The Dollar: Where's It Headed?

0:00Well, there's one answer, at least if we're looking at it from the long run, regarding what the future of the dollar is. It's simply downward. It's continually downward. If you think that in 1914, a basic middle-class car, automobile, the Model T, was $350, and a men's suit, a good suit, cost you $20. You can see how far downward the dollar has gone. Today, a Ford Taurus is much, much more than $350. It's at least $15,000, which means that the purchasing power of the dollar, at least in terms of autos, has lost 98% of its value. And in terms of men's suits, around 6%. It's lost about 94% of its value.

0:49So, I'll anticipate my conclusion regarding the long run future of the dollar, unless things change radically. Okay, and we'll talk about the prospects for radical change. But I also want to focus on the short run future of the dollar. In fact, if we look at the news that has been coming out, the recent financial news, We're seeing signs that we're really on the precipice of a deep and possibly prolonged recession. Most commentators, most pundits have missed this because they don't properly define the inflationary process. Only the Austrian School of Economics really has a theory of the correct, or a correct theory of what inflation is.

1:38Inflation is not simply a general rise in prices as almost all college professors teach in their introductory college courses. It's much more than that. The fact that prices have not been rising very greatly or very rapidly, consumer prices from 1991 through 1995 has misled many economists, as we'll see, into thinking that the U.S. economy is going to continue growing, without incident. Yes, growth has slowed down somewhat, but we will not have a recession. But now we see the unemployment rate creeping up, we see the U.S. economy having experienced a contraction in the number of jobs created in the previous month, 200,000 jobs lost, and we see the Fed showing the slightest signs of panic now, cutting the discount rate and cutting the Fed's fund rate, certainly not enough, however, to stave off the coming recession.

2:38which means to me that given that Alan Greenspan comes up for reappointment in March as a chairman of the Federal Reserve System and like you and I he wants to keep his job even though he's a lifelong Republican serving a radically liberal democratic president he still wants to keep that job. It means to me that we may face an attempt to greatly inflate the US economy in the short run. Those are the signs. Now what I want to do then is to focus first on inflation. I want to tell you some unvarnished truths about inflation that really only the Austrian School of Economics continually proclaims.

3:26Even the monetarists make grave errors about what inflation is and what the consequences of inflation are. And I want to explode some myths, some entrenched in popular myths that are perpetrated by again leading economists and finally I want to point out that I want to give you a little bit of details of why I think that we're headed for a recession and how a lack of economic knowledge has caused people, has caused economists and forecasters and economic journalists to miss the signs of the coming recession Let me just start with some basic truths about inflation. In fact, what I want to do is to tell you what you should know about inflation, which Austrian economists have done again and again.

4:16There's a great little book by Henry Hazlett called What You Should Know About Inflation, which is then republished as The Inflation Crisis and How to Resolve It. Also, these lessons can be learned in a number of books that are being sold here right now. I highly recommend Murray Rothbard's What Has Government Done to Our Money? and for a solution to inflation, there's the case of the 100% gold dollar which is being sold. These are very important works. They're easily understandable to the educated layman who is vitally interested in these questions. So I recommend them. First of all, let me point out the first truth about inflation that everyone should know but unfortunately doesn't. that inflation is caused by, or more correctly, is an increase in the supply of money.

5:05The price of money, like the price of any other good, changes when its supply increases. We know that when we had this explosion of high-tech products coming onto the market, that is, the increases in the amounts of personal computers and hand calculators, prices fell precipitously, despite the fact that the large companies that sold these goods would have liked to keep the prices up but yet hand calculators fell from in 1970 $350 to $10 and $5 today and the price of personal computers have come down from $20,000 to $2,000 and less well the same thing is true of money, the law of supply and demand applies to money the less scarce or the more abundant money is made, the lower its price Only in this case, remember the price of money is its purchasing power, what it can purchase on the market.

6:02So that, for example, when the price of hand calculators came down from $350 to $10, the price of a dollar increased. In 1970, a dollar could only buy one 350th of a hand calculator. Now it can buy one 10th of a hand calculator. So as prices fall, the value of money goes up. And of course, the obverse is true. As prices go up, the value of the dollar depreciates. Or to put it another way, a fall in the price of money is manifested in a rise in all other prices. Okay, keep that in mind. Now, of all the schools of economic thought, the Austrian School has been the most unflinching in its recognition of this truth. In fact, really the first one to adequately explain how inflation comes about and how it percolates through the economy was Ludwig von Mises in his book in 1912.

6:58He demonstrated irrefutably that every increase in supply of money brings about inflation. And in fact, he used this to actually stop, to arrest the Austrian inflation. It was a great Austrian inflation after World War I. And Mises went to the Austrian government, was asked by them as a leading monetary theorist to come up with a solution. Okay, now there's a story about this, which I want to read you, and which I think brings home Mises' insight into the quantity of money as the sole cause of inflation. It's not OPEC sheiks that cause inflation, it is not greedy unions that cause inflation, it is not temporary shortages in harvests, none of those things bring about inflation.

