Ending the Monetary Fiasco and Returning to Sound Money

0:00Ladies and gentlemen, dear Professor Salerno, dear Mr. Tucker and dear Mr. Rockwell, it is the greatest pleasure and honor for me to be here and to have the opportunity to give the Mises Lecture 2009. I may say that I was really overwhelmed by your invitation. Giving the Mises Lecture, making a tribute to a gigantic thinker, is a great challenge, which I accepted, well knowing what Mark Trane said. It is better to keep your mouth closed and keep people think you are a fool than to open it and remove all doubt. Ludwig von Mises is, and I suppose virtually all of you would agree, the Dean of the Austrian School of Economics.

0:50And I do not hesitate to add he is also the most important economist of the 20th century and one of the greatest social philosophers.

1:05Mises' personal courage and rigorous intellectual reasoning are and will always be an inspiration and encouragement to all students of social sciences. His outstanding expertise in the fields of economics, politics, history and psychology combined with his unwavering ability to integrate these diverse elements into a coherent theoretical system is what sets him apart from other economists. Mises not only reconstructed the theory of economics along the line of a humanistic social theory, praxeology, the science of the logic of human action. He also made a scientifically founded ethical case for capitalism, showing that the free market, the organization along the lines of private property, essentially means productive, peaceful and sustainable association and cooperation among three individuals.

2:09Mises knew that capitalism for a number of reasons has politically powerful enemies. The most powerful, most destructive and most vicious and subversive of these would be a false monetary theory and a result of that a misguided monetary system. In The Theory of Money and Credit published in 1912, Mises noted, It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction. The development of the fiduciary medium must necessarily lead to its breakdown.

2:59With fiduciary medium, Mises meant fraudulent money. Money that is systematically or is systematically violating the principle of private property. Money that isn't backed by freely chosen money proper. Government controlled money is and will always be by construction, fraudulent money. We already find ourselves facing the destructive consequences of the worldwide fiat money regime, impoverishment caused by malinvestment and rising despair among the people, which it must be feared will set into motion disintegrating forces for capitalism.

3:44We are witnessing yet another sign of the failure of the fiat money regime, this time perhaps its eventual collapse on a worldwide scale. It has been predicted, logically deduced from praxeology by Ludwig von Mises and his followers. However, this assessment is not shared by public majority opinion. On the contrary, free markets are being blamed for having caused the disaster and even more government interventionism, restrictions, controls, special privileges, subsidies or Keynesian spending programs is seen as the way out of the catastrophe.

4:29Interventionism is, Mises wrote in 1940, not an economic system. It is not a method which enables people to achieve their aims. It is merely a system of procedures which disturb and eventually destroy the market economy. It hampers production and impairs satisfaction of needs. It does not make people richer, it makes people poorer. From the viewpoint of the Austrian School of Economics, only a return to sound money, that is free market money, can prevent further impoverishment and the destruction of a free societal order. In his magnificent magnum opus, Human Action, Mises identified the cause and the way out of the disaster.

5:18There is no means of avoiding the final collapse of a boom brought about by circulation credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved. In 1923, when nations were still suffering from the devastation caused by World War I, Mises wrote, The claimer to eliminate the deficiencies in the field of money has become universal. People have become convinced that the restoration of domestic peace within nations and the revival of international economic relations are impossible with a sound monetary system.

6:17Today, with the standard of living relatively high in major economies and international relations between the economic and militarily powerful nations being by and large peaceful by historical standards, one would think that the chances for monetary reform are much more promising than back in the 1920s. In an era of big government, however, with its corrupting effects in the society increasingly weakening the voices of freedom, the chances for returning to what Mises called sound money have undoubtedly declined. But change hasn't become impossible. Powerful tools remain in place, intellectual debate, education and conversion of a large number of people to the cause.

7:09The most powerful and rigorous arguments making an uncompromising case for sound money as an indispensable prerequisite of freedom can be found in the works of Ludwig von Mises. And having said that, please let me briefly outline the structure of the rest of my talk. In the second part, I will briefly review the work of Ludwig von Mises. In the third part, I will turn our attention to the current state of world monetary affairs. I will show you some charts which you may like. In the fourth part, I will take the courage along the lines of Mises and Rothbard and outline a strategy for ending the monetary fiasco and returning to some money.

