Who and What Controls Our Money

0:00Okay, I think having come before to Mises Institute functions, you know the answer. It's a single word, FED. The FED presently controls our money. It's an entity that is conceived in both error and sin. The error is economic. The sin is not greed, but covetousness. That is, it was the covetousness or the greed of Wall Street bankers for other people's money, that is, we, the public's money. And I'll talk a little bit about the errors and then go on and talk about what the Fed is up to today. It's something I think that is very, very useful to know.

0:47What were the two errors? Well, when the Fed was created in 1914, by an act of Congress in 1913, its avowed purpose was to be a lender of last resort, to keep the banks in the United States from failing. We had just had the panic of 1907. A number of banks had gone under. The public certainly was affected. The people who kept deposits in those banks saw them disappear into thin air. quite like what occurred during the early 1930s, when a wave of bank failures destroyed people saving deposits and checking deposits. That was in the era before federal deposit insurance.

1:33So the Wall Street bankers got together, and you can read this in detail in Murray Rothbard's book, Fine Booklet, The Case Against the Fed, he has a lot of detail on this, But basically the Wall Street bankers got together and with certain economists, who were not free market economists, put out an ideological line, and that line was that we need a lender of last resort, we're the last industrial country to have a central bank. The Bank of England was created as early as 1692, and here it is in the early 20th century, and the United States is without a central bank. Bank. This is a scandal, or so they said. Well, let's look at that argument. Why do we need a lender of last resort? Is there a lender of last resort for the computer industry?

2:28Is there a lender of last resort for the automobile industry? That is, what is so bad about businesses that fail going out of business? There's nothing wrong with that. The market economy is what we call a process of creative destruction. In order to create new and more efficient ways of producing things or new products, you need the destruction of the older firms, of the inefficient ways of doing things. No one cried when lamented the fact that the horse and buggy industry or even the 299 automobile firms that were competing with Ford in 1910 and building cars by hand, most of them went went out of business, but they were using inefficient technology to produce automobiles.

3:17Ford introduced mass production, which lowered the price of automobiles in 1910 from something like $750 down to $300 five years later, permitting the middle class to enjoy this new mode of transportation. What was wrong with the producers of electric adding machines and slide rules going out go out of business as the price of personal computers came down in the 70s and 80s. There's nothing wrong with this. There's nothing wrong with failure. If entrepreneurs make mistakes, they should go out of business. This keeps them on their toes. Imagine if the government bailed out IBM when it was on the verge of collapse. IBM had lost $13 billion in the early 80s in two successive years, $5 billion one year and $8 billion the next year.

4:05But that was good for IBM. It was a bracing dose of competition that forced them to readjust their production methods and so on. And to begin producing goods that consumers wanted. So why do we need a lender of last resort to bail banks out? Well, because the point is we don't need a lender of last resort to bail banks out. If the Federal Reserve system stands ready to print up new money and lend it to failing banks, banks, and beyond that in the 1930s to insure deposits, to make sure consumers know that their money is safe, well then you get what we had in the late 80s. You get banks and thrifts, savings and loans and so on, investing money in making bad loans in Poland, in Mexico and other parts of Latin America.

4:58On the other hand, if you look at a free market investment firm, a firm like a money market mutual fund, they're not insured by government, and yet they don't lose money. They make very short-term loans in very safe commercial paper, government securities and so on. There have been instances of a few money market mutual funds losing some money on the dollars invested, but the overall managers of those funds have themselves bailed those funds out in order to maintain consumer confidence in their product, okay? On the other hand, when you and I go into a bank, what do we do? We look to make sure that the FDIC sticker is there, and then we don't look at the bank's perspectives. We don't care whether they're investing our money.

5:45The bank knows that, and knows that if it makes unsafe loans at very high interest rates, then it has a good chance of being very, very profitable, despite the fact that it's also and also incurring the risk of failing. That's why we got the bank failures of the 1980s and 1990s. It goes way back to the turn of the century when the ideology of a lender of last resort was introduced. So that was the first function of the Fed, and that was erroneous. It was erroneous to think that a modern economy needs a lender of last resort. Beyond that, by the 1920s, the Fed also was billing itself as the agency that would stabilize the price level and get rid of, forevermore, get rid of the business cycle.

