Monetary Freedom and its Opposite

0:00Like everyone else, it's great to be here with you this weekend, this very important conference. I've been very excited about this conference, known about it for quite a long time. And as a matter of fact, I'd actually written out two other speeches for this conference that I'm not going to be giving today. The first speech was, I was going to warn you about a coming crash of the stock market. And in the second speech I was going to warn you about the dangers of financial bailouts of Wall Street. So, I'm basically stuck with monetary freedom and its opposite. Today we stand at a point in time, at the beginning at least, of the end of an economic era that we can call the dollarization of the global economy.

0:55The dollar still dominates world financial markets and many currencies around the world are still linked with the dollar, including China. The period in which the dollar gained this influence in the world economy is now over and it has two new competitors have entered the scene, the Euro and the Chinese Yuan. As all of you know, gold has now gone over $1,000 an ounce for the first time, and our trading partners around the globe are growing worried, both about the inflation that we are exporting to them, as well as the value of their central bank holdings of U.S. government securities.

1:42Of course, given all these recent bailouts, it would seem that just about everything, including my home mortgage, is now a U.S. government security. As we enter the era of the decline of the dollar, all sorts of reform efforts will be used to address this decline and the economic instability that results in order to shore up the value of the dollar and its prestige. Reforms designed in Wall Street or in Washington, however, will not work and will amount to nothing more than a rear-guard action by the moneyed interests that control our government. The only true path to reform is monetary freedom.

2:28Now we have gone from a situation in history where money and banking were entirely free. They were developed and emerged in the market economy and entirely free of government intervention. And now we have one that is completely dominated by government. Instead of privately minted coins made from precious metals, we now have a system of government printed fiat currency. We have gone from a system of private banking that provided bank notes and checks for demand deposits, as well as banks that made loans on the basis of bank capital and time deposits, all regulated by the profit motive and competition in a free market.

3:14Now we have banks that are completely regulated by the central bank and a whole host of other regulators, all types of federal regulators, state regulators. I was a, I confess, I was a state banking regulator. So, only for two years, and actually I didn't do a thing, they didn't want me to do anything. So the whole idea that our current financial mess resulted from a lack of regulation is absolutely laughable and completely untrue.

4:06Everything done by banks and financial institutions is regulated, re-regulated, over-regulated by many layers of different regulatory bureaucracies. Now this transformation from a free market to one that's completely controlled is a process that has taken place over centuries and the end result that we're living with right now is clearly not working. By giving up our monetary freedoms, particularly over the last 100 years, we have given government the ability to grow in size and scope and to achieve unthinkable levels of power. So giving up our monetary freedom has also resulted in a tremendous loss of other types of freedom by big government. Every step forward towards government control of money has resulted in chaos and destruction. And if you look back in history, in American history, every time the government took control of money and banking, we ended up with business cycles, wars with depressions and so forth. We are now at a point in time when the US government is bankrupt. It cannot pay its bills. It cannot pay off its debt and it

5:31has a future unfunded liabilities of a current value in excess of 60 trillion dollars and that calculation was made before any of the bailouts, before any of and the restructurings like increasing FDIC insurance from $100,000 to $250,000 or taking AIG or Fannie Mae and Freddie Mac under the wings of government. So that $60 trillion is probably much greater as we speak in growing every day. Given that the political parties have done nothing to solve the financial problems of government or to even reduce its magnitude And given the fact that everything that they have done, including things like the prescription drug benefit, the war in Iraq and the bailout of Wall Street, only makes this problem worse, I can only conclude one of two things.

6:27Either that Washington, D.C., and the politicians that we send there are evil and plan to resort to a hyperinflation to pay off for this mess, or they are collectively as dumb as a sack of horse manure. I'm willing to entertain the idea that both apply. Now, at the first gold conference, the problems that we imagined would result from a fiat fractional reserve banking system seemed remote in work. We've gone through a number of problems, financial meltdowns around the globe.

7:14We've now gotten to the point where the whole system is really in a meltdown phase. And that's what we were imagining back then. So when we think about hyperinflation, you know, how far out into the future that's going to take place, we really don't know any more than we did 25 years ago with the gold standard conference. But it's important to remember that hyperinflation is not just higher prices. It is social chaos and the breakdown of social order. You can see that in Zimbabwe. Dr. Prince was just showing me the currency over there. It's dated and it goes from like 50 million one month and 50 billion the next month.

8:02And at a basic level we have to realize that our lives are built on a structure of prices, that we of course co-determine, but our lives are built on those prices, what we eat, what we wear, where we live, how we live, all of that is determined by the structure of prices in the economy. But in a hyperinflation there is no solid basis for prices, and therefore our lives are thrown into chaos. Society becomes more violent, more criminal in addition to becoming more chaotic, and government too becomes more violent and criminal, more than normal, towards its own citizens.