7:52So you said that they raise prices of those particular goods, oil, food and so on, with the same quantity of money in the economy, you would find other prices falling. So in general, prices wouldn't rise when the price of one particular good goes up. It would simply mean that consumers have to reallocate their spending, more money to buying oil and less money to buying McDonald's hamburgers. Well, Mises knew all of this. In 1920, Ludwig von Mises, the world-renowned economist, was called upon by the frantic government officials to give his remedy for the ever-worsening Austrian inflation. He agreed to meet with them on one condition, that it was to be at midnight on a certain street corner in Vienna. Although government officials were baffled by his request, They nevertheless agreed.

8:38When they met, it was quiet except for the continuous noise of machinery in an adjacent building. When officials asked von Mises how to solve their foremost economic problem, he simply pointed to the noisy building and said, first and foremost, you must stop that noise. The building was, of course, the government printing plant. And the sound was the printing of money 24 hours a day. Well, I don't know if that story is true or not, but I've heard it quite enough, and it is something that I think Mises would say. But in any case, it gets my point across. Nothing but increases in the quantity of money cause inflation. The most notorious instant of inflation is hyperinflation.

9:24If inflation is not caught in time, it hides off into hyperinflation, in which people's expectations of prices going up the next day or the next hour causes them to spend money even faster. So we get a tiger by the tail. In other words, we get a vicious cycle in which expectations of inflation, which is fueled by the government printing new money, brings about an even greater inflation. Now, this occurred in Weimar, Germany. Let me just give you an idea. In 1913, to compare the price level in 1913 and 1923, at the end of this hyperinflation, prices had risen one trillion times. So if you had bought a house for $100,000 today, if it's something like that, in two years, it would be $100 trillion, or actually more than that, $100,000 trillion.

10:19And of course, we hear many of the stories, but they're true. People were bringing wheelbarrows full of German marks to market to purchase things like a pound of butter. Women brought their laundry baskets full of these notes. And there were two cumbersome to carry around the store, so they left them out in the front. And robbers would run by, dump all the currency out, and take the laundry basket. It was worth more than all this. Mises calls this the flight into real values. Engineers quit their jobs in factories so they could become taxi drivers and waiters because taxi drivers and waiters got paid every half hour whenever they served a customer. So they would run at, because prices at the end were rising by hundreds of percent per hour. Prices were tripling, quadrupling per hour.

11:05Workers began to demand to be paid once a week, every day, then two and three times a day. Their loved ones, their fiancés, their wives, would wait outside the factory gates, and they would give them their check, and they would rush out and spend the money. In the end, prices became infinitely high, which means that a person wouldn't sell you one egg, for example. A farmer wouldn't sell one egg to a city dweller, no matter how much currency he offered the farmer. Now, how did the government react to this? Typically, stupidly. The government inflation had set off, the printing of money had set off the inflation, which in turn generated these inflationary expectations, people expecting prices to go up. So on that expectation, they were spending money even more quickly.

11:53And what happened was that now prices began to rise faster than the increase in the money supply because of people's reactions. And there was not enough currency because sellers were raising prices to anticipate tomorrow's prices, Tomorrow's Demands, there wasn't enough currency today. So how did the German government solve this? Well, it took over all 2,000 printing plans in Germany and it took over all stocks of paper and it began to print day and night. That part of the story about Mises certainly was true, certainly true in Germany. But at the end, they couldn't keep up. So what they began to do was simply to recall the notes they had issued from the banks. So if you had a 1,000 mark note, and I have one here and I'll pass it around, They simply stamped over it one million marks, which is one billion.

12:41They were just stamping. They traded denominations overnight just by stamping them. I'll pass that around at the end. This occurs in the modern world. For example, in Serbia, the way the Serbian government is financing its support of the Serbs in Bosnia is through inflation, and it's suffering also from an embargo. So, it turns out that the inflation rate has been, for a period last year, 10% daily. Price is rising 10% every day, which translates to an annual rate of inflation in the quadrillions. It now costs to buy a candy bar, a Snickers bar in Serbia, what it costs two years before to buy an automobile. So, it's as if in two years, then, we'd be paying $20,000 for a Baby Ruth bar.

13:31So, inflation is dangerous. It's a tiger held by the tail, very precariously. The tiger can break loose at any time and consume the economy. Fortunately, there was gold circulating in Germany, there were dollars circulating in Germany. So, what Mises called, Hans, correct my German, the Katastrophenhausen, which is the crack-up boom, did not occur in Germany, but it would occur in the United States. There are not alternative currencies circulating. We would be thrust back into the border. To avoid that, we have to avoid increasing the money supply. It's as simple as that. Now, let me say something else about another truth, another homey truth about inflation that most economists understand, but they try to soft-pedal.

