WEBVTT NOTE Failure and Prosperity 1 00:00:00.000 --> 00:00:05.500 Well, it seems like I'm kind of a junkie for financial TV. 2 00:00:05.500 --> 00:00:09.500 I watch all the financial channels every chance I get. 3 00:00:09.500 --> 00:00:14.500 But what's starting to annoy me is to hear this constant going on about, 4 00:00:14.500 --> 00:00:21.500 thank goodness the government stepped in or the world financial system would have collapsed. 5 00:00:21.500 --> 00:00:28.500 I mean, I'm afraid we're going to hear this kind of talk go on longer than the war on terror. 6 00:00:28.500 --> 00:00:33.500 I mean, if bailouts are questioned at all, the TV talking heads will challenge with, 7 00:00:33.500 --> 00:00:39.500 yes, but everyone was just worried in the fall of 2008 whether if they went to their ATM machine, 8 00:00:39.500 --> 00:00:42.500 whether any money would come out. 9 00:00:42.500 --> 00:00:49.500 And if there had not been any bailout or stimulus, there would have been the depression for sure. 10 00:00:49.500 --> 00:00:54.500 And if we wouldn't have had the wise men and women at the Treasury and the Fed, 11 00:00:54.500 --> 00:00:57.300 We'd all be standing in soup lines. 12 00:00:57.300 --> 00:01:00.540 We'd be selling apples on street corners. 13 00:01:00.540 --> 00:01:03.620 Sheesh, the prices might even plummet. 14 00:01:03.620 --> 00:01:06.580 I mean, we'd all be doomed. 15 00:01:06.580 --> 00:01:11.180 White House economic director Lawrence Summers said a year ago, 16 00:01:11.180 --> 00:01:15.460 deflation is a real risk facing the economy, 17 00:01:15.460 --> 00:01:21.100 urging passage of a stimulus bill and taxpayer funds to bailout banks. 18 00:01:21.100 --> 00:01:29.100 Summers said that stimulus and bailouts was required for our economic security. 19 00:01:29.100 --> 00:01:37.100 So do financial failures and falling prices mean depression and a stagnant economy 20 00:01:37.100 --> 00:01:42.500 that Summers and these other people so much fear? 21 00:01:42.500 --> 00:01:50.600 For instance, many historians describe the period after the crash of 1873 to 1896 22 00:01:50.600 --> 00:01:53.840 as a deflationary dark age. 23 00:01:53.840 --> 00:01:57.320 John Lupkin in his book, Jay Cook's Gamble, 24 00:01:57.320 --> 00:02:02.880 writes that the damage from the Panic of 1873 lasted for five years. 25 00:02:02.880 --> 00:02:10.360 And its economic damage was second only to this past century's Great Depression. 26 00:02:10.360 --> 00:02:14.400 However, Jim Grant, Grant's interest rate observer writes, 27 00:02:14.400 --> 00:02:26.960 You can look far and wide without finding a decade so ebullient, prosperous, and in so many ways, so modern as that as the 1880s. 28 00:02:26.960 --> 00:02:39.320 The U.S. economy in the 1880s moved from agriculture to manufacturing, and even at that time, global trade was controversial. 29 00:02:39.320 --> 00:02:44.800 But while prices fell in that decade, the U.S. economy prospered. 30 00:02:44.800 --> 00:02:57.480 Industry expanded, the railroads expanded, physical output, net national product, real per capita income all roared ahead. 31 00:02:57.480 --> 00:03:06.360 For the decade from 1869 to 1879, the real national product grew 6.8 per year, 32 00:03:06.360 --> 00:03:16.160 And the real product per capita was described by Murray Rothbard as phenomenal at four and a half percent per year. 33 00:03:16.160 --> 00:03:22.820 The money supply didn't actually contract during this period, but rose 2.6 percent annually. 34 00:03:22.820 --> 00:03:36.320 So the period that Wikipedia describes as a severe nationwide economic depression that lasted until 1879 was really a period of prosperity. 35 00:03:36.320 --> 00:03:49.320 This Great Depression was a myth, and as Rothbard explains, a myth brought about by misinterpreting of the fact that prices in general fell sharply during the period. 