Bitcoins, Greenbacks, and the Fed

0:00With me today is a very special guest, Mark Thornton from the Ludwig von Mises Institute, and I believe, Mark, first, welcome to the podcast, I'm pleased to have you on board. Well thank you very much, it's a pleasure to be here with you. Are you still the book review editor over at Quarterly Journal of Austrian Economics? I sure am, I've been the book review editor for the Quarterly Journal of Austrian Economics for about 10 years and the journal basically publishes all the leading edge economics related to the Austrian school and I was marveling at it in reviewing the last year's production of the journal is that we had such a fabulously high number of articles relating to and extending and improving the Austrian theory, the business cycle which has really got everybody's attention and I thought to myself we could cherry pick some of those articles and make a fine, fine book that not just academics would want to read but business people and people who are

1:09concerned with financial people or just people interested in investing their own money and they want to understand why does the stock market go up so high and then why does it crash and then we get the whole thing over again and so there's some really good stuff Profile Investment Services, Inc., Ltd., or Israel National News.

1:56and the largest economic web pages in the world and the center of and the heart of the Austrian School. And I might add to that too, you know, a lot of the books that I talk about here on the podcast are actually available as PDFs or other style downloads at the Mises Institute. It's just in economics or the economic end of the liberty discussion. Yeah, if you go to the site and you see a book that you're interested in, what I do is I do a search for the title plus PDF and up pops the PDF and I can examine it, look at the table of contents, things of that nature, get a feel for whether or not the book might be valuable for me at this time and if it is, you can either just read off the PDF or Profile Investment Services, Ltd., or Israel National News.

3:19The paperbacks are usually less than $20 or less, so it's very reasonable, it's almost not worth reading off of the computer screen because it's just so inexpensive and we have hundreds of these books and in our bookstore we have hundreds and hundreds of books as well as t-shirts and coffee cups and all that kind of paraphernalia type stuff. Now I wanted to ask you today, and I've had a lot of people giving me questions as well, but I wanted to ask you about bitcoins today because that's a buzz that's sweeping the internet. It's now gone over, or the last I checked, it was over $100 per bitcoin. And there's a lot of confusion about bitcoins.

4:07How do Austrians consider bitcoins? What are your thoughts on Bitcoin? is also considered economic web pages, has pushed us down to like 24, 25. So you know something is going completely viral in terms of Bitcoin and the price of bitcoins.

4:55I remember the first time I looked at it, it was like 35 cents and now last time I checked, it was over $100. So there's a huge bubble in the Bitcoin market and it's a bubble of interest and it's a bubble

6:08and so people are trying to get some diversification of their monetary holdings and bitcoins seem to really just answer every all the problems and so you know it's really taken off there they're now starting to install ATMs where if you don't want to produce bitcoins yourself you can just go to an ATM that's coming real soon and put in your cash and You use your electronic wallet, smartphone or whatever, and you're given the bitcoins electronically as a result. And then you can turn around and electronically use those bitcoins to give them to other people or to make purchases, things of that nature.

6:58So it's really taken it off. And in 2013, it's made a huge splash, Not necessarily because of what it is. I don't think it would have been taking off quite as much and getting all this attention had it not been for the reality, the real physical world out there, which is in a slow motion, crumbling collapse, basically. And we don't know how far that's going to go, but we know it has longer to run and the consequences of banking systems melting down across Europe makes people want to have an alternative way to feed themselves and to put gasoline in the car and things of that nature so what we expect is that governments are going to try to suppress this in some form or fashion and that more and more people are going to start offering their goods for sale using bitcoins.

8:00I would also think that there's a lot of critics of bitcoins because it doesn't have the proper backing that we'd like to see with a hard currency and that kind of thing, but I kind of look at it as maybe it's not perfect, maybe in a totally free market where there was no government influence at all on the money system, maybe bitcoins wouldn't work at all. But for now, since its competition is things like the Euro and the Dollar, I hate to use this phrase because it disgusts me so bad, but could Bitcoins just simply be the lesser of evils in choices right now? Well, you know, I wouldn't call it evil. I think it's very well intentioned and I think it's very well designed.

