Money, Banking and the Current Mess

0:00This talk will be going to cool it down a little bit, Norma. Yeah, thanks. Good idea. Hopefully you're not too cold out there. If anybody gets too cold, I'm going to have you come up and give a speech. That will warm you up right away. But this will be a tad more focused. I'm going to talk about money. I know the title was Money, Banking and the Current Mass. But I don't think I'll get beyond money today, and certainly won't get to the current mess. But when we talk about money, the first thing we need to talk about is how money originated, and money did not originate by order of the state.

0:45Eventually you're going to go to college and you're going to learn that that's what happened, but that is not the case. Money originated in the free market, and it originates in barter. Goods are produced by those that are good at it, and those who are good at producing a particular good, they will have surplus of these goods. When they have surplus of these goods, they will trade those goods for other goods that they don't, that they don't produce, they'll trade with someone who is good at producing those goods. I always like to use the log man and the egg lady when I'm talking about this, and if you were the log man and you had a grove of trees and you would have extra firewood, and down the road there would be a lady with extra, she has chickens, and the chickens are laying eggs, and certainly more eggs than she can eat.

1:47So, there's the immediate potential for these two folks to trade. The egg lady is going to need to get rid of some eggs, and she's going to need some firewood to keep her warm. The log man is going to have extra logs, and he's going to need something to eat, so he's going to want to trade logs for eggs. And eventually there would be some sort of exchange would happen. You might have an egg equal to a medium-sized log. So the egg lady would trade one egg for a medium-sized log, but, you know, those terms of exchange could change depending on supply factors of logs or supply factors of chickens.

2:39Let's say some of the chickens died, and if some of the chickens died, the egg lady would She would have fewer eggs to trade with, and so she would need to use a certain number of those eggs to eat, so she'd be less likely to trade eggs, and she would demand maybe two logs for each one of the eggs that she wanted to trade for. Conversely, if there was a fire and the log man's trees burned down, he'd probably want maybe two logs for every egg. So you can see how these exchange rates would change, even in barter. Now the main problem with barter immediately comes up and that is what's called the double coincidence of wants.

3:32If you're bartering with somebody, you need to, number one, find someone who wants what you have, right? And they have to want what you have, and that's the double coincidence of wants. So if you're the log man and you have to find somebody who has eggs, if that's what you want, and also the egg lady has to want logs and that's pretty tough to do you can see that an economy that's driven by barter or uses a barter system it limits trade tremendously second problem with barter is indivisibility I mean you can You can cut logs in little pieces and trade with those logs, but eggs don't divide very well.

4:26Try to cut an egg in half and it doesn't work necessarily very well. So, indivisibility is a problem. The other problem is business calculation. Now, if you've got a grove of trees and you sell logs, but you trade logs for any number of things, How can you determine whether you're having a profit or whether you're having a loss? It's impossible if you're trading for eggs or shoes or any number of different things that you may be trading for. So these are the problems with barter and thus the need for a medium of exchange.

5:14And that's what develops when you have a good that trades not just for its usefulness, an egg for what you would eat, but maybe an egg that you may want to trade for. And that's what becomes money, is this medium exchange. and actually this is explained very well by mr. Jeffrey Tucker who you will hear from later in a piece recently wrote for I guess he wrote it a long time ago but we continue to reprint it over and over and over again Halloween and its candy economy so I don't know if I don't know if you guys still trick-or-treat a couple If you do trick-or-treat, you know how it works. You go from door to door, you have a big bag, and you're kind of at the whim of the mean folks at each stop in terms of what they're going to give you.

