Smashing Myths and Restoring Sound Money

0:00Today I'm going to talk about sound money, but in particular I'm going to sort of give the talk that if I were a spectator, I would want someone to give. That's the normal strategy I follow. So I'm extremely narcissistic, as you notice. Everything I say revolves entirely around me and things that I'm interested in. But here, in particular, what I want to do is lay out as clearly as possible, from the ground up, what the case is for the position that we hold on money. And I think this is useful to do, just to have it on the record. I think it's useful because there are people who are coming to these ideas for the first time who might still feel like they don't have the full 100% argument mastered.

0:50And I hope that what I have to say will also be of some use even to those of you who have been reading all the books that Jeff mentioned there on the website. So let's start right in here. I mean, I had some initial banter and jokes, but those are just out the window. No time for that. We've got to just get right down to business. I'm told that I still get my full time. So, you know, everybody just hang on. I will finish. You don't have to worry that I'll be droning on for hours. What I want to do, first of all, is point out that we could subtitle this talk I'm giving as a tribute to Guido Hulsman. And you may not know who Guido Hulsman is, but we'll rectify that difficulty right now.

1:36Guido, among many other things, wrote this very, very important book called The Ethics of Money Production. came out in 2008. There are apparently six copies available here, including this one, which I'll replace at the end. But Guido is an extremely original and important thinker. He's the chairman of the economics department at the University of Angers in France. A very, very impressive person in every way, and I've learned a tremendous amount from him. And I've been meaning to review his book, The Ethics of Money Production, from Mises, Oregon. for Mises, Oregon. I've just never, for one reason or another, never gotten around to it, so I hope to make this up to him today by this tribute, because much of what I'm going to tell you today is derived from the writings of Guido Holzman, to give you a sense of what you're missing out on by not reading him, so as to encourage you to seek out the work of Guido Holzman, and thereby get him off my case for not reviewing his book. That was just in parentheses. Now, of course, there's another book you might also feel like, you know,

2:39I want to be one of the cool kids you might read, and that of course is meltdown. We shouldn't neglect this book. My wife is with me today, and we are expecting our fourth child in February. So if you should wish to make an indirect contribution to the Woods Small Child Fund, this is, I think, the most discreet way of doing so, just buying your own copy. Right. Well, let's get right down to it. I'm going to start right from the beginning, again, from a point that will bore some of the veteran Austrians. But I want to start from the foundation and build my way up. And start off simply by talking about money and what it is and where it originates. And I can already see, I'm not even looking, I don't have my glasses on, so you're all a big blur. I can already see Bob Murphy rolling his eyes, saying, if I have to hear this explanation one more time.

3:26But, all right, Bob, you're stuck here. There's no getting out. The origins of money simply goes like this, so we all know that, you know, let's say way back in the old caveman days, before there was a medium of exchange, you know, if you've got a scrambled egg and you want to get a frisbee, you have to look for a frisbee-owning scrambled egg-wanter, and this is inconvenient and difficult, so eventually people realize just they don't need to be told this, they don't need to be regimented into doing it, they realize through the exercise of their own reason that they could facilitate their transactions better, If they found a highly marketable good, a good that they knew other people generally wanted, they exchanged their good for that good, and now they go looking to exchange, now they're much more likely to get a taker because they have a more marketable good in their hands.

4:16Well, very often, although by no means exclusively, precious metals such as gold and silver were chosen because of a variety of qualities that they happened to possess that we don't need to go into now, Now but that lent themselves to functioning as a medium of exchange to facilitate transactions. So the gold or the silver stands in between the frisbee and the scrambled egg and makes this transaction in effect possible even though it might be directly difficult to find a scrambled egg when you have a frisbee or vice versa. You can find the money commodity and then use the money commodity to acquire the good you want. Now what's significant about this description is that it's describing how money comes about and it's describing how money comes about in the only way it could have come about.