7:56Mises' book The Theory of Money and Credit, I mentioned already, it was published in 1912, was a groundbreaking work. In it, he succeeded in solving what had been seen so far as an insurmountable task, integrating the value of money into the marginal utility theory. In doing so, Mises not only provided a macroeconomic foundation for determining the value of money, but also solved the so-called Austrian Circle. You may know in Principles of Economics, Carl Menger in 1871 had developed a logical historical theory of the origin of money. Money, he maintained, could only have originated out of barter.

8:44Such an explanation, however, led to the problem of the Austrian Circle. At any given time, the purchasing power of money is determined by the supply of and demand for money, which, in turn, depend on the pre-existing purchasing power of money. This led to the so-called infinite logical regress. But Mises showed that the hitherto assumed infinite logical regress would not be infinite. The regress ends at precisely the point in time when money is a useful non-monetary commodity. Mises regression theorem demonstrates that the value of money has a historical dimension, as was stated by Menger, and it also provides a logical explanation for Menger's theory.

9:36And what is more, the regression theory shows that money must be established by free market forces, that it cannot be established by government interventionism. The only possibility for the government obtaining control of the money supply is through coercive action. In The Theory of Money and Credit, Mises also outlined the foundation of what later became the Austrian monetary theory of the trade cycle. Mises built his business cycle theory on basically three existing elements. The boom and bust model of the currency school, the differentiation between the natural interest rate and the market interest rate, Market Interest Rate, as outlined by Swedish economist Knut Wichsel, and the Capital and Interest Rate Theory as developed by Eugen von Boehm-Bawerk.

10:31By integrating these previously separated theories, Mises showed that any artificial government manipulation of the interest rate by expanding what he called circulation credit sets into motion an economic boom which must inevitably end in bust. In his monograph Economic Calculation in the Socialist Commonwealth, Mises in 1920 irrefutably demonstrated that socialism was doomed to fail, outstanding achievement in a time when everybody basically believed socialism is the new societal order. This argument was then developed further in his remarkable book Socialism. Early on, Mises was of the opinion that government-market interference would almost invariably prove to be counterproductive.

11:25And his works on money and the business cycle confirmed and reinforced this view. In interventionism in 1940, Mises exposed the fallacies of the middle-of-the-road policy, showing that interventionism would be inherently unstable, unsustainable form of societal organization. He identified the general law of government failure basically. Whenever the state intervenes, it invariably ends in not solving the problem it tries to solve, but in creating one or many other new problems, Provoking even further government interference in private property. Socialism is impossible. It does not allow for the survival of the human race.

12:13And interventionism leads to full-scale socialism. So the logical conclusion is that the only viable form of societal organization is capitalism. In that sense, Mises provided the hitherto vaguely formulated and moral-based case and the free market with a logical, consistent and thought-through theory in favor of capitalism. After he fled Europe in 1940, Mises continued his prolific work in the United States of America. He published Omnipotent Government and Bureaucracy both in 1944. In 1949, Mises published his Human Action, a completely rewritten and expanded version of national economy.

12:59Planning for Freedom, The Anti-Capitalistic Mentality, Followed in 1952, Theory and History in 1957, and The Ultimate Foundation of Economic Science in 1962. All these works made important contribution to economic theory and the pro-capitalism case. And all of them were in stark opposition to the prevailing mainstream viewpoint of the profession, which had been characterized by logical positivism, empiricism and societal relativism. In fact, these tenets have remained the very guiding principles of today's mainstream economics.

13:44Perhaps most characteristically in Human Action, Mises gave economic theory a solid epistemological fundamental, reshaping economic theory as the implication of the formal fact of human action. He cast economics as a subdivision of praxeology, the science of the logic of human action. Economics follows the discipline of applied logic based on the axiom of action, and a priori true proposition, basically in the best tradition of the great philosopher Immanuel Kant. It goes without saying that praxeology, building on axiomatic, deductive arguments for providing irrefutable truth, brought Mises in an age of socialism, interventionism, democratic, egalitarianism and ethical relativism in severe conflict with the mainstream economic profession.

