WEBVTT NOTE What is Sound Money? 1 00:00:00.000 --> 00:00:09.200 Up next, fresh from his Auburn University gig across the street, yeah, but he is the 2 00:00:09.200 --> 00:00:13.340 academic vice president of the Ludwig von Mises Institute, he's the editor of the quarterly 3 00:00:13.340 --> 00:00:15.900 journal of Austrian Economics. 4 00:00:15.900 --> 00:00:22.700 He runs our summer programs, which include the Rothbard Graduate Seminar, of course Mises 5 00:00:22.700 --> 00:00:31.700 in this University and our Scholars Conference in the Spring, Professor of Economics at Pace University 6 00:00:31.700 --> 00:00:38.700 and he's got a big book on money coming out very, very soon. It's called Money, Sound and Unsound. 7 00:00:38.700 --> 00:00:45.700 He's going to tell you today what is sound money. Please help me welcome Joe Salerno. 8 00:00:45.700 --> 00:00:50.700 Thank you, Doug. 9 00:00:50.700 --> 00:00:55.700 We're going from cyberspace to the very mundane, everyday world of money. 10 00:00:55.700 --> 00:01:02.700 Though we're much more interested in money, I think. 11 00:01:02.700 --> 00:01:07.700 Let me start by sort of demonstrating sound money. 12 00:01:07.700 --> 00:01:12.700 This is a silver coin from the Austro-Hungarian Empire. 13 00:01:12.700 --> 00:01:17.700 That's the sound of sound money. 14 00:01:17.700 --> 00:01:24.700 This is the physical embodiment, such as it is, of unsound money, okay? 15 00:01:24.700 --> 00:01:29.700 Today I'll talk a little bit about the differences between the two. 16 00:01:29.700 --> 00:01:31.700 Where does money come from? 17 00:01:31.700 --> 00:01:36.700 Let me just briefly address that question so I don't have that much time. 18 00:01:36.700 --> 00:01:42.700 Let's say I'm a caveman artist, primitive artist, and I've come up with this. 19 00:01:42.700 --> 00:01:53.700 This actually was a sort of famous sculptor around here, and I would like to buy your cell phone, okay? 20 00:01:53.700 --> 00:01:58.700 So I go to somebody and I ask them, can I have your cell phone? 21 00:01:58.700 --> 00:02:01.700 And that person says, this is ugly, I don't want this. 22 00:02:01.700 --> 00:02:03.700 I mean, who shoots an arrow down on a deer? 23 00:02:03.700 --> 00:02:07.700 I mean, on the side or something like that, right? 24 00:02:07.700 --> 00:02:10.700 So what would I do? Would I be stuck? 25 00:02:10.700 --> 00:02:18.500 Could I still get a cell phone or something that's similar to a cell phone in primitive times? 26 00:02:18.500 --> 00:02:22.700 Well, the answer is, if I'm ingenious, yeah, I think I could. 27 00:02:22.700 --> 00:02:29.600 I notice everyone here has pencils and that pencils are widely used by students, people with cell phones. 28 00:02:29.600 --> 00:02:31.600 Very generally acceptable. 29 00:02:31.600 --> 00:02:37.900 What I could do was find the one person that was willing to, 30 00:02:37.900 --> 00:02:44.900 So a lot of people have pencils in stores of pencils, willing to give me pencils for this, okay? 31 00:02:44.900 --> 00:02:49.900 So now I found someone who gave me pencils. I don't want the pencils. I don't want to use all these pencils. 32 00:02:49.900 --> 00:02:57.900 I don't like writing with pencils. I'm lefty, so all the graphite gets on my hand because I write backhanded, so I hate pencils. 33 00:02:57.900 --> 00:03:04.900 But in any case, once I have the pencils, I can get what I desire. Let's say the cell phone. 34 00:03:04.900 --> 00:03:08.900 Let's say I would give someone a thousand pencils for the cell phone. 35 00:03:08.900 --> 00:03:15.900 You get the idea. Pencils then become a medium of exchange, something that I'm purchasing, not because I want to use it directly. 36 00:03:15.900 --> 00:03:23.900 I may even hate the good, but because I want to pass it on to someone else who's willing to give me what I desire in return, that being a cell phone. 37 00:03:23.900 --> 00:03:29.900 Now, in primitive times, it might be that somebody who is an egg farmer has a lot of eggs. 38 00:03:29.900 --> 00:03:38.900 He approaches someone who makes shoes, he wants a pair of shoes, and that person is allergic to eggs, doesn't want the eggs, so what does he do? 39 00:03:38.900 --> 00:03:44.900 Again, is he stopped? This is called a lack of coincidence of wants. Their wants don't coincide, okay? 40 00:03:44.900 --> 00:03:48.900 I want what the shirtmaker has, but he doesn't want my eggs, okay? 41 00:03:48.900 --> 00:03:57.900 Well, what happens then? I go to someone who does want eggs, and who has a commodity that everyone in the society uses, let's say wheat, which might be the case. 42 00:03:57.900 --> 00:04:02.900 Everybody uses it to bake with, they use it for rituals and so on. 43 00:04:02.900 --> 00:04:05.900 So I sell it for a number of bushels of wheat. 