5:07And one of the arguments that Mises in effect makes and other Austrians have made is that money could not actually have emerged in any other way. The argument that I'm making here is that it emerges out of barter as one good gradually comes to be acknowledged as the most marketable and is being accepted more and more in exchange until finally it becomes in wide and in effect universal use as the money, the medium of exchange, the most marketable good is the money. This is the only way it could have come about and there are two reasons for this, at least two. One of them is a practical reason, imagine a society without money and then you're trying to describe money to these people. They've never seen this system work, they've never heard of it and you say to them, and here I borrow from Bob, You say to them, oh look, here I've got a bunch of totally useless stones.

5:57Why don't we all use these? I promise you everybody will accept them and this will facilitate our transactions. People would say, why don't we burn this guy at the stake? What a social nuisance this is. It would be very, very hard to persuade people of this who had never been exposed to money. But there's actually a more, really an insuperable obstacle to the introduction of money any other way. other than as originating as a useful commodity that people initially valued because it was a useful commodity and then they realized hey because it's a useful commodity everybody wants it and then once it begins to be used in exchange even if people don't want it they still want it because they at least they know they can exchange with it the difficulty here is that it let's say the government just suddenly said here's a piece of paper and I'm going to put in fact let's say I do this I just put a big old set

6:50What is society supposed to do with that? How in the world would you know what five woods were worth? How would you know if you were getting a good deal or really getting the short end of the stick? How could you know? You have no idea what this thing is worth. So the problem is nobody would know what the thing was worth. Certainly as a piece of paper, it's not worth a thing, other than a fraction of a cent. So how would you know how to make transactions if you were simply to say, okay, I think this is the thing we're going to use, so everybody go out there and try and use it. Where would you even begin? Whereas, when you have a money that emerges spontaneously, as you're coming out of the barter system and into a money system, that good that is gradually acquiring the qualities of money Money in that it is being used more and more as a medium of exchange, begins to acquire

7:48an array of prices in terms of itself. So as people start exchanging gold, let's say, for various goods, well, there becomes a gold hat price and a gold pants price and a gold bacon price, so that gradually, once you get to the point at which gold is being universally used, well, you've got a previously existing array of barter prices in terms of gold that you can then use to get a handle on how much the gold is worth. What can it actually command in exchange? If I just suddenly impose a paper on you, you have no idea what this paper can command or what it's worth. So it can't be done. It actually can't be done. Now, having said that, that point will become, I think, useful to us a little later in my presentation. But that is, that I think is the foundation point.

8:35Now it's true that, of course, we are using unbacked paper money now. So it almost sounds as if I'm lying to you. I'm telling you this can't be, and yet here it is. So how did it come about? Well, it did not come about directly. The government did not simply say, or the Federal Reserve, hey, here's some pieces of paper, everybody go use it. Initially, we had a precious metal money system in the U.S. And throughout the colonial period and into the early republic and through the 19th century, people were using gold and silver coins, depending on the time. They were using coins from other countries. They just used these, you know, money was just a good like any other good, and they used it in this way. And when paper began to be used as money, by and large, the paper was simply a money substitute. It was a more convenient mode of carrying your money.

9:22But the paper was just a money substitute that you could exchange for some fixed quantity of gold or silver. Well, eventually, what governments typically want to do is, they don't like this system because they want to be able to print up a lot of money and hand it out to their buddies or themselves, and you can't print up gold and silver. So what typically they'll do and what happened in the US in 1933 and then definitively in 1971 was that the gold backing was taken away from the paper so that now if you go and say I'd like to redeem my paper for money they'll give you a new piece of paper. They won't even know what you're asking. So in 1933 the gold backing was taken away and so that all you had left really was just the paper. And then particularly in 1971 the situation is intensified and completed.

10:08All you have is pieces of paper, but notice they didn't start off that way. The paper now circulates sort of out of habit, and because the paper has an array of prices in terms of itself, it makes it possible for us to use it, but we couldn't have started that way. It goes through this evolutionary process, and Rothbard I think makes an important contribution in what has government done to our money by pointing out this step-by-step process. How you go from spontaneously emerging money on the market, what Guido calls natural money, as it occurs without coercion, to the system we have now, totally unbacked paper money. The system we have now, very much different from the precious metal system that emerges spontaneously on the market through the transition from a barter system to a money economy.