14:19And that is, our very banking transactions under our modern banking system are inherently inflationary. That is, fractional reserve banking is inherently inflationary. There's no other way to put that. There's no appeal from that. There's no way to say, well, if it's competitive, that's really not the case, they'll adjust the quantity of money correctly. Incorrect, wrong. Fractional reserve banking is inflationary. So that if you were to put $10,000 worth of currency into a checking account today, In a few days' time, that would be multiplied into a multiple expansion of the money supply. Your bank is only legally obligated to keep 10% of your deposit in its vaults.

15:07Actually, it keeps it with the Federal Reserve Bank in its district, as a reserve, but they can lend out 90% of the currency so deposited, which means then that you have a $10,000 checking account that you can draw on up to $10,000, Yet someone else, a borrower, now has 9,000 new dollars that have been loaned out. Now, when that money is spent by the borrower, it's redeposited in another bank. So once again, 90% can be loaned out. So you have the creation of another $8,100. Now, if you took this to its limit, this can be multiplied. Every dollar that you deposit in your checking account can be multiplied approximately 10 times in today's economy. So that $10,000 would result in a few weeks' time in a $100,000 increase in our money supply. Well, actually, a $100,000 increase in checking account money.

15:54You'd have to subtract the $10,000 of currency from that that you originally deposited. Okay. So that's very important to keep in mind. That's the second... Oh, and let me just mention also that in mid-January, total checkable deposits in our banking system were $733 billion. Okay. Now, how much money was backing that up? In actual reserves, $100 billion. So in other words, think about it, if everyone decided, which they are legally permitted to do, to withdraw their currency from their demand deposits, and by the way, this tends to happen during Christmas, and the Fed scrambles to add more reserves, only out of the 733 billion, people would only be able to receive 100 billion, and the whole banking system would collapse.

16:43When I was at Boston College as an undergraduate in the heyday of the student revolution, The new left up in Boston, there was an underground newspaper and they put out a call for all students, there were 250,000 students in Boston, all college students, to go to the bank the coming Friday, these new leftists, some of them were economists, they were new left economists, and to take out all your money from your demand deposits. That would have put the Boston banks in deep trouble, okay? Had it been a call by a libertarian, I may have gone, but since it was a left When you're calling for it, I would have liked to pull my money up, but I didn't. And not many people did, and there was no problem. But that is the result of the very nature of fractional reserve banking.

17:29OK, thirdly, it's important to realize that an increase of the money supply does not bring about an increase in wealth or human welfare, OK? In other words, it doesn't add one more item of consumer goods that directly satisfies our wants. Nor does it add any more capital goods by printing up this new money. In fact, all it does is to bring about a reduction in the purchasing power of money, is to raise prices. So in other words, if we have this dollar and I were to tear it up, there would be no destruction of wealth in our economy. None at all. No one is any worse off. Is anyone any worse off? I am worse off in my wealth position.

18:17Luke promised to reimburse me later for this. However, note what's happened. I now can make less demand on goods and services in the economy. Their number hasn't changed. In effect, this is the essence of the inflationary process or deflation. Wealth has been redistributed, not destroyed, redistributed away from me, who now has less currency toward you. There's a slight, slight, slight tendency towards a fall in prices, because of the subtraction of that dollar for more money supply. I think it was worth the rise, the one dollar. Anyway, now, it doesn't make it any more difficult to exchange goods and services.

19:06Nothing bad happened to the economy as a result of that. I just perpetrated a monetary deflation in our economy. I'll come back to that point. Let me bring up another important point about inflation. This is one of my pet peeves. You continually read in the financial press and also you hear statements by Alan Greenspan that we have to cool the economy off. We have too much economic activity. There's too much economic growth. We're in jeopardy of bringing about a precipitating inflation. We can't grow at 3%. We can only, we have to cool it down at 2%. That's nonsense and it's evil. It's evil because it's saying that scarcity is better for human beings. Okay? That's evil for human beings. We want more economic growth.

19:55Okay? We don't want to, in other words, people's preferences are such, of course, that they want to save more for the future and bring about economic growth. There's no reason why that economic growth cannot occur on a free market. In fact, it's really the other way around. economic growth, because it leads to greater output of goods and services, brings about falling prices not the other way around, okay, brings about falling prices we see that in the computer, in the high-tech industries, they've grown phenomenally since the mid-70s, since the microchip revolution and yet prices have fallen, okay, prices of personal computers have fallen from $20,000 to $2,000 I don't see any computer firms. I see a growth in the number of computer firms.

