 00:21:15.960 --> 00:21:21.600 See that there isn't a threat to the stability of the foreign exchanges. 256 00:21:21.600 --> 00:21:26.780 Adjust interest rates to assure that gold does not flow in or flow out in any way that 257 00:21:26.780 --> 00:21:33.640 destabilizes the stability of the monetary system internally or threaten the stability 258 00:21:33.640 --> 00:21:38.320 of the international order vis-a-vis our currency with other nations' currencies so there can 259 00:21:38.320 --> 00:21:44.280 can be this internationalizing web of exchanges and mutual benefits through trade. 260 00:21:44.280 --> 00:21:48.720 The problem is that that institution has been taken over in the 20th century by people who 261 00:21:48.720 --> 00:21:51.200 have different agendas. 262 00:21:51.200 --> 00:21:55.200 And those agendas are basically ones not only of planning but even more importantly the 263 00:21:55.200 --> 00:21:57.560 mentality of the social engineer. 264 00:21:57.560 --> 00:22:05.840 The idea that it is possible and desirable to manage an economy to assure certain goals 265 00:22:05.840 --> 00:22:22.200 Now, what I'd like to spend the remaining time on is to try to explain why, to use a 266 00:22:22.200 --> 00:22:28.280 phrase of Hayek's, the belief that they can centrally manage the money supply to assure 267 00:22:28.280 --> 00:22:34.220 the things that they consider desirable is inherently impossible. 268 00:22:34.220 --> 00:22:38.660 That is what Hayek referred to as they suffer from a pretense of knowledge, the capacity 269 00:22:38.660 --> 00:22:45.140 to be able to do things which is beyond human capability and in fact by attempting to do 270 00:22:45.140 --> 00:22:50.540 so create situations that are worse than leaving the situation alone. 271 00:22:50.540 --> 00:22:56.820 The best way to contrast this is to first set up the idea of a monetary system that 272 00:22:56.820 --> 00:23:03.440 is not controlled by the government and to imagine some change in the market situation 273 00:23:03.440 --> 00:23:07.880 and very briefly explaining how the market would adjust to the changing situation 274 00:23:07.880 --> 00:23:09.840 and contrast that to the government. 275 00:23:09.840 --> 00:23:14.040 Let us imagine types of monetary systems 276 00:23:14.040 --> 00:23:16.580 in which the government does not control 277 00:23:16.580 --> 00:23:19.580 the money supplier or the monetary system in any way. 278 00:23:19.580 --> 00:23:22.760 Basically some type of form of free banking. 279 00:23:22.760 --> 00:23:25.960 And we can imagine that this free banking could be of two different types. 280 00:23:25.960 --> 00:23:27.920 Let me briefly outline both. 281 00:23:27.920 --> 00:23:30.760 One could be one hundred percent reserves, as 282 00:23:30.760 --> 00:23:37.040 Professor Salerno was pointing out. In this case, all liabilities have to be backed 100% 283 00:23:37.040 --> 00:23:42.200 by gold. And basically, what would emerge under this type of system would be basically 284 00:23:42.200 --> 00:23:48.600 two types of accounts that banks would offer. Basically, demand deposits and time deposits. 285 00:23:48.600 --> 00:23:52.440 Demand deposits basically would be warehouse facilities. You'd probably pay the bank 286 00:23:52.440 --> 00:23:58.040 a fee. The bank would hold 100% your hard currency on deposit. You'd be saved the 287 00:23:58.040 --> 00:24:02.400 the trouble of holding it or storing it yourself, the warehouse receipts that they would issue 288 00:24:02.400 --> 00:24:07.720 would tend over time to be used as money substitutes to save the inconvenience of rushing to the 289 00:24:07.720 --> 00:24:13.840 bank every time you needed cash to undertake a transaction, and everyone who accepted such 290 00:24:13.840 --> 00:24:18.000 warehouse receipt money substitutes would know that at any time they could redeem them 291 00:24:18.000 --> 00:24:24.480 on demand, and that is how a version of gold back paper money would be supported. 292 00:24:24.480 --> 00:24:27.040 Some deposits basically would be savings accounts. 293 00:24:27.040 --> 00:24:31.520 You would have to agree to deposit your money in a bank for a set period of time. 294 00:24:31.520 --> 00:24:36.080 You would not be able to withdraw that money for that period of time, unless perhaps for 295 00:24:36.080 --> 00:24:39.200 a very severe penalty rate. 296 00:24:39.200 --> 00:24:42.960 And basically the banks would then know that they had had the sum of money for an X period 297 00:24:42.960 --> 00:24:44.160 of time. 298 00:24:44.160 --> 00:24:48.680 They would then arrange a time horizon of loans so that they synchronize when loans 299 00:24:48.680 --> 00:24:54.440 would be paid back, when potentially depositors could withdraw their savings account when 300 00:24:54.440 --> 00:25:00.440 and the time deposit became due, and that's basically how such a 100% reserve system would work. 301 00:25:00.440 --> 00:25:07.440 In that situation, there is a total and very closely synchronized process of savings and investment, 302 00:25:07.440 --> 00:25:13.440 and basically that eliminates the possibility in a very rigid and mechanical sense for what the Austrians refer to as a business cycle, 303 00:25:13.440 --> 00:25:20.440 that is an over issuance of money-generated investments that can overextend what the savings base can sustain. 