14:43But he held course. As a great teacher and mentor, the list of Mises devoted students among which rank highly eminent names is truly staggering. Murray Rothbard is certainly the most influential scholar among the rationalist mainstream of the Austrian School of Economics. Inspired by Mises, Rothbard, going beyond utilitarianism, developed a system of rational ethics based on private property. In the ethics of liberty, Rothbard deduced Austrian-based libertarianism, a system that integrated value-free Austrian economics and the libertarian political philosophy.

15:28I would now like to move our attention to Mises' achievements in monetary theory, which is, as will be seen shortly, inseparably linked to the scientific case for capitalism. Let me say that capitalism rests on individuals' property rights, private ownership of the means of production. All claims capitalism makes result from this fundamental insight. Motivated by self-interest, property encourages individuals to increasingly take advantage of the division of labour. and free trade, as the latter allow for higher productivity and higher incomes when compared with the system of economically self-sufficient individuals.

16:13Money emerges from individuals pursuing their self-interest. Using money no longer restricts exchange to a double coincidence of wants of the parties involved, Mises realized that money is not an abstract concept that can be treated separately from the sphere of commodities, but he knows that money is a commodity, in a free market, money is the kind of commodity which is considered most exchangeable or marketable. of Commodities. But he knows that money is a commodity. In a free market, money is the kind of commodity which is considered most exchangeable or marketable. With prices of all vendable items expressed in terms of a single commodity, transaction costs are greatly diminished, requiring less resources for making exchange possible, They are also contributing to higher productivity and higher standards of living.

17:10The use of money as an accounting tool provides for an accurate expression of an individual's opportunity costs. This in turn supports efficient decision making on the part of producers and consumers. Money allows for higher incomes and higher incomes lower people's time preference, that is individual's preference for present goods over future goods. And the lower people's time preference is the earlier the onset of the process of capital formation. A decline in people's time preference means that a greater portion of current income will be saved and invested. As the stock of capital rises and as production becomes more roundabout, the marginal productivity of labor increases.

17:59and this leads to higher employment and higher wages and higher standards of living. The expansion of the division of labour and free trade accompanied by a rising saving and investment activity brings about ever closer economic ties between individuals. Growing economic integration makes people less present oriented and more future oriented and this too gives another boost to higher degree of interpersonal cooperation. In other words, civilization. So we can basically conclude that money plays a key role in facilitating the process of civilization. However, this holds true only for free market money, while with government controlled fiat money, the opposing tendency comes into operation, namely the process of de-civilization.

18:54As noted already, Mises showed that money is an integral and forming element of the free market system. In that sense, free market money can be characterized as sound money. In the theory of money and credit, and I apologize, the quote was already mentioned by a speaker in the previous session, Mises, the sound money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system. And further, it is impossible to grasp the The meaning of the idea of sound money, if one does not realize that it was devised as an instrument for the protection of the civil liberties against despotic inroads on the part of governments.

19:57Ideologically, it belongs in the same class with political constitutions and bills of rights. So, Mises' sound money principle is basically a protection against destructive government interference in the free market. In that sense, sound money can be interpreted as a means to an end. Sound money safeguards the free market order, leading to prosperity and supporting the process of civilization. It is against this backdrop that today's monetary regimes, which in the last decades have evolved in a diametrical opposition to Mises Sound Money principle, must be seen as a source of destruction to the free society.

20:43Today's money is supplied by government controlled central banks, which hold the money supply monopoly. Today's money is fiat money. It is no longer linked to any commodities such as gold, silver or other precious metals. Central banks can and do issue new money out of thin air. The stock of money is increased without invoking any wealth producing activities which are required in the free market. Fiat money creation, which is typically done via the credit markets, Free markets can therefore, from the viewpoint of the best legal tradition, be called counter-fighting money. In a free market wealth can only be created through homesteading, producing and contracting.

21:30Exchanging goods and services against fiat money, be that in the market for present goods or in the market for exchanging present goods against future goods, The time market as Rothbard called it, it is a violation of the free market principle as it is no longer mutually beneficial for all parties involved. And having said that, please let us turn to Mises' business cycle theory. From praxeology we can deduce that government fiat money is to be held responsible for the recurrence of boom and bust cycles. as outlined by Mises' monetary theory of the trade cycle. So let us take a look at the chain of events.