6:33Never again will we have panics and crises as we did in the 19th century. By the way, politicians have changed these words to make them more and less threatening to us. For example, business cycles used to be called, in the early 19th century, panics. That's a harsh word, right? Then a little bit later on, towards the middle of the 19th century, the word was changed to crisis. A little softer. But then as the crisis grew worse, the word was changed to depression. The business is slightly depressed. There's no crisis. But of course, then the Great Depression of 1929 to 1940 hit. Depression became a bad word. So then recession was used after the war. Business, economic activity is receding from its previous level. A very, very gentle word. But of course then we had the recession, the inflationary recessions of 1980-82, before that of 1973-1975 in which unemployment was high and inflation was high. So now we're told that we have growth slowdowns or the economy is moving in a sideways manner

7:46or there's some waffling of the economy, okay? All of these phenomena are the same, okay? They're panics or crises or depressions and as I'll argue in a little while, they are caused by the inflation of the money supplied by the Fed. Now, need the Fed step in and create new money to stop prices from falling? Well, we don't want to create inflation. We don't want to create an overabundance of money and drive prices up. That's not our purpose. Yes, yes, you're right. That's bad. We just want to step in and create enough money to prevent prices from falling. Well, I don't want prices to be prevented from falling. Right after Christmas, I needed a winter jacket. I went to a local department store in New Jersey. They had advertised a 40% sale.

8:34And there was a nice leather jacket there for $300. and I brought it to the counter and I knew I would get the 40% off and the guy says well it's a one-day additional discount 10% so I didn't get edgy and say wait a minute this might be bad for the economy you're cutting prices too deeply here you know I didn't get worried and the woman behind me was stunned because she didn't know she was going to get the extra 10% either we were all smiling I mean we had we had no fear of falling prices nor should anyone fear falling prices no one is worried about the fact that personal computers came down from $20,000 in the late 70's to under $2,000 today. It's great. The lower the prices, the better, because that implies that we as human beings are overcoming scarcity.

9:21The lower prices are, the more abundant the goods are. It would be great if all prices went down to a nickel. Not only does the economy need a good nickel cigar, it needs a good nickel computer. And you laugh, but capitalism, the natural tendency of capitalism is to cause a proliferation of new and better products, of more products, and to cause prices to fall over time. That occurred during the 19th century. Why did it stop occurring? One word, the Fed, or two words, the Fed, which began to create money to prevent prices from falling. Of course, they didn't stop there. They didn't even carry out that mission correctly. They created a superabundance of money.

10:07So we don't need, if it's fine for the prices of individual products to fall, hand calculators coming down. I remember when I was going to college, people were still walking around with slide rules in their pockets. because hand calculators at that time were $350. Now they're $5 and $10. That's a boon to mankind. There's nothing wrong with falling prices. So those are the two errors which were the basis or the ideological basis of the creation of the Fed. Has the Fed, however, carried out its mission of stabilizing the price level?

10:53And this brings me to a third error. That is that the Fed is the inflation fighter in the economy. The economy needs someone to be ever vigilant, to be on its guard against this insidious affliction of inflation, Inflation, as if it comes from on high, or as if it's caused by greedy OPEC oil countries, or by greedy unions that get large wage settlements, that's all nonsense, it's just utter nonsense. Inflation is caused by the agency that is the only agency that has the legal right to print new money out of thin air, that is the Federal Reserve system. So how has the Fed used its powers?

11:40Well let's go back to the pre-1914 situation and let's see what occurred under the gold standard. We had no Fed then, we had no inflation fighter then, we had no price stabilizer then. Well wholesale prices in the United States in 1914 were no higher than they were in 1814 Over the course of a hundred years, prices didn't change much. They went up at times and at other times they went down. By the end of that hundred years, they were about the same. They weren't stable. There was a revolution of prices. Price of some things were higher, price of other things were much lower. But on average, they were about the same. So the gold standard did very well in not bringing about any sort of inflation of prices.

