I just have to mention that I was born in Brooklyn, and I'm Jewish, I guess.
My talk today is on money, the origin and nature of money.
There are many fairy tales that abound with regard to money, and I'd like to begin with
a fairy tale of my own, only I think that mine has a kernel of truth unlike some of
the others, although some do have a kernel of truth.
Once upon a time, long, long ago, in a faraway land, all fairy tales have to start that way,
there was no trade. Everyone consumed only that which they produced. They had to produce
everything that they consumed. Food, clothing, shelter, you name it. If they ate it or used
Finally, self-sufficiency had been attained, of which the anti-globalists and the economic nationalists whacked so eloquent.
In effect, there was a tariff wall around each individual.
Naturally, they were very, very poor.
How can you be rich when you're a jack of all trades and a master of none?
When everything you consume has to be produced by you and you have no efficiency,
No efficiency, no innovation, no division of labor, no perfection of skills, because you're making 25, 50, 100 different things.
Then some genius got the idea that he would specialize in the production of only one thing.
And this was a great idea because now he could specialize and learn and get more skills.
If you want to become a concert pianist, you have to practice all day.
There's one exception I would offer for this, and that is the CRITs. These are the Critical Legal Studies Theoreticians at Harvard University, the Marxists at Harvard Law School, and they are the critical legal theorists at Harvard University, the Marxists at Harvard Law School, and they are the critical legal theorists at Harvard University.
They may have this idea that they should really swap with the people who wash the floors
because they don't want to be seen as too high and mighty or anything like that.
And I would say that here is one exception to the general rule that only proves the general rule.
Yes, it would be a good idea for these Marxist legal professors to, you know, get behind a broom once in a while, probably do less harm.
But apart from that, I think it's a good idea to specialize.
There's only one problem with specialization, and that is if you specialize in any one thing, it'll pile up.
I mean, suppose you're a shoemaker and you make tons of shoes.
You get good at making shoes, but you can't eat shoes.
You can't medicate yourself with shoes.
So in order to have specialization in division of labor, productivity, growth and innovation,
You have to have trade so that you can swap some of your shoes for a frisbee or what have you.
But trade is very difficult without money because you have this thing called the double coincidence of wants.
If you have a chicken and you want a pickle, you're a chicken-owning pickle-wanter and you have to find a pickle-owning chicken-wanter.
And the odds of doing this is pretty small.
You go to a new city, you have computer expertise, you want an apartment, you have to find a landlord who needs computers.
It's very difficult.
So it was found that indirect trade, still border, no money yet, indirect trade was more efficient than direct trade.
So if you had a chicken and you wanted a pickle, you wouldn't try to find a guy who had a pickle and wanted a chicken.
For example, salt. So you'd make a two-stage thing out of it. First, the chicken traded for salt. Then you take the salt and trade it for a pickle. It's a pain in the neck. You have to go through two stages, but it's actually more efficient than trying to overcome the double coincidence of wants.
The pain in the neck, you have to go through two stages, but it's actually more efficient than trying to overcome the double coincidence of wants.
So, salt began to be used for two purposes now.
One, as good old salt, and secondly, to intermediate trade or to facilitate trade.
And then salt became more valuable because in addition to the demand for salt as a commodity,
There is now a demand for salt to facilitate or intermediate trade.
There were many items used in this money-ish kind of a way as a trade facilitator.
Salt, sugar, tobacco, fish hooks, cows, metal, brass, copper, silver, gold.
But notice one thing about all of these facilitators or intermediators of trade.
They're all commodities.
They all had some sort of intrinsic value apart from the trade.
Now, I'm not a Marxist, so I don't believe in intrinsic value, but I mean a value apart from the trade, based on supply and demand.
Notice that we didn't start with, we couldn't start with pieces of tiny paper saying, you know, ten money units or something like that.
Murray Rothbard, when he would explain this, would give an example.
Well, suppose I wrote out a paper, you know, ten Rothbards, would anyone give me anything for it?
And I was a snotty kid in those days. I still am, although I'm no kid anymore.
And I would pipe up and say, Murray, Murray, yeah, give me, I'll take ten Rothbards.
I swear, if I had ten Rothbards signed by him now, I could probably auction it off and get a hundred bucks for it.
But I think the point is that it's sentimental value, and it's just a story.
A story. I mean, if it was a million Rothbards or, you know, if he wanted a million bucks for it, I wouldn't give him a million bucks for that.
So, he's making a very important point, and mine was sort of silly, but what the heck.