44 00:04:05.900 --> 00:04:10.900 I then take the wheat and I go buy the shoes, a shirt and other things that I might want. 45 00:04:10.900 --> 00:04:13.900 That's how money developed. It developed on the market. 46 00:04:13.900 --> 00:04:20.900 There was no government, no government that called together, let's say King called together his wise men at some point and said, 47 00:04:20.900 --> 00:04:25.900 You know, my people are suffering from a problem of lack of coincidence of wants. 48 00:04:25.900 --> 00:04:31.900 Let's all get together, let's get our heads together and come up with something that people will use. 49 00:04:31.900 --> 00:04:33.900 Let's say paper, okay? 50 00:04:33.900 --> 00:04:36.900 Well, no one would use that paper because they wouldn't know the value of it. 51 00:04:36.900 --> 00:04:43.900 Whereas wheat or pencils have a pre-existing value under barter, that is, under direct exchange. 52 00:04:43.900 --> 00:04:45.900 So people wouldn't know how to value the pencils. 53 00:04:45.900 --> 00:05:00.900 If more and more people were using pencils or wheat in that society, then others would see that they could achieve their ends, they could buy the goods that they desired, if they could just sell whatever they have, they're specializing in producing, for the wheat, for the pencils, okay? 54 00:05:00.900 --> 00:05:13.900 So over time, you've got one or two goods growing up as what we call media, plural, media of exchange, things that were wanted to buy other things, not for their own direct use. 55 00:05:13.900 --> 00:05:24.900 The goods that developed out of this centuries-long, millennium-long process on the market were the precious metals, gold and silver. 56 00:05:24.900 --> 00:05:38.900 Gold primarily in the East and in Western Europe up until the late 18th century into the 19th century, or rather silver, and then gold later on in the 19th century in Western Europe. 57 00:05:38.900 --> 00:05:45.900 So, what came out of this was money. Now, money grew up without any sort of government edict. 58 00:05:45.900 --> 00:05:48.900 So, there's two kinds of money. Let me just explain the difference very quickly. 59 00:05:48.900 --> 00:06:00.900 Given that money originated on the market, there's a second kind of money that we call the silver money or gold money or whatever. 60 00:06:00.900 --> 00:06:06.900 Let me give you some very quick examples of exchange prior to gold and silver. 61 00:06:06.900 --> 00:06:11.900 They're kind of interesting. Cattle were used in ancient Greece, leather in ancient Rome, 62 00:06:11.900 --> 00:06:15.900 animal pelts, whiskey and tobacco leaves in the American colonies. 63 00:06:15.900 --> 00:06:19.900 Wampum, which were strings of beads, were used by American Indians. 64 00:06:19.900 --> 00:06:23.900 Dried fish were used in the Canadian maritime colonies. 65 00:06:23.900 --> 00:06:29.900 Maize or corn was used in Mexico. Salt and iron farming tools were used in Africa. 66 00:06:29.900 --> 00:06:33.900 Wives, believe it or not, were used in ancient Egypt. 67 00:06:33.900 --> 00:06:37.900 So, don't bother me, or you may very well be a medium of exchange tomorrow. 68 00:06:37.900 --> 00:06:41.900 And cigarettes were used in POW camps. 69 00:06:41.900 --> 00:06:45.900 Okay, there's a famous article on all of this, but I don't really have time to go into that. 70 00:06:45.900 --> 00:06:49.900 Okay, so we got gold and silver. Why do we get gold and silver? 71 00:06:49.900 --> 00:06:53.900 Well, imagine iron was used, for example, in Africa. Imagine trying to purchase 72 00:06:53.900 --> 00:06:57.900 a lawnmower with iron. Okay, you have to bring it, 73 00:06:57.900 --> 00:07:01.900 which is about $300 a ton. If you're going to spend $300, you have to carry 74 00:07:01.900 --> 00:07:08.900 You don't have to carry a ton of iron in your car to go to Lowe's or wherever else you're going to buy a lawnmower. 75 00:07:08.900 --> 00:07:15.900 Well, the point is gold and silver were chosen for very specific reasons and they were chosen over time by individuals 76 00:07:15.900 --> 00:07:23.900 who all more or less agreed that these had combined the qualities that made them a good minimum of exchange. 77 00:07:23.900 --> 00:07:28.900 They were easily portable, that is, gold and silver had high value to weight ratios. 78 00:07:28.900 --> 00:07:35.900 So if you want to buy a lawnmower, you only need to bring, you know, maybe a half an ounce of gold for the lawnmower, okay? 79 00:07:35.900 --> 00:07:38.900 They're homogeneous. Every unit was like every other unit. 80 00:07:38.900 --> 00:07:44.900 No matter where they were mined, every single unit was like every other. They were identical. 