12:27In fact, during the period of greatest growth in American history, from 1880 to 1896, prices fell every single year. Prices were lower. For example, in 1890, consumer prices were 7% lower than they were in 1880. In other words, people's real incomes, in addition to raises that they were getting in work because their productivity was going up, their real incomes were increasing. Remember, if the price of a normal bill is cut in half, your income in terms of the normal The number of automobiles you can buy is doubled. The same thing with computers. When their price came down, your real computer income went up. You can now buy ten computers for $20,000 instead of one. So falling prices increases everyone's real income, even people on fixed incomes, on pensions.

13:17With the Fed creating new money and driving prices up, the people that feel it the most are those people who are on fixed incomes. Yet, before 1914, these people naturally benefited from the progress in the capitalist economy because the money supply was stable, we had new gold coming from mines every year, 1 or 2 percent maybe at most, and yet goods and services were increasing by 3 or 4 percent per year, which meant that prices were falling, okay, very slowly, and that benefited all of us. In fact, there was a phenomenon that was called the Great Inflation, which occurred from From 1896 to 1913, new mines were discovered in South Africa in 1896, and gold poured forth onto the market from these mines. Now this gold was then turned into coins. So the money supply was increased in the United States during that period, and elsewhere throughout the world. And what was interesting was that people were shocked by the increase in prices that resulted, and they call this the Great Inflation. Well, you want to hazard a guess

14:21The point is that the Fed was never really set up to improve on this performance. The Fed was set up to permit banks to legally counterfeit money and to benefit some groups at the expense of other groups, and I'll talk a little bit about that. Now, there were depressions in the U.S. during the 19th century, but they were not caused by the gold standard. They were caused by the fact that we had fractional reserve banking even then. That is, that banks, when people deposited their gold in banks in exchange for checking deposits and paper bank notes, the banks loaned out a proportion of that gold or print it up, additional notes and deposits based on that gold.

15:22So instead of one dollar having one dollar worth of gold backing it in a vault, one dollar might only have ten cents worth of gold or twenty cents worth of gold backing it up in the vault. In this way, the amount of paper money was pyramided on top of a smaller base of gold. What happened was that as prices rose and as people came in to redeem their gold By cashing checks and bringing in their paper notes, the gold began to flow out of the banks, and the banks panicked and began to call in their loans, businesses collapsed, more people rushed to the banks to get their gold, and we had the phenomenon of a bank run. The bank runs were not caused by the gold standard. If there was a dollar's worth of gold for every dollar in circulation, a bank run could not exist.

16:13So, there were depressions, but the Fed, you didn't need the Fed to cure them either. They could have been cured by going to a hard money 100% gold reserve currency. That's not to say that people would not be able to invest their money in interest. It's simply that if you want a checking account, that means that your money has to be ready at every instant. So the money invested in a checking account cannot be lent out by banks. If you want to save your money and earn an interest fee, well then you invest your money in a certificate of deposit as you would do today. In that way the money will be loaned out by the banks for six months, let's say, but you're not permitted to take that money for six months. So there is no addition to the money supply.

16:59So in a world in which we got rid of fractional reserve banking, it would be true, you and I would have to pay a small fee for our checking accounts. But on the other hand, our money would always be there, we wouldn't have problems with banks making bad loans and so on. If we wish to invest our money legitimately at interest, we could do so through banks by purchasing certificates of deposit. Or putting it in money market mutual funds. Now what about the performance of the Fed compared to the performance of the gold standard in the 19th century? In 1914, there was about $11 billion in terms of the currency that people had in their wallets and the balances in their checking accounts. There was $11 billion in circulation in the United States.