The key to money is knowing that others will later accept it, that you won't get caught holding the bag,
that you won't sell your pickle or your chicken or your frisbee for a piece of paper, and then no one else will take the piece of paper.
So that's why you can't start out with a piece of paper in any serious way as opposed to the joking way that I had with Murray.
So that's why it had to be a commodity and it couldn't start out as a piece of paper.
Now there was a competitive struggle over which commodity would be the money.
Everywhere in the civilized world where there was free competition allowed between these various items
The gold standard is just a name for a competitive process which eventuates in one commodity becoming the money.
We are not fetishists about gold, as some people accuse us of.
The picture I get is Scrooge McDuck who was a boyhood hero of mine.
He'd get into the money bin and he'd throw money and sort of, you know, get a little lift off of this.
We have been accused of this by Milton Friedman and others who claim we're gold bugs or gold fetishists.
If platinum had won out instead of gold, nobody here in this group, I don't think, would say,
would say, well, you know, platinum is no good.
Platinum would then be the money.
There's nothing specific about gold.
It's rather that it's the name for a competitive process.
So if you favor the gold standard,
you don't favor gold per se,
you favor whatever the market comes up with
as a result of its competitive process.
Why gold?
What were the advantages of gold?
Well, it's malleable, it's cheaply divisible.
You can break it in two, make change.
Whereas with diamonds, wouldn't be good money
because if you break a diamond in two,
you get the square root or the cube root
or something like that, the value.
You lose most of the value by breaking a big diamond
into two bits.
The two bits are worth a very small fraction
of the bigger one diamond.
It's low cost transport, high value per volume and weight.
That is gold, whereas cement and iron
wouldn't make good money for that reason. Bananas wouldn't make good money because they rot too quickly.
What are the advantages of the gold standard? Well, checks and balances.
Not only internal to government, the so-called three branches and the state versus the federal,
which I think don't really stop much of anything, but this is a citizen check on the government as a whole.
Because the government raises money in three ways. This is why money is very important.
Taxing, borrowing and inflation. The advantage of taxes, that's a horrible way to say it, but I'll stick to it.
One advantage of taxes is at least it's easy to see who's doing the taxing. They can't blame someone else for the taxes.
for the Taxes. Even borrowing, when they freeze out other borrowers, it's easy to see who's doing the borrowing.
But when it's inflation, it's very hard to see who's responsible.
I remember when I was a kid, I used to watch this TV show, maybe some of you are familiar with it, T-Men.
And the T-Men would come out of the treasury building and they'd go look for counterfeiters.
And I felt like saying, why don't you guys turn around and go back to the building from which you
have you eventuated and, you know, look for counterfeiters there, because that's where the counterfeiters are.
What they do is they blame everyone and his uncle for inflation.
They blame the businessman, the profiteer, the consumer.
The consumer is buying too much. That's causing inflation.
Even unions. Now, I'm no big fan of unions, and I'm not going to get into that, but I don't blame unions for inflation.
Inflation is a monetary phenomenon.
Why is this hard to see? Well, because the correlation between increases in money on the one hand and increases in prices on the other hand is not exactly direct.
It varies based on expectations. Take the typical housewife who is going to buy a pot and a pan and suppose that her expectations of the prices of pots and pans is that the prices will be flat because they always have been flat.
and now all of a sudden government fiat currencies starts increasing and there's
a tendency more money chasing the same number of pots and pans for the prices
to go up on the other hand the housewife seeing prices going up and expecting
them to be back down will buy less so that counteracts the increase in other
words there's an increase in the money supply which would push prices up and
there's a decrease in prices because the housewife expects them to fall and the
The two cancel each other out and the government starts creating money and prices don't rise
and they say, you know, hot diggity dog, this is great. We'll put in more money and prices
won't rise and, you know, we'll get to spend that extra money. Well, that's the first stage.
The second stage is, well, the first stage is the housewife says, I'll wait till tomorrow
to buy the pot and the pan because prices will go down. The second stage when the government
The reason why the government keeps doing this is I need the pot now, I'll buy it now.
And now you sort of get into a correlation of money and prices, the monetary theory, monetarism.
And here there is a high correlation between the increase in the money supply and the increase in prices.
But if the government keeps pumping in more money, then eventually the expectations of the populace change.
The housewife thinks, well, you know, her expectations are not that prices will fall because they're higher than she expects them, but that they'll keep rising.
And her motto is, I'll need the pot or the pan in two years, but I'll buy it now because the prices will be higher then.
And now, all of a sudden, the price increases are higher than the increase in the money supply.
