Ladies and gentlemen, Mark mentioned this rock star phenomenon, and much as I hate that term, nevertheless, I can't help mentioning to you something that happened to me early last month in Minneapolis.
Ron Paul was having a big event, a rally for the republic, and I was one of the speakers.
When you prepare remarks for an event like that, you usually know what your applause lines are going to be.
You throw some red meat out to the crowd and they always oblige.
But I just had sort of a throwaway line in there about, well, you know, by the way,
more and more people are looking into the Austrian theory of the business cycle.
I had to stop speaking. The place erupted in cheers.
See? See? I have to rethink my whole philosophy of applause lines, right?
Absolutely astonishing. So I actually ad-libbed a little something after that.
I said, just recalling what John McCain had said about his knowledge of economics,
I said, because this was taking place right down the street from the Republican Convention,
I said, let's go ask John McCain what he knows about Austrian business cycle theory.
So the world has changed. The fact that this garners cheers. In fact, Bob Murphy, who is another adjunct scholar of the Mises Institute, posted on his own blog under the title Tom Woods, Manipulator of Crowds.
He wondered how it was possible that I could give a speech whose dorkiest portions got the biggest applause.
I just couldn't understand this. So I'm quite pleased about that.
So this is a hot topic that we're dealing with right now, of course.
Now right now I'm under a really extraordinary book deadline.
So some of you whom I owe emails to, my sincere apologies, but I have a book deadline of November 17th.
and I think I've been working on it for about three weeks now at most, so this is ridiculous, there's no way anyone could possibly make this deadline.
But I was just under the, I had the view that somebody should write a book that was short, understandable to the layman,
and would be published really fast to get the sort of Austrian take out there in the general public.
Don't let the Fed get away with pretending it's the savior in this crisis.
We should blame it as the culprit and do it quickly before all the books calling for evil come out.
Now, no one appreciates more than I do how, well, unfit for this task I am.
But I thought, you know, I have published a couple of books with this particular publisher in the past,
so I already have a relationship with them. They might be likely to rush my book.
Sure enough, if I can have it to them by November 17th, given that Christmas slows down everything in publishing,
they can have it in the stores in January, which will mean I'll beat Paul Krugman, you know, whatever book he's coming up with.
So, in any event, that means that it's a little difficult for me to hurry up and throw something together for this event, you know, so, you know, suddenly crept up on me.
So I'm reminded of the Simpsons episode in which Homer unfortunately has to go back to college because of course he is grossly incompetent when it comes to his job as the safety inspector at the nuclear plant.
So he's got to go back to school and he's totally unprepared for his exam in nuclear physics.
And so the geeky kids he's hanging around with say to him, Mr. Simpson, what are you going to do? You're totally unprepared.
Well, on the day of the exam, I'll hide under some coats and hope that somehow everything works out.
Well, that's sort of how I feel today, you know, just hide under some coats.
So we're going to find out together whether what I've assembled here is a coherent presentation.
We're all going to find this out together.
Well, Jeff Tucker, I believe, is the originator of all these titles and topics,
and so he's given me what I first thought was a pretty joke-proof topic.
How am I going to joke about monetary theorists throughout American history?
I'll do my best, you know, we'll just have to wing this.
But it is nevertheless an important topic.
And yet as I read and as I looked through some of the great American thinkers on money and banking,
it occurred to me that, present company accepted,
on these issues the only good economist is a dead economist.
The best ones are from the 19th century.
Now, of course, I leave out Murray Rothbard.
I figure people have more or less heard of him.
I want to focus on people you might be less likely to have heard of.
So there are a few honorable mentions who may deserve to be in here,
and I'll at least mention them quickly.
One would be Pelletier Webster, who's considered to be one of the first American economists.
And he wrote an awful lot about money and, in particular,
about the historical experience with the continental currency.
and Financial Currency. He had a book of his writings come out in 1791.
You can actually find those writings fairly easily online with an astute Google search.
So, Pelletier-Webster deserves sort of honorable mention.
Condé Regé is the author of an 1840 treatise called A Treatise on Currency and Banking,
which is an outstanding hard money book that the Mises Institute has available at Mises.org
in PDF form, his last name is R-A-G-U-E-T, and you just can't believe what you're reading,
that there were people putting these views out to the public at that time.