20:40Now, individual firms have gone out of business, but the more efficient firms have expanded, and new firms have come in. So, falling prices, and I'll get to that, actually, that's my next point. Falling prices does not hinder economic growth, nor does economic growth cause inflation. Economic growth brings about, as it did in the 19th century when we were on the gold standard, a gently falling price level. We've had growth in hand calculators, prices have fallen. When ballpoint pens were first introduced in 1946, their price was $18, $19, they were first sold at Gimbals. Within two years' time, we had hundreds of ballpoint pen companies and the price was 39 cents. I don't see an inflation of the prices of ballpoint pens occurring because of the growth in the industry, that's ridiculous.

21:27The economy is made up of individual industries. So if it doesn't happen in one industry, it ain't going to happen throughout the economy, okay? Okay, economic growth also, as I said, does not require an expansion of the money supply. In fact, each dollar becomes more powerful as prices fall, okay? As the price of ballpoint pens fell from, let's say, $20 down to 39 cents, those additional ballpoint pens were easily sold because each dollar could buy more ballpoint pens. The same thing is true with computers. and Computers. Each dollar has a greater value in terms of computers. So, as we would say in Austrian economics, that as prices fall, the real quantity of money in our economy goes up. Not the number of physical dollars, but the amount that each dollar can purchase. So if we have 5% growth, if there's 5% more goods and services in our economy, we don't have to worry that, well, how are we going to buy this extra 5% of goods and services without extra dollars?

22:27In fact, the market will cause prices to fall, as they have, as I said, with hand calculations and so on, by about 5%. So each dollar will be worth 5% more. Hence, the entire money supply will be worth, in real terms, 5% more. We'll be able to afford those new goods, those additional goods and services. Nor does deflation or falling prices lead to recession or unemployment. In fact, falling prices result from falling costs. As technology improves, as we get a greater investment in capital goods, which makes labor productivity greater, as it allows permits workers to produce more, in fact, what happens is that costs fall.

23:15And as costs fall, there's more competition, because there's greater profits, and that's what eventually pushes down prices. In fact, in the computer industry and other industries, Costs have fallen faster than prices have fallen. That's why those industries have expanded. So falling prices did not discourage entrepreneurs from investing in that industry. They are interested in the profit margin. The profit margin is simply the gap between the price and the cost of production. If costs fell, fall faster than prices. That gap actually is enlarged and you get more competition. In fact, the greatest rate of growth in the American economy in terms of real goods and services occurred in the 1880s. We were growing it between 4% and 5% per year. Now, we're happy if we grow 3% per year.

24:04And anything over that, everyone starts to worry that we're going to have inflation, so we have to dampen growth. But we grew at 5% per year, and prices fell 1% to 2% per year in the 1880s. You don't need rising prices to have growth. Nor is there a trade-off between inflation and unemployment. The so-called Phillips curve, named after the economist that came up with this alleged trade-off that he supposedly found in history, is one of the most pernicious errors in modern economics. As long as wages and salaries are set at the level at which supply equals demand, there There is and can be no involuntary unemployment in any economy.

24:52Recently Ken Griffey Jr., a star baseball player in Seattle, received $8.5 million per year. He wasn't unemployed at that price because his services were expected to generate at least that additional amount of money for the Seattle Mariners, his team. However at some point, regardless of how great a star he is, if he asked for $11 or $12 or $13 million per year, and that exceeded what the owners expected to get in revenue additions from having him on the team, then he would have been unemployed. There's always a right price. Everybody is employable at some price. Now, it's true that it might be that price is extremely low. Some teenage dropouts may have what we call a marginal revenue product of $1.50 an hour.

25:41That is, they only produce goods and services worth about $1.50 on the market per hour. But in that case, then, if they were permitted to ask for $1.50, which are not under minimum wage laws, they would not be unemployed. Or even on a world level, take Hong Kong. Hong Kong is a barren rock, has no natural resources, its labor force is unskilled compared to the U.S. labor force, it's not very productive. And yet, everyone there is fully employed. The reason? Their products are competitively priced on world markets, and so is their labor force. The reason why American workers, for example, in the steel industry or the auto industry may be unemployed is not because of a lack of effective demand or aggregate demand, which means a lack of printing up new money, it's not because of that, it's because their wages which are above levels that reflect their productivity, okay?

26:39Moreover, if you inflate, you may very well drive down unemployment for a little while. You do that by fooling the workers. Even Keynes knew this. Keynes himself, in the general theory, revealed that you increase employment when you increase the money supply by driving up the prices of products. So initially the prices of goods and services go up. Yet wages don't change at first, so profits are higher for firms, so they rush in and hire more workers. So yes, it's true you can reduce unemployment caused by minimum wages and so on by secretly or surreptitiously reducing the real wages of workers, eroding the purchasing power of their dollars. But when workers catch on, of course, they demand an increase in wage rates by withholding their labor, and eventually the unemployment then reappears.