10:56That system occurs spontaneously without any need for any government intervention whatsoever. However, to the contrary, when you look at paper money, fiat paper money, in other words, Money that the government can reproduce and that is not convertible into anything else, that that is it, it's just the paper, that system has never been introduced voluntarily and spontaneously by society, never, no such thing. It has always been introduced by means of violence and with the use of the police to suppress alternatives, so that's the glorious system we have now whose merits are praised all the time, it has never come about spontaneously. Now I want to proceed to the disadvantages of the current system because by implication they suggest the advantages of an alternative.

11:45And incidentally, let me pause to note that it never ceases to amaze me how often people look at the position that we hold on money and say, boy, that's just a crankish thing. That Ron Paul, what a crank he is. And suggesting that sound money is something that really belongs in the province of cranks and Weirdos. And I sort of feel like saying, you obviously don't know us very well. I mean, we have a lot weirder positions than this. I mean, I actually think to the contrary, our position on money is probably the most easily defensible and obviously persuasive of all the things we believe. And yet it's most consistently singled out as being, well, out of bounds and whatever. And I'll leave it to the student as an exercise as to why the establishment would want to Now, what we normally hear about what happens when governments increase the supply of paper money is that consumer prices rise and this hurts people on fixed incomes.

12:44Now, that is true. That is true. But there are far more consequences. I will at least, though, first mention that if you look at the history of the world, That is true, but there are far more consequences. I will at least though first mention that if you look at the history of England and its silver coinage, the silver pound in England from 1066 to the beginning of the 1600s was debased by the government by about one third over the course of more than 500 years. We're talking about inflating the money supply by a factor of about 0.3 or so.

13:30But then, in the next 200-year period after that, when modern banking comes into existence, we see that the supply is increased by a factor of 16, not 0.3. And then in the case of the US dollar, in just the 30-year period from 1973 to 2003, The U.S. money supply, M1, increased by a factor of five in just 30 years. So even with governments attempting to debase the precious metal money, it still actually holds up quite well. Well, also related to this, there are unjust redistribution effects, known as Cantillon effects, because when the money is created out of thin air, who gets it first?

14:17Well, typically government's friends, government contractors, big banks, government officials with their salaries, they get the money first. And so this new money not having yet trickled through the whole system, well, prices have not yet commensurately risen. So those people enjoy a windfall. They get to spend new money at the old price level. By the time the average person gets the new money, he's been paying the higher prices all that time. So the favored constituencies' windfall comes at the direct expense of the average person who typically lacks their political connections. Paper money and paper money inflation artificially encourage consumption over saving, artificially encourage consumption over saving. Hyperinflation is merely an extreme example of this.

15:03Now we sort of arbitrarily define hyperinflation as a case of a 50 percent increase in, let's and, say, the price level per month, and it could be more than that, and it sometimes has been. Well, in that case, who in his right mind would save? Who would say, you know, I think the thing to do now is to save up some German marks and just wait this thing out? No, to the contrary, you want to rush out and spend like crazy, right? You've got to get rid of this stuff, so it encourages you to blow all your money now. So lesser cases of inflation are going to have the same effect, although at a lesser rate. But you're going to want toside your money more quickly than you otherwise would, because you anticipate it's going to lose its purchasing power. In addition, the ability to create money out of thin air, depending on how it's carried out, can in fact carry in its train the business cycle.

15:58And here, for the sake of completeness, because I want this to be as complete and comprehensive an overview as I can possibly make it, I want to see if I can do, in three or four minutes, if I can give a reasonable overview of what we mean by this. And it so happens, we'll start as follows, and then I'll show how this follows from creation of paper money. It so happens that when interest rates go down, this happens to be the time that businesses are most likely to invest in long-term projects. and it shouldn't require the drawing of a diagram to see why that would be. The longer term the project is, the more heavily the interest payment is going to weigh on you. So as the interest rate comes down, even sometimes very slightly, it can have a very substantial effect on the amount of your loan payment.

16:45So the longer term your investment, the more interest rate sensitive it will be. So the Austrians typically speak of higher order and lower order stages of production. Higher order stages are the ones that are most remote from the consumer. So research and development, for example, is a very high order stage because that might not bear fruits for the consumer for 20 years or more in some cases. Or increasing, expanding mining capacity, which by the way helps on the predictability of money supply increases under a gold standard because the increase in mining capacity is such a slow process. It gives everybody years and years of time to anticipate it. But then beyond that you can think of manufacturing, construction, machine tools. These things are far from a bagel in a bagel shop, which is immediately usable by the consumer.