Charles Holt Carroll is another, but I decided that I'm going to focus on three individuals in particular,
all named William, and that's actually the reason I chose them.
I thought, isn't this a funny coincidence? It's three Williams.
So we're going to talk about the three Williams.
The first William I want to talk about is a guy named William Leggett.
This is the only William whose book, or at least one of whose books, we do not feature here in the bookstore,
but we're ecumenical, broad-minded people. That's not any reason not to mention you.
So I want to talk about William Leggett for a minute.
This fellow was a New Yorker who wrote editorials for the New York Evening Post in the 1830s.
He was a Jacksonian. He later went on to found two of his own publications, The Plain Dealer and The Examiner.
He devoted his pen to the causes of free trade, opposition to slavery, and limited government in the Jeffersonian tradition.
But most significantly, for our purposes, he was a hard money man.
And even more significantly, he was not a professional economist. He was just a popular journalist.
And yet, just this little collection of his editorials that Liberty Fund publishes, called Democratic Editorials,
to maintain some of the old-timey usage, that book, there is more genuine knowledge and enlightenment about money and banking than in whole shelves of modern treatments of this subject put together.
Now, he begins this way. He says, the basis of our banking system is certainly wrong. Good so far.
Good so far.
Banks should be established on a foundation which neither panic nor mismanagement,
neither ignorance nor fraud could destroy.
That which is received as money and which is designed to pass from hand to hand as such
should not be liable to change into worthless paper in the transition.
He argued that the banking establishment of his day had poisoned the culture.
He said,
The great castle of credit is suddenly overturned, burying hundreds of industrious mechanics and laborers under its ruins.
Such a man would once have been execrated, he is now pitied.
Interestingly, Leggett had a kind of inchoate understanding of Austrian business cycle theory,
which of course would not be fully developed until the early 20th century.
But right away, we notice in at least every other editorial he wrote on this subject,
this general conclusion.
The alternate inflations and contractions of the paper currency incident to such a pernicious
system as ours will continue to produce their inevitable consequence on wholesome activity
of business followed by prostration, sudden and disastrous.
So right away, he's got some kind of sense that there's a monetary explanation for the
and the boom-buzz cycle.
But I want to suggest to you that in fact his insight is far greater and more impressive
than even this, although this alone would place him in the top rank of monetary economists
in our day.
So first what I want to do is say a little something about Austrian business cycle theory
and then return to leg it because the passage I'm going to quote to you is just absolutely
stunning and I want to prepare it properly.
Now I'm sure I'm not going to be the only one who will say something about business
I'm the first one, so I steal the thunder of everybody else.
If I misstate it, everybody has to spend the rest of the weekend hurriedly correcting me.
The simple version that I would use to explain it is as follows.
I assume most people in this room know about this, but so many people have become interested in these topics
just in the past 18 months that I think it's wrong to just take for granted.
Everybody knows Austrian business cycle theory. We can just throw this lingo around.
not necessarily but it's one of these things that when you hear it it has such
explanatory power and it makes so much sense that it changes can change the way
you think sort of instantaneously so we'll run a little experiment see if
that works for anyone here in the room so according to the theory here we have
the economy we have the interest rate whose function is to coordinate
production across time and when the interest rate is artificially
When the money is interfered with, this function is disrupted.
It can't coordinate production across time the way it's supposed to.
So when the monetary authority, let's say, I don't know, the Federal Reserve system,
when they artificially lower interest rates, the result is an unnatural artificial boom in capital goods production,
in production of goods that are farther removed from the production of final consumer goods,
things like raw materials or construction, that sort of thing.
You see a boom there, but this is an unsustainable boom and the reason that it's unsustainable
is that there aren't enough real resources in the economy to complete all these projects.
There is this superstition in our day that says that the Federal Reserve system can,
by manipulating the interest rate, can create wealth, but of course it can't.
If it could, we could solve all the problems of the world, but it was just a single fed
computer.
But of course, by artificially lowering the interest rate, you haven't increased the number
The number of projects that can be completed, you may have increased the number of loans that can be taken out,
the number of projects that can be initiated, but the pool of real savings is not there to support the completion of all these projects.