27:31Now, I think one of the most important lessons that I can teach here is that inflation is not merely a general increase in prices, okay? It's very important to keep in mind. When this definition is used, it really obscures the outlines of the inflationary process. Okay, in other words, when the money supply is increased, when the number of dollars in circulation is increased, and I'll give you some idea of how great this increase has been since we've had the Fed established, when those number of dollars is increased, it causes many other things besides an increase in prices.

28:18In fact, many economists talk as if when inflation occurs, all prices go up by the same proportion. So, if the government increases the money supply in a given year by 10%, many economists, including, for example, Milton Friedman and the monitors, would hold that, well, eventually, in the long run, after a year or two, six months to 18 months, all prices will rise by approximately 10%, the same rate of increase as the increase in the money supply. In fact, that's incorrect, and not only is it incorrect, but it really obfuscates what's going on, who's benefiting and who's losing from inflation. Murray Rothbard used to talk about the angel Gabriel model of inflation. That is that if we all went to sleep and woke up the next day and found that our money, let's say our currency and our wallets, and the money in our checking accounts had been doubled miraculously by an angel.

29:14But an angel ignorant of economics, hoping to benefit the human race, this angel doubles everybody's money supply. Now, we would all rush out and spend that new money. We'd have extra money, right? As if we won the lottery. A lot of it would be spent on consumer goods, but there's no more consumer goods in the economy, so all prices would rise, roughly proportionally. Now, that's a good way to teach students that, in fact, an increase in the money supply does not benefit society, but we have to go deeper than that. In fact, new money is not dropped from helicopters, as Milton Friedman's example would lead us to believe, or brought by an angel. Okay, in fact, it's injected into certain segments of the economy. If, for example, the U.S. government wants to purchase new missile guidance systems from Silicon Valley, and let's assume they don't want to raise taxes, they want to pay for it by printing up new money.

30:12Once that new money is spent, now some people in the economy have the new money, others don't. I don't have it sitting in New York at Pace University, my office. So my wages, my salary is not going to go up for a long period of time. The people who get the new money, the stockholders in the firms that sell to the government and the highly skilled workers that work in those firms, will have some of the new money and they'll go out and spend it. And they may spend it on luxury automobiles, the stockholders, and on beer, in the case of the workers. Now suddenly the price of beer and luxury automobiles go up, and people in Detroit and Milwaukee have the new money. Now I'm paying more money for beer and for automobiles, Yet, my salary hasn't increased, so there begins a process of a depreciation or reduction of the purchasing power of my wages.

30:59Money or real income is being transferred from me and others in that situation to the people who have gotten the new money first. And of course, the people in Detroit, workers in breweries, in Milwaukee and auto workers now begin to spend that new money and drive up other prices. The prices of trips to Disney World and the prices of McDonald's hamburgers and so on. So prices go up step-by-step and as the other side of that process, the real wages of the people who have not gotten that new money initially go down. Now ultimately, most people get that new money. Eventually, people will buy financial services from New York City. They'll increase their purchase of financial services maybe a year down the road, in which case people in financial firms will get paid more and they'll go into MBA programs. I teach an MBA program at Pace University.

31:47And the tuition will go up at Pace. And maybe two years down the road, my salary will finally go up. But in those two years, during which prices throughout the economy have increased and my wage rate or salary is not kept up, real wealth has been redistributed from me to others in the economy. And you have to pity, of course, the people on fixed incomes. People living on pensions, insurance payments, and so on. These people never get that new money, which means that they take permanent cuts in their real incomes. So, what happens is that the people, these people who might spend money on oatmeal and Florida vacations, we find that their demands relatively for those things don't go up as much. So the prices of oatmeal and Florida vacations, or Florida condos if they buy condos to retire in Florida, of Florida, those prices may go up very little or not at all, whereas other prices go up by a great deal, luxury automobiles and so on.

32:41So the first lesson is that prices do not increase proportionally. The other point we want to make very quickly is that the way this new money is injected into the economy in today's world is through the fractional reserve banking system. The government, in effect, creates new reserves out of thin air. In 1971, or actually 1990, reserves in our banking system were $75 billion. That was the amount of reserves. Just a few days ago, the reserves were up to $100 billion. The government injected, over the course of the last five years, $25 billion new dollars into the banking system.

33:28Now remember, when that's loaned out, that's multiplied about tenfold. So it brought about, in the last five years, a massive increase of the money supply, but in doing so, in relentlessly injecting that new money day after day, up until 1993, we'll talk about what has happened in the last two years, it pushed down interest rates. Now what did that do? That caused businesses to borrow more, so they could buy more capital goods. Some of these other effects of inflation we begin to see, a drop in interest rates, a run-up in the stock market, which is caused by lower interest rates. If corporate earnings don't change, in fact, corporate earnings are going up because there's more money being spent on capital goods. On the one hand, on the other hand, they're discounting those earnings at a lower interest rate. So we see a stock market boom come about as a result of inflation.

