Monetary Control Planning and the Federal Reserve System: A Misesian Critique

0:00Classical liberals who had lived part of their lives before 1914 would often emphasize the stark contrast in the nature of the political and economic orders preceding and following the First World War. One of these classical liberals who did so in one of his books was a German liberal named Gustav Stolper. And I'd like to read a passage from his book, published in 1942, called This Age of Fable. We have difficulties in remembering how it was before August 1914. How it was to live in a world where everything was safe, certain, secure. How it was to live in a world where institutions, systems, customs, political frontiers and economic forces were so much taken for granted that few people troubled to give critical thought to them.

0:52How it was to live in a world where progress was a matter of course, moral standards were not seriously questioned, and economic rules were immutable and general. Stauffer reminded his readers that this pre-World War I era was based on what he called the three freedoms. And let me give you his account of this. This economic and social system in Europe was predicated on a few axiomatic principles. They were freedom of movement for men, for goods, and for money. Everyone could leave his country when he wanted and travel or migrate wherever he pleased without a passport. The only European country that demanded passports, not even visas, was Russia.

1:42Who wanted to travel to Russia anyway? was not yet the mecca for millions of dreamers from all over the world. The trend of migration was westward, within Europe from the thinly populated agricultural east to the rapidly industrializing center and west, and above all from Europe to the wide open Americas. There were still customs barriers on the European continent, it is true, but the vast British The British Empire was free trade territory, open to all and free competition, and several other European countries such as Netherlands, Belgium, Scandinavia came close to free trade. In the 60s of the 19th century, the conviction was general that international free trade was the future.

2:29The subsequent decades did not quite fulfill that promise. In the late 70s, reactionary trends set in. But looking back at the methods and the degree of protectionism built up at that time, we are seized with nostalgic envy. And the most natural of all was the freedom of movement for money. Year in, year out, billions were invested by the great industrial European powers in foreign countries. European and non-European. England and France held the lead. Germany joined them at a rapidly growing pace after the 1880s. These billions were regarded as safe investments with attractive yields, desirable for creditors as well as debtors, with no doubts about the eventual return of both interest and principal.

3:19Most of the money flowed into the United States and Canada, a great deal into South America, billions into Russia, hundreds of millions into the Balkan countries, minor amounts into India and the Far East. The interest paid on these foreign investments became an integral part of the national income and the system of the great industrial powers, protected not only by their political and military might, but, and more strongly, by the general unquestionable acceptance of the fundamental capitalist principles, sanctity of treaties, abidance by internal law, and restraint of governments from interference in business. Writing after the Second World War, another German liberal, Wilhelm Repke, explained that what enabled this international monetary order to evolve was the fact that it also had developed an international monetary system.

4:08And this is what Repke said. This international monetary system was not dependent upon a world monetary authority, nor a world monetary union or any other international pact. It rested on the contrary, entirely on the law of the individual state. Since the validity of the individual currencies depended upon gold, the fact that money equaled gold not only affected a fixed and free coupling of national currencies, but also compelled national governments by means of their national currency regulations to behave in manners of monetary and credit policy in such a way that this fixed and free coupling Every coupling remained an undisputed permanent institution, irrespective of all trade fluctuations. And finally, Repker emphasized the moral element in this system.

4:58But at the same time, it was a phenomena with a moral foundation. The obligations, namely, which are conscientious conformity with the rules of the gold standard imposed upon all the participating countries, formed at the same time a part of that system System of Written and Unwritten Standards, which comprise the International Liberal Order. This international economic order came crashing down with the First World War. In a matter of weeks after the war's beginning in August 1914, the world was converted into a system of national economies. Free immigration was halted and passport requirements were established. Trade among the warring nations was halted. Economic relationships, in other words, were were nationalized and politicized by the war.

5:44Economic affairs became affairs of state, rather than trading arrangements among private individuals. And in turn, and as a consequence, the individual and his affairs were made subordinate to the state while the state now took responsibility for an increasing share of the affairs of the individual. The same nationalizing and politicizing process occurred in monetary affairs in all of the belligerent nations as well. Within a few months of the beginning of the First World War, all the governments involved restricted their citizens' use and ownership of gold. Individuals were no longer legally permitted to demand payments in gold for banknotes. The exportation and importation of gold was strictly controlled and regulated by their respective governments. It soon became clear to all the governments involved in the war that the costs of the conflict were going are going to impose severe financial burdens upon all of them to cover their war expenditures.