81 00:07:44.900 --> 00:07:49.900 So there was no, people didn't have to worry about deciding the quality of these different units. 82 00:07:49.900 --> 00:07:56.900 They were highly divisible. They could be divided into very small parts or coins without losing their value, okay? 83 00:07:56.900 --> 00:08:00.860 okay something like diamonds and other precious gems were also used but they 84 00:08:00.860 --> 00:08:05.980 weren't highly divisible once once you you try to divide a gem quality diamond 85 00:08:05.980 --> 00:08:10.740 that would lose all its value okay cows weren't divisible another example okay if 86 00:08:10.740 --> 00:08:14.140 it's the dairy cow you know you can't chop it up and so on they're highly 87 00:08:14.140 --> 00:08:24.180 durable gold that what was mined before let's say Jesus of Nazareth walked the 88 00:08:24.180 --> 00:08:30.180 of the Earth is still in existence today, and it's naturally scarce. 89 00:08:30.180 --> 00:08:33.180 It can't be multiplied. 90 00:08:33.180 --> 00:08:38.180 So all of these things make gold and silver natural media of exchange. 91 00:08:38.180 --> 00:08:44.180 The market discovered these things and ensured that they did become money. 92 00:08:44.180 --> 00:08:46.180 So those are commodity monies. 93 00:08:46.180 --> 00:08:52.180 That is, we define a commodity money as something that develops from a useful commodity. 94 00:08:52.180 --> 00:09:02.180 On the other hand, paper money is fiat money. Fiat comes from the Latin, which means let it be done, as in a government command or decree. 95 00:09:02.180 --> 00:09:09.180 So a government puts fiat money into circulation, first by connecting it to the gold standard, 96 00:09:09.180 --> 00:09:15.180 but then later on when it cuts the link and says that gold and paper are no longer convertible, 97 00:09:15.180 --> 00:09:26.180 It then makes it legal tender, it passes a law that says this piece of paper is now legal tender for all debts, public and private, meaning including paying your taxes. 98 00:09:26.180 --> 00:09:31.180 No one can refuse to accept dollars in the discharge of a debt that was previously contracted. 99 00:09:31.180 --> 00:09:41.180 What's interesting though is that the face value of this dollar is much higher than the cost of producing it. 100 00:09:41.180 --> 00:10:11.180 of Producing it. Whether you're producing a one dollar bill or a one hundred dollar bill, it costs four cents, whereas if you're producing an ounce of gold and you have a gold dollar, and the gold dollar, let's say, is twenty dollars in U.S. history, was equal to about one ounce of gold. So if that were the case, it was actually twenty dollars and sixty-seven cents, the gold in that ounce, subtracting out the cost of minting it, was about twenty dollars. So there was no 101 00:10:11.180 --> 00:10:17.180 There's no incentive to multiply it. With commodity money, there's a natural constraint on the supply. 102 00:10:17.180 --> 00:10:21.180 That natural constraint is the cost of producing it. 103 00:10:21.180 --> 00:10:29.180 The fact that it's costly to produce, that it's scarce, it's difficult to find new sources of gold and silver, and so on. 104 00:10:29.180 --> 00:10:32.180 So that restrains the supply. 105 00:10:32.180 --> 00:10:34.180 That is not true of unsound money. 106 00:10:34.180 --> 00:10:42.180 In the case of fiat money, the government earns 96 cents on every dollar that it produces. 107 00:10:42.180 --> 00:10:51.180 But even more so in today's world where money is mainly created initially through the banking system, 108 00:10:51.180 --> 00:10:56.180 it doesn't even cost four cents. It's simply a keystroke and an entry in cyberspace. 109 00:10:56.180 --> 00:11:02.180 How does the Federal Reserve System or central bank create money? 110 00:11:02.180 --> 00:11:15.180 In today's world, actually this morning and what time is it now? In New York, actually a few hours ago, between 9 o'clock and 12 o'clock in the morning, there's something called Fed time. 111 00:11:15.180 --> 00:11:30.180 At that time, the Fed goes into the market through a network of computers, goes to the banks and asks them to give them prices, to give the Fed prices for government securities that it's selling. 112 00:11:30.180 --> 00:11:41.180 So, if the Fed wants to buy, let's say, $50 million worth of government securities, it will buy those securities from the banks that offer those securities at the lowest price. 113 00:11:41.180 --> 00:11:46.180 It's an auction. 114 00:11:46.180 --> 00:11:54.180 Where does the Fed get the money to purchase those securities? 