My friend and colleague at the Mises Institute, Joseph Salerno, published a book this year
entitled Money, Sound and Unsound.
The book consists of 26 chapters which were based on articles that were published over
the previous 30 years in publications around the globe.
And the common theme of that book is explaining the principles of sound money to an audience
of non-specialists.
And this principle of sound money consists of two things.
The first of which is the positive affirmation of the market's ability to discover and maintain
money and provide all the benefits that it confers upon society.
The second is the negative view of government meddling in money and all the negative consequences
it has for society.
And Salerno is a leading light in contemporary Austrian economics.
The book really does a marvelous job of presenting all the important theoretical debates to the
general reader.
There are, of course, important historical stories that are beautifully disentangled,
particularly regarding the Great Depression.
The book is chock-filled with analysis of policy, including some of the very best discussions
of inflation and deflation.
Finally, in terms of moving forward, the book contains several important industries, excuse
gives me essays on the gold standard and how to re-implement it.
So I highly enthusiastically recommend this book to you.
The book is a great accomplishment and contains the very information we need to move the world
in the right direction.
Therefore I'm dedicating my lecture today to Joe and his accomplishments and to his
goal of restoring the principle of sound money.
And so what is sound and unsound money?
Well the principle of sound money acknowledges what the market has provided society in the
form of money.
Money began as a commodity that started to be used as an intermediary in exchange.
For example, I accept tobacco in payment for a service even though I have no desire to
consume tobacco, but I do know that I can use the tobacco to buy some tomatoes down
at the Vegetable Stand. Initially such goods back in history, such as tobacco, may serve
the purpose as an exchange intermediary. However, there is a natural tendency for particular
goods to emerge as the best intermediaries for exchange across the entire economy. Eventually
only a small number of goods emerge as the very best commodities to serve as intermediaries.
These goods will naturally have qualities that allow them to best serve the economy.
These qualities include being durable because you don't want an intermediary good that
might spoil or degenerate between the time you accept it and the time you want to reuse
it in exchange.
Another important quality is that the good be divisible in order that you can measure
To measure the amount of a commodity you might be willing to offer in exchange, therefore
a cow would not be a very good intermediary because you couldn't just cut off one leg
and then sell it bit by bit.
Tobacco on the other hand, for example, can be measured by weight to a precise amount.
Tomatoes on the other hand are less divisible and less durable than tobacco.
The very best intermediaries will also be easy to transport and store, and also represent
a large value relative to weight and size, and they also must be difficult to forge or
to imitate.
The commodities that emerged on the market process as the very best intermediaries are
what we call money, or the medium of exchange, because they are the very best in terms of
of Salability in the Marketplace.
Now, it is important to note that this is not
some mysterious process unguided by human choice.
But rather, it is an entrepreneurial process
whereby certain individuals discover
those particular commodities that have these properties
and that they can benefit from them,
that they can profit from them.
The best entrepreneurial discoveries
are eventually imitated and the market is driven in the direction of these certain commodities
and away from others.
Now long ago, metals emerged as some of the very best intermediaries for exchange, specifically
things like bronze, tin, copper and silver and gold.
These commodities are extremely durable, highly divisible, easily transportable and stored
and very difficult to counterfeit. And to enhance the divisibility of these metal commodities,
metalsmiths would cut the metals into equal-sized pieces and add their marks to indicate the
weight and who produced them, and in this manner the business of minting coins came
into being. In order to enhance the ability to store and transport money, banks and banknotes
came into being.
Initially goldsmiths and silversmiths,
who already had a safe place to store their own metal,
served as the repository for storing other people's money.
In order to enhance the transportability of money,
paper bank notes emerged as a way
of reducing the cost of transportation
and the problem of theft during transport.
So instead of transporting 100 pounds of silver
for a trip from London to Paris, I would simply have my London banker write me out a bank note for 100 ounces of silver, which I would carry with me and then redeposit or cash at the corresponding bank in the city of Paris.