304 00:25:20.440 --> 00:25:25.440 or we could imagine a free banking system with fractional reserves. 305 00:25:25.440 --> 00:25:31.440 Banks would take in deposits, perhaps banks would competitively offer different rates of return, 306 00:25:31.440 --> 00:25:38.440 different interest rates on deposits, telling their depositors that we hold different types of reserve levels, 307 00:25:38.440 --> 00:25:42.440 25% reserves against liabilities, 10% reserve liabilities. 308 00:25:42.440 --> 00:25:46.440 You run a risk and the likelihood of us having financial difficulties, 309 00:25:46.440 --> 00:25:53.440 and financial difficulties, so we offer you a spectrum of risk-based interest rates to make it more or less attractive. 310 00:25:53.440 --> 00:26:02.440 And what would basically limit the overitions of notes in that situation would be two factors, as economists who advocate for banking have usually argued. 311 00:26:02.440 --> 00:26:06.440 One is the clearinghouse mechanism of an individual bank overextends its notes. 312 00:26:06.440 --> 00:26:14.440 The notes will be returned to the bank through the clearinghouse mechanism, that is, the notes are received by people in society. 313 00:26:14.440 --> 00:26:18.320 those people deposit those notes in their banks, those other banks through a clearinghouse 314 00:26:18.320 --> 00:26:23.040 process demand redemption of those notes from the bank that has issued them. 315 00:26:23.040 --> 00:26:30.680 If that bank owes more obligations than it has claims on other banks, it has a gold drain, 316 00:26:30.680 --> 00:26:37.240 its solvency is threatened and it must rein in its issuance of notes or it threatens its 317 00:26:37.240 --> 00:26:39.040 own financial stability. 318 00:26:39.040 --> 00:26:43.280 At the same time, the other factor that acts as a limit on any individual bank and free 319 00:26:43.280 --> 00:26:48.260 Banking arrangement is the possibility that members of the society will become suspicious 320 00:26:48.260 --> 00:26:52.760 of the stability and financial soundness of that institution. 321 00:26:52.760 --> 00:26:58.200 Its notes will only be accepted or traded at a discount in relation to its par or face 322 00:26:58.200 --> 00:26:59.260 value. 323 00:26:59.260 --> 00:27:05.140 That will result in people who have deposits on those accounts taking their funds out of 324 00:27:05.140 --> 00:27:10.300 that bank and putting them into banks that are viewed with greater stability and confidence 325 00:27:10.300 --> 00:27:14.980 in the Community and that loss of reserves through deposit withdrawals also would act 326 00:27:14.980 --> 00:27:17.700 as a check on the behavior of the bank. 327 00:27:17.700 --> 00:27:20.940 So each bank would therefore have to act in a more conservative manner. 328 00:27:20.940 --> 00:27:23.340 Those are basically two types of arrangements. 329 00:27:23.340 --> 00:27:29.820 Now let us suppose that in this situation there were to be a change in one of the monetary 330 00:27:29.820 --> 00:27:32.940 factors in the economy. 331 00:27:32.940 --> 00:27:36.900 And we can imagine that such a change could occur perhaps if there was a change in the 332 00:27:36.900 --> 00:27:40.580 If there was a change in the demand for money, if there was a change in the demand for money, 333 00:27:40.580 --> 00:27:41.980 how would this manifest itself? 334 00:27:41.980 --> 00:27:46.060 Well, if there was a change in the demand for money, this change in the demand for money 335 00:27:46.060 --> 00:27:54.460 could come from two avenues or causes, like Professor Rothbard and his book on Man Economy 336 00:27:54.460 --> 00:27:58.660 and State refers to either pre-income or post-income demands for money. 337 00:27:58.660 --> 00:28:03.340 Now, all that pre-income demand for money means is that individuals offer goods and 338 00:28:03.340 --> 00:28:08.980 Goods and Services in the market to earn money income in the exchange process. They wish 339 00:28:08.980 --> 00:28:13.580 to earn a total sum of money income for various and secondary purposes for which money is 340 00:28:13.580 --> 00:28:19.020 desired. Now, if there's an increase in the demand for money in this pre-income sense, 341 00:28:19.020 --> 00:28:23.380 what individuals would do would be to offer a larger quantity of goods and services in 342 00:28:23.380 --> 00:28:29.020 the economy. Offering a larger quantity of factor services would result in a competitive 343 00:28:29.020 --> 00:28:36.140 bidding down of factor prices. A fall in the cost of production would act as an incentive 344 00:28:36.140 --> 00:28:40.860 for the hirers of factors of production to want to expand output, because now costs in 345 00:28:40.860 --> 00:28:44.460 relation to initially to selling prices are greater. There would be incentives to want 346 00:28:44.460 --> 00:28:50.020 to expand output, to take advantage of those profit opportunities with lower cost of production. 347 00:28:50.020 --> 00:28:54.460 After these production processes are completed, a greater quantity of final goods and services 348 00:28:54.460 --> 00:28:58.540 would come on the market. There would be a competition for consumer business and then 349 00:28:58.540 --> 00:29:03.660 and Consumer Prices would tend to fall, and how far they would individually fall would 350 00:29:03.660 --> 00:29:08.740 depend upon the degree of responsiveness of demand given the supply increases in each 351 00:29:08.740 --> 00:29:09.740 individual market. 