6:29And at the end of the night you end up with a big bag of various candy and other things that these people give you. I know in my day we hated to get like apples and anything healthy like that. It's just that Halloween is not for health, it's for chocolate and gooey stuff and things like that, but occasionally you get the mean old lady down the street who insists on giving you an apple and of course then you start hearing about razor blades and apples and crazy stuff like that, but anyway in Jeff's piece he talks about how a medium of exchange appears in candy on Halloween night. He has a big family and he lives in a very prosperous neighborhood here in Auburn. So the kids all came over to his house and they dump out their bags of candy. There's trading, right? You've got so many reeses and you've got so many Money Snickers and you got some popcorn balls and you got some blow pops and you got all

7:47this stuff and people started trading because you don't like all this stuff. And there's these various transactions going on but eventually what happens is that one of the candies becomes the medium of exchange. It's the candy that kids would trade for because they knew, not that they wanted to eat it or to consume it, but they knew that they could trade it for something else. And in this case, it turned out to be the micro-sized Three Musketeers bar. And that's because everybody knew what it was.

8:32It was small in bite size, and it worked very well for this exchange. And so you can see how this would happen. Over time, kids would think beyond just consuming their candy. They started trading for these bite-size three musketeers, and they even started hoarding and saving them, thinking that they would make a better deal as the night went on, and ultimately the three musketeers served to facilitate other exchanges. So it's a very good piece to read, and something that you can see very quickly in how a money develops, a medium of exchange develops even in Halloween candy.

9:29And at the end of the night, everybody was happier. That's the key to the story. Some kids had less, some kids had more, but through this medium of exchange, they were able to make trades that made them better off and everybody was happier than they were when they just showed up with this big bag of candy that some of it they liked and some of it they didn't like, et cetera. Now, you can see that money is, it's a huge leap forward in the history of civilization. If we were all bartering, we couldn't trade for, you wouldn't be able to trade your time and talent for money and then go buy what you want. You would, again, you'd be trapped by this double coincidence of wants.

10:18So money has has served to to really civilize the world and businesses are now able to calculate whether they're making money or whether they're losing money. All goods can be priced in money or the commodity that is in money. Now, a number of things have been money over the years. Salt, sugar, cattle, iron hoes, tea, calorie shells, and even, in a very famous case, cigarettes in prison camps have developed as money. And in fact, I think cigarettes are probably still used as money in prisons. So what kind of goods are picked as money? Well, it's a commodity that number one is generally marketable, which means it has to have a high non-monetary demand. Just in the case of the Three Musketeers bar, it was good not only as a medium of exchange, but it was Money should be generally marketable.

11:32Number two, it should be divisible. Those are the problems with our egg problem that we had earlier. It's hard to divide up an egg unless you scramble it. Chopping up eggs doesn't work very well, so you need goods that are divisible. You need to have a high value per unit weight, that means it's portable. So in the past, cattle have been money, but cattle are pretty hard to carry around with you, so they don't make particularly good money, so a high value per unit weight is important. Fairly stable value, money should retain its value over time.

12:21Number five, it should be durable. Again, that's a problem with tea, possibly with the cigarettes I've mentioned. Some of the other things that have been money in the past is that they're not necessarily terribly durable. Number six, recognizable. Everybody should recognize the value of what money will be. Certainly in the case at the Tucker residence On Halloween, everyone recognized that three Musketeers bars were a good that everybody recognized the value of. And they should be homogeneous.

13:07That's the other problem with the candy is that there's various types of candy. And so a money should be the same when we talked about the logs. Not all logs are congregated equal. And so the perfect money, monies that will truly last throughout history, will be homogenous. They'll be roughly the same. And as you might expect, over time, two commodities have been dominant to compete as money. That is gold and silver, and gold used to be money, if you can see that, hopefully.

13:57That is an 1895, $20 gold piece. And that's what used to be, that's what used to be money, here in the United States. And for good reason, gold has always been highly priced for its luster and for its ornamental value, don't pay any attention to this white that's around it, it's in plastic, it's gonna stay in plastic, it's also not gonna get passed around, so don't ask me to do that, stay right up here. Come to me individually, no problem. So, gold and silver have always served this role as money. It's relatively scarce, has a high value per unit weight. It's very portable.