Because not only are prices increasing because of the increase in the money supply, they're also increasing because of her expectations.
Then in the fourth stage when you have this crack-up boom like they had in 1923 Germany, I don't need the pot, I don't need the pan, I won't need it in two years, I'm up to my armpits in pots and pans, but I'm going to buy one anyway, because the money is going to be worthless, at least I'll have a pot or a pan.
So the correlation between money increases and price increases is more complicated, it's not just the one-to-one correlation.
And then people say, well, you see, the one has nothing to do with the other because there's not this one-to-one correlation.
But it's intermediated by these expectations.
Did the gold standard collapse? No.
Government abolished it to make inflation easy.
Because, again, taxes you can only do so much.
Borrowing you can only do so much.
Inflation gives you a little bit more mobility on the part of the government.
government. With the gold standard there are no balance of payments problems, no competing devaluations, no impetus toward protectionism, at least from the money side. The entire world economy would be integrated just like the economy of any one country where they have the same amount of money or the euro in Europe which now integrates them. It's no accident that the period from 1815 to 1914 was a hundred
100 years of relative peace, and it was also 100 years of the gold standard.
So I think the gold standard takes some credit, not only for prosperity and economic growth, but also for world peace.
Okay, the fairy tale continued. How did inflation start?
Well, now we have a pure gold standard in our fairy tale,
People are in the habit of leaving their extra stores of gold with the person with the biggest safe in town, the goldsmith.
He would store it, charge a warehouse fee, give a receipt, and then people would start trading these receipts for gold.
They don't have to trade the gold because if the goldsmith has good veracity and people trust him,
You'll accept a one ounce receipt for gold or a receipt for one ounce of gold in lieu of the one ounce of gold.
So everyone doesn't have to keep running back to the goldsmith to get the money or keep it in their pocket.
They can trade these little pieces of paper around.
Well, one day he realized that there's a lot of gold that he's got and there's a lot of warehouse receipts out there.
And the odds of everyone coming in all at once to get the gold would be very, very small.
It hasn't happened for years.
And his wife needs a new mink coat or a carriage or something.
It's always the woman's fault.
And he starts to create a few extra warehouse receipts for which there is no gold.
And his wife says, wow, what a great businessman.
You know, he's creating wealth.
He's helping the economy.
and thus fractional reserve banking was born.
The Mises Rothbard radical proposal for free market money is no legal tender laws, 100% reserves, no fractional reserve banking,
denationalization of fiat currency, abolition of the Fed, central bank, private coinage.
Speaking of private coinage, I was going over the newspaper here and just yesterday's newspaper
When they have this thing fed's lower boom on alternative money, there's a thing called the Liberty Dollar,
which is not a U.S. dollar, it's created privately.
And people are using this to facilitate trade.
And the U.S. Mint is threatening to put these people in jail because they have a monopoly over the Mint.
Well, this certainly would not exist in a free market society.
There would be private coinage, return of the gold hoard to private hands, no government monopoly in the supply of money, mining, minting, certification, storage of money would all be done privately.
There would be a complete separation of money and state, just as some people want religion and state, or school and state, or health and state, or X, Y, and Z and state, well, also money and state.
If this occurred, another benefit of it would be that the Austrian business cycle would not be created.
The way the Austrian business cycle runs is government creates more money,
not only raises prices as the Chicago types are aware of, but also reduces interest rates.
And when interest rates are initially reduced, this leads to greater roundaboutness of production.
Namely, entrepreneurs are subsidized into and fooled into undertaking longer-run investments than they would have taken had the interest rate been higher.
And when these things that never should have been built in the first place fail during a recession or a depression, the cleansing period,
well, then we have a disruption of the economy, whereas with gold, gold is part and parcel of the economy.
Gold is dependent upon the time preference rates
which determine the market interest rates.
So gold is endogenous to the market.
Government fiat currency isn't.
Gold will not create the business cycle.
The fiat currency will.
So much for our brief look at the Misesian case
for the gold standard.
Peace, prosperity, no inflation,
no artificial creation of the business cycle.
That's the gold standard.
Now, I claim it's not enough to show
the glorious, insightful analysis of Mises
to truly appreciate him.
Because suppose every economist believed this.
Then, you know, we might applaud Mises,
but, you know, the applause would be limited.
However, I think Mises deserves a lot more applause
because the profession of economics
is not at all receptive to the gold standard.
There was a survey of economists
and they asked them 27 different questions
to see, to gauge where economists stand
and gold wasn't even on the top 27 list of questions.
So gold is a non-issue in the economics profession.