17:44That was the first year of the Fed, as I mentioned. By 1946, it went from $11 billion to $107 billion. That is, the money supply increased tenfold. The amount of gold in the economy certainly didn't increase that much. By 1971, the money supply had more than doubled from 100 billion in 1946 to 225 billion. Now, 1971 was the last year that there was any link at all between gold and the dollar. At that point, during that year, the United States was losing its gold to other countries. During the 60s to finance the Vietnam War and to finance President Johnson's Great Society programs, the United States government engaged in, excuse the word, orgy of inflation, in order to pay for these programs without having to raise taxes.

18:40Having done that, these dollars piled up outside our country. Foreign governments, as these dollars were spent on imports, foreign governments got a hold of them and held them because the dollars, still at that point in the early 60s, was as good as gold. The US may have had something like $25 billion worth of gold. American citizens could not convert their dollars into gold. That was not permitted. From 1933 onward, we were not permitted to convert dollars into gold. However, under an agreement, the Bretton Woods Agreement of 1946, foreign governments could convert their dollars into gold, so they were willing to hold dollars. And they were holding maybe $12 billion worth of gold, $12 billion of convertible dollars.

19:28And the U.S. Treasury had $25 billion worth of gold, so everyone felt this is great, you know, we'll hold dollars rather than holding, demanding the gold. However, after the inflation, after more dollars had piled up, There was something like $80 billion now in the world economy held by foreign foreigners and the U.S. government, which had lost some gold as France and Germany began to turn their dollars in, our gold stock was down to $12 billion. So now there was $12 billion which had claims of $80 billion in the world economy, only $12 billion worth of gold left. There was a run-on on our gold stock. We had tried to prevent it in the late 1960s. France wanted to turn in their dollars for gold, and we told them, well, you know, you can do that, but we'll remove our nuclear umbrella, okay? We'll stop protecting it from the Russians, do the same thing to the West Germans. Okay, so basically blackmail. But the whole game was up

20:26by 1971. We certainly didn't have enough gold to convert people's dollars, foreign government's So at that point, President Nixon in effect declared bankruptcy and went back on a solemn pledge. He closed the gold window. There was no more discipline on money creation left. The last link to gold was gone. It had been cut. So from 1971 to the end of 1996, remember I told you in 1971 we had about $200 billion in checks, in checking account money and currency in the United States. in the United States, it quintupled to over one, by the end of 1996 we had over one trillion dollars of M1 in our economy, it quintupled. Now, remember we started with 1914, it was 11 billion dollars in the economy in circulation, now there's one trillion dollars.

21:16Where did all that new money come from? The Fed created it out of thin air. Every dollar of that new money that was created over the years, in effect was counterfeiting, and as all counterfeiters, it affected a redistribution of income from one person to another person. In other words, if there's a counterfeiter in your neighborhood who counterfeits $10,000 worth of bills, and goes and begins to spend them in the retail outlets in your neighborhood, that's going to drive prices up. There are no more goods available in the stores. Prices will go up. go up, and you and your family and others in the neighborhood will now face higher prices, which means that even if your money income that you earn from your jobs and your investments stay the same, your real income is dropping.

22:07So what the Federal Reserve did was to permit the U.S. government to surreptitiously redistribute income and wealth from one group of citizens to another group of citizens. Who were the people that got this income and wealth? For the most part, it was the people who got the new money first. If the government spent this money, for example, on subsidies to farmers, they got the new money before prices went up, so their real incomes were going up. If I get this new money 18 months later, because finally there's an increase in the demand for financial services in New York where I work, and some of these people who are getting higher salaries there increase their demand for an MBA education at my school, well then 18 months later I have an increase in my salary. After 18 months, I've been paying higher prices. My salary has been cut in a very real sense.

22:56So this increase in the money supply, this relentless increase, year after year from 1914 to today, was just massive fraud in any reasonable sense of that word. Just want to give you another example. In 1914, you could walk into an auto showroom, if they had such things in those days, and you could buy a Ford for $350. Today, a Ford tourist costs you $20,000. That's all the Fed's doing. Prices should be dropping over time, because cars are more abundant today. Prices should be lower, not higher. We should be paying $300 for a Ford, $250 for a Ford. It's ridiculous. Men's suits were $20. Now they're between $300 and $500.