6:41And as a consequence, all the European belligerents resorted to the printing press to finance the war. And the United States did not escape these monetary sinews of war. Between the establishment of the Federal Reserve system in 1913 and 1919, when the war boom ended, The money supply in the U.S. increased by over 70 percent, while wholesale prices rose more than 100 percent. What the First World War brought about was the triumph of political and economic collectivism. The ideological currents that had begun to shift back towards statism in the 19th century had their opportunity to be brought into practice in the war. And when the war ended in 1918, collectivism, though making moderate retreats, dominated the political, cultural and economic landscape.

7:33And the advent of the Great Depression in 1929 only accelerated the process, with either total planning or extensive intervention being the hallmark of government policies everywhere. When Mises wrote his treatise on socialism and was published in 1922, he began his book with the following, socialism is the watchword of our day, the socialist idea dominates the modern spirit, it expresses the thoughts and feelings of all, it has a seal upon our time. When history comes to tell our story, it will write above the chapter the epic of socialism.

8:19Now the liberal idea and ideal had come under attack a good half century almost before the beginning of the First World War. In fact, at the turn of the century, a German historian named Hermann Levy, in a book called Economic Liberalism, observed, the Manchester School of Economic laissez-faire has of recent years been brought face to face with two very momentous phenomenon. Liberalism and Neomercantilism. Both agree that industry should be organized by the state. Manchester liberalism has been undermined bit by bit by the union of these two forces. Now the focal point for this emergence of an anti-liberal spirit, I'm not wishing to sound too much like an anti-German basher, was in fact in Germany. It was in Germany that there first arose the neomercantilist spirit under Bismarck. It was in Germany that that there arose the modern welfare state where Bismarck attempted to preempt the growing strength of the social democratic party by co-opting their program of social security, unemployment compensation, welfare retirement programs, and basically setting up a welfare

9:26state through protectionist and other regulatory systems, a welfare state for both labor and business. But what was worse about this is that the German experience set off a rippling effect throughout the rest of the world. In England, it took the form of the Fabian Socialists. In the United States, what we experienced was two or three generations of American scholars, as Professor Rothbard mentioned last night, who went off to Germany to have a capstone of their educational experience in the land of philosophers and poets, came back with their PhDs after studying with members of what were known as the German Historical School, particularly American studying economics, sociology, and Political Science, and came to institute what in the United States became known as the Progressive Era and the movement known as institutionalism.

10:13They first had their high watermark during the First World War where they had the opportunity to institute a planned economy and their second high watermark with the New Deal. But what's important to realize, and which is what I want to partly talk about, among among a number of other things is that when this momentum towards political and economic collectivism started gaining greater and greater force in the 20th century, there was one crucial part of the economy in which government control and management was taken for granted and in fact for 100 years had been the main focus of the most perverse form of government management and the economic order as a whole.

11:00And that has to do with government management of money and central banking. In her study, the rationale of central banking, Vera Smith, says the following, In the present century, centralized banking systems have come to be regarded as the usual arrangement, if not the one of the conditions of the attainment of an advanced stage of economic development. The belief in the desirability of central bank organization is universal. It is notable that when laissez-faire theories and politics were at their height, so far as other industries were concerned, banking was already regarded in another category. Even the most doctrinaire free traders were unwilling to apply their principles to the business of banking. It was widely contended that banking must be the subject of special regulation, although what precise form these regulations should take remained an open question for several decades.

11:56This was during the decades of the gold standard in the 19th and early 20th century. The international monetary system, of which people like Wilhelm Röpke and others spoke in such glowing terms, was itself a creation of a planning mentality and was a state-managed monetary order, even during the zenith of classical liberal domination. The decision to officially go on the gold standard in the 19th century in each of the major nations was a matter of state policy And a central banking structure for the management and control of the gold-backed currency was established in each of these countries, either in the form of giving a private bank the monopoly control over gold reserves, in the issuance of bank notes such as in England, or in the form of a state institution assigned the task of managing the monetary system within its borders, that the monetary central planners have been guided by different policy goals in the 20th century than in the 19th century should not blind the analysts

12:53Now, the classical liberals were extremely suspicious of government abuse and mismanagement of money. In England, the particular event that brought about a change were the experiences during during the Napoleonic War, where basically the British government had immense financial costs to fight Napoleon. They found it difficult to float loans at what they considered attractive rates of interest. They went to the Bank of England and cut a deal. The Bank of England would supply them with low-interest loans provided through the issuance of additional banknotes, and so the bank's solvency would not be threatened.