352 00:29:09.740 --> 00:29:14.980 And what would basically would be happening is that if the economic statistician was observing 353 00:29:14.980 --> 00:29:21.020 this after a period of time, he would collect a data for a set of prices in the economy, 354 00:29:21.020 --> 00:29:26.420 he would collect them, he would average them, and what he would show is that on average 355 00:29:26.420 --> 00:29:28.420 prices in general had fallen. 356 00:29:28.420 --> 00:29:30.100 Though in fact what had happened 357 00:29:30.100 --> 00:29:32.220 beneath that price level index 358 00:29:33.860 --> 00:29:36.980 would be the fact that there had been individual responses 359 00:29:36.980 --> 00:29:39.020 in individual sectors of the economy 360 00:29:39.020 --> 00:29:41.180 in response to individual decisions 361 00:29:41.180 --> 00:29:43.860 to offer a greater quantity of factor services 362 00:29:43.860 --> 00:29:46.660 in individual markets based upon individual decisions 363 00:29:46.660 --> 00:29:49.140 of a respective increased demand 364 00:29:49.140 --> 00:29:52.060 to want to earn greater amounts of money income 365 00:29:52.060 --> 00:29:54.060 and individual price would be tending to fall, 366 00:29:54.060 --> 00:29:59.620 Individual A, price A would tend to fall, price B would tend to fall, price C would 367 00:29:59.620 --> 00:30:05.380 tend to fall, each in response to their individual changing supply and demand situation, a cumulatively 368 00:30:05.380 --> 00:30:10.060 would be recorded in the statistical averaging as a decline in the price level. 369 00:30:10.060 --> 00:30:13.820 Now in each case, the market would have smoothly adjusted. 370 00:30:13.820 --> 00:30:16.560 No economy-wide change has occurred. 371 00:30:16.560 --> 00:30:21.640 What has happened is individual changes, individual changes. 372 00:30:21.640 --> 00:30:29.280 accumulatively, just as given this macro manifestation of a lower index-based measurement of a price-level 373 00:30:29.280 --> 00:30:30.480 decrease. 374 00:30:30.480 --> 00:30:34.960 Or we can imagine another change in the demand for money. 375 00:30:34.960 --> 00:30:38.640 What Professor Rothbard refers to is the post-income demand for money. 376 00:30:38.640 --> 00:30:42.480 And that's basically as after you've earned money income, you have to decide how to apportion 377 00:30:42.480 --> 00:30:45.160 your money income among alternative uses. 378 00:30:45.160 --> 00:30:50.760 There's basically in terms of three categories, consumption, investment or cash balance holdings. 379 00:30:50.760 --> 00:30:55.680 And an individual might decide that on average during the income period he wishes to hold 380 00:30:55.680 --> 00:31:02.400 a larger fraction of his income as a cash balance. And he would tend to do so by diminishing 381 00:31:02.400 --> 00:31:07.260 his expenditures in other directions so that on average he is holding a larger amount as 382 00:31:07.260 --> 00:31:13.040 a cash holding. That means, however, in the decision to diminish his expenditures that 383 00:31:13.040 --> 00:31:17.340 probably would not be across the board and proportional. Individuals evaluate the goods 384 00:31:17.340 --> 00:31:18.340 and Services. 385 00:31:18.340 --> 00:31:22.540 They purchase in their market basket of personal goods differently and at the margin they would 386 00:31:22.540 --> 00:31:27.380 decide at what margin, that is what commodity, could they afford to cut back on their expenditures 387 00:31:27.380 --> 00:31:32.540 to add on average to their cash balance holdings in which the loss of utility or satisfaction 388 00:31:32.540 --> 00:31:37.120 from the foregoing of some consumption activity would be felt the least. 389 00:31:37.120 --> 00:31:40.740 And as a consequence they would cut back perhaps marginally on the purchase of this product 390 00:31:40.740 --> 00:31:44.780 and marginally in some different amount on that product and so on and so forth until 391 00:31:44.780 --> 00:31:50.620 on average they were holding a larger average cash balance during the income period. 392 00:31:50.620 --> 00:31:56.380 Now again, what would be the consequence of this? Individual commodities would experience 393 00:31:56.380 --> 00:32:02.020 a decline in the demand, individual markets would experience a decline in the individual 394 00:32:02.020 --> 00:32:07.340 demand for their output. That would result in particular prices going down, there would 395 00:32:07.340 --> 00:32:12.020 be a decline in the demand for resources to make those products, those products would 396 00:32:12.020 --> 00:32:15.660 would then search for alternative employment. They would shift into different sectors of 397 00:32:15.660 --> 00:32:21.700 the economy. They would have to competitively bid down wages and prices in those alternative 398 00:32:21.700 --> 00:32:26.780 sectors to make themselves attractive to different employers. The lowering of factor 399 00:32:26.780 --> 00:32:31.300 prices in those alternative employments would, over time, result in increasing output in 400 00:32:31.300 --> 00:32:35.540 those sectors of the economy, which would generate more output in those sectors. And 401 00:32:35.540 --> 00:32:40.780 cumulatively, therefore, prices would be lower. Partly prices would be lower because people 402 00:32:40.780 --> 00:33:08.780 In this fashion, it shows that a change in the demand for money in this fashion is not as many monetary theorists argue, it's just a monetary phenomena, is in fact a real phenomena. 