8:49You can't eliminate the possibility that this thing could crash and crumble, that governments

9:54The early users found the computations that they had to solve were fairly easy and they were fairly quick and they resulted in coins that weren't really worth that much. Now it's getting harder and harder to solve those computations and basically the system itself through a random adjustment process makes the computations more and more difficult to solve so that more resources have to go into it. It also accounts for the fact that computational power becomes easier over time so those algorithms get more difficult to solve over time and so the supply of bitcoins is going to slow down over time and it will eventually max out at 21 million bitcoins.

10:44So these are real resources unlike fiat money. These are scarce coins or money, unlike fiat money, which can be reproduced virtually in an unlimited way. Now there was an inventor of this system, but there's no central player in Bitcoin. It's all open source software and everybody theoretically could be involved in this. But there's no central player like with a central bank that can rig the system and make to make it go in a certain direction to the negative impact of certain people, the positive impact of other people, and all coins have specific owners, property owners, which is a nice aspect of it because we think in the Austrian School that money should be property that has what some people refer to as intrinsic value but it just means real tangible value

12:17of course it's not that difficult to counterfeit gold itself, I mean we've heard stories in history where people have made counterfeit silver bars and gold bars by taking base metals and covering them with silver or gold coating so that all seems to line up much better with the gold standard relative to fiat money. By and large, I think that Bitcoin has better properties certainly than fiat money. When you look at the actual physical production of Bitcoins, it's competitive because anybody can get into it.

13:03Indeed, there are people all over the globe who are producing Bitcoins or trying to produce Bitcoins. As I mentioned earlier, it takes up capital, computers, it takes up labor to do that. It takes time, which production processes typically involve. There's uncertainty of whether or not you're going to be able to produce bitcoins. And as I mentioned earlier, at least in a historical sense, there's decreasing returns from resources. So it has a lot of things in common with the real physical world out there. Is it possible, and this is not my realm of expertise, so that's why I'm throwing it at you, is it possible that a better definition of what's happening with Bitcoin now, rather than calling it a bubble, could it be considered sort of a deflation as the value of the money, Well, I don't want to call Bitcoin a bubble, because it's really unlike what we typically refer to as bubbles, and it's one money set in terms of another, but you're right.

14:29A lot of the demand for bitcoins is the result of a decrease in the demand for paper fiat currencies and so the value of bitcoins is going up which means in relationship to goods and services there is a dramatic deflation. Now if you were one of the persons who were producing bitcoins in 2009 and 2010 in its Profile Investment Services and Inc. www.profile-financial.com and so that you know that's it's a price deflation effect for Bitcoin owners relative to the goods and services that are exchangeable in terms of bitcoins which I understand you know there's not a lot of vendors and and retailers who are who are accepting bitcoins but there's enough that you can basically Profile Investment Services, Ltd., or Israel National News.

16:26The Medium of Exchange, that's its purpose but I think, you know, so far it's been a novelty item, it's been a, you know, it starts out with its demanders who sort of oppose government money and oppose the banking system on ideological grounds but it's, you know, it's continuing to, the interest in it continues to expand outward which is a necessary condition for it to have characteristics of money. I think also something that may become a factor in it. You know, a few years ago, the only thing PayPal was good for, and I realize it's apples to oranges here in comparison to the two, I'm only making the comparison because they're computer related, but a few years ago the only thing PayPal was any good for was buying things from eBay. And now I have a PayPal card in my wallet and I can actually go up to a gas station, swipe that PayPal Paypal Card, fill up my gas tank, go to the hardware store, buy nails at the hardware

17:28store, swipe my PayPal card and come back home and do my banking to clear out the accounts or whatever. And that didn't take a lot of time to leap from one spot to the other, to go from eBay only to being able to literally get a McDonald's hamburger with my PayPal. So I kind of tend to think that unless governments really bring the hammer down fast, I think bitcoins will probably make that leap as well. Well, you know, and that's how money originated too. I mean, money didn't, you know, just immediately appear and everybody started using it. It was introduced by individuals who realized that particular goods were particularly useful to hold and then to resell and then the expectations were that more and more people were going to be willing to accept this good in exchange for other goods.