115 00:11:54.180 --> 00:11:59.180 It simply writes a check on itself. It's permitted to do that. It writes a check on itself. 116 00:11:59.180 --> 00:12:04.180 It's even simpler than that now in the electronic age. It doesn't just write a check on itself. 117 00:12:04.180 --> 00:12:10.180 What it does is simply go to its computer, find the bank's account from whom it's buying the bond, 118 00:12:10.180 --> 00:12:14.180 and let's say it's buying $10 million worth of bond from a given bank, 119 00:12:14.180 --> 00:12:19.180 it would simply just add credit, $10 million to that bank's account. 120 00:12:19.180 --> 00:12:24.180 Most of the reserves that banks hold in those really fancy safes that you saw, 121 00:12:24.180 --> 00:12:29.180 I was in a bank yesterday because they messed up my debit card. 122 00:12:29.180 --> 00:12:33.180 They told me they were going to send the number forward, and they didn't do it. 123 00:12:33.180 --> 00:12:40.180 And they had the very impressive vault partially open, and everybody's whispering, and everything looks so somber and sober. 124 00:12:40.180 --> 00:12:45.180 But of course, very little money is in there, very little of the reserves. 125 00:12:45.180 --> 00:12:50.180 And the reserves are only 10% of the money that you deposit. The other 90% is out on loan. 126 00:12:50.180 --> 00:12:54.100 but even that ten percent okay very little in the vault very little in the 127 00:12:54.100 --> 00:13:00.860 ATMs most of it is in cyberspace at the Federal Reserve Bank in in the region so 128 00:13:00.860 --> 00:13:04.460 in this case would be most of the bank reserves are at the Atlanta Fed 129 00:13:04.460 --> 00:13:11.740 okay so what we we get from this is that it's very easy to create new money when 130 00:13:11.740 --> 00:13:15.620 and you have a fiat money standard. 131 00:13:15.620 --> 00:13:24.620 So we want to compare the control on the money supply process under commodity money and that 132 00:13:24.620 --> 00:13:25.620 under fiat money. 133 00:13:25.620 --> 00:13:31.140 Under commodity money, the supply of money depends on the cost of production, the mining, 134 00:13:31.140 --> 00:13:36.340 the refining, the minting of the coins in relation to the demand for money. 135 00:13:36.340 --> 00:13:44.740 So just like any other good, like iPods, cars, McDonalds, hamburgers, the supply of money 136 00:13:44.740 --> 00:13:51.420 under the commodity standard is limited by market forces. 137 00:13:51.420 --> 00:13:54.860 On the other hand, under fiat money, it is not so limited. 138 00:13:54.860 --> 00:14:00.080 The Federal Reserve system is the only agency that is legally permitted to create new money. 139 00:14:00.080 --> 00:14:03.420 So it has a monopoly of the supply process. 140 00:14:03.420 --> 00:14:10.500 Not only that, because money, fiat money, unlike other goods is almost costless to produce, 141 00:14:10.500 --> 00:14:13.640 unlike other monopolists who want to restrict the amount they sell to so they can keep the 142 00:14:13.640 --> 00:14:18.380 prices high, the exact opposite incentive operates with the Fed. 143 00:14:18.380 --> 00:14:21.380 That is, they want to increase the money supply. 144 00:14:21.380 --> 00:14:23.660 There are a number of reasons for that. 145 00:14:23.660 --> 00:14:28.980 One is that government puts pressure on the Federal Reserve system to finance its deficits 146 00:14:28.980 --> 00:14:32.340 by printing up new money and buying the bonds. 147 00:14:32.340 --> 00:14:40.340 The bonds represent what the government wants to borrow, to spend over and above what it's taking in taxes, okay? 148 00:14:40.340 --> 00:14:49.340 The other point about that is that the government gets to spend that new money first, or the people it subsidizes, 149 00:14:49.340 --> 00:14:55.340 the farmers, you know, that are getting big subsidies, or the defense contractor from whom it's buying military equipment. 150 00:14:55.340 --> 00:15:00.340 They get the new money first, or the government gets the new money first, and that's before prices have risen. 151 00:15:00.340 --> 00:15:16.340 By the time you or I, I live in New York, get that new money, it might be a year later, 18 months later, after most prices in the economy have gone up and real income has already been redistributed from us to the government and its favorites. 152 00:15:16.340 --> 00:15:21.340 Let me just give you an example of what we're saying is this. 153 00:15:21.340 --> 00:15:24.340 The value of money, the amount of goods and services it can purchase, 154 00:15:24.340 --> 00:15:30.340 which is the other side of the coin of prices and how high prices are, 155 00:15:30.340 --> 00:15:34.340 that is determined under commodity money by supply and demand. 