The Truly Unintended Effects of the Fed

0:00I guess I'll start off with this title, and it's actually pretty good. The Truly Unintended Effects of the FET is what I'm going to talk about today. And Jeff came up with this based on, you know, I told him that I'd done a paper in this area. And this is pretty close, originally when I saw it I thought this was pretty good, but it occurred to me later sort of talking with a few people that in order to talk about the What are the truly unintended effects of the Fed? You sort of have to identify what the truly intended effects of the Fed are. And the key word there is truly, okay, and what the effects are and who intended them and so forth. So that's maybe not such an easy thing to do.

0:46So I'll talk about what some people's intentions are and I'll talk about one specific intention of the Fed, which is smoothing interest rates, and there are reasons for doing that supposedly that we'll get into, and what I'd like to do is talk about how interest rates smoothing can have consequential unintended effects. First a little bit of background information, just really quickly. Central Banking began began in, not the United States, but England in 1694, and actually the United States was the last major nation to have central banking, and that of course came with the adoption of the Federal Reserve system in very late 1913.

1:39The first paper money in the Western world appeared in the colonies, actually the colony of Massachusetts in 1690, actually right before the first central bank appeared in England, and printing was developed in China, so the first paper money in the world appeared in China around the mid-eighth century in China. So what does the Fed do? Well, one of the things the Fed does is it alters the money supply, or alters the amount In this book, The Case Against the Fed, Rothbard opens up with a little discussion on the money supply and what the optimal quantity of money is. I think we're all sort of versed in this area, but let me just read here something on that, just to catch us up if we're not.

2:38He says an increase in the supply of money cannot relieve the natural scarcity of consumer or capital goods. That stuff is still going to be present. All it does is to make the dollar or the franc or whatever money we're using cheaper. That is, it lowers whatever money we're using's purchasing power in terms of all other goods or services. So once a good has been established as a money on the market then, it exerts full power as a mechanism of exchange or an instrument of calculation. So all that an increase in the quantity of dollars or whatever money we're using does is dilute the effectiveness or the purchasing power of each dollar. So the great truth of monetary theory emerges and that is that once a commodity is in sufficient supply to be adopted as a money, no further increase in the supply of money is needed.

3:26Any quantity of money in society is optimal. Once a money is established, an increase in its supply confers no social benefit. Yet, we have a Federal Reserve system, and have had it for quite some time, that changes the supply of money, and is sort of hoping that this has some sort of effects, some ends that it tries to achieve by changing the supply of money. And this has led to debates in different schools of economics. The neoclassicals say that nominal changes in money supply have little or no effects in real variables. The Austrians would say that if it's not perfectly anticipated, nominal changes in the money supply can have real effects.

4:13So, changing money supply and interest rates can have real effects, and that's sort of the brunt of my talk. So, what is the role of the Fed then? What are the truly intended effects of the Fed? Well, that depends on who you ask. Rothbard would say, and does say, that the Central Bank has always had two major roles. The first of which is to help finance the government's deficit. And I don't know if it was by coincidence or not, but the Fed sort of popped up right in time to finance the government's war effort in World War I in the United States. The second role of the central bank is to cartelize the private commercial banks in the country, to get them all together, so as to help remove the two great market limits on their expansion of credit or on their propensity to counterfeit.

5:07And these are a possible loss of confidence leading to bank runs and the loss of reserves should any one bank expand its own credit. Now, let's talk for a little bit about bank runs. There were, before and after the Fed, there were a great many bank failures due to bank runs in the United States. And one of the rationales that is sort of developed in the literature, one of the reasons for this, is that there are seasonal fluctuations in the demand for credit. and this is sort of tied in with a highly agricultural economy and the reason for this farmers demand credit in seasonal patterns in high demand at certain times during the year and low demand at other times and this is based on the idea that they need credit to move their crops to market and to just run their farming operations and there's in the literature in this area on banking families and so forth. I think it's Myron finds that there's a positive relationship between the volatility of this demand for credit or the volatility of the interest rates and the number of banking panics.