13:46They instituted a restriction act which said the Bank of England did not have to redeem its notes for gold. Now this situation created an inflationary bias in the British economy during the 1790s and the first decade of the 19th century. And when the war ended, many British economists and classical liberals said this system could not be allowed to remain. Perhaps the classic statement of this was made by David Ricardo. It may be questioned whether a bank lending many millions more to government than its capital and savings can be called independent of that government. It was then owing to the intimate connection between the bank and government that the restriction on bank note redemption became necessary. The only legitimate security which the public can possess against the indiscretion of the bank is to oblige them to pay their notes on demand in specie.

14:42But unfortunately these advocates of a gold-backed currency believe that the issuance of such Such species-backed banknotes should be a monopoly privilege issue to a central banking organization, and as I said in the case of England, the Bank of England. Money and the monetary system, in fact, was a nationalized industry even during the era of free trade. And it was a manipulated and managed system. A German economist named Malchior Paulyi in his book, The Twilight of Gold, points this out. A new approach developed under the leadership of the Bank of England in the late 1860s and the early 1870s. The self-correcting mechanism of international payments remained the foundation of the gold standard gain, with the gold reserve ratio the ultimate guidepost, but the practice of central banking had now evolved to the use of discretionary measures.

15:39That is as far as control over short-run fluctuations in the issuance of payments and in the domestic current conditions were concerned. Managerial discretion was essential to decide, for example, when and how to intervene in a panic by granting liberal credit at high interest rates in order to foresee all forced liquidation of otherwise sound investment. Yet the basic objective of discretionary policy was to try to prevent panic and the dangerous gold drains and to be able to counteract them if they occurred. When an active policy line was chosen, it became mandatory to induce the financial community, the commercial banks in particular, to coordinate their credit practices with those of the central bank. Central bankers had to learn their profession, not only the quasi-mechanical rules of the gold standard game, but also the techniques of adapting them to immediate control objectives.

16:34Now all that happened in the 20th century was that the purposes and directions and desired targets of the central bank changed, but not the conception that it needed to be a central bank that undertook this approach. In the 1920s, the major focus of this change came through Irving Fisher and John Maynard Keynes. Professor Salerno touched upon both of those. In the 1920s Irving Fisher believed that now economics had the capacity to scientifically manage a monetary system. It had the capacity to scientifically manage a monetary system because he believed that through quantitative techniques the economic statistician could both collect sufficient data and construct such targets and goals as a price level and then have the Federal Reserve manage the monetary system to assure some stability in that target.

17:29In the 19th century, the goal of the monetary central planners was to assure international monetary stability. That is, the foreign exchange rate of that country's currency, vis-a-vis other nations, in terms of gold stability. Now the target would be not the external exchange rate, but basically certain internal policy And in the case of John Maynard Keynes, following the First World War, his arguments were is that now gold had become a barbarous relic and that it was necessary for the British government to focus on domestic targets such as unemployment, price stability as the solutions.

18:23In truth, the gold standard is already a barbarous relic. All of us from the governor, I'm quoting Keynes, all of us from the governor of the Bank of England downwards are now primarily interested in preserving the stability of business, prices and employment. Advocates of the ancient standard, notice the way he tries to set rhetoric with the concept, the ancient standard, something out of date. Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age. Our conclusions up to this point are therefore that when stability of the internal price level and stability of the external exchanges are incompatible, the former, that is, stability of the internal price level, is preferred. In the nineteenth century, the ruling idea had been liberty.

19:09The spirit of the age was captured in Richard Cobden's slogan, free trade, peace and goodwill among nations. The wealth of nations was seen as arising from individual freedom and the social order respecting private property and the means of production. And this was extended to the international order as well. Gold was considered the commodity most proven through the ages to serve the internationalization of trade. And preservation of a gold standard was given a prominent place among the limited duties assigned to the limited state of the last century. But as Ludwig von Mises pointed out in one of the essays that is included in that volume that I edited for the Mises Institute. A nation's policy forms an integral whole. Foreign policy and domestic policy are closely linked together.