17:35So the lower order stages would be retail, stores, services, things of that nature. So the higher order stages, because they're far, relatively speaking, from finished consumer goods, and they are longer term, are going to be the ones that are going to get the most stimulus from lower interest rates. So this is fine, this is good, and the reason it's good that businesses invest when interest rates have gone low is twofold. First, how did the interest rates get low? Let's imagine this is a free society, not one with a Soviet Commissar dictating money and interest rates. Let's imagine we've got a free monetary system and interest rates have gone low. How did that happen? It happened because the public is saving more, and that leads to lower interest rates. Now, when the public is saving more, it is implicitly saying we're not going to go out and blow our entire paychecks on consumption right away.

18:24We're going to defer some of our purchasing power for the future. Well, that aligns very well with businesses' production processes, which are future-oriented, right? They're engaged in long-term processes. Well, people are deferring some of their purchases, so there's a match-up here time-wise. But secondly, if we save more, we are in fact constricting how much we're blowing immediately of our paycheck. Paycheck. So we're not spending as much, let's say, in retail stores. So relatively speaking, that sector may start to contract. And when it contracts, it doesn't need as many trucks anymore. It doesn't need as much labor anymore. It doesn't need as much steel. These factors of production are now released from the lower order stages and amazingly now they happen to be available for use by these higher order stages that are expanding.

19:11So again, there's a coordination that the structure of interest rates makes possible. Now contrast that with what happens if the interest rate is interfered with artificially and is forced down artificially. Well in this case again, businesses will engage in expanding long-term projects in the higher order stages. But in this case, number one, people have not indicated that they're deferring their purchases for the future, they're purchasing right now. So businesses are engaged in long-term product development at a time when people want more of existing goods in the present, so there's a time mismatch. But secondly, because in this case the interest rate decline is artificial, it doesn't follow from people's restriction of consumption. The retail sector isn't constricting in any way, so no additional trucking services have been made available, no additional labor has been made available, no additional factors of production have been made available that could now be used in the higher stages.

20:05So instead of there being a smooth, elegant transition from one structure of production to another, instead we have a tug of war in the economy between the higher and the lower order stages. And this discombobulates the economy, this threatens the profitability of the higher stages because these factors of production are scarcer than the higher order stages realized and their costs are going to go up and ultimately this will be shown to have been unsustainable. Now in doing that, in engaging in long-term projects at a time when they shouldn't have, Because the central bank, by making interest rates artificially low, has misled them, they've wasted resources. They've started projects that won't be able to be finished because the physical stuff to complete them, to see them through to completion, does not exist.

20:55Well, they're going to have half-finished things, one-third finished things, or they'll have finished things that the complementary factors of production won't be finished for. So they will have blown a lot of resources. They will have wasted stuff. So we will be the poorer for this. This follows from the fact that, particularly under either a fractional reserve type system with hard money or under a system of fiat money where the central bank can just create all the money it wants, this is how it leads to lower interest rates. It creates all this money. It pumps it into the banking system. The banks now have all this additional money at their disposal. They want to lend it out. And how are they going to do that, if not by making the terms of the lending more attractive and lowering interest rates? So this is all an artificial process that is amplified and made possible to the extent that it is in the modern world precisely by fiat paper unbacked by anything.

21:50Now to the contrary, by the way, I'll get to the contrary later, let's continue. That was a Thomistic thing with his to the contrary and then so on and on. I'll get to my I answer that in a few minutes. Other problems with fiat paper money, well, they lead to massive increases in the power of government and the banking system. It should be obvious how it leads to the increase in the power of government. If the government has recourse to a printing press, it's going to be able to commandeer more resources from the voluntary or competitive sector, which I actually prefer that to private sector because everybody's been brainwashed into thinking private is evil, you know, whatever. You know, whatever, and people think of when they were seven years old and they wanted to throw that ball against that wall, but the sign said private property, so everybody's got this sort of sense that they hate private things.