6:33And the idea is the more seasonal the demand for credit by farmers, this introduces seasonality into the interest rates. And this is putting a lot of pressure on banks that are providing, sort of small banks that are providing credit for these farmers. And so this could lead to high volatility and that demand could lead to bank runs. And so from there, it seems reasonable that if we can somehow reduce the volatility of the interest rate, and we can reduce the volatility of the demands on banks and reduce bank runs or banking balance. And one way to do this, to take seasonality out of the interest rate, is to mess with the money supply.

7:24And that's what the Fed attempts to do. Now, this gets complicated pretty quickly because there are other things that could be causing these panics, tons of other things. And one of these, which I'll get to later, is this idea of branch banking. And in the United States it was prohibited, branch banking. So what we have is sort of a lot of smaller independent banks that are providing credit. So as compared to maybe a system in Canada where branch banking is permitted and what you end up with is a lot of larger, more sort of all-encompassing banks, banks that are providing credit not just in one state, I mean in Canada there's not states, but just to make an analogy to the United States, you know, sort of country-wide banks or whatever, larger banks, it seems to me that larger banks would be a lot, Let me talk about changing the interest rate with the money supply.

8:38The Fed comes in in late 1913 and starts smoothing interest rates by varying the money supply. And the idea here is an interest rate, let's talk in real simple terms here, if you can imagine the supply and demand for money in some market determining the equilibrium quantity and price of money, that price of money or the price of credit is the interest rate. The supply of money is determined by savers or lenders and the demand for money is determined by Borrowers, and so you've got your supply curve and demand curve and you get an equilibrium plus the interest rate. Well, what happens is when you artificially increase the supply of money, let's say to lower the interest rate, this drives the interest rate down, it shifts the supply curve out artificially, but artificially lowering the interest rate from its equilibrium level has two effects.

9:39First of all, it causes people to want to borrow more, okay, because it's now cheaper to do so. But on the other hand, it causes people to want to save less, because the return to savings has now gone down. And so this is sort of the Austrian theory of the business cycle in a nutshell, sort of a two-minute version. It drives a wedge between, it's just a price ceiling or driving a price fixing. It drives a wedge between savings and investment. So when you artificially lower the interest rate, it causes people to take on projects sort of more farther removed projects because it's now cheaper to do so, the price of borrowing money has gone down. But it also induces people to save less so that as these projects are coming into fruition, the money runs out and there's some sort of mad scramble for credit and then the thing collapses and this causes a business cycle.

10:35So, the literature then suggests that they find that indeed, after the Fed comes into existence, yeah, interest rates do become smoother, okay, and this is supposedly a good thing, and this is done by changes in the money supply, okay, and the cause and effect there is fine, and they find that the money supply becomes more seasonal, okay, to smooth the interest rates. But the thing is, you have to understand that that doesn't just take place inside a sealed coke can and everything else stays put. Changes in the money supply are having these real effects, or the Austrian theory of the business cycle would say, that changes in the money supply are having other real effects in the economy.

11:23So if it's okay to look at money supply and interest rates, and we've taken the seasonality out of interest rates, out of interest rates, put it into the money supply, and some people say that that has reduced the frequency of banking panics, I didn't mean to slap Rothbard there, some other people say that that has reduced the frequency of bank panics, but what has it done to other variables in the economy? And so I wrote this paper, I guess almost two years ago, studying that, we looked at Pre- and post-fed data on a number of other variables such as bank clearings in and outside of New York, business failures in terms of liabilities, business failures in terms of the number of business failures, interest rates, factory employment indexes, money supply Supply Variables, New Business Incorporations, Log of Industrial Production, Bank Failures, unfortunately I don't know if Dr. Wells has found the data yet, but we didn't have pre-fed data on bank failures, which would have been good. Other price indexes and I mentioned

12:42interest rates. So other variables, what's going on with them when we're taking seasonality out of interest rates and putting it into the money supply? Okay, are they becoming are becoming more seasonal. This would be the unintended effects of the Fed. And it turns out that they are. It turns out that these other variables are becoming more seasonal. You're introducing volatility into variables that sort of fell outside of the realm of these two little things that you're concentrating on. And that, then, sort of, the theory that smoothing interest rates is decreasing banking panics sort of falls by the wayside.