This is the good form of paper money.
Now, yeah, this might all seem rather simple and obvious, but it's very far from that.
This process whereby money and banking developed could never have been imagined prior to it
actually happening.
There is an example of cigarettes becoming money very quickly in World War II prisoner
of war camps in Germany, but that's only because the prisoners already knew about money
Money and what money was and how it could be used.
No one would have been capable of discovering money in its modern form back in prehistoric
times.
Likewise, governments could never have been capable of creating such a system by themselves.
Governments merely monopolized existing forms of money.
Now of course, everybody thinks money is important and most of us would like to have more of
and that's why Ben Bernanke is popular in some circles.
But few people realize how important it really is.
Without money, the ability to exchange would be extremely limited.
Bartering goods is a costly and cumbersome process where you have to find somebody that wants something that you have
and they have something that you want and you can come to terms on how much each of you are going to be willing to
without money people would have to supply most of the goods for themselves and their families by their own production and as a result you would have much less to consume we would basically all be on a subsistence level of existence the specialization and division of labor would be extremely limited because we wouldn't have the ability to pay our workers
other than in the production of whatever we're doing.
Economies of scale would be very difficult,
would be very limited as a result.
Complex goods simply could not be produced
without the existence of money.
We wouldn't have prices, we wouldn't have wages,
we wouldn't have the ability to create complex production processes.
And so barter is a very, very difficult form of an economy, and you can't just go to Craigslist and, you know, put what you have up there and try to find somebody that you can make an exchange with.
There would be no Craigslist. There would be no computers. There would be no internet. There would be no cell phones. There wouldn't even be phones.
In other words, the long-term development of our standard of living is based on and
coincides with the development of money.
There are still societies in Africa and Asia and the Americas that are non-monetized, but
they're very primitive.
People live in primitive structures, have primitive clothing, and have a very unsure
supply of food.
They have none of the things that we take for granted, like indoor plumbing, refrigeration,
Soap, Clean Underwear.
Their lives could be healthy and satisfying, but the point is, is that their lives are
very different, and if we didn't have money, our lives would be incredibly different.
So the principle of sound money is based on commodity monies that emerged from the market
guided by the principles of property, commerce, and entrepreneurship.
As the system of money developed and spread across cultures, it did cause shocks to various
culture-specific economies as they became integrated into the system, and such integration
is always a messy process, but ultimately the monetary integration itself was a wholly
beneficial process to both societies.
Now on the other hand, any step away from the principles of sound money can cause the
And here I am speaking about the unsound money and specifically about government interference and intervention into money and banking.
The first type of intervention is the monopolization of money and banking, basically the government taking control over the minting of coins.
Now this may have an initial appearance of benefit as the coins become homogenous, the government has the power to stamp out counterfeiters and the like.
However, government monopoly ultimately leads to a second type of interference which is debasement of money or what we call monetary inflation.
Government and counterfeiters will shave, they'll clip, they'll reduce the size of coins over time in order to have more money to spend for themselves.
And of course now we have simply electronic monetary inflation where they press a button and the money supply starts to grow.
And even if the state did not use the monopoly to inflate, it would have destroyed the market
process.
Only with competing money suppliers would it be possible to have certain types of innovation
and product development that improves money and thereby enhances economic development
throughout the economy.
And another book that I'd like to plug is by George Selgin, it's called Good Money,
And basically, it's a wonderful historical study which shows that when the government
stepped away from the minting of small change, that the private sector move in, took over
and provided a better product than what the government had done previously.
The types of innovation that have occurred with state monopoly of money have all been
negative.
They include fractional reserve banking, bi-metalism, the gold exchange standard, central banking,
fiat paper money, the Brentwood system, the World Bank, the International Monetary Fund,
the current dollar hegemony, and of course, QE2.
Now time limits me from actually going into the problems of all these developments, but
Rest assured that they are all handled in great detail within the Austrian Economics literature and on Mises.org.