34:14Also a real estate boom, as prices of industrial and commercial real estate go up. Also, at least up until 1995, as the U.S. dollar loses its purchasing power because of this inflation, in domestic terms, we begin to get a fall in the exchange rate. The U.S. dollar loses value on the foreign exchange markets. So all of these effects occur and are ignored when we define inflation as simply a rise in consumer prices. Now, it's this misdefinition of inflation that has misled economists on three different occasions, misled them seriously into denying that the U.S. economy would experience a recession.

35:06It occurred in the 1920s. In the 1920s, even though the economy, or even though the Fed increased the money supply at a fairly rapid rate, and if you look at Murray's book, America's Great Depression, which I recommend, he sets that rate at about 7% per year, consumer prices didn't go up. The CPI didn't go up. In fact, prices fell slightly from 1921 to 1928. So most economists, most American economists, led by Irving Fisher, who is Milton Friedman's mentor, claimed that the era of perpetual prosperity was at hand. Our economy was growing tremendously and yet prices were level. There was no inflation. So we would never have another depression. The U.S. economy was depression-proof.

35:53Now, Austrian economists, led by Friedrich Hayek and also including von Mises, looked around and said, wait a minute. The Federal Reserve is rapidly increasing the money supply. Regardless of whether or not consumer prices are going up and they had not been because of the tremendous increases in technology and productivity in the 20s. Whether or not those prices are going up, the same effects are occurring on interest rates. Interest rates are being pushed down, they're being distorted. On investment, we had an investment boom in the late 1920s, we had a real estate boom in the late 1920s. As a result, we had a massive distortion of the structure of production. Our entrepreneurs were fooled by the low interest rate into producing too many capital goods and not enough consumer goods. When the inflation stopped in 1928, we quickly got the Great Depression hitting us in October of 29.

36:43And that was predicted by Austrian economists who take a much fuller and richer view of what the inflationary process is. Inflation distorted relative prices, not just, didn't change overall prices. Now, why do I bring that up? Well, it's relevant to what's happening today. The so-called Reagan recovery, the Reagan prosperity of the 1980s, that seemed to be very great and to go on for a long period of time, at least from 1982 through 1987 when we had a stock market crash, but then it picked up again and went from 1988 to 1990. That was not done because of tax cuts. The tax cuts that the Reagan administration implemented in the early 80s were piddling tax cuts. They were tiny, and they were reversed, pretty much, by increases in social security taxes and so on.

37:35That was not what caused the seeming prosperity. What caused it was a massive increase in the money supply that occurred from 1982 until 1986 that was perpetrated by the Fed. A Fed that wanted to get President Reagan re-elected, that is, a Fed that wanted to give the incumbent president a monetary policy that would get him re-elected. And in fact, just to give you an idea of the dimensions of that inflation from an Austrian point of view, let me just point out that from 1983 through 86, the money supply increased by 17% per year. The Fed increased the money supply by hundreds of billions of dollars, printing up new money, in effect, out of thin air, okay?

38:25We also found that the interest rates were pushed down by the Fed. For example, the commercial paper rate was 8.75% on March 15, 1985. Two years later, it had fallen to 6.29% or about 2.5%. Corporate bonds fell from 12.6%. They fell by 4% down to 8%. That set off an investment boom. The prime rate was driven down from 10.5% to 8%. But economists missed all this, and so did the commentators, okay? Why? Because consumer prices rose very little during that time, by two or three percent per year. So everyone was telling us that, well, it looks like, again, we've banished recessions, okay? The economy is in for a soft landing.

39:14Now, once the economists begin talking like that, we are in for a major recession, okay? And they're starting to talk like that again. The stock market from 1982 to 1987 increased by 214 percent, tripled in value, the stock market. And the U.S. versus the yen, the U.S. dollar lost about 77 percent of its value against the yen, where the price of the yen went up by 77 percent. Okay, in any case, what happened, the Fed began to be frightened by what was occurring with the dollar losing its value in 1986. It slammed on the monetary breaks, it stopped increasing the money supply for a few months, And then by October, we had the stock market crash, okay? Interest rates shot up, price of capital goods fell, and we had the stock market crashing.

40:01Now, I want to toot my own horn here for a moment. I was the only one that I know that predicted this... Well, actually, after the crash then, the government was fearful that the whole financial system would collapse. So they began to inject new money into the economy again in 88 and 89. and that postponed the recession for a while. So then economists began to feel good again. They began to say, well, you know, generally when we have a recession, we have, generally when we have a stock market crash, we have a recession six months later. That hasn't happened. So the stock market crash was a speculative bubble or something. It really has no bearing on real economic activity. And that's when we began to get talk of a soft landing. Now, of course, we had a very deep and grinding recession in 1990 to 1991, it actually I think carried on longer, and it was responsible for Bush losing the election.