18:31That process took a very, very long time, in fact thousands of years and that silver coins and copper coins were only used in the most advanced places on the planet. Real money took a very long time to become throughout the entire world economy and these new financial innovations, the ones that succeed are taking place at a faster and faster pace. Bitcoin is going to need the attention that it's grabbing right now to become a more widely

19:40But they're looking pretty good right now. Yeah, definitely. Just a note to my listeners, I had planned on having an interview with a person who actually works in a business that sells, buys and sells bitcoins and gold and silver and that person, I was going to use the interview today with Mark Thornton to sort of have, you know, two, not really two different sides of the coin but having one guy who is explaining the Bitcoin whole process from a salesman's point of view and then have Mark Thornton on as the as the calm economist to keep us keep us from from going head over heels over this. Unfortunately I haven't had the other the other guy's been busy and I haven't got his interview yet so any of you listeners who had a whole list of I had a whole List of Questions for that guy. If you're listening today and you're saying, hey, Ben's not asking my question, hang in there. We'll get the Bitcoin guy on. But while I've got Mark Thornton on, I want to take advantage of his expertise in several different fields. Mark, we were just talking about goods and services and prices. So as you mentioned to me during the break, there's still one thing left to happen with bitcoins that we're looking for.

21:35really are, at this point, would be considered a means of payment or a form of money, but it's not money in the sense that they're generally accepted means of transactions. And so it's more of a store of value and a means of payment, but it's not a full-blown and Money because we don't go to stores, either hard stores or internet stores and find goods priced in money. That's something that's just trickling in at this point in time. So it's not a full-blown money, but the most important takeaway is that it's certainly not as dangerous as fiat money with central banking.

22:25There's something in comparing bitcoins to fiat, there's sort of a buzzword that's being rebirthed again on the internet, and that's the greenbackers. A lot of people are wanting to get rid of the Federal Reserve, which that's a good idea, but there are other people that are taking advantage of the frenzy to get rid of the of the Federal Reserve, and they're calling on Congress to begin issuing money directly from the Treasury as, like those of us who know about this process, derogatorily call it a Greenbacker dollar in reference to Lincoln's use of it. And you're kind of an expert on the Civil War era, or I hate to use that word even, Lincoln's War of Aggression.

23:17You're kind of an expert on how the economy worked during that time. I want to throw a couple of facts out for my audience, and then just let you talk about what Greenbacker dollars did during the Civil War, or so-called Civil War. We're going in the time frame from 1861 to 1865. The war started in April 1861. By July, essentially, the government was broke, and Mark, at any point in here where I say So if I say something wrong, be sure and correct me on this, because this is not my area of expertise. So in July, just a couple months after the war starts, the government issued $50 million, that's my rough guesstimate, is about $4 billion in today's money going by the value of gold.

24:06By December the same year, the Lincoln's government was essentially, they basically defaulted on their promise to pay that $50,000 in notes that they had issued. And then the following February, they issued another $150 million, and they started for the first time issuing $500,000 bills because of the inflation problem that they created. By March of 1863, they had to issue another $450 million greenback dollars, and for the first time they had to start issuing ones and two dollar bills because gold and silver was being driven out of the market nobody wanted to let go of their gold and silver because of the inflation that was taking place with the greenback dollars so now mark correct me on any of that information that I said was wrong and explain to the to the listeners why this folly did what it did and what Well, simply put, the Union government's war effort to invade and to reduce the Confederacy in the South was a very expensive process.

25:21The Union army, at any particular time, averaged hundreds of thousands of soldiers, they had at a very large Navy and it was a very expensive process and the president and the secretary of the treasurer promised that as they entered this war that they would not give up the gold standard and that they would not inflate in order to pay for it and of course they lied about that. I mean within a very short period of time they were issuing the fiat money, money by by Law which were green banknotes issued by the government itself and that's why they were called greenbackers for the green backing and they ended up issuing more and more of these banknotes to pay for the war effort throughout the period 1861 to 1865 and actually the amount that they issued or spent into the economy grew over time because of course In response to this much larger sum of money in the economy, prices for goods and services increased, and of course the South did the same thing to a much greater extent, and so

26:42the value of the Confederate paper money fell much more dramatically, and actually in the final months of the Civil War, the South is faced with the prospects of hyperinflation and ultimately the money losing all of its value. There's a common commonality between fiat money and war. Our monetary systems throughout history have broken down because of countries that have gone to war and then sought to pay for those wars by issuing paper money. And so nowadays, for the first time in human history, Human beings think of unbacked paper government issued notes as being money and we think of it as a normal sort of thing.