19:57They condition each other. Economic nationalism is the corollary of the present-day domestic policies of government interference with business and of national planning, as free trade was the complement of domestic economic freedom. And that is the dilemma that we have had in the 20th century. The classical liberals left the residue of a crucial matter of planning untouched by their revolution against mercantilism in the 18th and early 19th century. The residue of planning that they left was the belief that it was necessary to separate money from other aspects of the economy, for there to be central planning of money, monetary management. And all that happened is that the institution that they had created was taken over by different Managers of the 20th Century. Now one has to say this for the 19th Century gold standard.

20:51The 19th Century advocates of monetary planning had a greater degree of humility. They believed that governments couldn't control and manage, oversee and direct an economy better than basically leading those affairs to the individuals of the society themselves. And therefore they They assigned a very simple target in general for the monetary managers. Stay on the gold standard. See that there isn't a threat to the stability of the foreign exchanges. Adjust interest rates to assure that gold does not flow in or flow out in any way that destabilizes the stability of the monetary system internally or threaten the stability of the international order vis-a-vis our currency with other nations' currencies so there can can be this internationalizing web of exchanges and mutual benefits through trade.

21:44The problem is that that institution has been taken over in the 20th century by people who have different agendas. And those agendas are basically ones not only of planning but even more importantly the mentality of the social engineer. The idea that it is possible and desirable to manage an economy to assure certain goals Now, what I'd like to spend the remaining time on is to try to explain why, to use a phrase of Hayek's, the belief that they can centrally manage the money supply to assure the things that they consider desirable is inherently impossible.

22:34That is what Hayek referred to as they suffer from a pretense of knowledge, the capacity to be able to do things which is beyond human capability and in fact by attempting to do so create situations that are worse than leaving the situation alone. The best way to contrast this is to first set up the idea of a monetary system that is not controlled by the government and to imagine some change in the market situation and very briefly explaining how the market would adjust to the changing situation and contrast that to the government. Let us imagine types of monetary systems in which the government does not control the money supplier or the monetary system in any way.

23:19Basically some type of form of free banking. And we can imagine that this free banking could be of two different types. Let me briefly outline both. One could be one hundred percent reserves, as Professor Salerno was pointing out. In this case, all liabilities have to be backed 100% by gold. And basically, what would emerge under this type of system would be basically two types of accounts that banks would offer. Basically, demand deposits and time deposits. Demand deposits basically would be warehouse facilities. You'd probably pay the bank a fee. The bank would hold 100% your hard currency on deposit. You'd be saved the the trouble of holding it or storing it yourself, the warehouse receipts that they would issue would tend over time to be used as money substitutes to save the inconvenience of rushing to the bank every time you needed cash to undertake a transaction, and everyone who accepted such warehouse receipt money substitutes would know that at any time they could redeem them

24:18on demand, and that is how a version of gold back paper money would be supported. Some deposits basically would be savings accounts. You would have to agree to deposit your money in a bank for a set period of time. You would not be able to withdraw that money for that period of time, unless perhaps for a very severe penalty rate. And basically the banks would then know that they had had the sum of money for an X period of time. They would then arrange a time horizon of loans so that they synchronize when loans would be paid back, when potentially depositors could withdraw their savings account when and the time deposit became due, and that's basically how such a 100% reserve system would work. In that situation, there is a total and very closely synchronized process of savings and investment, and basically that eliminates the possibility in a very rigid and mechanical sense for what the Austrians refer to as a business cycle, that is an over issuance of money-generated investments that can overextend what the savings base can sustain.

25:20or we could imagine a free banking system with fractional reserves. Banks would take in deposits, perhaps banks would competitively offer different rates of return, different interest rates on deposits, telling their depositors that we hold different types of reserve levels, 25% reserves against liabilities, 10% reserve liabilities. You run a risk and the likelihood of us having financial difficulties, and financial difficulties, so we offer you a spectrum of risk-based interest rates to make it more or less attractive. And what would basically limit the overitions of notes in that situation would be two factors, as economists who advocate for banking have usually argued. One is the clearinghouse mechanism of an individual bank overextends its notes.

26:06The notes will be returned to the bank through the clearinghouse mechanism, that is, the notes are received by people in society. those people deposit those notes in their banks, those other banks through a clearinghouse process demand redemption of those notes from the bank that has issued them. If that bank owes more obligations than it has claims on other banks, it has a gold drain, its solvency is threatened and it must rein in its issuance of notes or it threatens its own financial stability. At the same time, the other factor that acts as a limit on any individual bank and free Banking arrangement is the possibility that members of the society will become suspicious of the stability and financial soundness of that institution.