14:57It's divisible and in fact we just had a conference last weekend in Newport Beach and we were talking about gold and how divisible it is. We were talking about if anybody's familiar with the Golden Dome at Notre Dame and that is actually in gold flake, done that in gold flake and the question was how much gold did it take to cover the Golden Dome at Notre Dame? It's less than half an ounce of gold. And gold can be spread very thin and thus is very highly divisible. It's also highly durable. Again, that's a coin from 1895. Occasionally you will hear stories of shipwrecks at the bottom of the sea.

15:47They'll pull gold up and it has the same luster that it had when the coins were newly minted. So, what should be the supply of money? I mean, we get this question all the time. If you watch any of the financial news, they'll ask about money supply, what should the money supply be? We never talk about that in terms of other things like biscuits or shoes. Nobody ever sits around and goes, oh my gosh, how many biscuits should we have? How many shoes should we have? We let the market determine that, right? But somehow now it's thought that somehow the government should determine how much money we should have. But the difference between other goods and money, the difference between biscuits and money are that we're all better off if there are more biscuits.

16:42More biscuits are better than less biscuits. But having more money as opposed to less money, we're not any better off. In fact, if we doubled the amount of money overnight, none of us would be any better off, because goods and services haven't changed. It makes our lives worth living and the things that we use every day are the labor and capital and goods and the amount of money doesn't really play into that. So it's, if society is better off with goods and services, but not necessarily with more money, if the amount of money was doubled overnight, prices would just go up.

17:33Prices would roughly double. It wouldn't double overnight, some stuff, some goods and services would go up quicker than others, but society as a whole would not be better off with more money. So the market's perfectly capable of deciding what its own money supply should be but unfortunately the government has gotten involved in this over centuries and centuries and which leads us to the discussion of counterfeiting now when you counterfeit gold is very hard to counterfeit when you hold an ounce of gold you immediately know by weight what it is it's very easy to determine gold and whether it's really gold or something else but if you were to counterfeit try to counterfeit gold you actually are You're harming everyone. You're harming everyone who all the other legitimate money holders are harmed when you create money out of nowhere.

18:47And of course, as you can imagine, counterfeiters benefit first. If you can't make money, if you were able to create gold and be able to pass it off as gold, gold, say you made it out of brass or something else, you would benefit by being able to use that as money, trade it for goods and services at the expense of all other money holders. And if you want to guarantee a spot in jail, counterfeit, get into the counterfeiting business because the government is the counterfeiter and they do not like competition. So, like I say, if you absolutely positively want to go to prison, get into the counterfeiting business.

19:40Now, counterfeiting took a big leap forward when government got in the money business, or the paper money business, and that's what this is. This is what passes for 20 bucks today. Today, again, I go back to 1895. It was this. Now that's 20 bucks. Is that right there? And government is able to insist that people trade with that money, with that paper money, through legal tender laws. In other words, in the United States, you couldn't decide that this red, blue and black pen are legal tender. You couldn't trade for those. You You can create contracts. You can't create a contract in gold, per se. The government prohibits that. The United States government insists that you take poor old Andy Jackson there as legal tender. Now originally, governments went to pay for money, but it was backed by So you might have had the $20 bills circulating, but at least there was gold backing them up.

20:58Eventually over time, that goes away. The last bit of tying of gold to paper was in 71 and Richard Nixon undid that last tie. and he said we're all Keynesians now and at that point government then is is not constricted by the supply of gold can create all the paper that it wants and as my old teacher Murray Rothbard used to say the government at that point is now in seventh heaven they can they can create all the paper they want to pay for what they want to pay for, various government programs, you know, health care, it's being talked about, wars in various places around the globe, etc., etc., and then gold is derided as a barbaric relic, you know, people who have gold are viewed with suspicion, and the and the fact that I have some of the yellow metal makes me immediately suspect with some people.