13:33Okay, it doesn't make a whole lot of sense to me anymore that smoothing interest rates is decreasing these bank panics. I mean, what else is this doing? Well, it's introducing seasonality, which can cause other real effects in the economy. So these are the unintended effects of the Fed. So let me get back for a second and talk about banking panics in the United States. These people in the literature suggest that banking panics in the United States are helped by after the Fed comes in. One of the roles of the Fed is to act as a lender of last resort to banks. Bank. So if banks go experience troubles or whatever, the Fed can loan them the money and everything's fine. And this will have some effect on people's expectations. People will be more confident in banks if they're backed by the Fed and so on and so forth.

14:32So that's all, that's fine and that's one interpretation. But another possible explanation for more, if you compare, there's some literature by or specifically a paper by Bordeaux, Rockoff and Reddish and what they do is they compare the United States banking system to the banking system in Canada and they try to identify, they seem to think that there is a trade-off between these, if you look at any given country between the stability of a country or the The Stability of a Country's Banking System and the Efficiency of a Country's Banking System. Okay, so let me explain that for a second.

15:18In Canada, branch banking is allowed, okay, and I've mentioned this a few minutes ago, and so what you tend to get are larger banks that are sort of more widely dispersed in terms of the areas that they're operating, branches, branching all over the place, whereas When that's prohibited, which it was in the United States, if branch banking is prohibited, you tend to have a lot of decentralized, smaller, local banks. And so, the Canadian system then, it would seem, would be more stable in terms of their ability to deal with, let's say, volatility in the demand for credit. And indeed it was. They've had far fewer bank failures. In fact, I think this paper said they've only had one major bank failure this century, just one.

16:08As compared to the United States, who's had quite a few, a lot around this time before the Fed came in, a lot around the Great Depression, not so many after that time, but then in the 1980s, we started to see this once again. So, if you allow branch banking, you get sort of a larger, more stable system, but then the apparent trade-off of that is that possibly if you've got, let's say, ten huge banks in your country instead of a thousand small banks, the opportunities for collusion between these banks are greater. Okay, it's sort of an oligopoly of banks in your country. Okay, so there might be an efficiency trade-off.

16:54Okay, we've got a better system in that it's more stable. It's more able to deal with volatility and the demand for credit. But on the other hand, we might be paying, it might be less efficient in terms of sort of the banks are charging monopoly rates on borrowing money and lending and so forth. And on all the services that they charge for. So that was sort of the theory up till this time when Bordeaux, Rakoff and Reddish write this paper and compare the two systems. And what they found was, interestingly, that yes indeed the Canadian system where they allowed branch banking, they found that yes indeed it was more stable than the American system. That was sort of the obvious part, but when they went back and tested efficiency, They found out that they are about both as efficient as each other.

17:47So that seems to suggest then, if you're trying to design some banking system for a country, this evidence suggests that a freer, in terms of being allowed to branch and do whatever, a freer system is better. It's going to give you increased stability, but it's not going to cost you efficiency. So then if stability was what the United States wanted at this time in the early 1900s, their answer was to come in and bring in the Federal Reserve system. Okay, and we're going to get stability by artificially adjusting interest rates, we're going to smooth them, and that's going to give us stability. Well, it hasn't. It has not done that. You have a Federal Reserve system that's come in, we saw banking panics shortly after the Federal Reserve came in, And a lot of that, and then the Great Depression, and that can, the Austrians say, be attributed to large expansionary policy throughout the 20s, which led to a huge collapse in the 30s.