36 00:03:49.320 --> 00:03:56.320 Sure, prices fell by 3.8% per annum, but what's so bad about that? 37 00:03:56.320 --> 00:04:03.320 While economists and historians believe that falling prices equal bad times, that's just not true. 38 00:04:03.320 --> 00:04:05.280 is not true. 39 00:04:05.280 --> 00:04:07.040 Falling prices in the United States 40 00:04:07.040 --> 00:04:09.320 mean dollars are worth more. 41 00:04:09.320 --> 00:04:11.520 If prices of goods and services are falling, 42 00:04:11.520 --> 00:04:15.240 more and more people in all income brackets 43 00:04:15.240 --> 00:04:18.080 can enjoy the fruits and the efficiencies 44 00:04:18.080 --> 00:04:20.800 of free market capitalism. 45 00:04:20.800 --> 00:04:24.480 It is a fact, the definition of prosperity 46 00:04:24.480 --> 00:04:26.640 is when people's standard of living improves 47 00:04:26.640 --> 00:04:30.960 as goods and services become more affordable. 48 00:04:30.960 --> 00:04:37.240 Rothbard explains that these economists have overlooked the fact that in the natural course 49 00:04:37.240 --> 00:04:42.560 of events, when government and the banking system do not increase the money supply very 50 00:04:42.560 --> 00:04:49.080 rapidly, free market capitalism will result in an increase in production and economic 51 00:04:49.080 --> 00:04:56.440 growth so great that it will swamp the increases in the money supply. Prices will fall and 52 00:04:56.440 --> 00:05:04.080 And the consequences will not be depression and stagnation, but prosperity, economic growth, 53 00:05:04.080 --> 00:05:10.680 spread of increased living standards to all consumers. 54 00:05:10.680 --> 00:05:19.800 All the panic of 1873 did was topple bloated banks and bloated railroads into bankruptcy. 55 00:05:19.800 --> 00:05:24.520 Philadelphia firm Jay Cook & Company was a powerful government bond dealer. 56 00:05:24.520 --> 00:05:29.280 Its owner, Jay Cooke, was one of the creators of the national banking system. 57 00:05:29.280 --> 00:05:35.920 He also controlled the Northern Pacific Railroad, which had, by the way, benefited from 47 million 58 00:05:35.920 --> 00:05:41.360 acres worth of land grants from the federal government in the 1860s. 59 00:05:41.360 --> 00:05:48.700 Cooke had sold Northern Pacific bonds by hiring pamphleteers to spin tales alleging that the 60 00:05:48.700 --> 00:05:54.900 The climate in the Great Northwest was similar to that in the Mediterranean 61 00:05:54.900 --> 00:06:00.140 and had a number of politicians and government officials on his payroll. 62 00:06:00.140 --> 00:06:06.100 The mighty House of Cook fell apart in 1873 with the banking firm filing for bankruptcy 63 00:06:06.100 --> 00:06:09.420 on September 18th of that year. 64 00:06:09.420 --> 00:06:16.460 But the Panic of 1873 was really a worldwide affair, just like the Panic of 2008. 65 00:06:16.460 --> 00:06:21.980 It started with the stock market crash in Vienna, stock market crash then in Berlin, 66 00:06:21.980 --> 00:06:26.660 and throughout Europe, and then three months later in New York, the New York warehouse 67 00:06:26.660 --> 00:06:31.260 and security company failed, followed by Jay Cooke's firm. 68 00:06:31.260 --> 00:06:38.440 Now Jay Cooke was a powerful financier, he was a millionaire many times over, he lived 69 00:06:38.440 --> 00:06:46.100 in a 53 room mansion on 200 acres just north of Philadelphia, he entertained presidents, 70 00:06:46.100 --> 00:06:56.100 Captains of Industry, and Jay Cooke, if not the nation's largest house, was clearly the most powerful, writes Lupkin. 71 00:06:56.100 --> 00:07:08.100 Decades later, people who knew him would compare him to Jay Pierpoint Morgan, and Cooke was regarded as one of the Union's saviors. 