26:52Its notes will only be accepted or traded at a discount in relation to its par or face value. That will result in people who have deposits on those accounts taking their funds out of that bank and putting them into banks that are viewed with greater stability and confidence in the Community and that loss of reserves through deposit withdrawals also would act as a check on the behavior of the bank. So each bank would therefore have to act in a more conservative manner. Those are basically two types of arrangements. Now let us suppose that in this situation there were to be a change in one of the monetary factors in the economy. And we can imagine that such a change could occur perhaps if there was a change in the If there was a change in the demand for money, if there was a change in the demand for money, how would this manifest itself?

27:41Well, if there was a change in the demand for money, this change in the demand for money could come from two avenues or causes, like Professor Rothbard and his book on Man Economy and State refers to either pre-income or post-income demands for money. Now, all that pre-income demand for money means is that individuals offer goods and Goods and Services in the market to earn money income in the exchange process. They wish to earn a total sum of money income for various and secondary purposes for which money is desired. Now, if there's an increase in the demand for money in this pre-income sense, what individuals would do would be to offer a larger quantity of goods and services in the economy. Offering a larger quantity of factor services would result in a competitive bidding down of factor prices. A fall in the cost of production would act as an incentive for the hirers of factors of production to want to expand output, because now costs in

28:40relation to initially to selling prices are greater. There would be incentives to want to expand output, to take advantage of those profit opportunities with lower cost of production. After these production processes are completed, a greater quantity of final goods and services would come on the market. There would be a competition for consumer business and then and Consumer Prices would tend to fall, and how far they would individually fall would depend upon the degree of responsiveness of demand given the supply increases in each individual market. And what would basically would be happening is that if the economic statistician was observing this after a period of time, he would collect a data for a set of prices in the economy, he would collect them, he would average them, and what he would show is that on average prices in general had fallen.

29:28Though in fact what had happened beneath that price level index would be the fact that there had been individual responses in individual sectors of the economy in response to individual decisions to offer a greater quantity of factor services in individual markets based upon individual decisions of a respective increased demand to want to earn greater amounts of money income and individual price would be tending to fall, Individual A, price A would tend to fall, price B would tend to fall, price C would tend to fall, each in response to their individual changing supply and demand situation, a cumulatively would be recorded in the statistical averaging as a decline in the price level. Now in each case, the market would have smoothly adjusted.

30:13No economy-wide change has occurred. What has happened is individual changes, individual changes. accumulatively, just as given this macro manifestation of a lower index-based measurement of a price-level decrease. Or we can imagine another change in the demand for money. What Professor Rothbard refers to is the post-income demand for money. And that's basically as after you've earned money income, you have to decide how to apportion your money income among alternative uses. There's basically in terms of three categories, consumption, investment or cash balance holdings. And an individual might decide that on average during the income period he wishes to hold a larger fraction of his income as a cash balance. And he would tend to do so by diminishing his expenditures in other directions so that on average he is holding a larger amount as a cash holding. That means, however, in the decision to diminish his expenditures that probably would not be across the board and proportional. Individuals evaluate the goods and Services.

31:18They purchase in their market basket of personal goods differently and at the margin they would decide at what margin, that is what commodity, could they afford to cut back on their expenditures to add on average to their cash balance holdings in which the loss of utility or satisfaction from the foregoing of some consumption activity would be felt the least. And as a consequence they would cut back perhaps marginally on the purchase of this product and marginally in some different amount on that product and so on and so forth until on average they were holding a larger average cash balance during the income period. Now again, what would be the consequence of this? Individual commodities would experience a decline in the demand, individual markets would experience a decline in the individual demand for their output. That would result in particular prices going down, there would be a decline in the demand for resources to make those products, those products would would then search for alternative employment. They would shift into different sectors of

32:15the economy. They would have to competitively bid down wages and prices in those alternative sectors to make themselves attractive to different employers. The lowering of factor prices in those alternative employments would, over time, result in increasing output in those sectors of the economy, which would generate more output in those sectors. And cumulatively, therefore, prices would be lower. Partly prices would be lower because people In this fashion, it shows that a change in the demand for money in this fashion is not as many monetary theorists argue, it's just a monetary phenomena, is in fact a real phenomena.