18:51Okay, this system came in and people didn't know what the heck was going on. Okay, so, I mean, the more people don't know how, like, expanding the money supply is going to affect interest rates, the more they're going to be fooled by nominal changes. Okay, so this leads to a massive depression in the thirties, and then also you've got a bank coming in and acting as a lender of last resort to small banks, or just banks in general. Okay, if you get into trouble, we'll bail you out. Now, is that a good thing? Well, a lot of the problems in recent eighties with the savings and loan can be attributed to FDIC insurance, forcing insurance onto companies. Here, you have to have insurance, and here's what you're going to pay for it.

19:38And so, what does that do to the riskiness of the projects that you undertake? Well, obviously, it's going to change that, okay? If I force you to get insurance, it's going to lead you to undertake more risky projects. And so, it seems that, you know, we've got a system here at the beginning of the 1900s is in far back before that and we impose constraints on it so you can't take away some of the system's freedoms in terms of what banks can do like branching and so forth and this creates problems and the other way to solve it is to bring in this, make it more bureaucratic, centralize it even more, more government in terms of the Fed coming in in 1913.

20:24Well, if you compare that to Canada, all they had to do, it seems, was free it up. Okay, now this analysis is simple, obviously, but that's the conclusion that I've come to with this. Canada, you have increased stability as you increase freedom, and so you don't get that efficiency cost. And sort of an interesting note on just bank failures in general and sort of the lender of last resort role of the Fed, Do you really want an agency coming in, let's say, the Fed coming in and acting as a lender of last resort, a bailout mechanism for banks? Now, I mean, on the face of it, that seems to be a good thing that's going to save people money in the event of catastrophes and this and that.

21:13But if you view this as sort of a dynamic, how this is going to change businesses' incentives, I'm not sure that that's such a good thing at all. I mean, do we want, do we want some, how is a bank truly different than any other business, I guess is my question. Don't we want the bad businesses to fail? Isn't that part of the market process? Doesn't that give businesses incentives to take actions that will, you know, lead to them not failing to be better businesses, to produce quality products and services? You know, if the business is responsible, if the business has to cover all the costs of its actions, they're probably going to make better decisions as opposed to a situation in which they don't have to cover the costs of their actions.

22:02So, you know, I'm not so sure I agree with the whole lender of last resort purpose of the Fed and the First Bulls. And that's basically it. As promised, I've sort of shifted the average back into where it should be. Are there any questions? Well, maybe I missed it. When they were comparing stability versus efficiency, what was the efficiency? The efficiency... How are they measuring it? How are they discussing it? Efficiency is in terms of there's a loss in efficiency if the banks or whatever can oligopolistically get together and charge monopoly prices for their services.

22:53As opposed to a highly competitive banking system which would be more efficient just in terms of the way we think of allocative efficiency and productive efficiency of firms. So to measure that, they looked at the returns of these banks, they looked at financial balance sheet and income statement data for these banks, and looked at what kind of return these banks were making on their activities, and they found then that there was little difference between the returns or the efficiency of the banking system in Canada and the United States. And this also sort of, I think, goes well with what Austrians think about free markets and monopoly and stuff like that.

23:43So long as there's entry as possible, you shouldn't, even if there's two or three or four firms, in this case, I think Canada's got 11 really large banks. And so if there's 11 banks, yes, it's possible that they could cartelize or form some oligopoly How closely tied were the Canadian banks to the Bank of England? Until Canada became a separate country, I would have imagined that since the Bank of England was controlling the empire and all the banks in the empire, I would have...

24:38When did Canada become a separate country? I don't know. 1866. Yeah. I don't know when the Bank of Canada was set up. It was later. I think that was the last Western country that got a central bank, wasn't it? He said major. So there was a period of about 70 years when Canada didn't have a central bank and had branching. And England then did, but apparently they were, I mean they were free in the sense that they weren't tied, I guess that sort of implies that they weren't tied into England's banks.