22:39So how about voluntary or competitive sector? So the private sector loses resources more readily when they can be siphoned off through artificially created money. But also the banking system itself is artificially enriched. And here I quote Guido directly. He writes, The market economy can be understood as a great organism that caters to the needs of consumers as expressed in money payments. When the economy is flooded with legal tender fractional reserve notes, the whole economic body of society begins to cater excessively to the needs of those who control the banking industry. The American economist, Frank Fetter, once observed that the unhampered market economy resembles a grassroots democratic process.

23:26Don't hold that against the market economy, but this is a real democratic process. One penny, one market vote. From this point of view, the imposition of fractional reserve notes through legal tender laws creates market votes out of nothing. The bankers and their clients, usually the government in the first place, have many more votes than they would have had in a free society. Unlike a commodity money, fiat money's value can fall to zero. A commodity money will still have some value as a commodity. You still use gold for industrial and ornamental purposes. You don't use green pieces of paper with smelly disgusting ink for any use other than exchange. So if the exchange use goes, if they inflate it so much that people flee from it and it has no value, it can go to zero.

24:16Commodity money is not going to go to zero. But worse than that, the fiat money, once it goes to zero, can never be revived. Because once it goes to zero and it stops being used by people then you're back to the initial problem of a government trying to introduce a fiat paper money completely from scratch. As we've seen, that can't be done. So once the fiat paper money goes out of use, you'd have to start the whole thing up again. You'd have to start up through the spontaneous adoption of a commodity as a medium of exchange. You would not simply be able to force that paper back on the people. All known hyperinflations involve paper money. Not hard to see that. We have one of my favorite stories, favorite in sort of a macabre sense, but involves a gentleman in Germany in 1923 where they had the terrible hyperinflation, prices were going up tremendously, and he got a letter from his bank.

25:11He had 68,000 marks in a bank account, which was comfortable fortune. You've got a letter from his bank saying, we have to close your account and unfortunately we can't return your money because the smallest denomination bill in circulation now is a million marks. So you'll be happy to know we've rounded up your deposit from 68,000 to a million. So he closes your check for a million marks and this was sent to him in an envelope whose stamp cost five million marks. So, the guy is completely wiped out. It's hard to save for the future under a fiat system where government, again, can create all this money. It was the case in the 19th century that to save for the future you could simply acquire precious metal coins.

26:00Just acquire them. Now, of course, you could save them, you could invest them. I mean, that's true, but the point is you didn't have to. You didn't have to be a speculator. You didn't have to go into the stock market. You didn't have to say, well, gee, where can I put my money so that it will at least hold on to its value? You didn't have to worry about that because it held its value. When these metals served as money, they held their value or increased their value over time. And any graph you look at and set of statistics you look at will bear this out. Whereas today, only a fool would save for the future by piling up Federal Reserve notes. You would have to factor in a depreciation factor of at least three, at least. So you'd have to save an enormous amount. So in other words, it makes it harder to save because now, just to hold on to the purchasing power you've earned,

26:47you have to become a speculator. And most people, myself included, are not fit to be speculators. We don't belong in the stock market. We don't belong in some of these financial instruments. But we feel like we have to do that as a self-defense mechanism. And that was not the case under hard money. So, so much for, you know, the paper money system helps the little guy. Yeah, right, yeah, it helps the little guy. That's why it was all little guys who drafted the Federal Reserve Act of 1913, right? It's all little people. Joe Blow down the street drafted that. Then we have the problem of moral hazard. We hear a lot about moral hazard. Moral hazard is the phenomenon by which people are willing to act with an artificially elevated level of risk tolerance of Risk Tolerance because they believe that any gains they make will be kept by themselves but any losses they might incur will be shared with a bunch of other suckers.

27:40Well, think about the incentives that are created by the existence of a monopoly paper money producer. You know that there is no physical limitation on how much money they can create because as Bob says, they don't even need to use paper. They can use a couple of computer keystrokes to create the money and even if they lose If you use the electricity and they have to even churn it out using an old-timey printing press, let's say, they can always just pencil in a few extra zeros on the note. So there's no limit on how much money it can create. So therefore, there is likewise no physical limitation on how much money can be created out of thin air to bail you out if you happen to be politically well connected and viewed as being too big to fail, which is the subject of a whole other talk on another day.