22:16An increase in the fiat money supply through what Mises called the expansion of circulation credit lowers and necessarily so the market interest rate to below the natural interest rate or people's time preference. It is this artificial downward manipulation of the market interest rate which sets into motion the economically harmful and politically devastating boom and bust cycles. The increase in the fiat money supply via circulation credit is inflationary and its consequence is prices for consumer and or assets going up. What is more, it leads to a false sense of real savings. The artificially lowered market interest rate induces investment projects which would not have been undertaken under an unchanged credit and money supply.

23:11The artificially lowered market interest rate makes production more roundabout. That is, economic resources are increasingly diverted from the production of consumption to goods to investment goods. The lowered market interest rate reduces real savings and increases consumption and investment, making monetary demand overstretch the economy's real resources. Sooner or later, however, people return to their favored portfolio situation. When this happens, it becomes obvious that the economy has lived beyond its means. That is, it has embarked upon an unsustainable path and the credit and money-fueled boom turns into bust.

23:58But now comes the hard part, of which Mises was so well aware. In view of an approaching depression, recession, whatever, people start calling for the continuation of the very policies that have caused the Malays Even lower interest rates through a further increase in the supply of credit and money. More credit and more money at the lowest possible interest rate are seen as a remedy rather than a cause of the disaster. Lower central bank interest rates may prevent depression on some occasions, but this comes at a high price. A correction of the distortions in the production structure is prevented.

24:46and the artificially lowered interest rate encourages even more distortions in the economy's production structure. As a result, a monetary policy that tries to fend off depression, the economically painful but necessary process of correcting malinvestment, merely postpones the inevitable crisis and because it increases the amount of malinvestment, increases the cost of the ultimate bust. First, one may blame the public's economic illiteracy and its anti-capitalist mentality for failing to come up with the right diagnosis of the causes of the crisis and to advocate an appropriate cure. This, however, would run the risk of underrating the disaster-causing role of government. Governments and their sympathizers and beneficiaries have an existential There is a considerable interest in preserving and strengthening the fiat money regime, marketing it in public, especially in state funded schools and universities, as being in the best interest of the people, suggesting that there is no viable alternative.

26:01But of course, there is a viable alternative, free market money. And a monetary regimen change is badly needed, a case unmistakably made by the disintegrating developments of the fiat money systems the world over. But the majority of the people, as I indicated earlier, does not believe in free markets as epitomized by the popular term credit crisis. To put it mildly, this is a misleading interpretation of what is really going on. What is called crisis is actually an inevitable process through which malinvestment is corrected.

26:47However, governments and their central banks take measures, essentially bailouts of the greatest possible dimension for fending off the inevitable correction. It goes without saying that they won't improve things but will make things worse. In view of the gigantic debt pyramid which has been hit up over the last decades, lenders have become increasingly concerned about the ability of the borrower to service their debt. Creditors are no longer willing to refinance loans falling due, let alone increase their credit exposure. Borrowers, on the other side, accustomed to carrying high debt loads, cannot repay their maturing debt and shoulder higher refinancing rates.

27:41In an effort of deleveraging and de-risking the balance sheets, commercial banks rein in the credit supply and call upon borrowers to repay their debt. As a result, the credit and money supply is going to contract. If commercial banks default on their debt, bank liabilities in the form of unsecured and secured debentures and finally also demand time and saving deposits would be destroyed. The economic process brought about by the remaining free market forces under a fiat money system would transform the inflation regime into a deflation regime and before we talk in some more detail about inflation and deflation and its consequences please let us take a brief look at some charts which should help illustrate demonstrate the current state of worldwide monetary affairs and the developments that have led to it.

28:45I would like to kick off with showing some symptoms. The first chart shows stock prices around the world are falling sharply, in particular bank stocks. That is the light blue line. This might reflect growing investor concern about the future profitability of banking, especially so in view of growing banking nationalization efforts on the part of governments. In fact, let me say Karl Marx would be most delighted to see what mainstream economists, including many who think of themselves as capitalism friendly, are calling for. In effect, most mainstream economists agree now with Marx in calling for, quote, the centralization of credit in the banks of the state by means of a national bank with state capital and exclusive monopoly, which is actually proposal number five in Karl Marx's Communist Manifesto published in 1848.