25:23like member banks of England's central bank. When did Canada break away from the pound toward the dollar? Was that when, or to its own dollar, was that when it declared its independence? Because if they were using pounds still, then they would be tied to the bank of England's. Well, the Canadian dollar was way back into the 19th century, but it was on the gold standard. All of the gold standard countries are tied to the Bank of England in that sense. Yes? I'm going to allow national branch banking and the establishment of the Fed would require the several government overriding all the states.

26:09I mean, it's not that national branch banking is illegal. It would just be because of the federal setup. In your view, if national branch banking had been an act of Congress, I guess it might have been a difficult time getting away with it, but would there have been other negative effects in your view? of National Banking.

26:41Are you talking about branch banking with the Fed? If you had national branch banking, it would have required an act of the central government overriding all the state governments. Well, I actually don't know. I think, didn't the National Banking Act outlaw branch banking? Yes. Interest in branch banking? What it said was that no bank could change contrary to the laws of the state, even if it were a national bank. Yeah. But then, so the laws on banking varied from state to state, and some, as I understand it, some banks had much more leeway as far as like state branching.

27:28You know, that varied a great deal from state to state, to the extremes, you know, you could branch all over the state, some states and some other states you couldn't do it at all. And so, I don't know, I don't think that, I think branch banking, allowing it between states is a good idea for the stability reason. I think that, let's, I mean, some states are more agriculturally intensive than other states. It just seems to me that if you've got a bank that can span state borders, or let's say be national, it's just going to be a lot better insulated from state shocks, where shocks are defined as high volatility or some sort of seasonal volatility in the demand for credit.

28:15Okay, so, but then again you've got the problem of different states, you know, where did that bank start, how, you've got 50 or however many states at any given time, with different laws on banking, how are these states, how are they going to reconcile or deal with each other in terms of whose, you know, state laws they have to follow or not, which I guess sort of leads to your question, does it require some sort of national laws or back there on Banking. Yes. When you were saying, when you were talking about interest rate smoothing, you were referring to the agricultural cycle because there was these seasonality swings. The Fed or the Secretary of the Treasury before that, we tried to smooth the interest rates. And then, I'm not sure if I I don't know if you understood this correctly. Were you saying that because of this interest rate smoothing, that this caused seasonality in all these, in other industries not related to agriculture?

29:21Yes, yes, yes, and that's what the data shows. You take seasonality, you say you've got sort of natural seasonality in interest rates because of these agricultural cycles, the demand for credit by farmers or whatever. And that's a bad thing because you think that that's causing banking panic. So you say we want to smooth that out so that there's less stress on these banks. In doing so, you vary the money supply. You transfer seasonality from interest rates to the money supply. Then, you've got the Austrian theory of the business cycle. You've got, wait a minute, you change the money supply and you can start driving a wedge between savings and investment, so that's going to have real effects elsewhere.

30:09That's what happens. You take seasonality out of interest rate, put it in the money supply, but not just in the money supply. You put seasonality or introduce volatility into a whole lot of other areas. You'd also get that through changes or maybe be lack thereof of relative prices over savings and investment. Yeah. Because if you're a farmer, right, and here comes your crop, you're going to go out and start spending. And then if you're adjusting the money supply to do that, you're going to be affecting relative prices of what these farmers are supposedly spending their money on. That's true, but a lot of it has to do with anticipated and unanticipated changes in things, okay?

30:55Sort of natural seasonal variation in, let's say, interest rates. It seems to me that year after year that would have been anticipated. Okay, whereas, and expectations then sort of leads me to believe that anticipated changes have less or no effects, as opposed to unanticipated changes. When you start messing with the money supply, that's going to introduce seasonality into a whole lot of other things, and I think that these are unanticipated. Okay, I mean the Austrian theory, the business cycle, if everybody knows exactly what's going on here that the interest rates being artificially lowered and it's totally anticipated, then that should have no real effect. It's totally anticipated.