23:42Not the ones I buy, unfortunately. A gold ounce was $20. Today, a gold ounce is about $350. Very interestingly, in 1914, a men's suit was one gold ounce, and today it's about one gold ounce, $20 then, $350 today. So gold has held its value in terms of goods and services. Also, very quickly, our economic growth has slowed down. From about 1950 to 1973, labor productivity, the amount of goods and services produced by the average American worker, was growing every year by about two to two and a half percent.

24:29Each American worker was producing about two percent more than the year before. Since 1973, unfortunately, that has slowed down to a half a percent growth, to one percent per year. The Fed was supposed to ensure, through stable prices, that economic growth would be high, and actually it's been falling. Finally, let's look at the national debt. The national debt in 1914 was about zero. The national debt from the Civil War had been paid off. By 1946, after World War I and World War II, it was $250 billion. It hadn't risen much. Up to 1971, it was still $250 billion. Today, and I have figures for the end of 1995, the debt has gone from $250 billion in 1971 to $3,668 billion.

25:23That's net. If you count the off-budget items, it's just about $5 trillion. Enormous increase. The Fed has permitted that to happen. Democracy plus paper money equals huge deficits. Why is that? The way you get re-elected in a democracy is to increase your spending programs. That's how you get votes. You spend more on foreign subsidies. You increase defense spending on products from Silicon Valley. You buy more missile guidance systems. That gets you the votes of these groups of people. However, if you have to raise taxes to pay for those spending programs, what occurs is that you lose the votes of the vast majority of productive Americans.

26:10They see the money coming right out of their pockets into these spending programs. Under the gold standard, therefore, spending was low because if you raise spending, you had to raise taxes. You couldn't create gold out of thin air to finance these new spending programs. Today, especially since 1971, that link is broken. There are no more golden handcuffs on the government. Now, if they want to spend an extra $100 million, they have the printing presses. They can simply print it up. So not only did the Fed lead to a massive inflation, it also led to massive fiscal irresponsibility. Now, the Fed, obviously, is responsible for monetary policy. Fiscal policy is the treasury. But there is a connection.

26:56If you can print money out of thin air, it makes it easier to raise government spending. So the Fed is also responsible for the fiscal irresponsibility that we're confronted with in today's world. Now let me just say a few other things about the Fed. Let me address the independence myth. The Fed supposedly is independent. There is no oversight by Congress. Supposedly independent of all other branches of government. It doesn't report to Congress. Congress doesn't oversee its budget. And yet, the Fed really is not independent. Let me encapsulate that in an anecdote. Arthur Burns, who was the chairman of the Fed under President Nixon, After he retired from that position and became the ambassador to Germany, was asked by a reporter, well, why does the president tend to get the monetary policy that he wants?

28:07And what a president wants, of course, is what President Clinton, for example, wanted. Going into the last election, President Clinton wanted Alan Greenspan to lower interest rates, to increase bank reserves and to inflate the money supply to ensure that we didn't go into a recession prior to the election. Studies have shown that American voters are very interested in how the economy is performing about one year before the election. The one year leading up to the election is very crucial. If the economy is in a recession, the incumbent president will lose a lot of votes for that reason. And as a result, many will lose elections. That happened to President Bush. We were slowly recovering from a recession that we were in in 1990-91.

28:52That happened to President Carter. We were in a recession in 1980, and that's when he lost the election in 1980, and so on. But anyway, Arthur Burns said, if we don't give the president the monetary policy he wants, we'll lose our independence. In an unguarded moment, even out of the mouths of ambassadors and establishment figures comes the words of truth. And that's true. In fact, the Fed is not truly independent. There's a lot of pressure exerted on the Fed by the incumbent president and by his party to ease monetary policy, that is to inflate the money supply before an election. And they tend to give in into that pressure, as Greenspan did.