So as time passes, businesses will find that the complementary factors of production that they need to complete their projects
are not available in the abundance they might have expected at the time that they need them.
And that, in fact, they find that their costs are rising for these complementary factors
of production.
So, for example, in the dot-com boom of the 1990s, well, everybody's just going to become
rich though, just make an IPO and suddenly they're billionaires or something.
Everybody can just become rich this way.
But sooner or later they realize, well, whoa, whoa, what happened to the cost of web programmers?
They suddenly doubled in their salaries.
or the cost of domain names increasing by a factor of 10.
So suddenly it just turns out that the complementary factors of production are scarcer than entrepreneurs
could have been led to expect.
And so now they're going to need more credit to see them through a more expensive cycle
of production and yet that credit is either not going to be there, the Fed could just
keep pumping it in, but then we have an even bigger problem because again the pool of real
savings has not increased.
So the economy is being pulled in two different directions at once.
You've got all this long-term investment going on on the one hand, but you've got all this
consumption pulling from this direction.
This just can't go on.
And so some people are of the opinion that if only the central bank could just keep inflating
forever, the problems would go away.
You know, we could have the boom forever.
If only the central bank would just keep doing it, keep drugging the patient, then we could
just stay high forever.
And that is one of the reasons that the boom ends up, not being a boom, ends up crashing
is typically that the monetary authority will put the brakes on credit and suddenly a lot
of these projects are going to fail.
And Ludwig von Mises said a lot of times they feel obligated to do this because they're
afraid that if they keep, they continue inflating the money supply in order to keep this boom
going, eventually they'll have to increase the money supply and credit so substantially
in order to keep it going that the result will be hyperinflation and the destruction
of the whole system, but even if that weren't the case, given that the pool of real resources
has not increased, sooner or later the bust has to come regardless of what the monetary
authority does. The resources are not there as they would have been if the low interest
rates had been the result of actual saving, actual deferral of consumption and releasing
So, during the boom phase, there's this tendency for people to feel like, you know, they can do no wrong, the boom phase tends to include an increase in the stock market, the stock market booming, well, the stock market is the market in prices of titles to capital, so of course we would expect this, likewise for real estate, so it's not surprising that people would think, hey, you know, I can go into the stock market and become a millionaire.
or, hey, I can make my living flipping houses. I can do this for a living.
And then eventually reality comes crashing down.
Well, now let me share with you a couple of observations by William Leggett.
The first one is pretty good. The second one is unbelievable.
Here's Leggett. He says, and he's writing in 1837.
He says, any person who has soberly observed the course of events for the last three years
must have foreseen the very state of things which now exists.
He will see that the banks have been striving with all their might,
each emulating the other, to force their issues,
that is their paper money, into circulation,
and flood the land with their wretched substitute for money.
He will see that they have used every art of cajolery and allurement
to entice men to accept their proffered aid,
that in this way they gradually excited a thirst for speculation,
which they sedulously stimulated until it increased to a delirious fever,
and men in the epidemic frenzy of the hour wildly rushed upon all sorts of desperate adventures.
They dug canals where no commerce asked for the means of transportation.
They opened roads where no travelers desired to penetrate.
And they built cities where there were none to inhabit.
But now this passage.
What has been, whatever must be the consequences of such a sudden and prodigious inflation of the currency?
Business stimulated to the most unhealthy activity,
a vast amount of overproduction in the mechanic arts,
a vast amount of speculation in property of every kind and name at fictitious values,
and finally a vast and terrific crash when the treacherous and unsustainable basis
crumbles beneath the stupendous fabric of credit and the structure falls to the ground
burying in its ruins thousands who exalted in the fancied security of their elevation.
Men nowadays go to bed deeming themselves rich and wake in the morning to find themselves stripped of even the little they really had.
They count deluded creatures on the continued liberality of the banks, whose persuasive entreaties seduced them into the slippery paths of speculation.
So think house flipping and housing bubble.
But they have now to learn that the banks cannot help them if they would and would not if they could.
They were free enough to lend their aid when assistance is not needed.
Well that's pretty good for 1837, I would say. Yeah, pretty good for 2008, sure.
He also noted that it becomes easy to blame the inevitable crash and bust on scapegoats,
Convenience scapegoats, people, society generally doesn't like.