72 00:07:08.100 --> 00:07:13.940 He was the financier of the Civil War, and he had conceived and managed the sale of over 73 00:07:13.940 --> 00:07:22.940 1.6 billion dollars of federal bonds. That's when a billion was really a billion, to hundreds 74 00:07:22.940 --> 00:07:31.260 of investors, and this was all without the whiff of a scandal. But Cook bribed two vice 75 00:07:31.260 --> 00:07:35.640 presidents, he bought members of Congress, and while he was feared by all politicians, 76 00:07:35.640 --> 00:07:41.080 He was venerated by the public because he's a great philanthropist, and according to John 77 00:07:41.080 --> 00:07:47.680 T. Flynn, he was considered by all the country's leading banker. 78 00:07:47.680 --> 00:07:53.000 So imagine here, there was a bank that had unprecedented monopoly power to underwrite 79 00:07:53.000 --> 00:07:58.440 all government bonds, whose owner was close friends with the secretary of treasurer. 80 00:07:58.440 --> 00:08:03.760 He controlled the railroad that had been allowed to grab more acres than any other, and he 81 00:08:03.760 --> 00:08:11.920 had managed to have himself granted several national banking charters, historians believe 82 00:08:11.920 --> 00:08:17.640 that the Grant administration was culpable for not responding to the crisis soon enough 83 00:08:17.640 --> 00:08:27.200 and not bailing him out, but this big, powerful, dare we say, systemically important bank was 84 00:08:27.200 --> 00:08:35.520 was allowed to fail in 1873, and what happened? Prosperity. And that prosperity continued 85 00:08:35.520 --> 00:08:44.360 for another two decades. From 1879 to 1896, phenomenal growth in American industry, production, 86 00:08:44.360 --> 00:08:49.380 phenomenal growth of American industry and production continued. Real net national product 87 00:08:49.380 --> 00:09:00.380 The stock rose by a rate of 3.7% and per capita net national product increased a percent and a half a year. 88 00:09:00.380 --> 00:09:07.380 Prices were falling during this period by over 1% and although money supply increased slightly, 89 00:09:07.380 --> 00:09:12.380 it wasn't fast enough to outpace the gains in productivity in the supply of products. 90 00:09:12.380 --> 00:09:24.380 Prices fell less during the 1873 to 1879 period because the money supply rose, despite a return to the gold standard. 91 00:09:24.380 --> 00:09:34.380 Now, of course, there was agitation for inflation. There were over 60 inflation bills introduced in Congress. 92 00:09:34.380 --> 00:09:44.380 Congress actually debated inflationary policy and passed the Inflation Bill of 1874 that called for the release of 18 million in greenbacks. 93 00:09:44.380 --> 00:09:56.380 But President Ulysses S. Grant unexpectedly vetoed the bill, citing that inflation would destroy the credit of the nation. 94 00:09:56.380 --> 00:10:10.380 The next year, Grant signed the Resumption of Specie Act, which provided that paper money in circulation be exchanged for gold and silver, effective January 1st, 1879. 95 00:10:10.380 --> 00:10:25.380 Now, there was a financial crisis in 1884. It was triggered by an overflow of gold abroad as foreigners began to lose confidence in the willingness of the United States to remain on the gold standard. 96 00:10:25.380 --> 00:10:36.380 As Jim Grant writes, the crisis was the real McCoy, the wildest kind of panic raged and securities were thrown overboard regardless of price. 97 00:10:36.380 --> 00:10:46.380 But remember, there was no Federal Reserve, no lender of last resort, no central bank to flood the market with liquidity and cheap credit. 98 00:10:46.380 --> 00:10:53.380 So left to the market, the overnight money rate rose to 4% per day. 99 00:10:53.380 --> 00:10:59.380 That's a higher rate than your local payday lender will offer you right now. 100 00:10:59.380 --> 00:11:04.380 But how long did the crisis last? Three weeks. 