Needless to say, we have drifted far, far away from the principles of sound money.
We now have a system of fiat paper money with no commodity backing whatsoever.
We have fractional reserve banking that until recently there were basically no reserves backing up our demand deposits.
and finally we have a central bank that is embarked on a series of extreme and
unconventional policies. Our national debt is exploding and we have a futures
funded unfunded liabilities or what they call now a fiscal gap that has been
estimated to be as high as 200 trillion dollars and of course debt is the sort
are the fuel that fires inflation.
The more debt a nation has, the more inflation it tends to undertake.
And now we have quantitative easing too.
We have the price of gold shooting up over $1,400 an ounce.
And so finally, the gold standard is back in the news.
On the one hand, you have Robert Zolik, who is the head of the World Bank, has suggested
said that we go back to some type of gold price targeting as a guide for monetary policy.
Sort of a positive statement about gold.
On the other hand, you have New York economist, Nouriel Roubini, who has recently attacked
gold for several reasons.
First, he says it would limit the Fed's policy flexibility.
Second, it would prevent the Fed from stimulating growth.
Third, it would prevent the Fed from managing the price level.
Fourth, it would prevent the Fed from being a lender of last resort.
And fifth, it would prevent the Fed from bailing out the banks.
Now, of course, these are precisely the reasons that Austrian economists oppose the central bank
can support the gold standard itself.
The economics profession was long composed
of various schools of economic thought,
with the Austrians consisting of a small but highly
innovative number of economists who
worked within many of the leading institutions
of higher learning.
More recently, the Austrian School
has been growing rapidly and significantly,
both inside and outside academia.
However, instead of there being sort of a mixture
and a continuum of economic thought,
there's basically two camps, the Austrians
and various types of Keynesian economist.
The Austrian camp, what I've labeled and discussed
as supporting the positive principles of sound money,
support commodity money, competitive currencies,
The Keynesian Camp supports what I have labeled the negative principles of sound money that involve various forms of government intervention.
My view is that the Keynesian Camp does not really understand how the economy works.
as a social system of entrepreneurial actions
on the part of millions of people.
Instead, they seem to view the economy
as some kind of machine or some kind of single being
that they can stimulate with fiscal and monetary stimulus
to obtain various results.
You can sort of think of Frankenstein or something
along those lines.
So now I would like to discuss some examples
of the Differences Between Austrians and Keynesians.
And these are going to include the Great Depression,
the problem of deflation, and how
to get out of this economic mess that we're in.
These examples are just three of the many things
you're going to find discussed in Joseph Salerno's book, which
in my opinion is the single best source of information
and knowledge about these and many other economic issues
Related to Money.
The Great Depression, which began in 1929
and lasted throughout the 1930s,
has been thoroughly studied by economists.
And the Keynesian camp has come up
with various explanations or theories.
They all basically say that there was a lack
or insufficient aggregate demand.
But insufficient aggregate demand is really what recessions and depressions are all about.
It's really not true that we have insufficient aggregate demand.
I mean, if you could just demand things at will, well, you'd want a new car, you'd want
a better house, you'd want to buy a whole new set of clothing, there would be tremendous
stimulation in the economy.
But insufficient aggregate demand is merely a description of a phenomenon.
It is not an explanation of the phenomenon.
Milton Friedman said that the Great Depression was caused by a fall in the money supply in
the early 1930s.
Ben Bernanke, who's the chairman of the Fed and wrote his dissertation on the subject,
said that it was bank failures in the early 1930s that caused the Great Depression.
And I always thought it was funny that, you know, the guy who literally wrote the book
as far as big banks failing in the early part of the Great Depression and that if the Fed
had only prevented them from failing, if they only bailed them out, that we wouldn't have
had the Great Depression.
I always thought it was funny that he somehow got the job as chairman of the Federal Reserve
right at this point in time in history.