156 00:15:34.340 --> 00:15:37.340 Just like the number of apples in the economy, 157 00:15:37.340 --> 00:15:41.340 the number of automobiles in the economy and so on, 158 00:15:41.340 --> 00:15:44.340 are tightly constrained by profit motives, 159 00:15:44.340 --> 00:15:51.340 The supply of money is also constrained by profit motives and its value is determined by competitive processes. 160 00:15:51.340 --> 00:15:53.340 That is not true of fiat currency. 161 00:15:53.340 --> 00:16:12.400 So, here's an example of, I hope I have it here, yeah, this is what we mean when we say 162 00:16:12.400 --> 00:16:23.400 The Value of Money 163 00:16:23.400 --> 00:16:29.320 So very quickly, if you have the price of goods, so it's a dollar per Coca-Cola, ten 164 00:16:29.320 --> 00:16:34.420 dollars for a pizza, a hundred for an iPod and so on, that's the price of goods. 165 00:16:34.420 --> 00:16:37.740 The value of money is really just the inverse of that. 166 00:16:37.740 --> 00:16:43.640 We invert, a price is always a ratio, it's dollars per unit. 167 00:16:43.640 --> 00:16:49.620 We invert that ratio and we find that the purchasing power of a dollar in this economy 168 00:16:49.620 --> 00:16:54.140 is one coke per dollar or it can purchase one-tenth of a pizza per dollar or one-hundredth 169 00:16:54.140 --> 00:16:56.380 of an iPod and so on. 170 00:16:56.380 --> 00:17:04.300 The key point is that whenever prices rise, okay, in this case I've doubled them, whenever 171 00:17:04.300 --> 00:17:15.300 When prices rise, notice what happens to the purchasing power of money, it gets reduced, that is, the dollar shrinks because of rising prices. 172 00:17:15.300 --> 00:17:23.300 Now, not all rising prices are bad. If goods become more scarce for some reason, there's no problem with prices going up and adjusting supply and demand. 173 00:17:23.300 --> 00:17:32.300 However, if prices are rising because the government is creating new money, then that sets in process, really a process of robbery. 174 00:17:32.300 --> 00:17:36.300 that is allocating money or real income to the people who get the new money first 175 00:17:36.300 --> 00:17:38.300 and who can pay, buy things at the low prices 176 00:17:38.300 --> 00:17:43.300 and that money is coming out of the pockets of people who are buying goods later on 177 00:17:43.300 --> 00:17:45.300 after they've received the new income. 178 00:17:45.300 --> 00:17:47.300 Because at that point, prices have already risen 179 00:17:47.300 --> 00:17:51.300 and so for that year or year and a half, their dollar has been worth less 180 00:17:51.300 --> 00:17:55.300 until their incomes have caught up to the rising prices. 181 00:17:55.300 --> 00:18:01.300 So it's a secret tax, it's a surreptitious way, undemocratic way 182 00:18:01.300 --> 00:18:10.300 of taxing people who hold money, of shifting money from one group to another group, shifting income. 183 00:18:10.300 --> 00:18:19.300 So that is one of the effects of inflation. One of the effects of inflation is that it increases prices and in doing so reduces the purchasing power of money. 184 00:18:19.300 --> 00:18:30.300 It is not inflation itself. Inflation is defined and should be defined as an increase in the quantity of money in the economy. 185 00:18:30.300 --> 00:18:37.300 in the Economy. Now let me give you, let's compare unsound with sound money, commodity money with fiat money. 186 00:18:39.900 --> 00:18:43.860 There's 1790, right after the U.S. Republic was founded, 187 00:18:43.860 --> 00:18:47.620 all the way to your left. 188 00:18:47.620 --> 00:18:51.780 This is the price level. The index number is around 10 there, 189 00:18:51.780 --> 00:18:55.060 based on 1982 prices. 190 00:18:55.060 --> 00:18:59.340 So it's around 10. Notice that up until 1913, 191 00:18:59.340 --> 00:19:02.380 Right? This blip here, about there. 192 00:19:02.380 --> 00:19:05.740 When the Fed came into existence, prices were pretty stable. 193 00:19:05.740 --> 00:19:11.180 They were the same in 1900 as they were in 1800. 194 00:19:11.180 --> 00:19:15.660 There's ups and downs, and some of those ups were caused by going off 195 00:19:15.660 --> 00:19:20.140 commodity money onto fiat money to pay for the Civil War and the Revolutionary War. 196 00:19:20.140 --> 00:19:23.620 But then look what happens. 197 00:19:23.620 --> 00:19:26.580 If we fight World War II, prices continue to rise. 198 00:19:26.580 --> 00:19:30.580 They go down during the Depression, then they begin to rise as we fight World War II. 199 00:19:30.580 --> 00:19:37.580 Then in 1971, President Nixon reneged on the solemn pledge made at Bretton Woods in 1946 200 00:19:37.580 --> 00:19:43.580 by the US government to convert all foreign held dollars into gold. 201 00:19:43.580 --> 00:19:50.580 In 1971, in August, he went on television and closed the gold window, quote unquote. 