40:53But I had written an article in 1988 in which I went against the consensus, based on Austrian theory, let me just read you the conclusion of this, it appeared in the Baltimore Business Review, this is when everyone was denying that a recession was anywhere in sight, September of 1988, Based on Austrian cycle theory, my summary outlook for the US economy for the next year therefore includes accelerating price inflation, coinciding with rising interest rates and declining dollar during the first two or three quarters of 1989. While these trends of interest rates and exchange rates may be temporarily interrupted by well publicized and coordinated attempts by the US and foreign governments to support the dollar on currency markets, the Fed will be compelled to substantially tighten monetary policy before the end of the year.

41:44This will usher in a recession in late 1989 or early 1990, which should strike the U.S. economy with a particularly heavy impact on the thrift and banking industries, and we got that. Now, an Austrian economist would deny that you can predict the timing, and I hold to that. I still did. The key is that we know the broad trends, the theory allows us to predict that when there's been a massive increase in the money supply, there will in fact, at some point, which cannot be avoided, can be postponed but not avoided, at some point there will be a recession. and this is what's occurring now in the 1990s let me just give you some figures again to show we reveal to you the dimensions of the inflation that we've had to get us out of out of out of the recession and to save Bush's job we began to get an inflation in 1991 let me give you an idea of how much money was

42:49In the last quarter of 1990, or actually at the beginning of 1991, the money supply, as I would define it, and Murray Rothbard also has a true money supply, stood at about $2 trillion, just about $2 trillion. Three years later, it stood at $2 trillion 671 billion. In other words, in three years, the Fed created $674 billion new dollars. The increase in money supply by 33% or 11% per year, which is a very rapid rate. If you take a more conventional definition of the money supply, M1, the rate was 36% or 12% per year. The Fed, in this case, increased the money supply by approximately $300 billion.

43:36Okay, now what happened? Interest rates, at the end of 1990, the Fed funds rate was 8.25, by 1994, the first month, January, it was down to 3%. Short-term interest rates were pushed down precipitously. Commercial paper rates fell from almost 8% to 3.2%. So a boom was set off here. Now, it was not manifested in rising prices. One of the reasons is that Japan and Western Europe were still in recession. So the demand for commodities wasn't very great. So the consumer, the CPI rose only by 4% in 1991, 3% in 92, 3% in 93, and in the last two years by 2.9% or so. Which led economists to believe that the inflationary dragon had been slain by the Fed.

44:25But yet, we had an investment boom. Investment has been increasing from 91 through 95 by about 12% per year. and Dow Jones shot up in 92, 93, then it paused more or less in 94, didn't go up or down, and then it's begun to take off again, it's up 40% in the last year. I submit, however, that this is all now about to come to an end, I think the Fed realizes this, they think now that we're on the verge of a recession. Remember, the Fed does not want pressure from an incumbent president. If it doesn't give in and try to inflate us out of this impending recession, what you're going to find happening is that very bitter Democrats in Congress will begin threatening to take away the independence of the Fed.

45:19That's exactly what happened in 1992 when George Bush was on his way to defeat. The Republicans in the Congress went about saying things like, Well, Congress created the Fed, Congress can abolish the Fed or can change the act so that the Fed is more responsive to Congress. Plus, as I mentioned before, Alan Greenspan is coming up for re-election. So what I see then is more inflation. However, the inflation may be too little and too late and we may still get a recession in the election year, in which case Clinton would really be doomed, have been undertaken in the last five years to occur quickly, to get that out of the way. Certainly that leads to a healthier economy. It also, again, would lead, I think, to a better political regime.

46:05If Clinton lost as a result, or it helped him lose, that is the recession. One last point I want to make, and then I'll take some questions, and that is, one of the most nonsensical statements that is made in the press, in the financial press is that the Fed is an inflation fighter, okay? The Fed is the only institution legally permitted to create new money. The Fed is the cause of inflation. It doesn't fight inflation. That's ridiculous. In fact, if we just take a broad view, if we look at one of the conventional figures for the money supply, M1, We had $26 billion in our money supply, $26 billion in 1929, okay?

46:55At the end of 1995, M1 stood at $1,124 billion, okay? That's a massive, massive increase. Where did that money come from? If not from the Fed. Certainly it came from the Fed, okay? And that certainly has driven up prices from 1929 to today. Even since 1971, when President Nixon cut the last vestige of the gold standard, or removed the last vestige of the gold standard by closing the window, not allowing foreign governments and central banks to convert their dollars for gold. Since that point, the Fed has created 896 billion new dollars. The money supply has increased from that, from relatively recent past, 24 years ago, by 393 percent. In other words, it's quintupled. The money supply is quintupled in 24 years.