So I don't think we have to compare Mises
with mainstream economists,
certainly not with Marxists or Keynesians.
That's sort of like shooting fish in a barrel.
Rather what I'd like to do is to compare Mises
with four free market economists.
I don't know that I'll have time to go through all four
because I want to stop and have questions soon.
But the people I have on my list,
and I'll get as far through them as I can,
are Milton Friedman, Alan Greenspan,
Friedrich Hayek, and Robert Mundell.
All these people are free market economists
who are either bitter opponents of the gold standard
or opponents of the gold standard in one way or another.
Let's start with Milton Friedman
and let me read you a quote from Milton Friedman.
This is from his program for monetary stability.
The classical liberal, this is Milton speaking,
is suspicious of assigning to government
any functions that can be performed through the market,
both because this substitutes coercion
for voluntary cooperation in the area in question
and because by giving government an increased role, it threatens freedom in other areas.
Control over monetary and banking arrangements
is a particularly dangerous power to entrust the government
because of its far-reaching effects on economic activity at large
as numerous episodes from ancient times of the present over the whole globe
tragically demonstrate,
unquote. Well, wait a second, that's pretty good stuff.
This is wonderful.
We can almost infer that he favors the gold standard or that he's a Missessian.
After all, he's talking about voluntary cooperation, better than coercion.
He's talking about the tragic history of government control.
What more could you want? Enroll this man in the Mises Institute.
But wait, not so fast.
We have another quote from Milton Friedman where he takes it all back.
What he says is,
The fundamental defect of a commodity standard, read gold standard,
from the point of view of society as a whole,
You have to watch out for that.
Is that it requires the use of real resources to add to the stock of money.
People must work hard to dig gold out of the ground in South Africa in order to rebury it in Fort Knox or some similar place.
The necessity of using real resources for the operation of a commodity standard establishes a strong incentive for people to find ways
to achieve the same result without employing these resources.
If people will accept as money pieces of paper on which it is printed,
I promise to pay X units of the commodity standard,
these pieces of paper can perform the same function
as the physical pieces of gold or silver,
and they require very much less
in the form of resources to produce.
This is very disappointing.
The argument amounts to this,
a ringing statement for freedom,
but then to note that freedom costs real resources,
and then the conclusion is well then don't do it. This is very strange. Let's have coercion
because it costs money to have freedom. But this doesn't follow logically. There's no
deduction here. What about justice though the heavens fall or our lives, our fortunes
and our sacred honors or millions for defense, not a penny for tribute or kick butt or something.
But we don't get that from Milton Friedman. What we get is a total surrender.
First of all, it's not true that it costs real resources.
Digging in South Africa and burying in Fort Knox or a similar place would take place anyway.
Because gold has a value.
Maybe there'd be a little less gold mined because of the monetary value,
but there'd still be gold mined here and stuck there.
So it's not as if it's going to cost resources.
But suppose it did cost significant resources. Does it now follow that it shouldn't be done? No.
The question is, is gold worth the cost of resources and also who should decide?
Should Milton be deciding for us or should each individual decide through a marketplace?
Well, obviously, I take the view that markets are better than governments for deciding these things.
The political marketplace, if you want to use that word, which I don't, only occurs every four years, thank goodness.
Whereas economic decision making occurs every day.
Whereas in the political realm, when you vote every four years, you have to vote for a package deal.
But suppose you like Bush on policy one, three, five, and seven, and you like Kerry on policy two, four, six, and eight.
You have no way of registering anything. You have to take one or the other.
Whereas in the market, you can vote for a blue striped tie or a white shirt or a red tie or whatever you want.
It's like a scalpel rather than a bludgeon.
And when people are free to choose, which is the name of one of his books, which he isn't really upholding,
they've always chosen gold. So why are we cramming some other system down their throat?
This leads to the question, why would people choose gold when it costs real resources, when they could have had these green pieces of paper fiat currency, which are a lot cheaper because you can always add a zero and ink and paper don't cost that much?
Well, to ask this is to answer it. People have been victimized throughout history by government fiat currency inflation.
Even as Professor Friedman has stated, gold is an insurance policy. It's sort of like locks and fences and doors. These too use up real resources.
Does that mean that we shouldn't have fences and doors and locks?
What about the, I mean, it's just silly.
Just because a thing costs real resources,
you don't say, well, therefore we shouldn't do it.
A rational way is, okay, it costs real resources,
assuming that it does, arguendo, but what's the value of it?
And if we think the value is higher than the resource cost,
then we should do it.