33:08is that when individuals make such a change in the demand for money-holding decision to hold more of their income as a cash balance, they are choosing to spend less in the present on potential consumer items. That is, it is a time preference decision. I choose to hold part of my income from present expenditure to hold part of my income or wealth on average larger as a cash balance. Balance, that is, in a form that will make it available for me to have more monetary resources for future expenditures if I so choose, and a consequence, their decision to consume less and hold a larger proportion of their income or wealth as a cash balance is in fact a change in the time preferences of the members of the society.

33:57And when all prices have declined as a result of the fact of a lower rate of money spending in the Economy, what one will observe is that in general, the prices of consumer goods will have fallen relative to the prices of investment or capital sectors of the economy. Therefore, this itself is a real relative price signal to the economy, that even in this lower scale of prices, the structural relative prices have shifted from consumption demand and therefore resources and labor should be reallocated to more investment-related activities. And the economy would simply adjust. These are real changes in the economy. Real changes in the economy. They take the form of changes in either demand for money income or desire to hold a larger proportion of one's income as a money holding. But they are real changes Money is a real commodity, demanded for real purposes, reflecting and spreading out important real price information to agents in the economy, which need to be learned and adjusted to for an economy to operate and function smoothly.

35:13Now, what if one has a central bank and the central bank managers decide that such phenomena are undesirable? And in fact, as Professor Salerno again alluded to, this is exactly what happened in the 1920s. In the 1920s, most economic historians agree that following the First World War, there There was a great burst of innovation, technological innovation, capital investment, productivity enhancement, introductions into production processes, and as a result, costs of production were tending to fall. And if this had been allowed to work, as again Professor Salerno I think correctly used the sort of common-sensical view of it, it is nothing more than an example of many of the technologies of the 1970s and 1980s, of which I usually use the example of my classes to get this point across to my students, the idea of pocket calculators. When pocket calculators came out, starting in a big way in the 1970s, pocket calculators hardly fit in your pocket, they were so big, and they usually cost a couple of hundred dollars.

36:26Well, technological innovations and cost-efficient modes of production have not only made them more compact but have so lowered the cost of production that they either can be purchased at a low price or many companies offer them away as advertising gimmicks. Does anybody view that the pocket calculator business is suffering dire depressionary symptoms now? They innovated in new methods of production, they could lower their cost of production and they could stimulate greater demand by moving down their demand curve and generating more revenue from themselves. No detrimental effects on the economy. That's basically what was happening across the board in much of the economy in the 1920s. But what had happened? What had happened is that the economists and policymakers set up an illusionary target, and I use that term consciously and purposely, an illusionary target, a thing called the price level there is no such thing as the price level is used to talk about as most by most economists by which they mean a statistical construction of an average averaging of a selected group of prices in the economy what exists in the economy is the money price of apples the money price of pears the money prices of this that and the other and that array that spectrum is what represents the value of purchasing power of money

37:51is just an averaging of a set of prices, a statistical technique that in fact does not represent anything other than the construction of the statistician himself. An average of something that itself does not exist. And then they use that as a target. They use that as a target. as a Target. They set any fall of price, regardless of because or reason, is detrimental. And they introduced large quantities of money into the economy, they tended to push down market rates of interest below what the market would have set them at.

38:37The lower rates of interest as the decline of any price acted as an inducement for greater were quantity demanded, more borrowing, investment activities were undertaken and begun, that in fact were in excess of the available real savings of the economy to maintain and sustain. And when finally the effects of all of this monetary expansion resulted in prices tending to rise above the price level target in 1928 occurred, the Federal Reserve became nervous. They tried to pull in the monetary reins and the house of investment cards that they created fell. In the name of trying to prevent what is a natural and real and necessary adjustment to the economy, they set in motion the situation that generated into the Great Depression.

39:28And what made it worse is that it can be easily understood for those of you who are interested in reading Professor Rothbard's book, America's Great Depression, which is an excellent overview of the Rationale for the Policies of the 1920s and the Disastrous Consequences of the Hoover Administration. What is the other consequence of central banking policy to believe that we are going to manage the price level, manage the level of employment, manage the level of output in the economy? Well, I'd like to bring this out, and that is that this means that the central planners must purposely and intentionally and consciously and continuously distort what is perhaps the most essential and crucial linkage in the entire economy, and that is one particular market price, the rate of interest.

40:23The rate of interest is nothing more than the price between lenders and borrowers, which is nothing more than saying those who wish to defer consumption until a future date and and lend part of that which they earn, or that have saved, to others who would like to consume or invest more than their own financial capacity would permit them during a given period of time. And the purpose of the rate of interest, to use a little bit more of the economist jargon, the inter-temporal price, that is, the price connecting the present and the future, the result of constantly interfering and managing and regulating this price is to continuously distort and prevent a proper and efficient and rational coordination between the savings decisions of one group of members in the society and the investment horizon activities of another group of members in society.