101 00:11:04.380 --> 00:11:11.380 From 1879 to 1889, prices kept falling, but wages actually rose by 23 percent. 102 00:11:11.380 --> 00:11:17.380 And so, with there being no inflation, real wages soared. 103 00:11:17.380 --> 00:11:25.380 And according to Murray Rothbard, no decade before or since has produced such sustainable rise in real wages. 104 00:11:26.380 --> 00:11:33.380 Rothbard goes on to point out the three conditions that must be present to produce such a rise in real wages. 105 00:11:34.380 --> 00:11:40.380 An absence of inflation, an increase in savings, an increase in capital formation. 106 00:11:40.380 --> 00:11:56.380 Bond yields fell during this period, from 6.5% on railroad bonds in 1878 to 4.5% in 1889 and given that prices were falling, savers and lenders were richly rewarded. 107 00:11:56.380 --> 00:12:07.380 Productivity was robust 3.8% per year, gross domestic product almost doubled in the 1880s from the decade before. 108 00:12:07.380 --> 00:12:14.380 This was the largest decade-on-decade jump any time since. 109 00:12:14.380 --> 00:12:21.380 Labor productivity increased 26.5%, which reflects the increase in capital investment. 110 00:12:21.380 --> 00:12:31.380 There was an explosion of business start-ups in the 1880s and a 500% increase in the purchase of structures and equipment. 111 00:12:31.380 --> 00:12:40.380 Capital formation roughly doubled, farm productivity and production all increased, and farm wages also increased. 112 00:12:40.380 --> 00:12:48.380 So the most powerful bank in the country failed, and what was followed was a couple decades of prosperity. 113 00:12:48.380 --> 00:12:54.380 There was no too big to fail policy, no worried about systemic risk. 114 00:12:54.380 --> 00:13:02.380 J. Cook and Company blew up. Life not only went on, the economy actually flourished. 115 00:13:02.380 --> 00:13:15.380 But what happens now? Back in the fall of 2008, AIG, an insurance company, was viewed as too systemically important to be allowed to fail. 116 00:13:15.380 --> 00:13:21.380 Susie Orman told Larry King, Thank God they bailed out AIG. 117 00:13:21.380 --> 00:13:25.380 Felix Salmon wrote in Portfolio Magazine, 118 00:13:25.380 --> 00:13:30.380 Whether or not AIG deserved the money was pretty much beside the point. 119 00:13:30.380 --> 00:13:33.380 The key thing was that if it didn't get the money, 120 00:13:33.380 --> 00:13:39.380 the entire global financial system would be put at risk of collapse. 121 00:13:39.380 --> 00:13:47.380 In which light the cost of the AIG bailout looks positively modest compared to the benefit. 122 00:13:47.380 --> 00:13:56.380 Nobel Laureate Paul Krugman claims that the rescue pulled us back a few inches from the edge of the abyss. 123 00:13:56.380 --> 00:14:07.380 And just why was AIG rescued? Pennsylvania Republican Representative Paul Kanjorski told reporters, 124 00:14:07.380 --> 00:14:12.060 Reporters. One of the reasons we had to rescue AIG was the fact that it was going to bring 125 00:14:12.060 --> 00:14:21.580 down Europe. Well, that's sure working out. Well, now it turns out that Goldman Sachs 126 00:14:21.580 --> 00:14:27.740 was one of the 16 banks paid off when AIG was bailed out. 200 million in taxpayer money 127 00:14:27.740 --> 00:14:35.940 was pumped into AIG's insurance holding company, and it was essentially a huge backdoor bailout 128 00:14:35.940 --> 00:14:39.380 of International Investment Banks, led by Goldman Sachs. 129 00:14:41.820 --> 00:14:43.420 Well, I gotta tell you, 130 00:14:43.420 --> 00:14:46.620 I sure believe Goldman Sachs is in jeopardy. 