28:26Well, what in fact happens? Well, in fact, this is precisely what happens. You get the major financial firms, well, you know, look, we're in kind of a bind here. Can you bail us out? And in fact, although it's not quite the same point, nevertheless, the International Monetary Fund, early last year, issued a report saying, you know, it's funny, it seems like major financial firms are relying excessively on the World Central Banks to relieve them of their liquidity problems. Oh, you don't say. I wonder why they would do that. Or I wonder why, again, why would their equity ratios be so much lower than in all other industries? Because no other industry has some sugar daddy sitting in the wings waiting to bail them out. So this problem is accentuated when there's no physical limitation on the amount of money that can be created.

29:18All right, now then there are some myths that we might deal with. One myth would be, well, you know, what you're saying is all well and good, but how can you respond to the fact that we had booms and busts and monetary discombobulation in the 19th century before there was a Federal Reserve system that we're so critical of, so how do you answer that, ho, ho, ho, and they think that's the end of the argument. Oh, no, no, my friend, that's just the beginning. Richard Timberlake, whom somebody mentioned, is not actually an Austrian, but nevertheless made an interesting point in an article not too long ago, a couple of years ago. He says, as monetary histories confirm, most of the monetary turbulence, bank panics and suspensions in the 19th century, resulted from excessive issues of legal tender paper money, and they were abated by the working gold standards of the times.

30:14Well, in fact, there is a section in my book Meltdown that does deal, albeit briefly, with the major financial panics of the 19th century, 1819, 1837, 1857, 1873. And I think just through an oversight of mine, there's not 1893, but there's a YouTube where I talk about these at a Mises Institute event. I think it's called Monetary Lessons from America's Past, in which I do briefly get to 1893. But, to make a long story short, if you look through all these examples, they are in fact caused by, by and large, the same factors. It's not, okay, there is no Alan Greenspan at that time, so I'll admit I am slightly disappointed that I can't blame him for those. But nevertheless, in each case you've got either, you've got banks getting special privileges that encourage them to engage in fractional reserve banking, In one way or another they'll get special legal privileges that will bail them out of their normal obligations or at least temporarily.

31:16There's the fact that there were national banks involved, 1819, 1837 in particular, that were very inflationary. And so people at the time, as Rothbard shows in his book, The Panic of 1819, recognized the causal relation here. There was an artificial boom that was abetted by and in some ways led by the Bank of the United States. in the United States. And Rothbard's book, by the way, The Panic of 1819, was published by Columbia University Press. And if you look at all the historical journals, it gets excellent reviews. So this is not a crankish take. To the contrary, this is widely viewed. I read a book on Jacksonian America in grad school, and I was very gratified to see in the bibliographical essay, the author, who is not a libertarian or an Austrian, saying Rothbard's book on The Panic of 1819 18 is unlikely to be superseded. Very interesting.

32:07Well, I want to share with you a passage from 1837, which I've shared at one or two other Mises Institute events, but I hope you'll agree with me that this one's worth hearing again. This is a guy writing, this is William Leggett, New York editorial writer, who was a supporter of Andrew Jackson. Here he is describing the consequences of the massive inflation brought about by the Second Bank of the United States. and see if you don't hear some sort of family resemblance to Austrian business cycle theory in this 1837 commentary. I'm reading directly from Meltdown here. So here's December 1837. 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, their paper money, into circulation and Flood the Land.

32:55He 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 sensuously 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. Well then he says, what has been, whatever must be, the consequences of such a sudden and prodigious inflation of the currency? And among those consequences, he says, a vast amount of speculation in property of every kind and name at fictitious values.

33:42We wouldn't know anything about that, right? 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 and he goes on and on from there. Well, very significant, I think, that we hear that. In the interest of time, I won't talk about the 1870s, other than to say you should Google Charles Morris writing for the New York Times. Two years ago, the New York Times admitted there was no long depression of the 1870s. Economists have been all wrong about that. 1870s were actually pretty prosperous. They thought it was a depression because the price level was falling so hard and we all And we all know that if the price level falls, there's no way you can be prosperous, right, even though almost all of American history saw prices fall. Who are you going to believe? These people are your own eyes, but that's their argument.