41:18John Maynard Keynes in his book The General Theory would often argue that there was a weakness in a capitalist economy. And that weakness is that there is these great disturbing fluctuations in investment. and that these great fluctuations in investment in the economy is what causes this instability in output and employment. Yes, he was right. Historically, there has been great instability and fluctuations in the investment sector of the economy and it has caused business cycle phenomena and it has had deleterious effects on economies, the personal hardships of unemployment, the wastage of a lot of investment in capital undertaking, preventing of sound and Economic Growth. Yes, all true. But why is there these disturbing fluctuations and distortions in investment decisions? Keynes saw the phenomena, he understood it wrong.

42:11It's precisely because of monetary manipulations of the rate of interest that prevent a harmonious coordination between savers who are a one and separate group of people in the society and investors who are another separate group of people in the economy, which is the case in every market. Consumers are one group of people and producers are another. That's the purpose of prices, to coordinate consumer decisions with producer decisions, to changing circumstances on either side of the market. And that is the same role of the rate of interest, to act as a coordinator of these different decisions by different individuals to see We see that there is a general pattern in balancing between the two that the savings horizons of one group of people are matched by the investment horizons of another so that what is available for investment activities is balanced with the savings that are sustained and it is not surprising that these fluctuations occur when a central bank must have some means or tool to try to influence everything it considers important and it chooses that price which in fact is crucial to leave alone

43:20And what type of distortive effect does it have on the savings investment nexus? It is precisely these decisions concerning production, which the Austrians have always emphasized in what, again, the jargon of the economy is the non-neutrality of money. Changes in the money supply do not affect all sectors of the economy simultaneously proportionally. If any of you read the Wall Street Journal, you know that every Friday the Federal Reserve in its credit markets column, issues a report about what happened to the money supply the previous week, $3 billion increase last week. Well, my paycheck didn't go up some fraction of that last week and I doubt if yours did either. Money enters the economy through the particular point in which the Federal Reserve has the capacity to introduce it. It's received by certain individuals and in this case, received, spent, received, spent, received in a rippling sequential process, and that influences the types of investments undertaken, the types of relative price signals sent out to the economy,

44:28and therefore, destroying and distortion of the entire relative price structure. And what is the cumulative effect of this belief and desire to centrally plan the monetary flows in the economy in this fashion? Well, I would argue its danger throughout this century has been the destruction of the market economy. Why the destruction of the market economy? That's pretty strong language. For the simple fact is that economy naturally is bombarded by changes. Consumer preferences change. Demand, another demand factor changes occur. Supply changes occur. New innovations, changing availability of supplies. The judgments of resource owners to offer more or less at different market prices for services rendered.

45:17But the purpose in a market economy of prices is to allow these little marginal changes in prices to constantly be adjusting and adjustable to the changing currents of the economy. So that there isn't a backlog of problems to which the economy has to dramatically adjust with catastrophic effects on everyone simultaneously. still affects changes and adjustments to incremental causes. The problem with the business cycle is that by skewing in entire sectors of the economy, stimulating greater investment, huge myth allocations and distortions of how resources are used, how labor is allocated, its effect on the economy is large, pervasive.

46:08And that sets up a stage where rather than small groups of people having to make small And since nobody likes to adjust change, and if other groups are suffering from the same situations, there are incentives to form political coalitions to find ways to not have to adjust, I would argue is that in trying to manage the economy, they have created distortions and cataclysms in the economy that create the political climate in which groups affected by these monetary-induced changes have incentives to form coalitions of the same kind. and Special Interest Arrangements to fight hard to not have to face the adjustments. That is, special interest groups saying, I don't want to adjust. I don't want to have to shift from one employment to another.