31:41Still have the business cycle. Well, why then? They would know that supply shifting out was a nominal increase in the money supply. Well, because money is not neutral, and if you're injecting at one point in the economy, you're going to have changes in relative prices. And it's these changes in relative prices that reorganize the structure of production. It's not a question of whether or not people anticipate it. If you have the new money in your hand and you go to buy something, that person's not going to say, oh, I know what kind of money that is, I'm going to adjust my prices for it. They're not going to do that. Okay, well then the effects would be, I think, greater or more detrimental if what's being changed is unanticipated.

32:37I think the main point though, even the branch banking may be a red herring, in the sense that The national banking laws were written such that the banks couldn't issue currency against generalized assets, right? They had to buy T-bills and government securities. Yeah, particular securities that were eligible for this use. So the supply of currency was very inelastic and therefore that's why you get the seasonality and the interest rates, In the young currencies, people can't switch as they would want, deposits and currencies.

33:42Detectable whatsoever, but there is in the U.S. And so they issued a national, and they had 21 major and minor panics, banking panics, between 1890 and 1910. And there was some dispute over whether some of these were really minor panics or not. And they were all either in the spring or in the fall, okay, during the crop moving season. And so they issued The National Monetary Commission, they get together, they come before Congress in 1910, and they say, well, here's the problem, you know, we need a Federal Reserve, we need to learn our last result. Well, all they had to do was essentially change two laws in the National Committee. And avoid the Great Depression and the 2021 recession.

34:28That's presuming that the real goal was to use more stability. That gets back to the first question, what's intended and what's not. The Federal Reserve act applied a remedy at the wrong point. Right. Which is typical, I guess, of government policies. Create a problem and then create a bigger problem and fix it. The point is that the government wanted a permanent market for its bonds. They wanted a purchaser to always be the bank accountant. Right. The banks wanted to be cartelized. So I think Dr. Wells and John are still at odds on end point, and that's his question over seasonality. Now it appears to me that you're saying that you'd rather have Do you have some form of the money supply adjust to the seasonality of the agricultural products?

35:38Well, as you're reading Rothbard quotes right at the beginning, you're saying, let's just take the money supply at a certain fixed amount and let relative prices adjust. Regardless of what the solution is, I think there's a fundamental theory question that still hasn't been resolved. What's the fundamental theory question that needs to be resolved? Is this agricultural CDI a problem? Is it something that we should worry about in the first place? This is referring to the increased demand for cash, it's a different thing, you don't have to expand the money supply to meet an increased demand for cash.

36:27If you're trying to get me an argument about 100% reserves, I'm not going to fight. No, it just seems as though that you have a concern over the real fluctuations of seasonality of agricultural goods that can cause problems in the rest of the economy if it's not adjusted for the money supply. Well, what I'm trying to say is, the seasonality in interest rates, and these banking pacts, are vagaries of the way the laws were written. Under different situations, you may still get seasonality interest rates, but they might not be as pronounced, and you might not get these banking pacts that are artificially induced by the fact that banks are scrambling for liquidity and the only way they can issue further currency is by knocking it up the Sam's door and buying U.S. government assets. Under different situations such as Canada had, you don't have that problem.

37:39Was there a lender of last resort from Canada for high-confinition? No, there was not. Except to the extent that the banks tended to play off one another. What do you, I mean, should there be a lender of last resort for banks? I mean, I was sort of wondering about this. I don't think there should be for businesses. I don't think for any other, but money is sort of different than, you know, other things, right? So I don't know if I've made up my mind on this. It seems like, you know, you shouldn't guarantee Do you see, or have guaranteed bailouts for other businesses? What do you all think about for banks? It certainly changes banks' incentives.

38:35I still don't understand why, and I hope that you can clear this up for me, why is it that simply branch banking reduces the risk of problems of seasonality? Is it because with branch banking you're just a larger bank and have more dollars or whatever to be able to cope with it? Or is it rather a question of just successfully anticipating these changes and get your house in order? I think it's more the former than the latter. Just because you're big you can handle these fluctuations?