29:51You see that the volatility in financial markets has increased dramatically. Just take a look at the graph on the left hand side from 1920 until March 2009, you would see the volatility of the weekly changes in the stock prices of the Dow Jones stock Market Index. At the same time, and despite government guarantees for bank liabilities, banks refinancing costs have continued to edge up, basically across all rating categories, not only in the U.S. but also elsewhere. For instance, in the U.S., you can see the graph On the left hand side, on the right hand side you see the developments in the Euro area.

30:54The credit quality of the corporate sector has not remained unaffected. As another indicator for investor credit default concerns, the yield spread of corporate bonds have risen to the highest level since the Great Depression in 1929. At the same time, unemployment is going up. On these charts, on this chart basically, you see the unemployment situation in the major countries of the world. Unemployment is about to rise further.

31:41This chart shows you the annual expansion rate of the monetary base in the United States of America since 1918 up to January 2009. It's running at around 100% per year. This is the result of the US Federal Reserve taking over troubled assets from banks in exchange Change for Additional Base Money Balances. Now on this chart you would see the so-called credit default swap spreads on government bonds for various European government market traded securities.

32:33And as you can see, the price has been rising sharply in particular after the default of Lehman on the 15th September 2008. And this expresses investors increasingly concern that governments who have basically underwritten Bank's balance sheets are getting into deep trouble.

33:03Now, turning to the causes of the crisis, this chart shows the US private saving ratio from the early 1950s until the end of 2008. The saving ratio has been declining considerably from around 10% in the 1980s and it hit basically zero in 2008 and only lately it has increased slightly. Now the trend decline in the US savings ratio which you have just seen has been accompanied by bank credit exceeding the expansion of nominal GDP as you can see on this chart.

33:51And this strongly suggests that the credit expansion can be characterized as circulation credit expansion. So the expansion of credit in excess of real savings as Mises identified as the major cause of the business cycle. Now viewed from a somewhat different angle, the trend decline in the Federal Reserve fund rate, which set in the early 1980s, has been fueled a massive rise in the economy's total debt outstanding in percent of GDP. It's now around about 360% of GDP.

34:43In this context, it should be of particular interest to take a look at the relation between government debt and the Federal Reserve's interest rate in a longer term perspective. Declining Fed rates have been accompanied by rising government debt and vice versa. By the way, such a relation can also be detected, so this negative relation, can also be detected in other countries such as, for instance, Japan. After the credit boom collapsed in the early 1990s, the Bank of Japan lowered interest rates to zero with the government trying to deficit spend the banking sector back to health and the economy out of recession.

35:28And after running huge Keynesian economic-inspired public deficits, Japan's gross public debt to GDP is now approaching 200%. The negative relation between central bank rates and the level of government debt deserves some further comment at this juncture. If the government holds the monopoly of the money supply, inflation is a readily available source of government revenue. However, once inflation reaches a certain level, it becomes politically extremely difficult to handle. This is because inflation undermines the principle of mutually beneficial exchange, thereby damaging the prosperity creating forces of the free market.

36:22It leads to hardship for many and sooner or later it makes people dissatisfied with their government threatening its very existence through non-violent or violent action. When compared with inflation, issuing government debt seems to be a politically much more convenient instrument of Expropriation and Redistribution from the Viewpoint of the Ruling Class and the Class of the Ruled. On the one hand, government debt allows the government to secure its revenues. On the other hand, investors in government debt form an alliance with the state aimed at expropriating future generations of taxpayers.

37:09One should have no illusions about the fact that the huge government debt piles, Profiles, which have been accumulated over the last decades and which will grow even bigger by governments trying to fend off depression, represent pent-up inflation. Mises, basically in view of the German experience made in the early 1920s, put it succinctly, quote, inflation becomes one of the most important psychological aids to an economic policy which tries to to camouflage its effects. And further, by deceiving public opinion, it permits a system of government to continue, which would have no hope of receiving the approval of the people if conditions were frankly explained to them.

38:00The monetary fiasco which has been coming to the surface in recent months causes concerns of deflation rather than inflation despite unprecedented increases in the base money supply and the drastic increases in government debt the world over. In mainstream economics, inflation is typically defined as an ongoing rise in the economy's overall prices, while deflation is understood as an ongoing decline in overall prices. Mises had a different view. He noted that inflation and deflation are not praxeological concepts, but were created by economists adhering to the fallacious notion of the stability of money.

