WEBVTT NOTE Volcker, Greenspan, Bernanke: 25 Years of Fed Management 1 00:00:00.000 --> 00:00:20.000 In 1982, the year that Lew Rockwell founded the Mises Institute, you might have taken a trip to the grocery store in a new mid-sized Pontiac 6000 sedan that you paid $6,200 for, or a sportier but less reliable Ford Mustang that you purchased for $6,500. 2 00:00:20.000 --> 00:00:35.000 As you exited the supermarket and scanned your receipt, you would have noted that you were charged 50 cents per pound for blue bonnet margin, 3 00:00:35.000 --> 00:00:45.000 99 cents for a five pound bag of white flour, 84 cents for a dozen eggs, 50 cents per pound for sliced white bread, 4 00:00:45.000 --> 00:00:53.000 $1.39 per pound for ground beef, $0.46 for a can of shaving cream, and $2.20 for a gallon of milk. 5 00:00:53.000 --> 00:01:00.000 You may have then driven to your local post office where you paid a monopoly price of $0.20 a piece of first class stamps. 6 00:01:00.000 --> 00:01:08.000 Needing to do some yard work, you might have crossed the street and picked up a garden rake for $1.66 at the hardware store. 7 00:01:08.000 --> 00:01:14.000 Realizing that your spouse's car needed new tires, on your way home you would have driven past your local tire dealer 8 00:01:44.000 --> 00:01:54.000 In the beginning, you would be confronting a large three-bedroom townhouse in a desirable New Jersey suburb within walking distance of a train station from which your commute to Manhattan would be 50 minutes. 9 00:01:54.000 --> 00:02:00.000 You would have paid $77,000 for this new townhouse as I did. 10 00:02:00.000 --> 00:02:10.000 You would probably have been satisfied with either purchase because you had read that the median price of a new home in the US was $83,900 that year. 11 00:02:10.000 --> 00:02:30.000 Having put away your groceries and other purchases, you might have turned to the chore of washing and drying your family's laundry using a top-quality Whirlpool washing machine and Whirlpool clothes dryer, which your in-laws gave you as a gift in 1980 for which they paid $239 and $228 respectively. 12 00:02:30.000 --> 00:02:44.120 It is now 25 years later, and in your driveway sits a 2007 Pontiac Grand Prix, GM's replacement 13 00:02:44.120 --> 00:02:50.320 for the Pontiac 6000, which you just purchased for only $4,000. 14 00:02:50.320 --> 00:02:53.880 Looking over the supermarket receipt for the groceries you just bought, you note the following 15 00:02:53.880 --> 00:03:09.880 $35 cents for a pound of margarine, $65 cents for a five pound bag of flour, $1.45 for a gallon of milk, $35 cents for a one pound loaf of white bread, and $0.90 for a pound of ground beef. 16 00:03:09.880 --> 00:03:16.880 The garden rake you picked up at the front of the store to replace your dilapidated 25 year old one cost you 99 cents. 17 00:03:16.880 --> 00:03:32.880 Remembering that your son's car needs new tires, you pick up your local newspaper and begin browsing through ads and find new firestone tires for sale at $65 for a set of four. 18 00:03:32.880 --> 00:03:37.880 Before putting the newspaper down, an article on the Op-Ed page catches your eye. 19 00:03:37.880 --> 00:03:49.880 It reports that overall prices have fallen by about 35% in the last 25 years, that is since 1982, which works out to a modest annual decline of 1.75%. 20 00:03:49.880 --> 00:03:55.880 The author of the article, an Ivy League economics professor with the improbable name of Guido Hulsman, 21 00:03:55.880 --> 00:04:12.880 argues that the ultimate cause of this quarter century increase in the value of the dollar was the abolition of the Federal Reserve system and its money creating powers in 1982 and its replacement by a free market gold standard. 22 00:04:12.880 --> 00:04:19.880 Hulsman goes on to argue that this is the natural outcome of a monetary system based on a market chosen commodity money. 23 00:04:19.880 --> 00:04:26.880 The reason is that since gold mining adds minimally to the existing supply of money each year, except in extraordinary circumstances, 24 00:04:26.880 --> 00:04:31.880 the progressive increase in the supplies of goods and services in a capitalist economy, 25 00:04:31.880 --> 00:04:38.880 due to technological advances and continuing saving and investment by households, naturally causes prices to fall. 26 00:04:38.880 --> 00:04:50.880 Hulsman further points out that an annual fall in prices of about the same magnitude occurred in the U.S. in the latter part of the 19th century when the gold standard was restored after the Civil War. 27 00:04:51.880 --> 00:04:54.880 A door slams and you awaken with a start. 28 00:04:57.880 --> 00:04:59.880 Guido could not be an Ivy League professor. 29 00:05:00.880 --> 00:05:03.880 You realize that you have been asleep on your couch dreaming. 30 00:05:03.880 --> 00:05:11.880 Your son rushes in and tells you that he just got a great deal of firestone tires, paying $220 for a set of four. 31 00:05:11.880 --> 00:05:20.880 This compares to the $100 you recall paying in 1982, and the $65 you paid in your dream world without the Federal Reserve System. 