22:11And so paper money is the hip thing to have and that's what everybody trades with. Now just a bit about the demand for money, you know we've talked a little bit about the supply of money. When you have the demand for money, you know, goods and services are increasing every year. So if you had the supply of money was relatively static, then the price of those goods and services would fall. And in fact, prices did fall from mid-18th century until roughly about 1940, unless there was the war years. Prices did fall.

22:57So instead of this continual price increases that we've had in recent years, especially since 1971, prices would fall because as more and more goods and services are produced, the amount of money was held somewhat the same or static, then prices of goods and services would fall. But of course that hasn't been the case. The money supply since 1980 has grown, I believe, by 460% and thus we have a lot of money floating around. Eventually the government, when they print money and they need money, it used to be that when they needed to inflate gold coins, they would just shave a little bit off of them and they would take the shavings and bundle them up and make new coins and pay for their programs. That was back in the ancient times. Of course, with the printing press, it's very easy. You can just put bigger numbers on them. And this is a 10,000 denar note from the Bank of Iraq. I picked this I looked this up this morning. I was down at my friendly Bank of Iraq branch here in Auburn.

24:26It's amazing what people give you on the road these days. I had a guy trying to buy me lunch one day with this. Anyway, you can see there's a very handsome guy on there. He still has his head in that picture. I looked up the initial, now 10,000 dinars sounds like a lot, right? I looked up the official on the internet exchange and that's worth about eight bucks, U.S. today. But as governments need to pay for more and more of their programs, they just add zeroes and they add zeroes and they add zeroes.

25:11And then ultimately what happens is what's happened in, I mean you want to see a big note, yeah, this is a hundred trillion dollars, yeah, a hundred trillion dollars, Reserve Bank of Zimbabwe. Now imagine you saved your entire life, and you worked hard, and you put money away, and you saved up a hundred trillion, and you thought, you know, I've got a comfortable retirement because I've got a hundred trillion. Well, online yesterday, this is worth about the amount of a happy meal down the street at McDonald's.

26:03I actually think it's probably worth less than that in U.S. dollars, but just to show you that I'm not poor, I've actually got two of them. But this is what can happen when government gets a hold of the printing press, they want to create money out of nowhere to pay for their misdeeds. So this has happened numerous times, not just in Zimbabwe, various countries in South America and of course the famous Weimar Germany in 1923 and in fact of course hyperinflations Prices don't happen all at once, they happen in stages.

27:03And Ludwig von Mises explained that initially in phase one prices, they don't rise as much as the money supply because the public still has deflationary expectations. Your expectations of prices are really based on your most recent past. So right now you don't think prices are going up. If you've got money, you wouldn't necessarily immediately run out and spend it. In phase two, instead of rising demand for money, moderating price increases, falling demand for money will intensify price inflation. And what falling demand for money will mean is that as soon as people get money, they have no demand to hold that money.

27:48They're going to turn around and spend it on anything as quickly as they can. And of course in phase three, as Mises explained, prices go up faster than money supply. There's a shortage of money and money's disappearing and in the German hyperinflation, workers were paid twice a day and housewives would stand at the gate with a wheelbarrow and their husband would run out to the gate and throw the money they had been paid into the wheelbarrow. The wives would go to the store and they would buy anything. anything they could get their hands on and of course ultimately this collapses there's no goods to buy that's the situation in Zimbabwe Zimbabwe used to be a very prosperous country used to be the breadbasket of Africa and through printing money they've essentially just completely destroyed that economy but in the case of the German German mark in 1914 one mark equaled 25 cents or a By October of 23, it took 25.3 billion marks for a dollar, and a month later it took 4.2 trillion marks to equal a dollar.

29:09So you can see how quickly this happens in a hyperinflation. Certainly not predicting that as I stand here today, but just to give you an idea of what can happen. as we go from what the market considers money going from barter to gold and silver but when it turns into paper it can be something that is very deadly so with that since I put you in a good mood it's time for a break so you have 15 minutes and then it's back for mr. Jeffrey Tucker Thank you very much.