34:29But yeah, that there really was, this is actually a myth, and Rothbard anticipated this years and years earlier. But as usual, when the Austrians either predicted something or anticipated some recent discovery in scholarship, The people who discover it or talk about it later are of course always going to tell you that no one could have known this, no one could have imagined this, no one could have predicted it. Okay, I think we're getting pretty used to that. We need fiat money so governments and central banks can prevent deflation. Deflation defined as falling prices. If prices fall in society, this is bad. How can businesses make profits with falling prices? So we need to pump money in to keep prices up and make profitability possible. Well, to make a long story extremely short here, first of all, you should read Guido's booklet that's maybe 40, 50 pages called Deflation and Liberty.

35:22And the whole thing is available as a PDF online. And it's read also by Dr. Floyd Lilly, our friend. But just to give you just a quick answer to this, for one thing, there's just the empirical fact that, as I've said, prices did fall did fall throughout American history, and there are people still here in America. It did not result in the deaths of all the people. People, in fact, seemed to prosper. We had tremendous economic growth, particularly in the last quarter of the century, when the prices were falling the fastest. So something doesn't quite work here. China's had prices falling, and again, they also seem to be alive. And then there's been recent empirical research looking at, Is there even a correlation between deflation and depression? There just isn't.

36:08The American Economic Review had an article about this in 2004. I cite that in Meltdown as well. But just think theoretically, and again, I'm going to do this very briefly. It's true that businesses want to make profits. But here's how they do it if prices are falling. Entrepreneurs simply anticipate the falling prices in the same way that today they anticipate rising prices. They factor these anticipations into the bids they offer for the factors of production. So they lower their bids for the factors of production because they know they're only going to be able to fetch X number of dollars for the finished goods in the future. Problem solved. So if the price deflation is anticipated, then it's already been factored into the prices of the factors of production.

36:54So there's no problem with profitability. There's still a price spread and entrepreneurs are doing fine. There's no problem. What if the fall in prices is unanticipated? Well, then in that case, businesses may in fact find, yeah, they can't sell their product at a point where they could actually turn a profit. Okay, they may even go bankrupt at that point. All right, well, entrepreneurs go bankrupt when they make bad anticipations of the future state of prices. So what does that mean? It means new owners take over. The creditors take over. And so the business just continues to run with new owners. Now it's bad for that individual owner, but from an aggregate point of view this is not relevant to the economy, from an aggregate point of view.

37:39The worst you might have is a series of hiccups as ownership changes hands. But where it differs from inflation is that with inflation through the banking system you get all this waste of capital that we saw, talking about Austrian business cycle theory. Here you don't have any waste of capital. You might have capital temporarily underutilized while bankruptcy courts sort things out, but that's it. And then the question of what if the people are in debt and they've contracted the debt in nominal dollars? How are they going to deal with that? And there are two possible answers. One, the debt can be renegotiated in light of the changed purchasing power of the money. That happens. Or the creditor could simply demand the money in full, in which case, again, the business owner goes bankrupt.

38:24But again, this simply entails a change in ownership. This does not lead to a fall in production or harm to the economy in the aggregate. But as I say, there is no reason entrepreneurs can fail to have trouble anticipating this. That's their job. They're entrepreneurs. They can anticipate this. So the reasons for the hysteria about deflation are a subject for another day. I refer you to Guido on this, but the real reasons are not economic. Finally, there isn't enough gold to facilitate all our transactions. Well, the answer is yes, there is. I mean, there's enough there. But it could well be that gold, let's say we redefine the dollar so that the gold could cover all the dollars that we have. It could be that gold would be like $12,000 an ounce or something, in which case it would be impractical perhaps to use gold unless you're making super big purchases.