But again, falling money supply, failing banks are simply what recessions and depressions
are all about.
They're not explanations for why things happened in the first place.
Other economists have even blamed the gold standard for the Great Depression because
it prevented authorities from expanding the money supply rapidly.
Now let's contrast what Salerno writes in his book.
He demonstrates in his book that the Federal Reserve was a highly inflationary central
bank during the 1920s, which helped set off a bubble in the stock market and malinvestments
throughout the economy, investments that could not be sustained.
Rather than being deflationary, Salerno finds that the Federal Reserve tried and generally
succeeded in being inflationary, increasing the money supply during the 1930s.
Salerno also points out the simple fact that we effectively left the traditional gold standard
in 1914 and was not on the real gold standard during the 1920s, 30s and forward.
He shows that they basically substituted a Federal Reserve bureaucracy and the gold exchange
standard for the real one.
And the reason why the Great Depression was so great, why did it last so long, was basically
is really a continuing series of policies on the part of the Hoover administration and on the part of the Roosevelt administration to enact policies that prevented the market from working and specifically prevented wages and prices from falling.
And that takes us to the second example, which is deflation.
Deflation defined as falling prices.
Mainstream economists have a fear of deflation.
One whiff of the word of deflation and Paul Krugman would faint.
Ben Bernanke also has a tremendous fear of deflation, which is why he's engineered such
a massive inflation.
Salerno and Austrians think that deflation or falling prices is a good and natural thing,
as do most of us in this room.
We like falling prices.
That's why cash for clunkers worked.
That's why the first time home tax credit worked.
Falling prices led to increased sales.
But Keynesians associate deflation with depression, which, as Salerno explains, that association
does not hold up statistically over U.S. history.
So being fearful of deflation is wrong and the reality is quite the opposite.
When economy goes into a recession, there is a tendency for prices to fall.
No doubt.
However, if we look at the types of falling prices, and this is very important, the price
of capital goods falls dramatically.
That's why you see stock market prices go down dramatically.
The price of land goes down dramatically during a recession or a depression.
The price of labor goes down.
But the price of consumer goods, especially necessities and non-discretionary goods, they
don't fall so much.
So prices are falling, but as the Austrians are pointing out, they're falling at different
rates.
So how would entrepreneurs look at that?
How would future or present entrepreneurs look at that?
Capital's falling, land's falling, labor's falling, but the price of goods is not falling
so much.
Well it means that there's a profit opportunity there.
It means you can combine capital, you can combine commodities, you can combine labor
with lower prices and sell them to consumers at relatively higher prices, rather than causing
the economy to cycle out of control in a downward deflationary spiral which Krugman and Bernanke
believe deflation is actually a natural shock absorber that stabilizes the economy.
The final example is the differences between the two schools in restoring prosperity.
The Keynesians believe that you need to increase the money supply, and now appears that there's
no limit to that increase.
They also believe that you need to have stimulus spending, and there seems to be no end to
that anymore as well in their minds.
As part of that stimulus, they recommend that the government borrow the money, increase
Increase the Deficit and Increase the National Debt, and again, there seems to be no limit
to all of that.
Whatever is necessary to get the job done, basically those are the policy prescriptions
which led to the hyperinflations, which Professor Terrell explained to us just prior to lunch.
The Austrians view all these so-called remedies to be harmful and to impede the process of
of Economic Readjustment that corrects for the very malinvestments that occurred during
the boom, the Great Depression of the 1930s, the stagflation of the 1970s, the Japanese
economy of the 1990s, and the current economic crisis stand as testimony to our point of
view.
The correct view is that government should simply get out of the way, cut taxes, cut
to cut the size of government, restore a good environment for entrepreneurs, and allow markets to work.
Most importantly, government should adopt the principle of sound money.
We need to restore the gold standard, which Salerno has written about at great length in his book,
close down the Federal Reserve, and return the operation of money and banking back to the marketplace.
Thank you very much.