Alan Greenspan, the next person I'll be considering,
presents the greatest challenge to the task of contrasting Mises and other prominent economists for, for Greenspan is good on gold.
He's as good as gold. Read his contribution to capitalism, the unknown and ideal.
And it is written as if it was by a student of Mises, which is also true.
Let me just read a quote or two from Alan Greenspan.
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions.
They seem to sense, perhaps more clearly and subtly than many consistent defenders of laissez-faire,
that gold and economic freedom are indispensable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
One more quote.
But the opposition to the gold standard in any form from a growing number of welfare state advocates was prompted by a much subtler insight, the realization that the gold standard is incompatible with chronic deficit spending, the hallmark of the welfare state.
I could go on and on with quotes from Alan Greenspan about how great the gold standard is. He really is eloquent on this.
Well then how can we account for the fact that Greenspan was head of the Fed, an amazing place for a supposed Misesian to be,
and that the Fed hasn't been disbanded and that he hasn't promoted the gold standard.
Well, Murray Rothbard's analysis in the free market has the ring of truth.
What Murray says in effect, and I'll quote Murray, is that Greenspan does favor gold and laissez-faire, but only in the high philosophical level.
In practice, he's a conservative Keynesian like his predecessors and successor.
Here is Murray on Greenspan, on gold and the Fed.
Thus, Greenspan is only in favor of the gold standard if all conditions are right.
If the budget is balanced, trade is free, inflation is licked, everyone has the right philosophy.
In the same way, he might say he only favors free trade if all conditions are right.
The budget is balanced, unions are weak, we have a gold standard, the right philosophy.
In short, never are one's high philosophical principles applied to one's actions.
It becomes almost piquant for the establishment to have this man in its camp.
Over the years, Greenspan has, for example, supported President Ford's imbecilic Whip
Inflation Now buttons when he was chairman of the Council of Economic Advisers.
Much worse is the fact that this high philosophical adherent of laissez-faire saved the racketeering
Social Security program in 82, just when the general public began to realize that the program
was bankrupt.
He did it as head of a bipartisan conservative and liberal-centrist Social Security commission
and Save the System from Bankruptcy by Slapping Higher Social Security Taxes on.
So Mises is starting to look good now compared not just to the mainstream economists but compared
to free enterprise people, Friedman and Greenspan.
How does Hayek stand?
Well in his monograph, Choice in Currency, Hayek specific, I have to ask someone, I'm
I'm supposed to leave time for questions. Is it time yet?
A little bit more and then we'll have questions, okay.
Let me do Hayek and then I'll call for questions.
In his monograph, Choice and Currency,
Hayek specifically opposes any organized attempt
to restore the gold standard.
This leads some people to say, well, even Hayek says,
the idea is, well, Hayek is supposed to be
a laissez-faire person and even Hayek admits,
so you people who stand for the gold standard,
or Weirdo Extremist Crackpots, instead Hayek proposes elimination of legal tender laws, well this is good to be sure we should get rid of legal tender laws by all means, but this is necessary not sufficient, it's good to do but we must do more.
The reason we all accept U.S. currency is not because of legal tender, it's because of its moneyness,
because of its expectation that when we are handed a dollar, we will be able to hand off the dollar to someone else.
So even if the legal tender law was ended tomorrow, we would still accept the currency because we have the expectation that the currency will be accepted by other people.
So it's good to get rid of legal tender law, but that's not enough.
Experience shows that only hyperinflation can get us out of the money.
When they had the German hyperinflation of 1923, people started using other sorts of money other than the German money.
There's nothing wrong with competition, but only competition on the market and not between fiat currency of the sort that Hayek is proposing with his Ducat.
Consider an analogy. Do we as free market advocates want competition between government bureaus?
Not really. That's the whole problem with the school voucher thing.
Competition means competition for a laissez-faire advocate between private companies, not between government entities.
Competition between this public school and that public school, another Friedmanian idea.
Well, I don't know what we can say about that. Friedman would say it's better.
To me, it's like the market socialism of Yugoslavia and Tito.
Do we really want more efficient government? No, because unless we think that what government is doing is somehow good, we don't want government to engage in competitive processes between these bureaus and those bureaus to see which bureau can do better or worse.
That's what we had in the bailout of Gulf after Katrina. Various government bureaucrats were competing with each other.
Much better would be privatize them all.
So the Hayek-Ducat is an attempt to have competition
between his Ducat and the legal tender present fiat currency.
The Ducat system makes a similar area
as those flexible exchange rates.
Trade is okay, but between what?
We wanna have trade between market items,
and not between other things that are part and parcel of the government.