403 00:33:08.780 --> 00:33:13.780 is that when individuals make such a change in the demand for money-holding decision 404 00:33:13.780 --> 00:33:17.780 to hold more of their income as a cash balance, 405 00:33:17.780 --> 00:33:23.780 they are choosing to spend less in the present on potential consumer items. 406 00:33:23.780 --> 00:33:26.780 That is, it is a time preference decision. 407 00:33:26.780 --> 00:33:31.780 I choose to hold part of my income from present expenditure 408 00:33:31.780 --> 00:33:36.780 to hold part of my income or wealth on average larger as a cash balance. 409 00:33:36.780 --> 00:33:40.780 Balance, that is, in a form that will make it available for me to have more monetary 410 00:33:40.780 --> 00:33:46.980 resources for future expenditures if I so choose, and a consequence, their decision 411 00:33:46.980 --> 00:33:51.860 to consume less and hold a larger proportion of their income or wealth as a cash balance 412 00:33:51.860 --> 00:33:57.340 is in fact a change in the time preferences of the members of the society. 413 00:33:57.340 --> 00:34:01.980 And when all prices have declined as a result of the fact of a lower rate of money spending 414 00:34:01.980 --> 00:34:07.740 in the Economy, what one will observe is that in general, the prices of consumer goods will 415 00:34:07.740 --> 00:34:14.420 have fallen relative to the prices of investment or capital sectors of the economy. Therefore, 416 00:34:14.420 --> 00:34:21.340 this itself is a real relative price signal to the economy, that even in this lower scale 417 00:34:21.340 --> 00:34:26.920 of prices, the structural relative prices have shifted from consumption demand and therefore 418 00:34:26.920 --> 00:34:31.920 resources and labor should be reallocated to more investment-related activities. 419 00:34:31.920 --> 00:34:39.400 And the economy would simply adjust. These are real changes in the economy. Real changes 420 00:34:39.400 --> 00:34:45.080 in the economy. They take the form of changes in either demand for money income or desire 421 00:34:45.080 --> 00:34:50.600 to hold a larger proportion of one's income as a money holding. But they are real changes 422 00:34:50.600 --> 00:35:13.600 Money is a real commodity, demanded for real purposes, reflecting and spreading out important real price information to agents in the economy, which need to be learned and adjusted to for an economy to operate and function smoothly. 423 00:35:13.600 --> 00:35:25.880 Now, what if one has a central bank and the central bank managers decide that such phenomena 424 00:35:25.880 --> 00:35:26.880 are undesirable? 425 00:35:26.880 --> 00:35:35.400 And in fact, as Professor Salerno again alluded to, this is exactly what happened in the 1920s. 426 00:35:35.400 --> 00:35:41.040 In the 1920s, most economic historians agree that following the First World War, there 427 00:35:41.040 --> 00:35:51.040 There was a great burst of innovation, technological innovation, capital investment, productivity enhancement, introductions into production processes, 428 00:35:51.040 --> 00:35:57.040 and as a result, costs of production were tending to fall. 429 00:35:57.040 --> 00:36:04.040 And if this had been allowed to work, as again Professor Salerno I think correctly used the sort of common-sensical view of it, 430 00:36:04.040 --> 00:36:09.740 it is nothing more than an example of many of the technologies of the 1970s and 1980s, 431 00:36:09.740 --> 00:36:13.540 of which I usually use the example of my classes to get this point across to my students, 432 00:36:13.540 --> 00:36:20.540 the idea of pocket calculators. When pocket calculators came out, starting in a big way in the 1970s, 433 00:36:20.540 --> 00:36:26.040 pocket calculators hardly fit in your pocket, they were so big, and they usually cost a couple of hundred dollars. 434 00:36:26.040 --> 00:36:31.880 Well, technological innovations and cost-efficient modes of production have not only made them 435 00:36:31.880 --> 00:36:35.680 more compact but have so lowered the cost of production that they either can be purchased 436 00:36:35.680 --> 00:36:40.000 at a low price or many companies offer them away as advertising gimmicks. 437 00:36:40.000 --> 00:36:46.560 Does anybody view that the pocket calculator business is suffering dire depressionary symptoms 438 00:36:46.560 --> 00:36:47.560 now? 439 00:36:47.560 --> 00:36:54.080 They innovated in new methods of production, they could lower their cost of production 440 00:36:54.080 --> 00:36:58.400 and they could stimulate greater demand by moving down their demand curve 441 00:36:58.400 --> 00:37:00.560 and generating more revenue from themselves. 442 00:37:00.560 --> 00:37:03.040 No detrimental effects on the economy. 443 00:37:03.040 --> 00:37:07.600 That's basically what was happening across the board in much of the economy in the 1920s. 444 00:37:07.600 --> 00:37:10.240 But what had happened? 