29:38In fact, remember the chairman is reappointed every four years and they want to get reappointed. Okay, let me just say a few words about the Fed using its money creating powers to feather its own nest. Not only does it give the president the monetary policy it wants, or the president wants, But inflationary monetary policy is also directly beneficial to the Federal Reserve system. The Federal Reserve owns 451 billion dollars in assets. These are mainly interest-bearing government securities. In today's world, when the Fed creates new money, it doesn't run the printing presses. The printing presses are at the treasury. That's not how the Fed creates new money.

30:24What the Fed does is to go out and buy government bonds from the market. Where does it get the money to buy those government bonds? Just simply write the check on itself. You don't even have to write a check. You just input some data into a computer. That check that it writes on itself is then paid over to the bond dealers who then deposit it in the banks. And that money becomes reserves. Those reserves are multiplied. And if you want to see how this occurs, Murray Rothbard talks about it in the case against the Fed or even in his book, What Has the Government Done to Our Money? Those reserves are multiplied and the money supply increases as a result. So, every year since the Fed has been inflating the money supply, it's been buying government bonds, so now it owns over $400 billion worth of these bonds, interest-bearing bonds.

31:09Now, the interest it earns on these bonds, in 1995, for example, totaled $22 billion in that one year. It has to refund some to government, to the Treasury. It refunds $20 billion, but it keeps the other $2 billion for itself. So that they have an air force, you have to use this money for something, right? They have an air force of 47 Lear jets and cargo planes. Just last year it was found out that the Fed kept a $100 million slush fund, that came out. There's new building going on in Dallas and Minneapolis and other areas where the real estate market is depressed and businesses are cutting back, but the Fed is building. The salary of the Chief of Maintenance of the Fed, I guess this might be in Dallas, is $163,000.

32:06The maintenance chief, it's $163,000. 72 Fed employees earn $125,000. The maintenance chief, by the way, makes more than the Secretary of State or the Secretary of Defense. Okay, now, what is it fed up to today? Let me spend a little bit of time on that. We're facing a very puzzling situation. Let me just go back to the 1920s for a moment. Let me point out that the Austrian School of Economics, and you'll find most of the Austrian economists in the United States associated with the Mises Institute, really only the Austrian School of Economists fully understand the inflationary phenomenon.

32:56Almost every other school of economics defines inflation as an increase in the price of consumer goods or an increase in the CPI. But this leaves out of account a tremendous number of other implications of increasing the money supply. Austrian economists define inflation as an increase in the money supply. When you increase the money supply, you do many other things than simply drive up the price of consumer goods. And in fact, these other things cause greater maladjustments in the economy than a simple rise in consumer goods prices. Now, if you look at the 1920s, just very briefly talk about the 20s and 1980s, and then I'll talk about the 90s. In the 1920s, prices were pretty stable. From 1921 to 1928, the year prior to the stock market crash, wholesale prices hadn't changed. They were constant.

33:52So, American economists, led by Irving Fisher, the father, who was a forerunner of monetarism, told us that we have abolished the business cycle. From now on, we'll face permanent prosperity. The Fed has found a way to stabilize the price level. A few months after he made this statement, of course, we had a massive stock market collapse, followed by a deep depression. Why was that? Well, because the Fed, in fact, and by the way, Austrian economists, Ludwig von Mises and Friedrich Hayek, looking at the American situation in the mid-20s said there's going to be a great crash coming. Because even though American prices, consumer goods prices, are stable, there has been a massive increase in the money supply at about six and a half, seven percent per year.

34:40Why then weren't consumer goods prices rising? They weren't rising because of the tremendous technological innovation and capital accumulation. There was a lot of increase in machinery and so on going on every year. And the amount of goods and services in the American economy was increasing. And that was met by the increase in the money supply. So the increase in consumer prices did not show up. However, what the Austrians pointed to was we had interest rates falling, being pushed down artificially. With lower interest rates, we had more businessmen borrowing money and investing in what we call higher-order goods, investing in new electric utilities, steel plants and so on. We had the stock market booming, we had the real estate market booming. So the manifestations of the inflation of the money supply were in these other markets, stock market, bond market, real estate market and so on.