Because he puts it this way, he says the average person when this terrible time comes,
of course from the economy's point of view, it's a cleansing time,
is bewildered in his attempts to investigate the cause of the confusion
and is ready to listen to any explanation that fixes the blame of the disaster
on those whom he had previously regarded with dislike.
so rich people in general, you know, it's their fault, or businessmen, yeah, I never trusted them anyway.
So it becomes easy to just throw the blame somewhere else, but Leggett devoted his pen
to placing the blame where it belonged, which was in this inflationary expansion of credit.
Now much has been said and done in the recent history of Western civilization in terms of
the separation of church and state.
Well, what Leggett called for expressly was the separation of bank and state.
And he said that if you had a genuinely free banking system,
where there were no bailouts of any kind,
where there's no promise that you'll get to suspend your specie payment,
you have to pay your depositors on demand, or you go out of business,
there is no bailout, he said, well, we would have a system in which the banking system
would be hedged around by no special enactments, would be open to universal competition,
and would depend for its success and the continuation of its advantages
on the correctness with which it conducted its affairs.
And he says, moreover, that these banks would be sure that their notes would return upon them
in demand for the precious metals, thus forcing them to part with their profits
in order to purchase silver and gold to answer such demand.
So it would be impossible for them to issue notes over and above the species they had in their vaults
and that this non-monopolistic system of freedom would be a good substitute for the system that existed at that time
and he would hear none of the argument that we need national banks for economic prosperity and to prevent business cycles
and he said, look, to say nothing of constitutional objections and nothing of the political evils to be apprehended by such an institution
Has a federal bank ever prevented commercial revulsion?
And then he goes on and gives examples of panics that were not prevented by national banks.
So he's not going to listen to that.
Now, I spend most of my time on Leggett because he impresses me the most,
because he's not, as I say, he doesn't even do this for a living, and yet he's got these insights.
But just briefly about a couple of other thinkers.
William Gudge wrote a book called A Short History of Money and Banking in the United States in 1833.
It's available for sale here.
Now, he worked in the Department of the Treasury for a long time.
For a long time, he spent two years researching what became this book, and again he believes
in the separation of bank and state.
He says that the financial operations of the U.S. government should be limited to the collecting,
safekeeping and dispersing of the public monies and transferring them from the places where
they're collected to the places where they're dispersed.
Other than that, government should have no more business and concern with banking and
brokerage than it has with baking and tailoring.
Well, even I think that's too much, but all the same.
Now, again, people talk about church and state.
We have to have the separation of church and state.
Otherwise, the state will, you know, promote superstition.
But yet, we have people calling for kind of an incestuous union of bank and state who
say to us, well, you know, if we have this great banking system, you know, with all this
government help and monopoly privileges, then we can print up all the money we need to stop
business cycles, increase wealth, give everybody a 4,000-square-foot house.
Now, I'd be a little careful about whom I'm accusing of superstition if I were these people.
Now, Goudge's view was that when paper money is issued in excess of the hard money on reserve,
the result is, again, this unsustainable rise in prices and confusion.
People start buying more goods from abroad because domestic prices are going up,
and the foreign sellers of these goods typically want to take these paper notes and convert them into specie.
Banks, when they get these demands for specie, have to start calling in loans or not extending,
not granting extensions on loans because they don't, otherwise they're not going to have
the specie.
And so the result is this massive disruption of economic activity.
Once prices fall again, well, the banks start the cycle of expansion and contraction all
over again.
And so Goudge's preferred system was one of 100% reserves against demand deposits.
Banks can lend their own capital plus any time deposits.
He said, No instance is on record of a nation's having arrived at great wealth without the use of gold and silver money,
nor is there, on the other hand, any instance of a nation's endeavoring to supplant this natural money by the use of paper money
without involving itself in distress and embarrassment.
I love that term natural money.
Guido Holtzmann in his new book, The Ethics of Money Production, uses that term to refer to money that is created spontaneously on the market.
That's natural money.
There's one episode from history I want to make brief mention of that Goudge talks about
and that involves the Bank of the United States.
Alexander Hamilton was very much in favor of establishing a national bank which was established
in 1791 with a 20-year charter.