202 00:19:50.580 --> 00:19:54.580 At that point, look what has happened. When the last link with gold was cut, 203 00:19:54.580 --> 00:20:01.620 and the dollar is a pure fiat currency the index number is around 225 that is 204 00:20:01.620 --> 00:20:09.900 from around 1900 1913 on up to that point prices rose by about that that's 205 00:20:09.900 --> 00:20:18.540 around 10 and I believe it is it rose by about 23 times okay so the dollar was 206 00:20:18.540 --> 00:20:27.540 is worth a nickel compared to what it was worth back before the Fed came onto the scene, the central bank. 207 00:20:27.540 --> 00:20:32.540 We didn't go off the gold standard right away, but the Fed began manipulating the money supply. 208 00:20:32.540 --> 00:20:36.540 In fact, let me just mention right now something I wanted to mention at the beginning. 209 00:20:36.540 --> 00:20:40.540 How do we define sound money? There's two components to sound money. 210 00:20:40.540 --> 00:20:46.540 Sound money is money that consists of a commodity chosen by the market, like gold or silver, but there's a second part. 211 00:20:46.540 --> 00:20:53.540 and whose supply and value are completely independent of the government. 212 00:20:53.540 --> 00:21:03.540 So, the sound money program is just like a sound education policy, sound religion policy, sound newspaper policy, sound internet policy. 213 00:21:03.540 --> 00:21:14.540 There must be a complete separation of the state from money, just as there is from education, religion, internet and everything else. 214 00:21:14.540 --> 00:21:44.540 So, those are the two components. Now, you can have sound, pretty sound money, as we did even in 1913, if the Fed came in until maybe 1931, you can have pretty sound money, but the government can begin getting involved, encouraging banks to expand the money supply, even on the basis of gold, telling banks that they'll bail them out. So we had, that's a quasi-semi-sound money. So you don't want the Fed, you don't want the government doing anything. 215 00:21:44.540 --> 00:21:50.980 having any involvement whatsoever in money. 216 00:21:50.980 --> 00:21:56.780 Now when they do get involved in money, many bad things can happen, one of which, let me 217 00:21:56.780 --> 00:22:02.860 just go back to what I was saying here, one of which is hyperinflation, okay? 218 00:22:02.860 --> 00:22:11.100 And actually before I show you a little, or go into a little spiel about hyperinflation, 219 00:22:11.100 --> 00:22:22.780 I do want to show you what, from 1790 to about 1913, that's where I ended it. 220 00:22:22.780 --> 00:22:27.580 You can see that prices were going up and down, but not by very much, the index number 221 00:22:27.580 --> 00:22:34.460 is nine, it goes up to eighteen, that's during the Revolutionary War, I'm sorry, that's during 222 00:22:34.460 --> 00:22:40.840 the era when we had the first US bank, which was kind of a proto-central bank, okay. 223 00:22:40.840 --> 00:22:45.840 And during the Civil War, you see prices going up, but when we went back on the gold standard, the price level always came back. 224 00:22:45.840 --> 00:22:55.840 So notice that in 1790, the price level was just about what it was in 1913 or so. 225 00:22:55.840 --> 00:23:09.840 So what happens when governments get involved in, let's say, intensively increasing the money supply, increasing it at very rapid rates? 226 00:23:09.840 --> 00:23:16.200 What we call hyperinflation, and let me just say a few words about hyperinflation because 227 00:23:16.200 --> 00:23:22.440 inflation is bad enough, but inflation always tends to feed on itself if it's not stopped. 228 00:23:22.440 --> 00:23:26.080 And one reason why politicians don't like to stop inflation, on the one hand it's very 229 00:23:26.080 --> 00:23:32.520 unpopular when prices start going up, but if you do stop it, during the inflationary 230 00:23:32.520 --> 00:23:37.080 process you have fooled people into making investments by lowering the interest rate 231 00:23:37.080 --> 00:23:42.320 below its natural level. Investments that they would have not made if that new money 232 00:23:42.320 --> 00:23:47.840 was not injected into the economy through the credit markets. So when we had the housing 233 00:23:47.840 --> 00:23:56.840 bubble that popped a few years back, that housing bubble was stoked, was encouraged, 234 00:23:56.840 --> 00:24:03.480 was more or less shaped by the inflation that we had from about 2002 to 2005, where interest 235 00:24:03.480 --> 00:24:14.480 The rates were kept very low and a lot of money was being created. In fact, from the end of 2001 to 2005, the Fed was creating one billion new dollars per week. 236 00:24:14.480 --> 00:24:27.480 That's sort of a rough back of the envelope calculation. Every day, by simply buying government bonds in the market, writing checks on itself, wiring unsound money through cyberspace. 