32 00:05:20.880 --> 00:05:29.880 Still groggy, it dawns on you that you paid $22,500 for the 2007 Pontiac Grand Prix in your driveway. 33 00:05:29.880 --> 00:05:48.880 More than three times the $6,200 you paid for a similar model in 1982, and five and a half times the $4,000 you would have paid in 2007 in a world where prices decline moderately each year, as they would tend to do in a dynamic, entrepreneurial and progressive free market economy with a sound commodity money like gold. 34 00:05:49.880 --> 00:05:54.880 Still groggy, you locate your latest supermarket receipt and are jarred back to reality by what you see. 35 00:05:54.880 --> 00:06:00.520 It is not the price of goods and services, but the value of the dollar that has declined 36 00:06:00.520 --> 00:06:06.880 over the past 25 years. The price of milk has risen from $1.99 to $4.69 per gallon, 37 00:06:06.880 --> 00:06:12.800 the price of margarine from $0.50 to $1.99 per pound, the price of white bread from $1.39 38 00:06:12.800 --> 00:06:22.080 to $3.19 per pound, the price of a dozen eggs from $0.84 to $2.99, and so on. Why, if the 39 00:06:22.080 --> 00:06:45.080 If Fed is so diligently managing our money to fight inflation and promote the stability of the dollar, as it continually reminds us, have consumer prices increased by an average of about 113% since 1982, cutting the buying power of our dollar by more than one half? 40 00:06:45.080 --> 00:06:54.080 The answer is simple. Fed money management or monetary policy means the creation of money out of thin air, pure and simple. 41 00:06:54.080 --> 00:07:06.080 All the so-called tools that the Fed has at its disposal, setting a discount rate, conducting open market operations, changing reserve requirements for bank deposits, 42 00:07:06.080 --> 00:07:12.080 all of these arcane devices are suited to one thing and one thing only. 43 00:07:12.080 --> 00:07:34.080 facilitating the creation of new money at will and without limit, so it is the Fed and the Fed alone that is responsible for the rapid rise of consumer prices and depreciation of the dollar in the past quarter of a century, as well as for the occasional stratospheric rise in asset prices, the so-called bubbles in equity and real estate markets. 44 00:07:34.080 --> 00:07:36.080 Let us review the evidence. 45 00:07:43.080 --> 00:07:48.080 In 1982, the adjusted monetary base, sometimes called high-powered money, 46 00:07:48.080 --> 00:07:56.080 which is controlled directly by the Fed and consists of total currency and circulation plus reserves held by banks, 47 00:07:56.080 --> 00:07:59.080 totaled $152 billion. 48 00:07:59.080 --> 00:08:07.080 In 2007, the monetary base equaled $853 billion, an increase of 450%. 49 00:08:07.080 --> 00:08:15.080 Adjusted bank reserves increased in this period from $28 billion to $96 billion, or by three and a half times. 50 00:08:15.080 --> 00:08:24.080 Since increases in adjusted bank reserves can support a multiple expansion of dollars and checking deposits through fractional reserve banking, 51 00:08:24.080 --> 00:08:28.080 the overall money supply also exploded during this period. 52 00:08:28.080 --> 00:08:51.080 Thus, MZM, which represents money of zero maturity, the Fed's measure of the number of readily spendable dollars in the economy rose from $892 billion in 1982 to $7714 billion in 2007. 53 00:08:51.080 --> 00:08:56.080 This represents a more than eight and a half fold increase in the money supply. 54 00:08:56.080 --> 00:09:02.320 But how was the Fed able to accomplish this enormous expansion in the supply of dollars? 55 00:09:02.320 --> 00:09:03.560 Very simple. 56 00:09:03.560 --> 00:09:08.720 It purchased Treasury bills and other government securities from bond dealers in exchange for 57 00:09:08.720 --> 00:09:14.320 money that it conjured up on the spot out of thin air and wired to the banks of the 58 00:09:14.320 --> 00:09:15.320 bond sellers. 59 00:09:15.320 --> 00:09:23.080 In fact, these so-called open market operations continued to be repeated on a daily basis. 60 00:09:23.080 --> 00:09:40.080 Every morning, there's something called Fed Time. Between 9 and 11 a.m., the open market trading desk at the New York Federal Reserve Bank, located a few miles from here downtown in the financial district, establishes computer contact with 30 or so privileged bond dealers. 61 00:09:40.080 --> 00:09:48.080 It specifies what quantities and types of securities it wishes to purchase and then makes its purchases from those dealers who ask the best prices. 62 00:09:48.080 --> 00:09:55.080 In this way, hundreds of millions of dollars of new reserves are injected into the banking system daily. 63 00:09:55.080 --> 00:10:07.080 In short order, these reserves are lent out by the bank and eventually multiplied, in a few weeks or months, into billions of dollars of additional currency and checking deposits in circulation. 