8:50Now given all this, monetary reform is of an utmost importance, and knowing the proper path for reform is more important than ever. Before I get started with specifics, I will note three things. First, we should be moving in the direction of monetary freedom and away from government control and intervention. Second, we want to get back as quickly as possible to a situation where government has no control over money or banking. And three, ultimately we want to get back to a system of privately minted and purchase metal coins as the basis of money and banking and then let free market competition regulate and innovate from there. Now there are some reforms that we obviously do not want and that will not work.

9:40For example, we don't want the supply side or solution of the Federal Reserve targeting the price of gold. That solution is not only unworkable and dangerous, but it leaves government entirely in too much control of money and banking. We don't want a new Bretton Woods system that they're discussing as we speak here today. We don't even know what that amounts to, but for sure it's going to leave government with way too much power and control over our money and banking. The old system of Bretton Woods did not work and was doomed to failure as predicted by both Ludwig von Mises and Murray Rothbard. We also don't want to return to a gold exchange standard where governments are in charge of most of the gold and simply emit paper notes for people to use.

10:34This approach is unnecessary and inevitably harmful when too many notes are issued that that are not matched by a corresponding amount of gold. Now, don't get me wrong on this next point. We actually don't even want to return to a gold standard system, which leaves government, again, with too much room for manipulation. In fact, I would argue that in a sense we want no standard at all. Standards, with respect to money, implies government regulation and controls, and results, for example, in the problems of bimetallism, where government establishes a fixed ratio of gold to silver.

11:22As soon as reality deviates from the plans of government bureaucrats, either gold or silver, money virtually disappears from circulation and throws the economy into chaos. When Britain overvalued silver versus gold, for example, all but the most worn silver coins left the market, they left the country. And the British people were left without money for everyday exchanges and payments. This was the beginning of the gold standard. Pretty good by today's standards, don't get me wrong, but still an unnatural result of government control. I urge you to read George Selgin's new book, it's available here because of the Mises Institute, which gives the history of how the market came to the rescue at this time and prevented the derailing of the Industrial Revolution in England.

12:20And basically it amounted to private companies producing the much needed small change, coin money, all on a private basis. Now, the list of things that we do not want in our monetary system is short and simple. We do not want the Federal Reserve. In any form, including Federal Reserve notes, any legitimate role the Fed plays, such as serving as a clearinghouse for checks, can be, and in many cases already is, handled by the private sector. We do not want government control in any form over money, banking, the interest rate, or the money supply.

13:06Second, and this is also important, we do not want federal deposit insurance. Of course, Congress just increased it, but we don't want it at all basically because federal deposit insurance creates a moral hazard that puts the taxpayer at risk for bad decisions of bankers. In fact, deposit insurance is a moral hazard and therefore is not truly an insurable risk, okay? It's just not logically possible to say we're going to insure deposits that are based on loans being made by bankers who can make risky loans or sure bet loans. So you can't have that, it doesn't work in the market economy.

13:54However, banks and depositors can overcome this problem simply by being certified as holding 100% reserves against all of their demand deposits. So the market has an easy solution to the problem of moral hazard of deposits. In a market economy, as a matter of fact this was the way it existed when I was a child, Depositors pay fees to have their money deposited in banks, in fees to write checks on those same deposits. Remember as a little kid getting Christmas presents or birthday presents from my great-aunts and they would give me a check for $5.05. And I would take it to the bank and they would give me $5 back and I said, wait a minute, that said $5.05.

14:40and they say well that's the fee for writing the check and no amount of complaining, logic or crying got that nickel out of that bank. So you know there is a solution, there is a replacement mechanism for federal deposit insurance and it's basically being certified as a 100% reserve bank for all demand and Deposits. Now the list of things that we do want in our monetary system can also be brief. We know that money emerged on the market and was produced by the marketplace itself. After the world had achieved substantial integration, gold, silver and copper emerged as money.

15:28Their most useful form as money was coin and the dominant form of money throughout the The most obvious thing we want then is a return to coins denominated by weight, and of course all of the early coins of the world, Europe, the names of them, the British pound was a designation of weight, the lira was a designation of weight, the franc was a designation of weight, the thaler and the dollar was a designation by weight. This is the money the world used as a basis of its economic prosperity and higher standards of living because it enhanced trade and economic calculation.

16:15And of course, checks, debit cards, credit cards and everything else that has emerged in the market economy since then can easily be adapted to gold and silver. We need freedom, however, to hold our money in both gold and silver as we see fit with with no fixed government ratio between gold and silver. So what do we need right now? It seems that we need to proceed apace given the current crisis. The first thing and the most direct thing is the repeal of legal tender laws. This would begin to eliminate the monopoly of government and the Federal Reserve on the money we use. This would give us back the right to decide the money that we offer in transactions and These are the money that we would be willing to accept in transactions. We must also allow other monies, such as gold and silver, to compete with Federal Reserve notes.