35:31We did have a recession when the Fed became fearful of the bull market in 1928 and stepped on the brakes, stopped increasing the money supplies swiftly. Interest rates shot up, businessmen found that they had made mistakes in investing in these capital goods, there were layoffs and the country went into a depression. Only the Austrian theory of the business cycle has an explanation for that. The same thing happened in the 1980s. In the 1980s, when Mexico almost failed in 1982, almost defaulted on its debt to the Wall Street banks, the Federal Reserve system began to pump up the money supply to bail Mexico out. So the supposed Reagan recovery that was supposedly due to these tiny, tiny tax cuts that his supply-side advisors had talked him into carrying out was really due to a massive inflation of the money supply that occurred from 1983 to about the end of 1986.

36:31Once again, consumer goods prices rose very slowly for various reasons. One reason was that some of the new money that was being printed up went out of the country to finance the drug trade, to finance underground economies in Eastern Europe and so on. So there was an increase in the demand for money, but still the fact that the Fed was printing this new money up and increasing bank reserves, drove interest rates down, caused an investment boom, much as it did in 1920 and set up the conditions for a recession. Stock market crash as we know in 1987, right? The Fed immediately began pumping money into the economy in 1988 and it postponed the recession for a while. And we did have a very deep grinding recession, 90 to 91. That's the official dates. Most Americans would say it went on through 1992 and into 93.

37:20The Fed began to pump the money supply up again in 1991, and increased the money supply very rapidly, in 1991, 1992 and 1993. Now what happened? In 1994, very interestingly, the Fed stopped increasing the money supply. For the year, the money supply was slightly negative, and also in 1995. According to the Austrian theory, we would have expected a recession to hit in 1994. And there were some signs that there could have been a recession, but it never hit. Well, what's going on now? What happened was this. In 1994, or actually 1995 and 1996, even though the money supply, again, was in 95, was not increasing, and in the first half of 1996 it wasn't increasing, what happened was that there was foreign governments, which were in the recession longer than the United States.

38:14The recession was lingering in Japan and Europe, began to increase their own money supplies. Franks and pounds and yen and so on. That drove down their interest rates. So interest rates for a while in the world economy in 1994, 1995, 1996 were lower than they were in the United States. What that resulted in was foreign capital flowing into the United States at a very, very high rate in 1995 and 1996. This foreign capital was used to buy up American, U.S. government securities. That drove our interest rates down. Remember, if interest rates are low in one part of the world, money flows to where they're high and drives them down in the other part of the world. So we had an investment boom here in the United States. It was a result of inflation in foreign countries operating through our balance of payments.

39:03And what that did then was to, as interest rates fell in the United States, that pumped up the stock market. So we had this bull stock market, 95 and 96, that was financed basically by foreign capital. Now, in addition, in late 96, and to help Clinton out, Greenspan did begin inflating the money supply again, driving interest rates down and inflating the money supply, but not by very high levels. What we face now is the following. Foreign governments are starting to worry about inflation. Oh, by the way, there's also been some pressure on the Japanese to make sure that they keep buying U.S. government securities. Because if they stop, and if they begin to sell them, their banks are in a lot of trouble.

39:50Their banks hold stocks in their stock market, which is plummeting. Real estate, which the real estate market in Japan collapsed. If these banks were forced to liquidate, they would have to sell their U.S. government funds, the dollar would drop, capital would flow out of the United States, and you would find the recession hitting in the United States. You'd find a collapse of the stock market. So we're on the edge of a precipice in the United States, okay? We're about to fall off, okay? If you recall Alan Greenspan's remarks, I don't know if it was a month ago or two months ago, that the boom in the stock market may be artificial, may be speculative.

40:35That scared the stock market. The stock market is very, very nervous. Anything that drives up interest rates, and especially a flight from US Treasury securities, will bring about, I'm convinced, a drop in the stock market. and the stock market, and followed most likely by a very, very severe recession. So this is the crossroads that we're at right now. As a result, as I said, not only of intellectual error, but of the sin of covetousness. We're stuck with this monstrous entity that has our economy on the verge of a huge collapse in the stock market and possibly a very grinding recession.