237 00:24:27.480 --> 00:24:32.480 But when you stop that, what do you get? You get what we have now, a recession. 238 00:24:32.480 --> 00:24:35.480 So politicians are always juggling on sound money. 239 00:24:35.480 --> 00:24:40.480 You know, should I let the inflation go a little further or should I stop it now and have a recession? 240 00:24:40.480 --> 00:24:47.480 They don't want the inflation or the recession in the year leading up to an election. 241 00:24:47.480 --> 00:24:53.480 There's been studies done showing that the American public has about a one-year memory back. 242 00:24:53.480 --> 00:25:02.480 If times were good for the past year, you wouldn't tend to lose votes as the party in power because of the economy. 243 00:25:02.480 --> 00:25:09.480 However, if times were bad in the past year, then you will lose a significant number of votes as a result. 244 00:25:09.480 --> 00:25:13.480 So what you want to do is to keep the Fed inflating up to the point where you get re-elected, 245 00:25:13.480 --> 00:25:20.480 and then afterwards you would like to have the recession, before inflation gets out of hand, early in your administration. 246 00:25:20.480 --> 00:25:26.480 because recessions last 9 months or 16 months and it's over by the second half of your administration. 247 00:25:26.480 --> 00:25:28.480 So that's what politicians face. 248 00:25:28.480 --> 00:25:37.480 Now, in the U.S., even though it's not a sound money country, we have people who are very aware of inflation, 249 00:25:37.480 --> 00:25:40.480 we have the media continuously commenting on it. 250 00:25:40.480 --> 00:25:43.480 So we can't get away with a whole lot of inflation. 251 00:25:43.480 --> 00:25:48.480 But other countries, that wasn't true, especially earlier in the century. 252 00:25:48.480 --> 00:25:56.480 So I do want to talk a few minutes about the worst thing that can happen with an unsound money, and that's hyperinflation. 253 00:25:56.480 --> 00:26:00.480 Let me just talk a little bit about the German hyperinflation, which you may or may not have heard about. 254 00:26:00.480 --> 00:26:12.480 During the German hyperinflation, which occurred, got very bad from 1922-23, here's the prices of German newspapers. 255 00:26:12.480 --> 00:26:17.640 okay they start off at about one-third of a mark in January 1921 256 00:26:17.640 --> 00:26:22.800 it tripled by May of 22 they increased eightfold in the in the five or six 257 00:26:22.800 --> 00:26:23.400 months 258 00:26:23.400 --> 00:26:26.720 October then they started going up much more rapidly 259 00:26:26.720 --> 00:26:30.840 okay so from February 23rd a German newspaper cost 260 00:26:30.840 --> 00:26:35.040 100 marks that's 300 times more than it cost back in 261 00:26:35.040 --> 00:26:39.800 in about a year before by September was 10 times as high 262 00:26:39.800 --> 00:26:53.800 and then it doubled in one month, and then from October 1st to October 15th it went up 10 times, then in 14 days it went from 20,000 marks to a million marks for a newspaper. 263 00:26:53.800 --> 00:27:06.800 Now all other prices are going up in the same way. So think about an automobile going up from $20,000, which is an automobile today, to a million dollars in two weeks. 264 00:27:06.800 --> 00:27:15.800 That's what a hyperinflation is like, and then by November 9th it was $15 million, and then eight days later it was $70 million for a newspaper. 265 00:27:15.800 --> 00:27:23.800 $70 million marks. Additionally, the mark was about 25 cents. The mark was worth about 25 cents. 266 00:27:23.800 --> 00:27:32.800 By the end, it took one trillion marks to buy one dollar, whereas before it only took four. 267 00:27:32.800 --> 00:27:36.360 Okay, let me say a few things about the hyperinflation. 268 00:27:36.360 --> 00:27:39.880 Towards the end, the price 269 00:27:39.880 --> 00:27:43.760 of a full dinner the night before wouldn't even buy you a cup of coffee the next day. 270 00:27:43.760 --> 00:27:44.720 Prices were going up 271 00:27:44.720 --> 00:27:48.080 hourly, okay. German workers 272 00:27:48.080 --> 00:27:51.840 were demanding to get paid first every week, 273 00:27:51.840 --> 00:27:56.680 then every day, then twice, and three times a day. At the end they were getting paid three times a day. 274 00:27:56.680 --> 00:28:00.960 They had their family, their wives, their children, parents, show up at factory gates. 