46:55I don't want to have to accept the fact that inflationary boom resulted in prices or wages too high to what the market can now sustain. I want my wage or price guaranteed. I want my employment opportunity guaranteed. I want my investment, the value of my investments guaranteed. and the Destruction of the Market Economy. We are at the end of the 20th century. And it has been the most barbaric and destructive and evil century in human history, in my opinion. They were cruel and vicious leaders of the past. And they did despicable things to their fellow human beings. But the worst thing about the 20th century is that we have had the technologies the technologies to allow bad men to do bad things in larger dimensions the capacities and the tools to impose central planning manipulative controls resulting in the crushing of the deaths of multi-millions of people in the West we've had this pretense of the social engineer to manage and regulate and now at the end of the 20th century we have concluded that most of these experiments were wrong headed

48:06Yes, socialism and its various forms and facets were a disaster. Yes, abuse of power is likely to occur. We need to have reigns in government. And we all pat ourselves on the back and we say democracy and freedom is won against Soviet totalitarianism and Nazi totalitarianism. Well, I think unfortunately there's a lot of hypocrisy and inconsistency in that. What I will argue is that to the extent that we can hope to move towards real freedom, More of that old 19th century ideal of classical liberalism, a stulper, nostalgically looked back at. Free movement of men, free movement of goods, free movement of money. To the extent that we can hope to make the 21st century a better place in terms of those liberal principles, we will never be able to have such a liberal, good society until we realize that the crucial element, the crucial source Most of the instability and planning disasters in Western governments and in any government is continuing central monetary management of money.

49:13Until we eliminate that, we will always have the seed of destruction and we will always have the residues of the planning mentality in our midst. Thank you very much.

49:32I have a couple of questions. A couple of questions? Yeah. I want to make one more mistake. According to your thesis, with which I agree, we go back to the liberalism of the 19th century, the true liberalism, we would not need a one world order and all these central banks and international bonds and everything that's central. We would have what they say they're going to try to bring about by their plans and will not. are views a good liberal order in the 19th century.

50:20Liberal in the sense of freedom for the person, liberty. None of these policies, none of these international arrangements were arranged by international agreement. Great Britain, for example, went on free trade in the early decades of the 19th century by unilateral decision. The free market economists in England said, look here, free trade is good. And it's good in spite of the fact that other countries have protectionism. If buying in the cheapest market And selling in the dearest market is good. Take advantage of the lowest price seller and take advantage of the highest price markets to sell your own goods, then that's true unilaterally as well as if we can make a deal for another country to lower its tariff barriers as well. The establishment of the gold standard was unilateral. Even with its central banking aspects, Great Britain just established the gold standard on its own and then was followed by one country after another country that just established unilaterally free trading policies and gold-based monies.

51:16based monetary policies, unilaterally. It doesn't require world governments, international organizations, just get your own government to do the right thing and there'll be a boom to that nation's citizenry. And then hopefully the example of freedom in your own country and the successes of freedom of your own country will act as a stimulus for other countries to follow. I think the part of the, you see, part of the problem is the special interest problem.

52:08and the other problem is a moral problem as far as I'm concerned. I totally agree with people who are known as the public choice school who have I think done important work in explaining the logic of the self-interest biases that create incentives for the formation of special interest coalitions and the special interest on the parts of politicians and bureaucrats and How One Breaks the Spider's Web of Special Interest Groups is really the $64,000 question. But I think even beyond that, I don't see any hope until there is a moral revolution in our country. And that moral revolution would be sufficient to say that theft is immoral.

52:55And by that I mean is that we suffer from a dichotomy in our society. If I were to come If I come from this podium up to you and pull out your wallet and take $10 out of your pocket, both you and everyone else in this room would be aghast. How dare he do this? This is theft. This is robbery. You've not given your consent. But if I take this gentleman and hire him to be my representative, and in the name of the common good, he goes and takes $10 out of your pocket and then splits it with me. best-serving, you know, national prosperity, the common good, the general welfare. Until people realize that even when you hire someone to do the dirty work for you in the political arena, it is still theft. That in moral society, that a moral society is one that is grounded in a principled and uncompromising way, in that to use the phrase of Leonard Reed, only that which is permitted

53:54is peaceful and that is voluntary consent among agents. And to the extent that government has function in society, it is merely to, in the most narrow and mechanical sense, only protect the life, liberty and property of the citizen. We will not escape from this. Our problem today is that everybody believes that they have a right to be in everyone else's pocket. Frederic Bastiat's statement that the state is the great fallacy in which we all think we can live at other people's expense. And coupled with that is the idea that through this new notion of entitlement, we believe Until that moral change occurs, I see no hope. And now, if people want to get good policy changes, if they could get something changed that eliminates this, that, the other, I'm not objecting to that. But I really think that in the long run, to establish it and for it to be secure, it's going to require moral change.

54:44Okay, thank you.