17:12Without any hindrance on the use of gold and silver, coins, such as the application that currently exists of the capital gains tax against gold and silver. These two moves would go a long way to reducing the Fed's ability to inflate the money supply and manipulate the economy. For example, any inflation by the Fed would eventually result in higher dollar prices of goods and lower gold prices of goods. So what I imagine is you go into Walmart and their prices are maybe set in terms of dollars, but you could use your debit card that's holding gold directly for dollars.

17:57And so if you see the dollar prices rising, but gold prices falling, chances are more people are going to switch from holding their money from dollars and more people holding it in terms of gold. is an automatic check on the Fed's ability to inflate and it creates the mechanism for a smooth but certain transition from dollars to gold. Of course, ultimately we need to end and send the Federal Reserve into receivership process whereby the Federal Reserve assets, including the entire U.S. gold hoard at Fort Knox and all other depositories as well as the Fed's real estate portfolio should be used to satisfy the holders of Federal Reserve notes.

18:47Now this process of course would be conducted by lawyers and accountants with hopefully some Austrian economists serving as consultants as to what exactly qualified as dollars to be redeemed. Murray Rothbard offers a very specific plan in his Mystery of Banking which has just recently been released in a second edition and after this process the dollar would henceforth be just a name of a monetary unit that represented a very small amount of gold. One immediate advantage of this process is the restoration of monetary freedom would force a sharp reduction in the size and power of government.

19:36The federal government would immediately have a hard time borrowing money and would be forced to cut expenditures. Just as government control of money allowed government to expand to such a dramatic size, monetary freedom would force government to contract. New spending would have to be paid for by new taxes, and of course people don't like that, because borrowing and the inflation tax would no longer be a viable option. Balanced budgets would force Congress to start making tough decisions rather than just okaying everything that came across their desk. For example, the invasion of Iraq would never have been contemplated on a gold standard. Neither would things like the prescription drug benefit legislation and a whole host of other spending programs.

20:28Budget cutting would be put on an even keel with spending, or maybe even at an advantage. And politicians would be more open to shutting down entire programs and selling government assets, things that are currently basically off the table. So that's what we need to do as a group, as a society, as a people. What do we need to do as individuals? Well, Mises wrote that the era of inflation will only come to an end once people realize that the process of inflation is ongoing and that it will continue without end and that there is no end in sight to this process of inflation. At some people, At this point in time, people will stop holding dollars and dollar-denominated assets. Individuals who understand inflation should be in a process of converting dollars and dollar-denominated assets into non-dollar-denominated assets.

21:29For example, you can, in a sense, put yourself on your own personal gold standard simply by holding gold and silver for your savings, rather than dollars and dollar-denominated assets. So there are ways in which individuals can make a move, can add to this process of the more people who drop dollars and the more people who pick up things like gold, the more pressure it puts on the dollar. And the more we talk about gold and silver as an alternative to money, the more momentum we can create in terms of an ideological push for all of this legislation. And whereas in 1983 there was very little hope, very little on the horizon with respect to a positive movement for gold, even though there was a gold commission at work in Washington, there wasn't an ideological movement.

22:26But today, as far as I can tell, there is a growing movement in that direction and I note this because I get a lot of calls and emails, questions about economics, that's one of my jobs here, is to answer people's questions and over the last couple of months I've been getting a group of questions which I haven't gotten in many, many years and they all have to do with objections to the gold standard, people writing in and Frantically saying there's not enough gold to go back on the gold standard or what if China redeemed all of its government securities and all of our gold got sucked off over into China or what about you know that gold is too heavy and too bulky to carry around and I prefer to use a debit card and I just remember a lecture I gave a number of years ago where where I put as many paper dollar bills in one pocket and I pulled that out and that was about $200 and then I put all the gold coins I had, it didn't fill up my pocket, but all that I had and the price of gold was much, much lower back then, it was like $300 an ounce and yet I still was able to pull out several thousands of dollars of gold coins.

23:48So all of these objections to gold and silver as a monetary system are in context really not viable. There is enough gold. China's not going to suck away all our gold. Gold and silver are not too bulky or heavy. We can still use our debit cards and credit cards. All the gold that's ever been mined still exists, the supply changes almost imperceptibly, there's no big movements in the supply of gold or even for that matter the demand for gold, it doesn't cause harmful deflation, it doesn't cause the business cycle.

24:34One objection that's raised by Milton Friedman is that the gold is too expensive because gold itself is too expensive and we should therefore use paper and use gold for filling teeth and things of that nature. But of course that doesn't hold water either because almost all of the gold is held by governments and individuals as a hedge against inflation, so it's still out there being held. So Friedman's example, counter example to the gold standard is also laughable and so all of these objections are really laughable but it's a really important and I think telling that these objections are being raised in public discussions by journalists, by policymakers in Washington to try to fend off the movement to gold. Thank you very much.

25:28Thank you very much.