38:47In human action, however, there are no constants and there is no such thing as a stable piece of money. Money is a good like any other and as such it is subject to the law of diminishing marginal utility. That is the law of determining subjective value. Now, let us take a closer look at deflation. Under commodity-based money, such as the gold standard, deflation is a phenomenon inherent in the working of such a regime. It is either the result of voluntary exchange or a correction of a preceding violation of property rights by banks having issued too much notes relative to their gold stock.

39:32In that sense, there's nothing wrong with deflation as such. Under a fiat money system, however, especially so after a worldwide decade-long inflation process, it is important to note that deflation would yield consequences which would be different from deflation under free market money. First and foremost, under fiat money deflation, so I'm talking about the contraction of the money supply. Under fiat money deflation, it would be an arbitrary act like any other action taken on the part of the government. And so it cannot be called desirable in any way.

40:17What is more deflation cannot return, and this is most important I think, It cannot return the fiat money regime to some kind of market equilibrium in terms of the money supply prices, the production structure and employment. The reason is that the fiat money system does not have any base of money proper towards which it could deflate. And third, deflation would in all likelihood bring about a collapse of the government whose very existence rests to a large extent on debt financing and in deflation government tax revenues would drop and the government would no longer be in a position to roll over their debt falling due, let alone increase their debt.

41:06I may add a political consideration here. Public opinion massaged by government preservers will presumably see inflation, the increase in the money stock, as a lesser evil in view of an approaching deflation. And so the total destruction of the currency would presumably within reach. In this context, we should remind ourselves of the most prominent German experience in the early 1920s. It was a democratically elected government which decided in view of reparation payment obligations and depleted funds to take recourse to the printing press, which ended in hyperinflation and brought with it unspeakable hardship for the people and paved the way towards totalitarianism.

42:00Ladies and gentlemen, there is a way of transforming the fiat money regime into a sound money regime. Praxeology, the science of the logic of human action, allows us to state the very principle along which a sound money system must be built, namely allowing for complete freedom of the supply of and demand for the currency. This in turn implies privatizing the money system, establishing free banking based on a 100% reserve banking. The corollary would be ending any government interference in monetary affairs and abolishing the central bank. But how can the current fiat money regime be transformed into sound money?

42:48Well, I think Mises gave us some guidance. We can make use of the regression theory. As was outlined earlier, neither inflation nor deflation will prevent the final collapse of the fiat money regime. regime. So if we want to return to some money and if by doing so we want to prevent the total destruction of the existing exchange value of fiat money, the only option available is a re-anchoring in the first step, a re-anchoring of the stock of fiat money to commodity. Mises, the first 20th century economist proposing free banking with 100% reserve requirement on demand deposits had worked out such a reform proposal. Mises demanded that banks must no longer be permitted to expand the money stock and that all future that is newly created deposits would be subject to a 100% reserve of money proper.

43:56Rothbard built on Mises' proposal, supporting it with a strong legal foundation. Rothbard proposed in his Mystery of Banking a two-way strategy. In the first step, the outstanding liabilities of the commercial banking sector, plus notes and coins, would be backed by gold, which is still in the seller of the central banks. Holders of bank liabilities plus cash money would receive the legal right to convert at any one time the holdings into a predetermined amount of gold ounces. By doing so, the currency names such as, for instance, dollars, British pounds, Swiss francs, would simply become expressions of certain weights of gold.

44:42In the second step, the monetary system would be privatized and the system of free banking would be established. Now, the critical question is, how much should a unit of fiat money fetch in terms of central bank gold? It is this very decision that determines whether and if so by how much the exchange value of the existing fiat money will be affected. This simple equation shows you the gold cover ratio, as I call it, and it should help outlining the options available. It simply shows the sum of C, which is cash, coins and notes, D, T and S, which are demand, time and savings deposits respectively, and L, which is defined as banks long-term liabilities, divided by the amount of gold ounces in the seller of the central bank.