39:23Yeah, you can handle, if you have a national bank, you are better equipped to handle even unanticipated, I mean you will anticipate agricultural shifts in the demand for cash. You've got to catch on sometime, right? But even unexpected shocks in the demand for money, you are better equipped to deal with those in these agricultural states if you are nationwide and big seems to be just a more stable failure or drought in some region then you're better able to take care of it if you're not if your banking is not confined to that same right so you're assuming that the agricultural fluctuations are not homogeneous in the country that's right that's right Well, even, I mean, still, you've got a bigger bank, more assets that you can be able to drop off.

40:18And the more diversified across regions and industries, the less susceptible it's going to be. And even other shocks, too. I mean, I can't imagine, you mentioned, like, droughts or whatever. That's agricultural in nature, but other shocks, disasters or whatever. and it's still you know it's you still got a you've got a upward pressure on interest rates in during Christmas now I mean we're not a primarily agricultural society but Christmas and the spring season because of Easter and things like that you know you've got seasonal fluctuations and the Fed still pumps in money every fourth quarter and takes it out every first quarter still I mean you You look at the monetary base, and the fourth quarter levels monetary base are significantly above the other three with the first quarter being a trough.

41:20And even now that would have real effects. Yeah, I mean, yeah, no question about it. Well, depending upon what model you're in. Yeah. The effects are difficult to draw out, but definitely there's still, G&P is very seasonal. It's difficult to say what's driving what, simply the fourth quarter boom and consumption because of Christmas, the gift card buying season, would be enough to push up. Those effects are probably less in 1997 than they would have been in 1925. People have sort of caught on to what's going on. I mean, one of the, or at least to some degree, I think one of the explanations for why the Great Depression was so great was you had ten years of people sort of not knowing what was going on with expansionary monetary costs.

42:18You know, one thing that's intriguing about your talk is that the question of price stability just never seems to enter into the rationale of the Fed at all. Right? Well, the price of money. The interest rates, the price? Price levels.

42:37When did that become an institutional goal of the Fed to stabilize prices? I don't think it is. are you talking about like constant stable inflation yeah there's been a lot of people who've been advocating yeah yeah president of Cleveland's that has been rallying for that since the 80s yes it's the goal but it's the goal it's the goal of right it's the goal of stable there's a core of the governor's Is the goal a stable price level though, or is it a stable increase in the price level? They always say that if you look at the little things that happen...

43:23Stable inflationary enough to move M and K together. That's what they're saying. But was there not a wide understanding at that time that there's a connection between the price level and the amount of money in the economy? I don't know. All the propaganda, they always talked about the Fed making possible an elastic money supply, meaning it would contract as well as expand. The idea of constant expansion was entirely foreign, even though that's what they wanted. The purpose of this elastic monetary money supply was to stabilize the seasonality of interest rates. Not to somehow put a damper on the increase of overall prices. Yeah, and I don't think they realized the powers they had, at least Freeman Swartz made this point.

44:11They don't realize the powers. They didn't realize what the tools they had until the Great Depression. But even then, there was kind of all sorts of crazy schemes during the Great Depression. Everything but money schemes, right, to try to get prices shaped up. The Fed contracted the money supply by what, was it a third in the Great Depression, right, in the beginning? Well, it was calling in loans. The base didn't fall, though. No, that's because of the demand for currency circulation, you know, so much. But, yeah, they... Yep. Another interesting thing, though, worldwide you saw a change in interest rates, whenever the Fed got into seasonal behavior of interest rates. Even if you look at Bank of England discount rates, and Bank of France discount rates, and the Rice Bank's discount rates, all those were very seasonal before the Fed was introduced and became much less seasonal afterwards, which is somewhat curious.

45:12Why is that good? What, smooth industry? What's the demonstration then actually getting rid of seasonality? It's just transferring it, I don't know. I'm not saying it's... I don't think it is, into many that probably do. Did you get that? I don't think we got bogey.

45:43Should we call it a day there? Thanks a lot, John.