445 00:37:10.240 --> 00:37:17.960 What had happened is that the economists and policymakers set up an illusionary target, 446 00:37:17.960 --> 00:37:21.920 and I use that term consciously and purposely, an illusionary target, 447 00:37:21.920 --> 00:37:51.920 a thing called the price level there is no such thing as the price level is used to talk about as most by most economists by which they mean a statistical construction of an average averaging of a selected group of prices in the economy what exists in the economy is the money price of apples the money price of pears the money prices of this that and the other and that array that spectrum is what represents the value of purchasing power of money 448 00:37:51.920 --> 00:38:03.920 is just an averaging of a set of prices, a statistical technique that in fact does not represent anything other than the construction of the statistician himself. 449 00:38:03.920 --> 00:38:08.920 An average of something that itself does not exist. 450 00:38:08.920 --> 00:38:14.920 And then they use that as a target. They use that as a target. 451 00:38:14.920 --> 00:38:17.520 as a Target. 452 00:38:17.520 --> 00:38:26.520 They set any fall of price, regardless of because or reason, is detrimental. 453 00:38:26.520 --> 00:38:33.480 And they introduced large quantities of money into the economy, they tended to push down 454 00:38:33.480 --> 00:38:37.680 market rates of interest below what the market would have set them at. 455 00:38:37.680 --> 00:38:42.360 The lower rates of interest as the decline of any price acted as an inducement for greater 456 00:38:42.360 --> 00:38:48.160 were quantity demanded, more borrowing, investment activities were undertaken and begun, that 457 00:38:48.160 --> 00:38:54.920 in fact were in excess of the available real savings of the economy to maintain and sustain. 458 00:38:54.920 --> 00:39:00.200 And when finally the effects of all of this monetary expansion resulted in prices tending 459 00:39:00.200 --> 00:39:06.400 to rise above the price level target in 1928 occurred, the Federal Reserve became nervous. 460 00:39:06.400 --> 00:39:10.280 They tried to pull in the monetary reins and the house of investment cards that they created 461 00:39:10.280 --> 00:39:17.000 fell. In the name of trying to prevent what is a natural and real and necessary adjustment 462 00:39:17.000 --> 00:39:28.500 to the economy, they set in motion the situation that generated into the Great Depression. 463 00:39:28.500 --> 00:39:34.480 And what made it worse is that it can be easily understood for those of you who are interested 464 00:39:34.480 --> 00:39:39.400 in reading Professor Rothbard's book, America's Great Depression, which is an excellent overview 465 00:39:39.400 --> 00:39:43.920 of the Rationale for the Policies of the 1920s and the Disastrous Consequences of the Hoover 466 00:39:43.920 --> 00:39:46.800 Administration. 467 00:39:46.800 --> 00:39:52.420 What is the other consequence of central banking policy to believe that we are going to manage 468 00:39:52.420 --> 00:39:57.880 the price level, manage the level of employment, manage the level of output in the economy? 469 00:39:57.880 --> 00:40:05.040 Well, I'd like to bring this out, and that is that this means that the central planners 470 00:40:05.040 --> 00:40:12.400 must purposely and intentionally and consciously and continuously distort what is perhaps the 471 00:40:12.400 --> 00:40:20.480 most essential and crucial linkage in the entire economy, and that is one particular 472 00:40:20.480 --> 00:40:23.280 market price, the rate of interest. 473 00:40:23.280 --> 00:40:28.960 The rate of interest is nothing more than the price between lenders and borrowers, which 474 00:40:28.960 --> 00:40:34.180 is nothing more than saying those who wish to defer consumption until a future date and 475 00:40:34.180 --> 00:40:38.580 and lend part of that which they earn, or that have saved, to others who would like 476 00:40:38.580 --> 00:40:43.180 to consume or invest more than their own financial capacity would permit them during a given 477 00:40:43.180 --> 00:40:45.900 period of time. 478 00:40:45.900 --> 00:40:50.980 And the purpose of the rate of interest, to use a little bit more of the economist jargon, 479 00:40:50.980 --> 00:40:56.420 the inter-temporal price, that is, the price connecting the present and the future, the 480 00:40:56.420 --> 00:41:02.820 result of constantly interfering and managing and regulating this price is to continuously 481 00:41:02.820 --> 00:41:09.060 distort and prevent a proper and efficient and rational coordination 482 00:41:09.060 --> 00:41:12.380 between the savings decisions of one group of members in the society 483 00:41:12.380 --> 00:41:18.100 and the investment horizon activities of another group of members in society. 484 00:41:18.100 --> 00:41:20.780 John Maynard Keynes in his book The General Theory 485 00:41:20.780 --> 00:41:24.740 would often argue that there was a weakness in a capitalist economy. 486 00:41:24.740 --> 00:41:30.580 And that weakness is that there is these great disturbing fluctuations in investment. 