45:45Now, if only C and D, that is the stock of payments are backed by gold, the price of gold in terms of the existing fiat money stock would be relatively low. Alternatively, if C, D, T and S and L would be backed by gold, the price of gold would be relatively high. What is more, we have to take into account that the economy's money stock would be the gold stock as held by the central bank plus any outside gold that is gold which is already circulating. So the choice of the gold cover ratio has an important impact on the quantity of the money stock. I would like to outline three options. Option number one would be a gold backing of bank's liabilities and total liabilities.

46:33In this case, deflation would be mitigated in terms of the contraction of the money stock to the greatest possible extent. Option number two would be a gold backing just for monetary aggregates such as M1, M2, M3. Bank defaults could then wipe out part of people's savings in the form of non-gold-backed bank deposits. Option number three is basically similar. It would be using the prevailing gold price for backing fiat money with gold. Such a choice would lead to result basically similar to option two. And having said that option one, which implies a 100% backing of banks liabilities, would preserve people's total nominal amount of money holdings, While options 2 and 3 would allow for a potential reduction in the stock of money caused by bank failures.

47:33In other words, option number 1 would, assuming that the outstanding gold would qualify as a means of payment, exert the biggest loss in the purchasing power of money. What these considerations make clear is that there is actually no alternative to unmasking the loss of exchange value already incurred by fiat money holders and investors in fiat money denominated paper. Just consider the alternatives. If the current fiat money system is pushed into deflation, ensuring bank defaults would wipe out the paper claims of the people, It could, as the regression theorem shows, lead to complete breakdown, a complete breakdown of the exchange value of money.

48:22If the path of inflation is not abandoned sooner or later, the exchange value of money will be destroyed completely. And it is also no viable strategy if the government issues more debt for keeping afloat the fiat money regime, as this would merely postpone the inevitable day of reckoning. So, what about setting the gold cover ratio? Mises provides some very helpful thoughts and I would say, against the backdrop of his writings, it should be reasonable to opt for a gold cover ratio which backs less than 100% of bank liabilities, so backing of M1 or M2 seems reasonable and that is basically a proposal as upheld by Rothbard.

49:11Now, if for instance the money stock M2 in the United States would be backed by gold, the resulting gold price would climb to more than $31,000 per ounce. In the case of a 100% gold backing of M1, the gold price would exceed $6,000 per ounce. And just to give you a flavor, if for instance the Euro area would also back its fiat money stock as defined by M3, the resulting price for gold would be more than 26,000 euro per ounce of gold. And you can compare that with the current price of slightly above more than 900 dollars per ounce.

50:01and in euro you would pay close to 770 euro per gold ounce. But whatever the gold cover ratio will be, the really important issue is the re-anchoring in the first step of money to gold, which would save the currency system from a complete destruction and pave the way towards free market money, that is sound money under free banking. Ladies and gentlemen, in conclusion, I have tried to take the opportunity to pay tribute to Ludwig von Mises. He truly deserves to hold the preeminent place in the intellectual history of social theory.

50:47In the Mises tradition, I have tried to outline the key role of sound money for peaceful and productive cooperation in society. Mises lay bare, and unmistakably so, the de-civilization process caused by government controlled fiat money. Fiat money destroys, sooner or later, the free society. The only way out is a return to sound money, namely free market money under free banking. Free market money and individual freedom are inseparable, as Mises clearly recognized. All these conclusions are not, as some hysterical antagonists and mainstream economists may wish to maintain, ideologically distorted. On the contrary, they can be largely deduced from Mises' praxeology.

51:36The global financial debacle is a testimony to what Mises and his followers have stated on the basis of praxeology, namely the failure of government controlled fiat money and that it is high time to seek a fundamental monetary reform. It is my impression that the number of supporters for ending the monetary fiasco and returning to some money is growing by the day. This development is no doubt to a great extent attributable to the fantastic work of the Ludwig von Mises Institute. I imagine that if Ludwig von Mises, the defender of freedom, could see his intellectual heritage being cared for by the Mises Institute, He would not only be highly delighted, but also take hope that eventually sound money will win over fiat money and capitalism over socialism.

52:37Thank you very much for your attention.

52:55What do you think of the proposal to simply abolish legal tender laws and force the Federal Reserve on currency to really compete against them rather than trying to rejigger the dollar as a gold plate?