275 00:28:00.960 --> 00:28:04.960 They would give them money and they would just rush out and spend it as quickly as they could. 276 00:28:04.960 --> 00:28:09.960 The government had taken over all 2,000 printing plants in the country. 277 00:28:09.960 --> 00:28:13.960 They were running 24 hours a day printing money, okay? 278 00:28:13.960 --> 00:28:21.960 Almost all the money that was being printed was 1 billion mark notes at the end. 279 00:28:21.960 --> 00:28:24.960 That's how high prices were. 280 00:28:24.960 --> 00:28:29.960 At the end they ran out of paper. So, this is initially a 1,000 mark note. 281 00:28:29.960 --> 00:28:32.960 What's stamped across it? One milliard marks. 282 00:28:32.960 --> 00:28:36.960 A milliard is a billion in some European countries. 283 00:28:36.960 --> 00:28:38.960 We're just stamping them. 284 00:28:38.960 --> 00:28:41.960 What were the banks doing at the end? The banks were not counting. 285 00:28:41.960 --> 00:28:44.960 They were weighing the money, because they were all billion-dollar marks 286 00:28:44.960 --> 00:28:47.960 to put into your account. 287 00:28:52.960 --> 00:28:55.960 Professors like me and teachers, since they got paid, 288 00:28:55.960 --> 00:28:57.960 and civil service, they were getting paid every two weeks or every month, 289 00:28:57.960 --> 00:29:07.960 Women, when they went to the grocery stores, would take their money in wheelbarrows, laundry baskets or suitcases, and what would happen would be that the thieves, they couldn't carry them into the stores because you couldn't maneuver down the aisles and stuff, so they would leave them outside and the thieves would run by and just dump the money out and just take the laundry baskets out of the store. 290 00:29:07.960 --> 00:29:15.960 Women, when they went to the grocery stores, would take their money in wheelbarrows, laundry baskets or suitcases. 291 00:29:15.960 --> 00:29:22.960 And what would happen would be that the thieves, they couldn't carry them into the stores because you couldn't maneuver down the aisles and stuff. 292 00:29:22.960 --> 00:29:31.960 So they would leave them outside and the thieves would run by and just dump the money out and just take the laundry basket because it was worth more than all the marks in it. 293 00:29:31.960 --> 00:29:44.960 The greatest one in history though, greatest inflation in history was the Hungarian inflation occurred in 1946 after World War II. 294 00:29:44.960 --> 00:29:56.960 Initially it took one dollar to buy 3.38 pengos. By 1946 it bought, a dollar could buy 500 million trillion pengos. 295 00:29:56.960 --> 00:30:02.040 okay so people who had let's say a hundred thousand let's say let's say 296 00:30:02.040 --> 00:30:06.800 338,000 pengos in the bank was about $100,000 by the end that was even worth 297 00:30:06.800 --> 00:30:14.240 a fraction of a penny okay and then of course we have the Zimbabwean inflation 298 00:30:14.240 --> 00:30:19.120 hyperinflation and we're running a little over here but I wanted to show a 299 00:30:19.120 --> 00:30:25.600 couple of interesting pictures of that we have a minute or two more yeah okay 300 00:30:25.600 --> 00:30:30.600 Here's some interesting pictures I found on the internet, and I'll end it with this. 301 00:30:36.600 --> 00:30:41.600 Okay, there's ten million dollar notes, ten million Zimbabwean dollar notes. 302 00:30:41.600 --> 00:30:54.520 notes, okay, now to give you an idea of that ten million dollar note is worth about ten 303 00:30:54.520 --> 00:31:00.440 dollars, ten dollars is worth ten of those actually, okay. 304 00:31:00.440 --> 00:31:07.160 Here's a kid just going to get some candy from the store, okay. 305 00:31:07.160 --> 00:31:22.160 This guy's going to the supermarket, this is worth, this person, no, this guy's going to the supermarket, I'm sorry, he's going to the supermarket, I'm sorry. 306 00:31:22.160 --> 00:31:34.160 This pile of money is worth, actually, $100, that pile of cash there. 307 00:31:34.160 --> 00:31:47.160 At the end they had two hundred and fifty million dollar notes, and here's, let's see, here's a hundred million dollar note, and here's how much you can buy below it. 308 00:31:47.160 --> 00:31:53.160 Here's a hundred million dollar note, and there's what you can buy, three eggs. 309 00:31:53.160 --> 00:31:59.160 Finally, here's a guy just paying for his restaurant meal. 310 00:31:59.160 --> 00:32:18.160 And finally, here's a grocery bill. That'll be it. I think it's $1,243,000,000. I paid at the Amsterdam Cafe. Anyway, that's without inflation. Okay, I will stop there. Thank you very much.