39:14So maybe you'd use silver or whatever, but this is actually a fallacy. Any supply of money is perfectly adequate to facilitate our transactions. You will sometimes hear on the Internet... Now, I'm thinking I can go till ten after. I'm not going to look at Doug so he can't overrule me if I don't see him. Because I think I started ten minutes after, so I think he's not there if you don't... If Doug French makes a noise in the forest, no one's there. But in any case, on this gold thing, sometimes on the Internet you'll hear this type of argument that, Well, if you add up the value of all the gold in the world, it's X number of dollars, and look at the value of all the goods in the world, it's Y number of dollars, how could the gold possibly facilitate all these transactions? You get that sort of like third level kind of criticism, and that just totally misconceives the problem.

40:00I mean, just on the surface of it, for one thing, if gold were money again, it would be exchanging in every single market, hats for gold, cigarettes for gold, so its value would go way up. Secondly, it's not like we get one shot with all the stock of gold. We get to buy one thing with it, we get to use it once, and then that's it. You can use the gold again and again, right, and get many transactions out of it, and then so it actually can make possible many more transactions, but this is actually even beside the point. The gold is simply an intermediary. What we're actually doing in the economy is exchanging goods against goods, just like in barter, except with the intermediary of money. So gold is just in between. It doesn't matter how much the gold is worth now as a mere non-monetary commodity, that's totally irrelevant. Once it's used as money, you've got some supply of gold, and then you simply need some slice, some proportional slice of it to make possible this exchanging for that.

40:53That's what the gold does, and any supply would be able to do that. Depending on the supply of gold, you need more to facilitate a particular transaction, or you need less of it to facilitate it. And I will not address the supply of money needs to grow along with the increase in business activity argument because I think that's implied in what's gone before. There's no need to increase the supply of money. We can simply have the purchasing power of the money increase. That, okay, you get more and more goods being produced, supply of money is increasing not as fast. So that means the dollars people hold become worth more. This is not the end of the world. People might actually like this for a change. Now, let me leave you with a few statements here. This is from Mises writing in the 1953 edition of The Theory of Money and Credit in English.

41:38He writes, The eminence of the gold standard consists in the fact that it makes the determination of the monetary units purchasing power independent of the measures of governments. It rests from the hands of the economic czars their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse. What is needed, first of all, is to force the rulers to spend only what, by virtue of duly promulgated laws, they have collected as taxes. Whether governments should borrow from the public at all, and if so, to what extent, are questions that are irrelevant to the treatment of monetary problems. The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully, that is 100% covered, by deposits paid in by the public.

42:31No back door must be left open where inflation can slip in. No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves. One of the goals of the reform suggested is to explode and to kill forever There is a superstitious belief that governments and banks have the power to make the nation or individual citizens richer out of nothing and without making anybody poorer. The short-sighted observer sees only the things the government has accomplished by spending newly created money. He does not see the things the non-performance of which provided the means for the government's success.

43:18He fails to realize that inflation does not create additional goods but merely shifts wealth and income from some groups of people to others. Joseph Schumpeter, one of the great economists of the 20th century, writes as follows,

43:57is convinced of the validity of all that has ever been urged against it on economic grounds, and so on. Now this is the heart of it. Now I realize there are people who say we should forget this and focus on what's more practical, what's more immediately doable, but money is the foundational issue. The Federal Reserve system is a central planning agency that is given the task of manipulating the money supply in such a way as to maximize employment and minimize price inflation. This is the rankest superstition. But it's worse than that. The destruction of a free monetary system and its replacement by monopoly fiat paper is the great enabler of the leviathan that grows more voracious and destructive every day. The state is not the indispensable support of our monetary system. It is an interloper. It gives us discoordination and chaos.

44:46It enriches a favored few at the expense of the many. It is morally and economically indefensible. This is not a side issue we can safely neglect, that we might focus instead on matters that might be considered more fashionable, more politically viable. In fact, on the politically viable point, F. A. Hayek said,

45:22as politically possible. We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realization. They must be men who are willing to stick to principles and to fight for their full realization, however remote. And those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this had rapidly become politically impossible as a result of changes in a public opinion which they have done nothing to guide. This fight can be won. Public opinion is shifting for the first time in decades. And so I urge you to join the Mises Institute today. Become a member. Use these cards on your tables. Become a member before you leave.

46:09Make a donation. Help us. Because together we can strike down the falsehoods, the fallacies. We can kill the monster. and we can restore to America and the world the indispensable foundations of lasting prosperity. Thank you very much.