27:35We've all grown up with using paper money and token coins that have no underlying value. They're not backed up by anything. You can't trade them in for gold or silver. are essentially have value, whatever value we place on those dollars and however many are actually issued by the central bank and the fact that we're forced to pay our taxes and our debts in terms of these government issued bank note in the form of fiat money. So, there was a big inflation in the Union, there was a big inflation in the Confederacy, the war comes to an end and the Confederate currency is worthless, you can't use it to buy anything essentially, whereas the US dollar still had remaining value, but the value wasn't the previous value in terms of gold.

28:41And so after the war, the Union government maintained that it would ultimately redeem all of these paper notes in terms of gold and it took a long time for that to actually occur. I think it was over 10 years before they could actually seek to redeem all of these greenbacks in terms of gold. So after the war, there was a persistent deflation as a result of the government's choice to go back to gold at the pre-war rate. And so the paper currency had to appreciate in sort of a forced-fed way.

29:32And so the currency after the war, both silver coinage and the paper dollars, there was sort of a persistent shortage of it because of this policy and there was a sort of a heavier than normal deflationary pressure. There were a few bank panics in that period of time and people looking at the situation

30:32was to increase the supply of money to both issue more greenbacks and to have a free coinage of silver so that there would be, instead of the, instead of money being sort of restricted through this deflationary process, that we would have free coinage of silver, we'd have I have a theory on this and I haven't talked to an actual economist about this particular or Theory. So you might have the opportunity to shoot it down. But it seems to me that governments love fiat money because they can engage in war, even unlimited amounts of war if they have unlimited amounts of fiat money. And so coming into the early 1900s, the tension between specifically between Great Britain and Germany was at a real high level due to to a lot of the problems they'd had with the Boer Wars and so forth.

31:56And the growing problem, well, the problem that had existed between France and Germany for some 70 years or so was kind of coming to a head. And so you didn't have to be a genius by about 1910 or 1912 to realize that there was gonna be a problem. And you know, I believe that there were people in the United States who were just chomping at the Bit for that to happen and for the U.S. to be involved in it. And so, I kind of speculate that around the early 1900 that the movers and the shakers in the economy knew that the people still had the taste in their mouth from the Greenbacker debacle that had happened 40 years earlier and they probably weren't going to go for for a True Fiat Money and thus we had the Federal Reserve brought on in the way that it was.

32:52Now, do you think, does that make any sense at all to you? Oh, I think that's definitely in a play. There's no doubt about that and of course these elites, these movers and shakers, we call them, they're very attuned to these things that are happening overseas and in world markets

33:41and other big military dispute over there and they're really playing like they did with Iran and they're still doing it with Iran. So this power of fiat money is something that would be appealing to everybody. The ability to increase your supply of money to an infinite level, practically speaking, while the cost of it, the price inflation being borne by everybody, that's so appealing. And I've even had people call me here at the Mises Institute and they want to know how to set up their own fractional reserve bank and they want to be able to create money.

34:31and you know I just got to tell them that that's a very exclusive right that's guarded very jealously by the US government and they're not going to give that up and they're not going to you know they're not going to let that go unless there's a ideological uprising in this country which I think is coming and it's just it's the key to their power it gives them the ability to write blank checks to obtain resources and to move elections one way or the other. We're going at the heart of the matter. Central banking and fiat money are at the heart of the power of the big brother state.

35:22The ability of the government to wean us off of gold coin money took a very long time. They had to prepare for several years before they could get the Federal Reserve Act passed in 1913. They actually had to draw up the legislation in secret with the big bankers and the powerful senators. and then they had the Federal Reserve in 1913, but it was a gold-backed Federal Reserve. Then the Fed ended up causing the boom of the 20s and the Great Depression of 1929 and early 1930s, which gave a leading cause for the government's ability to take away the gold.