So it was going to expire in 1811 unless it were renewed and it was not renewed and it
was only in 1816 that the second bank of the United States was established.
But one of the benefits of being able to work here in the Institute Library is that a lot
A lot of the books were owned by Murray Rothbard.
So I was reading Murray's copy of Goudge's book and in this book there's a reference
to a Mr. Carey who wrote a pamphlet urging everybody, we need to renew the Bank of the
United States.
So he wrote a pamphlet on the ruinous consequences of a non-renewal of the charter of the Bank
of the United States and next to this in Murray's copy he's written the word, bastard.
So there's a move in 1816 to charter a new national bank, and Goudge knows this isn't
going to help, it's just going to make the problem worse.
Oh gee, one giant bank, well that's a big solution to our problems, instead of just
keeping an eye on the banks that exist and not bailing them out all the time.
And he quotes a U.S. Senator, we'll never get this again, Senator Wells, saying that
this bill came out of the hands of the administration, ostensibly for the purpose of curtailing the
over issue of bank paper, and yet it came prepared to inflict upon us the same evil
Being itself, this new national bank, nothing more than simply a paper-making machine.
He said, this is like hiding in the water for fear of the rain.
Likewise, he says that the disease under which the people labor is the banking fever of the states,
and this is supposed to be cured by giving us the banking fever of the United States.
So this is not the solution to the problem.
Now, I have got an exceedingly small amount of time.
I don't know how this possibly could have happened,
but let's say a little something about my third William, William Graham Sumner,
We have his book, History of American Currency, for sale, 1874.
He was a Yale University sociologist, died in 1910.
And although he was not a 100% reserve man, he was as close as you could be.
And his arguments were sort of contradictory about that.
So we'll just, everyone's allowed one deviation, according to Murray Rothbard.
So we'll grant him this one.
But what I do want to point out is that in Sumner's history of banking in the United States that he wrote in 1896,
He organizes each of the sections in ways that work very well in tandem with the Austrian business cycle theory.
So he'll have a section on some period, let's say around 1819, where the first section of the book would be the inflation,
then the second section would be the crisis, then the liquidation.
So it's all there and that's how he goes through all these various episodes.
And, of course, I had here prepared some quotations from him, I'm usually a much better judge of time,
But all the same, one thing that he points out is that the faster you allow the liquidation to occur,
the faster the economy is restored to health.
And he gives examples of this happening,
and examples in which the government and the banks try to inflate their way out.
You know, it's like you're having a good dream and somebody wakes you up
and then you go back to sleep hoping you can sort of re-dream it.
Well, that's what they're trying to do. They're trying to re-dream these booms, and you can't.
You know, they couldn't re-dream the dot-com boom. It just doesn't work.
And he explains why that is, again, with a very proto-Austrian understanding.
And again, he's saying that the pool of real resources hasn't increased
just because the paper dollars or the checking deposits or whatever in the economy have increased.
All that this can do when people go out to spend it is just to redistribute the existing resources
in ways that we wouldn't have been redistributing them if we'd had a sound money and we'd had sound interest rates.
Well, I'll conclude with this and say that, just quote William Gouge,
he says that, look, you know, the system we have now produces great evil.
But that doesn't necessarily mean that people are going to rise up against it.
He says, to infer that because a system produces great evil,
it must therefore soon give way, would be to argue in opposition to all experience.
If mere suffering could produce reformation, there would be little misery in the world.
Too many individuals have an interest in incorporated paper money banks to suffer the truth in relation to such institutions to have free progress.
Too many prejudices remain in the minds of a multitude who have no such interest to permit the truth to have its proper effect.
Well, that is why it is so important what we're doing here and the ideas that we're putting forth in this room and in this institute.
There are so few in the country, it is amazing to me when the chips are down, how few people actually stand up for capitalism.
It is amazing to me. And here we are about to witness the same thing being done to us that's been done time and again in this country and around the world
around the world where the same bozos who put us into this rotten situation pose as the saviors.
Their solution consists of more of the same that they've done to screw us up in the first place
and we have to sit back and helplessly watch this unfold before our eyes.
Well, I'm just one guy, but at least with my pen and speaking,
I'm going to at least try to do the best I can to wake up the rest of my countrymen
so that this doesn't happen again.
Thank you very much.