131 00:14:46.620 --> 00:14:48.980 Then Treasury Secretary Hank Paulson 132 00:14:48.980 --> 00:14:51.300 told CNBC's Steve Leesman, 133 00:14:51.300 --> 00:14:55.660 I believe that if any major financial institution, 134 00:14:55.660 --> 00:14:58.780 Goldman Sachs or any other major financial institution 135 00:14:58.780 --> 00:15:01.800 had gone down there, gone down then, 136 00:15:01.800 --> 00:15:03.740 with everything else going on in the market, 137 00:15:03.740 --> 00:15:09.260 would have been all she wrote for the American economy. 138 00:15:09.260 --> 00:15:14.220 Current Secretary of Treasury Tim Geithner, he's testified under oath he knew nothing 139 00:15:14.220 --> 00:15:19.300 about the bailout, the bank's worthless derivatives contracts, although he happened to be president 140 00:15:19.300 --> 00:15:22.100 of the New York Fed at the time. 141 00:15:22.100 --> 00:15:28.380 Neil Barofsky, he's testified that Geithner actually personally made the immediate early 142 00:15:28.380 --> 00:15:37.380 It was early November 2008 to pay the banks full face value for their toxic derivatives and collateralized debt securities. 143 00:15:37.380 --> 00:15:42.380 During a hearing on Capitol Hill, Representative Steve Lynch shouted at Geithner for several minutes, 144 00:15:42.380 --> 00:15:49.380 the commitment to Goldman Sachs has trumped your responsibility to the American people. 145 00:15:49.380 --> 00:15:54.380 But Geithner probably feels like he's being responsible to the American people. 146 00:15:54.380 --> 00:15:58.020 I mean, after all, Goldman Chairman Lloyd Blankfein says, 147 00:15:58.020 --> 00:16:03.020 I'm charged with managing and preserving the franchise for the good of the shareholders. 148 00:16:03.020 --> 00:16:08.320 And while I don't want to sound highfalutin, it's also good for America. 149 00:16:08.320 --> 00:16:13.780 I think a strong Goldman Sachs is good for the country. 150 00:16:13.780 --> 00:16:15.660 Peter Greer writes that, 151 00:16:15.660 --> 00:16:21.780 Cook & Company was the bare stearns of its time, a pillar of national finance. 152 00:16:21.780 --> 00:16:29.980 If it could fail, anyone could and the U.S. stock market collapsed that awful autumn. 153 00:16:29.980 --> 00:16:34.420 But the House of Cook would never have been allowed to fail today. 154 00:16:34.420 --> 00:16:40.660 Today's cook is AIG or Goldman Sachs, not Bear Stearns or Lehman Brothers. 155 00:16:40.660 --> 00:16:45.060 The politically connected cook would be thrown a life preserver today 156 00:16:45.060 --> 00:16:49.220 to bail out not only his bank but his ill-fated railroad. 157 00:16:49.220 --> 00:16:54.580 More efficient firms would not be moving in to take over what is left of his firms 158 00:16:54.580 --> 00:16:59.140 or buying what could be put into productive use. 159 00:16:59.140 --> 00:17:04.220 As Auburn University economics instructor has written on Mises.org, 160 00:17:04.220 --> 00:17:09.380 the underlying goal of the financial bailout is not to keep the economy healthy, 161 00:17:09.380 --> 00:17:17.860 but to keep a few Wall Street firms, mortgage banks and insurance firms in business. 162 00:17:17.860 --> 00:17:20.360 Bankruptcies do little harm. 163 00:17:20.360 --> 00:17:24.360 The economy would learn to return to prosperity quickly 164 00:17:24.360 --> 00:17:27.460 if the government would just let markets work, 165 00:17:27.460 --> 00:17:30.560 let inefficient firms go broke. 166 00:17:30.560 --> 00:17:36.960 But General Motors, Chrysler, Fannie Mae, Freddie Mac, Citigroup, 167 00:17:36.960 --> 00:17:39.760 and of course Goldman Sachs are still with us, 168 00:17:39.760 --> 00:17:43.460 propped up directly by taxpayer money 169 00:17:43.460 --> 00:17:46.660 or indirectly through zero interest rates. 170 00:17:46.660 --> 00:18:07.260 Just this week, Fed Chairman and 2009 Man of the Year, Ben Bernanke reiterated that the central bank officials expect the Fed's key short-term interest rates to remain at nearly zero for an extended period of time, which generally means several months. 