47:53Now compare that to the 19th century, to the gold standard. We had very slow increase in gold, and in fact, the increase in the output of goods and services outstripped the increase in gold, so that prices in 1896 were lower than prices in 1834, the year the United States were on the and the gold standard. By 1913, prices were just about what they were in 1834. And people called the period from 1896 to 1914, when the Fed was established, a great inflation. Now, you know why they did that? They called it that because we had an inflation rate of 13% over 18 years. Prices went up by less than 1% per year. And for people who were used to the gold standard, this was a massive inflation. Okay, now we have, in the US, certainly in the early 80s during the court administration, we had 16-17% per year, okay, never mind over 18 years.

48:46So now we're down to 3% per year, people are saying we've defeated inflation. Well, I guess I'll conclude by pointing out that really the only school of thought that consistently propounds the truth about inflation is the Austrian School, okay. And the Austrian School is very, very tied to the Mises Institute in that the Mises Institute gives Austrian scholars the wherewithal to pursue research into this important topic. We all of us face right now the specter of the comeback of Keynesian economics on the world level. Now, what they've been looking for since the early 1940s is a world money, a one world money. With a world money, there would be no barriers left against hyperinflation.

49:35So, what I would urge you to do is to begin to read the works of the Austrian School, spread the word among all your colleagues and friends, and...

49:52Well, I'm just going to go in there and take questions. Okay, you have to keep in mind that prices are determined both by the supply of and the demand for money. Occasionally the demand for money will go up. People want to hold more money. So even if there's new money coming into the economy, people will hold more maybe because of expectations about future falls and prices. Also, if the supply of goods and services increase, remember, when we talked about that, as they continually do in a free market economy, you're going to get new money coming into the economy, being met by increases of supplies of goods and services. So that's why you can't assume that because we don't see prices rising over any given period, there is no inflation. You must look at the money supply figures. Yes?

50:53Right, that's a good point. Yes.

51:08Right. Yeah. If I tried to get across any lesson, it's that inflation is a multi-dimensional process. We've had a massive inflation in the stock market in the last five years.

51:48In your book, that's the vast majority of monetary transactions today. We can comment on that. It's not the surrogate money that we're really dealing with, it's the modified money.

52:18and when the Fed creates new reserves, for example, let's say your bank wants a loan, for whatever reason, let's say your bank wants to go to the Fed and ask for a $50 million loan. Well, they get the loan and they lend that $50 million out and then that can be multiplied 10 times. Now, where does the loan come from? All the Fed does is go into the computer, find the T-account for your particular bank and just type in plus $50 million and then it calls up your bank at the end of the day and says you can now loan out $50 million more. That's the way it's done. Also, by the way, 70% of U.S. currency by some accounts is not in the United States. It's financing underground economy transactions including drug transactions throughout the world. Yes?

53:07If you pay your bank loan back, then the bank has those reserves to loan out to someone else. So unless the Fed destroys those reserves, and they can do that, and they do that too. They can just take it out of the computer. Then your bank has to call in loans, and the whole money supply decreases. Now that's been happening in the last two years. I didn't mention, I meant to mention it, that money supplies actually decreased slightly in the last two years.

53:52So that's why I think the prospects for recession fairly soon are good. Yes? What about the money market fund? Does that possibly multiply with that money?

54:29Mutual Funds. All it is, if you write out a check on a money market fund, it's simply like writing a note to your broker, telling him to sell certain stock and send the check to you or someone else that you name in the note. That's what the Money Market Mutual Fund does. In order to pay you back, they have to sell some of the certificates of deposit, some of the commercial paper that they own, and when you write out a check, you're just telling them to take the proceeds of that sale and send it to someone else. So they're good guys. They're not fractional reserve banks. In fact, I've argued that on a totally free market, fractional reserve banking would collapse, and you get these types of institutions as ways that people can have quick access to their money, yet still earn interest. But if we have some sort of stack inflationary recession, and I had $100,000, you know, see, that's tough. Inflation, you know, if it's rapid enough, you might want to hedge by going into gold.

55:36But an inflationary recession, maybe consumer goods companies, they don't do terribly in recessions, like Sears and Kmart and so on. They do all right during a recession compared to Bethlehem Steel. So you want to stay away, in a recession, you want to stay away from the capital goods industries. You want to stay away from mining stocks, you want to stay away from steel and so on. I mean, I wouldn't pick particular companies, but absolutely, yeah, it's tough. You see, with inflation, you get two things going at once. Yeah, but then you have to be careful. I mean, yeah, the Swiss franc is probably a harder currency now than the U.S. dollar. Yeah, yeah.

56:23Any more? Or that's it? Okay, thank you. Thank you very much.