36:12So after 1935 we didn't have gold, that was all confiscated at a reduced rate and we were left with basically a paper money with silver backing and it stayed that way until we became the world reserve currency for the entire globe after World War II and we started abusing that position by spending too much money and buying too many things in foreign markets until 1971 when Nixon took us off, closed the gold window and would not exchange the government's gold for the Federal Reserve notes, the dollar and so that process took a very long time and it continued on past that.

37:01The Monetary De-Control Acts of 1980 and 1982 also moved us further away from traditional Banking, things of that nature. It was supposedly a free market move but what it resulted in is one of the largest increases in the supply of money in our history basically. So it took a long time even though Americans you know have a hard time with economics and keeping up with all the stuff, they knew that they were going to have a fight on their hands with the American people and interest groups that were not centered in New York City or in Washington D.C., you know, your farmers and your ranchers and your manufacturers and your miners and your people like that, they know, they know that paper money works against the interests of people who produce goods and services and so it took them a long time and it's taken us a long time to turn that fight around on them.

38:04Now, I'd be doing my listeners a disservice if I had Mark Thornton on the phone talking to him and the opportunity to ask him about his first book, The Economics of Prohibition. I'd be doing a disservice to my listeners if I didn't bring that book up. Mark, it's a great book. It's spawned the phrase, Iron Law of Prohibition, and I had this in my mind long before I ever Before I heard the phrase or before I heard of you or your book or anything else, I observed firsthand that when something is prohibited and it's prosecuted the way that we see there, that it becomes more economical to transport and smuggle smaller, more concentrated parts of it, whether we're talking about brandy in the 13th century or opiates in the 1800s for Cocaine in the 1980s. And that's basically, you know, that's kind of the Law of Prohibition, the Iron Law of Prohibition wrapped up in one phrase. And I should have actually let you say all those things. But your book was one of the best things I've ever read on that

39:16topic. Profile Investment Services, Inc., www.profile-financial.com you know it's something that most people can get their hands around even if they haven't seen evidence you know in their own personal life as a matter of fact when when people ask me what I'm famous for I'll mentioned you know the iron law prohibition and then I'll explain it just as usually explained it and the most responses I get is you mean nobody had come up with that before and I have Profile Investment Services, Inc. www.profile-financial.com and that your property could be taken meant that it was a big risk for most people to be engaged in rum running or bootlegging or moonshining, all those terms that were developed

41:01to apply to illegal activities associated with the production distribution of alcohol products. and that increased risk which was tangible and substantial made for some big changes in the alcohol market and the alcohol market is basically divided into spirits or whiskey, rum, things of that nature, wine and then beer and prior to prohibition, Americans were a beer drinking society, the wine consumption was quite limited to pockets of southern European immigrants

42:10is that beer production fell almost to zero. You could get beer without alcohol in it legally but you couldn't get regular old-fashioned beer. That just wasn't being produced. It's too big and cumbersome. You need a lot of equipment and the amount of alcohol that you end up producing is quite small. But with whisky or spirits, once you produce that product, The Theory of Money and Credit

44:09The Age of the Cocktail was born and hundreds and thousands of new cocktails were drawn up or invented during this time in order to counteract the nasty, harmful product that was available basically and so they put things like orange juice in it to try to protect Transcription, Profile Investment Services, MSWordDoc, www.profile-financial.com I also studied the economics of marijuana prohibition, applying the same tool of analysis, and what I found there is that the data that I had, I got it from a government agency that was responsible for growing and tracking the government's marijuana programs,

45:57in the meantime, as the war on drugs became more and more effective in arresting more and more people and giving them more and more prison sentences, coming up with new detection devices and so forth, that over about a 12-year period that the potency of marijuana from this government study increased about 500% and I understand that it's increased even and further in the meantime is that sort of the prohibition tightening around the marijuana market continued and one thing to note is that marijuana is in a relative sense is more like beer than it is like whiskey and it's kind of bulky it takes a lot of room to grow if you're growing it it's sort of sitting there in in the open where the police can find it and then it's kind of bulky to move around relative to other drugs so that while marijuana is kind of like the beer to the alcohol market, other harder stronger drugs like cocaine and heroin are more like the whiskey component

47:10that are you know much more potent and much more potentially dangerous. I mean, there's probably more health issues that marijuana helps than it hurts. But cocaine, heroin and even prescription drugs like OxyContin, those things are very dangerous and lead to a lot of overdose deaths and emergency room visits and things of that nature. So, another thing that we saw as we look at the war on drugs over time is that marijuana China has become a smaller component of the marketplace and that the more dangerous drugs take on a bigger and bigger play as a result.