487 00:41:30.580 --> 00:41:34.740 and that these great fluctuations in investment in the economy is what causes this instability 488 00:41:34.740 --> 00:41:40.340 in output and employment. Yes, he was right. Historically, there has been great instability 489 00:41:40.340 --> 00:41:45.260 and fluctuations in the investment sector of the economy and it has caused business 490 00:41:45.260 --> 00:41:51.980 cycle phenomena and it has had deleterious effects on economies, the personal hardships 491 00:41:51.980 --> 00:41:58.540 of unemployment, the wastage of a lot of investment in capital undertaking, preventing of sound 492 00:41:58.540 --> 00:42:05.260 and Economic Growth. Yes, all true. But why is there these disturbing fluctuations and 493 00:42:05.260 --> 00:42:11.020 distortions in investment decisions? Keynes saw the phenomena, he understood it wrong. 494 00:42:11.020 --> 00:42:18.900 It's precisely because of monetary manipulations of the rate of interest that prevent a harmonious 495 00:42:18.900 --> 00:42:25.300 coordination between savers who are a one and separate group of people in the society 496 00:42:25.300 --> 00:42:29.940 and investors who are another separate group of people in the economy, which is the case 497 00:42:29.940 --> 00:42:35.420 in every market. Consumers are one group of people and producers are another. That's 498 00:42:35.420 --> 00:42:40.820 the purpose of prices, to coordinate consumer decisions with producer decisions, to changing 499 00:42:40.820 --> 00:42:45.280 circumstances on either side of the market. And that is the same role of the rate of interest, 500 00:42:45.280 --> 00:42:50.020 to act as a coordinator of these different decisions by different individuals to see 501 00:42:50.020 --> 00:43:20.020 We see that there is a general pattern in balancing between the two that the savings horizons of one group of people are matched by the investment horizons of another so that what is available for investment activities is balanced with the savings that are sustained and it is not surprising that these fluctuations occur when a central bank must have some means or tool to try to influence everything it considers important and it chooses that price which in fact is crucial to leave alone 502 00:43:20.020 --> 00:43:27.020 And what type of distortive effect does it have on the savings investment nexus? 503 00:43:27.020 --> 00:43:33.140 It is precisely these decisions concerning production, which the Austrians have always 504 00:43:33.140 --> 00:43:40.460 emphasized in what, again, the jargon of the economy is the non-neutrality of money. 505 00:43:40.460 --> 00:43:44.540 Changes in the money supply do not affect all sectors of the economy simultaneously 506 00:43:44.540 --> 00:43:45.540 proportionally. 507 00:43:45.540 --> 00:43:49.660 If any of you read the Wall Street Journal, you know that every Friday the Federal Reserve 508 00:43:49.660 --> 00:43:54.540 in its credit markets column, issues a report about what happened to the money supply the 509 00:43:54.540 --> 00:44:00.140 previous week, $3 billion increase last week. Well, my paycheck didn't go up some fraction 510 00:44:00.140 --> 00:44:06.380 of that last week and I doubt if yours did either. Money enters the economy through the 511 00:44:06.380 --> 00:44:11.760 particular point in which the Federal Reserve has the capacity to introduce it. It's received 512 00:44:11.760 --> 00:44:18.580 by certain individuals and in this case, received, spent, received, spent, received in a rippling 513 00:44:18.580 --> 00:44:25.020 sequential process, and that influences the types of investments undertaken, 514 00:44:25.020 --> 00:44:28.500 the types of relative price signals sent out to the economy, 515 00:44:28.500 --> 00:44:34.740 and therefore, destroying and distortion of the entire relative price structure. 516 00:44:34.740 --> 00:44:39.460 And what is the cumulative effect of this belief and desire to centrally plan 517 00:44:39.460 --> 00:44:43.140 the monetary flows in the economy in this fashion? 518 00:44:43.140 --> 00:44:48.540 Well, I would argue its danger throughout this century has been the destruction of the market economy. 519 00:44:48.540 --> 00:44:52.540 Why the destruction of the market economy? That's pretty strong language. 520 00:44:52.540 --> 00:44:58.540 For the simple fact is that economy naturally is bombarded by changes. 521 00:44:58.540 --> 00:45:05.540 Consumer preferences change. Demand, another demand factor changes occur. 522 00:45:05.540 --> 00:45:10.540 Supply changes occur. New innovations, changing availability of supplies. 523 00:45:10.540 --> 00:45:17.540 The judgments of resource owners to offer more or less at different market prices for services rendered. 524 00:45:17.540 --> 00:45:27.100 But the purpose in a market economy of prices is to allow these little marginal changes 525 00:45:27.100 --> 00:45:34.300 in prices to constantly be adjusting and adjustable to the changing currents of the economy. 526 00:45:34.300 --> 00:45:38.940 So that there isn't a backlog of problems to which the economy has to dramatically adjust 527 00:45:38.940 --> 00:45:43.380 with catastrophic effects on everyone simultaneously. 528 00:45:43.380 --> 00:45:49.060 still affects changes and adjustments to incremental causes. 529 00:45:49.060 --> 00:45:55.300 The problem with the business cycle is that by skewing in entire sectors of the economy, 530 00:45:55.300 --> 00:46:00.500 stimulating greater investment, huge myth allocations and distortions of how resources 531 00:46:00.500 --> 00:46:08.300 are used, how labor is allocated, its effect on the economy is large, pervasive. 