171 00:18:07.260 --> 00:18:16.760 And while Bernanke believes, quote, that most indicators suggest that inflation likely will be subdued for some time, unquote, 172 00:18:16.760 --> 00:18:25.260 John Williams over at shadowstats.com, who measures price inflation the way they did in the old days, 173 00:18:25.260 --> 00:18:31.260 says price inflation is actually running nearly 10%. 174 00:18:31.260 --> 00:18:35.960 If we could only return to the 1880s, deflation. 175 00:18:35.960 --> 00:18:41.880 Because price deflation, instead of being evil, as Guido Holzman points out, 176 00:18:41.880 --> 00:18:49.080 actually fulfills the very important social function of cleansing the economy 177 00:18:49.080 --> 00:18:58.000 and the body politic from all sorts of parasites that have thrived on the previous inflation. 178 00:18:58.000 --> 00:19:04.440 Explains Holzman, there is absolutely no reason to be concerned about the economic effects of deflation, 179 00:19:04.440 --> 00:19:12.080 and less than one equates the welfare of the nation with the welfare of its false elites. 180 00:19:12.080 --> 00:19:18.480 But to say governments and the friends of government are concerned about deflation is an understatement. 181 00:19:18.480 --> 00:19:25.800 Professor Peter Spencer from York University says that central banks have learned a lot since 1694 182 00:19:25.800 --> 00:19:32.680 when the Bank of England was founded, since there's no gold standard to get in the way. 183 00:19:32.680 --> 00:19:40.400 He says, cutting rates, they can cut rates very fast, and of course, they will too turn to the helicopters, 184 00:19:40.400 --> 00:19:51.640 referring to Milton Friedman's or Ben Bernanke's idea of just dropping bundles of banknotes from helicopters to stop deflation. 185 00:19:51.640 --> 00:19:59.760 This printing of money will keep the deflation wolf from our door, according to Professor Spencer. 186 00:19:59.760 --> 00:20:03.660 But creating more money doesn't create more goods and services. 187 00:20:03.660 --> 00:20:07.260 There is no wolf at society's door. 188 00:20:07.260 --> 00:20:11.860 From the standpoint of the commonly shared interest of all members of society, 189 00:20:11.860 --> 00:20:16.760 the quantity of money is actually irrelevant. 190 00:20:16.760 --> 00:20:22.560 And if the over-indebted and the over-lent go bankrupt, that's fine. 191 00:20:22.560 --> 00:20:27.960 The fact is these liquidations have no effect on the real wealth of the nation. 192 00:20:27.960 --> 00:20:35.060 And as Guido Holzman points out, they do not prevent the successful continuation of production. 193 00:20:35.060 --> 00:20:39.360 The fact is, deflation is a great liberating force, 194 00:20:39.360 --> 00:20:48.360 because it destroys the economic basis of the social engineers, spin doctors and brainwashers. 195 00:20:48.360 --> 00:20:54.560 Well, we sometimes find ourselves wondering just how different the world might have been 196 00:20:54.560 --> 00:21:04.960 And if Bernanke had studied the Gilded Age, rather than the Great Depression, writes Jim Grant, 197 00:21:04.960 --> 00:21:14.600 it's safe to say that the teetotaling George W. Bush was no match for the inebriated Ulysses S. Grant. 198 00:21:14.600 --> 00:21:19.040 And instead of there being no Fed for Wall Street elites to fall back on, 199 00:21:19.040 --> 00:21:25.480 Now Ben Bernanke continues the policy created at this very place in 1913 200 00:21:25.480 --> 00:21:30.280 of directing the world towards an inflationary poverty and despair 201 00:21:30.280 --> 00:21:35.280 that only benefits the politically connected select few. 202 00:21:35.280 --> 00:21:39.760 It is Rothbard and Holzman that know the way to prosperity. 203 00:21:39.760 --> 00:21:44.520 We must bring back failure and deflation and end the Fed.