48:00So we've seen more heroin and cocaine, we've seen methamphetamines which is the poor man's drug and then as those drugs were getting squeezed, what we saw is a lot of people basically

49:15The chaos that prohibitions cause in humanity just really makes me want to weep. Yeah, it's, you know, Bastiat warns on taking actions, he didn't specifically say drugs, but he warns on the government actions like that that have repercussions that most people don't take the time to look at. On a business end, if you think of meth production in the, you know, it existed, meth existed in the 70s and in the 80s, in very small amounts, it was not a very popular drug at all, but in, as the drug war was prosecuted more and more heavy in the 80s, more people figured out they could, that meth is not hard to make in your basement or in your backyard or whatever, and so there was a lot of mom and pop meth cookers that popped up out of nowhere and started supplying the demand, but then in the 90s as the government started cracking down on the meth labs and up into 2000 when there was a lot of hype about cracking down

50:22on these mobile meth labs and so forth, about 2000. And so now most of the meth is in the hands of these powerful cartels. Most of the meth production is done offshore in the hands of powerful cartels. So, oddly enough, production, because of government action, the production is taken out of the private mom-and-pop market and pushed into, is pushed overseas, that we've lost the jobs to overseas, so to speak. Not only have we lost the jobs to overseas, but we're destroying these countries. I mean, Colombia, there's been some improvement, I think, lately, but, you know, with our efforts, The U.S. involvement in Colombia in our prohibition of the cocaine trade nearly brought that entire country and its government to its knees.

51:12Bolivia, the same way, all the northern South American countries have high levels of corruption, have high levels of murder because of our policy of enforcing a worldwide drug prohibition. Now the Central American countries have been infiltrated and these are countries that really Profile Investment Services, Inc., www.profile-financial.com, www.profile-financial.com, www.google.com,

52:01and you know so you see this rot because of US policy you know Mexico there's a lot of corruption all of the northern states of Mexico are in trouble with high murder rates high corruption rates with where police officers and military officers who try to enforce the laws are being killed and there's a lot of other The South American drug cartel companies are extending their reach into the United States and so we're seeing this South American crime that's ultimately based on US drug policy that's starting to rot into Southern California and into Houston, places like that where these South American drug cartel companies are extending their reach into the United States and so we're seeing this South American crime in the United States and killing people and you know in the process of getting their drugs across the border and to their markets and to the retailers that they serve and then of course some of those retailers are drug street gangs and so it's not just a point of entry that they're corrupting but then the drugs and the weapons go to these street gangs which you know ends up causing a lot more violence

53:57Mark, I want to thank you for coming on the show today. Did you want to give any kind of shout out to anything? We've already talked about the Mises Institute, but definitely I'll put a link to the Mises Institute in today's show notes. Anything else you'd like to give a shout out to? Well, we have our most important program coming up this summer, Mises University, and that's a program for basically undergraduate students to come and to learn for a week with the best Austrian economists, philosophers, so forth, historians, and they get a complete introduction to the Austrian Economic School.

54:45So if you're out there and you're interested in Austrian Economics and you're a college student and you would like to talk to other college students who are interested in the the same thing and to get access to some of the great professors of the Austrian School and that's a program you want to apply for and the deadline is coming up very quickly so get in line. And they can do that also at Mises.org. Yes, when you get a chance maybe this weekend or so just M-I-S-E-S dot O-R-G and go and explore sign up for the daily articles and you know look for the the senior scholars of the institute and our programs for students and adults. We have Mises Circles around the country and supporter summit. We just had our 30th anniversary conference and there's a lot of audio and video on there. You probably got about two or three years worth of audio and two or three years of video that you can get a great education in Austrian economics and learn how the world really works and why sometimes it doesn't.

55:52Mises Institute. Mark, thanks a ton for coming on with me today. I appreciate being on. I'd love to do it again.