532 00:46:08.300 --> 00:46:12.500 And that sets up a stage where rather than small groups of people having to make small 533 00:46:12.500 --> 00:46:42.500 And since nobody likes to adjust change, and if other groups are suffering from the same situations, there are incentives to form political coalitions to find ways to not have to adjust, I would argue is that in trying to manage the economy, they have created distortions and cataclysms in the economy that create the political climate in which groups affected by these monetary-induced changes have incentives to form coalitions of the same kind. 534 00:46:42.500 --> 00:46:48.500 and Special Interest Arrangements to fight hard to not have to face the adjustments. 535 00:46:48.500 --> 00:46:52.500 That is, special interest groups saying, I don't want to adjust. 536 00:46:52.500 --> 00:46:55.500 I don't want to have to shift from one employment to another. 537 00:46:55.500 --> 00:47:03.500 I don't want to have to accept the fact that inflationary boom resulted in prices or wages too high to what the market can now sustain. 538 00:47:03.500 --> 00:47:07.500 I want my wage or price guaranteed. I want my employment opportunity guaranteed. 539 00:47:07.500 --> 00:47:11.500 I want my investment, the value of my investments guaranteed. 540 00:47:11.500 --> 00:47:15.500 and the Destruction of the Market Economy. 541 00:47:15.500 --> 00:47:18.500 We are at the end of the 20th century. 542 00:47:18.500 --> 00:47:25.500 And it has been the most barbaric and destructive and evil century 543 00:47:25.500 --> 00:47:28.500 in human history, in my opinion. 544 00:47:28.500 --> 00:47:31.500 They were cruel and vicious leaders of the past. 545 00:47:31.500 --> 00:47:36.500 And they did despicable things to their fellow human beings. 546 00:47:36.500 --> 00:47:39.500 But the worst thing about the 20th century is that we have had the technologies 547 00:47:39.500 --> 00:47:45.500 the technologies to allow bad men to do bad things in larger dimensions 548 00:47:45.500 --> 00:47:50.500 the capacities and the tools to impose central planning 549 00:47:50.500 --> 00:47:56.500 manipulative controls resulting in the crushing of the deaths of multi-millions of people 550 00:47:56.500 --> 00:48:01.500 in the West we've had this pretense of the social engineer to manage and regulate 551 00:48:01.500 --> 00:48:06.500 and now at the end of the 20th century we have concluded that most of these experiments were wrong headed 552 00:48:06.500 --> 00:48:11.220 Yes, socialism and its various forms and facets were a disaster. 553 00:48:11.220 --> 00:48:13.820 Yes, abuse of power is likely to occur. 554 00:48:13.820 --> 00:48:16.660 We need to have reigns in government. 555 00:48:16.660 --> 00:48:21.060 And we all pat ourselves on the back and we say democracy and freedom is won against 556 00:48:21.060 --> 00:48:24.900 Soviet totalitarianism and Nazi totalitarianism. 557 00:48:24.900 --> 00:48:29.380 Well, I think unfortunately there's a lot of hypocrisy and inconsistency in that. 558 00:48:29.380 --> 00:48:34.180 What I will argue is that to the extent that we can hope to move towards real freedom, 559 00:48:34.180 --> 00:48:41.620 More of that old 19th century ideal of classical liberalism, a stulper, nostalgically looked back at. 560 00:48:41.620 --> 00:48:46.480 Free movement of men, free movement of goods, free movement of money. 561 00:48:46.480 --> 00:48:51.840 To the extent that we can hope to make the 21st century a better place in terms of those liberal principles, 562 00:48:51.840 --> 00:48:57.580 we will never be able to have such a liberal, good society 563 00:48:57.580 --> 00:49:02.380 until we realize that the crucial element, the crucial source 564 00:49:02.380 --> 00:49:13.380 Most of the instability and planning disasters in Western governments and in any government is continuing central monetary management of money. 565 00:49:13.380 --> 00:49:22.180 Until we eliminate that, we will always have the seed of destruction and we will always have the residues of the planning mentality in our midst. 566 00:49:22.180 --> 00:49:23.180 Thank you very much. 567 00:49:32.380 --> 00:49:43.380 I have a couple of questions. 568 00:49:43.380 --> 00:49:45.380 A couple of questions? Yeah. 569 00:49:45.380 --> 00:49:47.380 I want to make one more mistake. 570 00:49:47.380 --> 00:50:14.380 According to your thesis, with which I agree, we go back to the liberalism of the 19th century, the true liberalism, we would not need a one world order and all these central banks and international bonds and everything that's central. We would have what they say they're going to try to bring about by their plans and will not. 571 00:50:17.380 --> 00:50:20.340 are views a good liberal order in the 19th century. 572 00:50:20.340 --> 00:50:24.300 Liberal in the sense of freedom for the person, liberty. 573 00:50:24.300 --> 00:50:25.540 None of these policies, 574 00:50:25.540 --> 00:50:27.900 none of these international arrangements 575 00:50:27.900 --> 00:50:29.860 were arranged by international agreement. 