53:25and the repeat against the fiat money unit. Well, basically I would agree, the only thing I'm concerned about is, and as you may have seen in my presentation, is that such a system would not allow to preserve any wealth stored in fiat money. I see the only possibility to preserve some of the exchange value of the fiat money stock by re-anchoring it to some kind of commodity. Otherwise, your system might result in the complete wiping out of the exchange value of fiat money. That's my concern and that is why I think Rothbard has made a practical proposal to solve the issue.

54:21Well, you say it would wipe out the value of the fiat money, but also the value of any contract denominated in fiat money. So that would just cause a lot of chaos. Exactly. What you say is, it's not only, we're not talking about the wiping out of the exchange value of money, but also the wiping out of all contracts denominated in the fiat money stock. and exactly I share this concern and again what I presented is a politically motivated concept it's not based on a scientific consideration unfortunately we have to take an arbitrary decision to get out of it and I think the most promising way is by re-anchoring the fiat money stock but even then there will There will be huge losses, huge losses in the exchange value of the existing fiat money stock, even if you get a re-anchoring.

55:21The damage has been done, there's no way of denial.

55:43Well, thank you very much. The gentleman said maybe the government gets an incentive for making its currency more competitive against a new market money. That may be so, but I'm not sure. Again, my major concern is really to prevent the complete collapse of the exchange value of the existing money, fiat money stock, which would, at least to me, appear very likely once people shift from, let's say, fiat money balances into free market money.

56:29What would you think it narrowed in your whole government shifts, in that it only covered the monetary base and then phased into 100% of your requirements?

56:59America is close to $2,000 billion and as far as I'm informed, the stock of M1 is around about $1,600, so basically we are close to get, close, close, you know, we're not really far apart, but I think the problem really is if banks default, people are going to lose their deposits, right? Because if you choose a coverage ratio, a gold cover ratio, which is just covering demand deposits, but not time deposits, and time deposits become due and banks cannot repay under default. So the money is gone. It's a deflationary impact. So weighing the pros and cons, and again, I mean it's not scientifically based, it's just a rather arbitrary way of looking at things.

57:56Do you think going to a basket of commodities is a good idea if you could try and lower yourself?

58:26and I think we we all should make our peace with gold and the second part of your question what's going to happen with China and maybe other fiat money countries. It's hard to say, I mean you are looking at this situation I guess in the same way as I do and all I can say is within the next five years we're going to see dramatic changes and I really could imagine that countries which will see that they cannot deficit spend themselves out of recession and see to see their money value getting eroded, to reconsider the idea of re-anchoring to money.

59:28That might be even the United States of America.

59:48Right, the question is, we're talking about free market money and obviously we would say that's the best kind of money. Why didn't it emerge? I think the case has been made, the fiat money has been established by basically cutting the link between paper money and gold in the early 1970s and I mean at that time people were quite familiar with using US dollars or DMACC at the time and for most people it didn't make a difference, so they kept on making their contracts in the fiat money.

1:00:57And see, the situation we're talking about, it's my feeling, maybe it's different in the US, we are not really there at the point where people become really concerned about the quality of money. I mean what's happening in the financial markets is people are dumping their stocks, their corporate bonds, in exchange for what? For government bonds and fiat money. So what I'm talking about is really something which is increasingly appearing on the horizon and soon or later it will hit. I have a couple of questions. One, how frequently do you give a formula for re-increasing price exchange ratio between gold and fiat money? How frequently do you see that being recalculated? And what do you think is the impact of this suggestion?

1:02:05I produce an update. I did that one on Wednesday and I run that every day. It's basically very simple because it's an Excel sheet and I have some feeds in it which give me the actual gold price, the exchange rates and well, the official gold price, the official gold reserves don't change much. Do you have your suggestion to re-tie the dollar with the Federal Reserve's fee? How would that impact money market problems?

1:03:04I mean, the banking system is going to change, but I guess that there will still be people who would like to hold time deposits or money market funds, so there wouldn't be much of a change, right? So money market funds basically would distribute the money stock within the banking industry. There will be new markets emerging, like for people who are concerned that there might be a new gold rush somewhere. You know, institutions would provide hedges against expected losses in the purchasing power of money due to a change in the worldwide gold stock. So a beautiful new world of new markets would emerge, no doubt.

1:03:53Thank you. We're all on time. I appreciate it.