64 00:10:07.080 --> 00:10:17.080 To repeat, the dollars the Fed used to make these bond purchases were created right then and there by a keystroke in electronic transfer. 65 00:10:17.080 --> 00:10:23.080 If we inspect the books of the Federal Reserve System, we discover the evidence of these operations. 66 00:10:23.080 --> 00:10:30.080 In its H.4.1 release, released every week, innocuously titled, 67 00:10:30.080 --> 00:10:39.080 quote, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks, 68 00:10:39.080 --> 00:10:45.080 I would just call it a counterfeiting statement, 69 00:10:45.080 --> 00:11:03.080 We find that in the week ending October 10, 2007, the Fed held in its possession under the category of securities held outright about $780 billion worth of U.S. Treasury securities of different maturities. 70 00:11:03.080 --> 00:11:14.080 The Fed secured the funds to finance accumulation of these billions of dollars of securities over the 93 years of its existence by what can only be called legalized counterfeiting. 71 00:11:14.080 --> 00:11:23.080 The depreciation of the dollar in the past 20 years, 25 years, has gone hand in hand with the degeneration of economic thinking on money and inflation. 72 00:11:23.080 --> 00:11:40.080 During what has come to be known as the great inflation of the 1970s, most economists abandoned the simplistic and insidious Keynesian doctrines that money did not matter when it came to explain inflation and that monetary policy was ineffective. 73 00:11:40.080 --> 00:11:46.080 In the US, Milton Friedman was especially influential and effective in arguing the opposing case, 74 00:11:46.080 --> 00:11:49.080 though not without flaws in his argument. 75 00:11:49.080 --> 00:11:54.080 That monetary growth was the primary, if not the sole, cause of inflation. 76 00:11:54.080 --> 00:11:58.080 Friedrich Hayek exercised a similar influence in Great Britain, 77 00:11:58.080 --> 00:12:02.080 especially after he was awarded the Nobel Prize in 1974. 78 00:12:02.080 --> 00:12:07.080 Inflation was reduced in the 1980s in the US and throughout the developed world, 79 00:12:07.080 --> 00:12:12.080 The more and more central banks began to heed the lesson taught by centuries of theory and history 80 00:12:12.080 --> 00:12:15.080 and reigning the growth of their national money supplies. 81 00:12:15.080 --> 00:12:22.080 Unfortunately, by the end of the 1980s, there was backsliding into another pernicious doctrine 82 00:12:22.080 --> 00:12:28.080 that the Fed neither had the means to control the money supply nor even the ability to measure it. 83 00:12:28.080 --> 00:12:33.080 Of course, in the US, Alan Greenspan was the most influential proponent of this view. 84 00:12:33.080 --> 00:12:55.080 were twofold. First, it allowed the Fed to obscure its key role in the inflation process, and second, it shifted the focus of monetary policy back to the manipulation of interest rates again, which was the case under the Keynesian New Economists in the 1960s and into the 1970s. 85 00:12:55.080 --> 00:13:10.080 This movement of denying the central role that money plays in inflation and monetary policy has proceeded so far today that an article in the latest and highly respected Federal Reserve Bank of St. Louis commented on it. 86 00:13:10.080 --> 00:13:20.080 In the effectiveness of monetary policy, Robert Rashi and Marcella Williams lament, money has largely disappeared from discussions on monetary policy. 87 00:13:20.080 --> 00:13:31.080 They go on to point out that in the 1970s, 11 of 22 central banks in industrial countries reported using the money and credit framework to formulate monetary policy. 88 00:13:31.080 --> 00:13:37.080 But by the 1990s, only two of these banks maintained this framework. 89 00:13:37.080 --> 00:13:48.080 They also report a negative trend from 1970 to 2002 in the fraction of titles of articles in major economics journals that included the word money, 90 00:13:48.080 --> 00:13:53.080 Though the frequency of titles including the word inflation was relatively constant. 91 00:13:53.080 --> 00:14:03.080 Finally, they cite a study that found that the frequency of the word money in the annual reports of major central banks declined over the period 1996-2002. 92 00:14:03.080 --> 00:14:08.080 They also studied about 100 speeches of three central bank chairmen. 93 00:14:08.080 --> 00:14:16.080 And in those 100 speeches, money was mentioned less than 10 times. 94 00:14:16.080 --> 00:14:30.080 All of this has occurred at the same time that an increasing number of central banks have instituted so-called inflation targeting, a deliberate depreciation of the monetary unit at a fixed rate per year, usually between 2% and 3%. 95 00:14:30.080 --> 00:14:54.080 So I'm here to reiterate, one, that an increase in the money supply is the sole cause of persistently rising prices, two, that the Fed is the one and only agency that has the power and the means to control the money supply, and three, that inflation of the money supply is theft and counterfeiting, pure and simple. Thank you. 96 00:15:00.080 --> 00:15:02.080 Thank you very much.