576 00:50:29.860 --> 00:50:33.380 Great Britain, for example, went on free trade 577 00:50:33.380 --> 00:50:35.900 in the early decades of the 19th century 578 00:50:35.900 --> 00:50:38.020 by unilateral decision. 579 00:50:38.020 --> 00:50:40.020 The free market economists in England said, 580 00:50:40.020 --> 00:50:41.540 look here, free trade is good. 581 00:50:41.540 --> 00:50:42.940 And it's good in spite of the fact 582 00:50:42.940 --> 00:50:45.180 that other countries have protectionism. 583 00:50:45.180 --> 00:50:47.140 If buying in the cheapest market 584 00:50:47.140 --> 00:51:02.140 And selling in the dearest market is good. Take advantage of the lowest price seller and take advantage of the highest price markets to sell your own goods, then that's true unilaterally as well as if we can make a deal for another country to lower its tariff barriers as well. 585 00:51:02.140 --> 00:51:16.140 The establishment of the gold standard was unilateral. Even with its central banking aspects, Great Britain just established the gold standard on its own and then was followed by one country after another country that just established unilaterally free trading policies and gold-based monies. 586 00:51:16.140 --> 00:51:30.140 based monetary policies, unilaterally. It doesn't require world governments, international organizations, just get your own government to do the right thing and there'll be a boom to that nation's citizenry. 587 00:51:30.140 --> 00:51:39.140 And then hopefully the example of freedom in your own country and the successes of freedom of your own country will act as a stimulus for other countries to follow. 588 00:51:39.140 --> 00:52:08.500 I think the part of the, you see, part of the problem is the special interest problem. 589 00:52:08.500 --> 00:52:18.000 and the other problem is a moral problem as far as I'm concerned. I totally agree with 590 00:52:18.000 --> 00:52:21.620 people who are known as the public choice school who have I think done important work 591 00:52:21.620 --> 00:52:27.820 in explaining the logic of the self-interest biases that create incentives for the formation 592 00:52:27.820 --> 00:52:33.860 of special interest coalitions and the special interest on the parts of politicians and bureaucrats 593 00:52:33.860 --> 00:52:40.200 and How One Breaks the Spider's Web of Special Interest Groups is really the $64,000 question. 594 00:52:40.200 --> 00:52:45.440 But I think even beyond that, I don't see any hope until there is a moral revolution 595 00:52:45.440 --> 00:52:55.900 in our country. And that moral revolution would be sufficient to say that theft is immoral. 596 00:52:55.900 --> 00:53:00.880 And by that I mean is that we suffer from a dichotomy in our society. If I were to come 597 00:53:00.880 --> 00:53:06.320 If I come from this podium up to you and pull out your wallet and take $10 out of your pocket, 598 00:53:06.320 --> 00:53:08.680 both you and everyone else in this room would be aghast. 599 00:53:08.680 --> 00:53:09.680 How dare he do this? 600 00:53:09.680 --> 00:53:10.680 This is theft. 601 00:53:10.680 --> 00:53:11.680 This is robbery. 602 00:53:11.680 --> 00:53:13.340 You've not given your consent. 603 00:53:13.340 --> 00:53:18.960 But if I take this gentleman and hire him to be my representative, and in the name of 604 00:53:18.960 --> 00:53:26.960 the common good, he goes and takes $10 out of your pocket and then splits it with me. 605 00:53:26.960 --> 00:53:32.100 best-serving, you know, national prosperity, the common good, the general welfare. 606 00:53:32.100 --> 00:53:37.120 Until people realize that even when you hire someone to do the dirty work for you in the 607 00:53:37.120 --> 00:53:40.200 political arena, it is still theft. 608 00:53:40.200 --> 00:53:48.060 That in moral society, that a moral society is one that is grounded in a principled and 609 00:53:48.060 --> 00:53:54.100 uncompromising way, in that to use the phrase of Leonard Reed, only that which is permitted 610 00:53:54.100 --> 00:53:57.500 is peaceful and that is voluntary consent among agents. 611 00:53:57.500 --> 00:54:02.000 And to the extent that government has function in society, it is merely to, in the most narrow 612 00:54:02.000 --> 00:54:06.500 and mechanical sense, only protect the life, liberty and property of the citizen. 613 00:54:06.500 --> 00:54:07.940 We will not escape from this. 614 00:54:07.940 --> 00:54:11.420 Our problem today is that everybody believes that they have a right to be in everyone else's 615 00:54:11.420 --> 00:54:12.420 pocket. 616 00:54:12.420 --> 00:54:15.700 Frederic Bastiat's statement that the state is the great fallacy in which we all think 617 00:54:15.700 --> 00:54:18.220 we can live at other people's expense. 618 00:54:18.220 --> 00:54:23.180 And coupled with that is the idea that through this new notion of entitlement, we believe 619 00:54:23.180 --> 00:54:31.180 Until that moral change occurs, I see no hope. 620 00:54:31.180 --> 00:54:35.380 And now, if people want to get good policy changes, if they could get something changed 621 00:54:35.380 --> 00:54:38.140 that eliminates this, that, the other, I'm not objecting to that. 622 00:54:38.140 --> 00:54:42.540 But I really think that in the long run, to establish it and for it to be secure, it's 623 00:54:42.540 --> 00:54:44.540 going to require moral change. 624 00:54:44.540 --> 00:54:46.380 Okay, thank you.