Transcript Below:


Mike Cook:                             Robert Murphy is the senior economist for the Institute for Energy Research. He's a research fellow at the Independent Institute. His PhD in economics is from New York University. Bob is the author of several books, one of which you can actually get today. It's called The Politically Incorrect Guide to Capitalism. It's a [inaudible 00:00:24] in 2007. He also has a book called Lessons for the Young Economist. He runs the blog, Free Advice, at ConsultingbyRPM.com.

His topic today is called The Importance of Sound Money. Before Bob comes up and begins to tell us the principles that lead to sound money, I thought it would be appropriate for us to take a look at the exact opposite of sound economic principle. How many of you have heard or seen this word [Trillion]? It can be a good word, and it can be a bad word. Trillion, it gets bantered about quite a bit today. That's what it actually looks like numerically [1,000,000,000,000]. It kind of stunned me when I realized there's actually 12 zeros after the word trillion. Now, the interesting thing is that sometimes we hear words that are bantered about. News commentators, MSNBC, CNN, whoever, we begin to talk about trillion as if we talk about one dollar. And yet, there's quite a difference.

How many of you are familiar with this friend? It's a scary thing. There's a lot of people that watch this every single minute of every single day, and it's quite a fascinating thing. I took a screenshot of it at 10:00 this morning. So I want you to be happy to know that this hasn't been running since 10:00 this morning. At least, it hasn't been running on my slide. But at 10:00 this morning, our U.S. national debt was at 17.9 trillion. What does that begin to kind of look like?

Well, I started to do things for myself, which makes things simple. So I began to look at the $100 bill. The stack right there is $10,000. So, if you take 100 $100 bills, that's 10,000. Now how many of you are old enough to remember the $6 Million Man? Do you remember Lee Majors, the astronaut? "We have the technology. We can rebuild him." What did it cost to build him? Six piles of that right next to this guy right over there. That's all there was, was six little piles. $6 million doesn't look like a lot of money. On the middle there, that's what 100 million looks like.

One billion are 10 pallets (five each side). Ten pallets are one billion. One trillion is ten thousand pallets stacked on top of each other two high. This little fellow right here, this is him in real life. That is only one trillion. The truth hurts sometimes. But this diagram shows 16 towers - each of them is one trillion - surrounding the Statue of Liberty. So around the Statue of Liberty, there are $100 bills stacked. Each tower represents one trillion. This is from 2013. So the reality of this diagram is it's actually kind of wrong. Because if this diagram were up to date, as of this morning at 10:00, those two towers that are partially being built would actually be to the very top.

So if there was ever a time for us to listen to an economist, graduate of Hillsdale College, doctorate from New York University, The Importance of Sound Money, please welcome Dr. Robert Murphy.

Robert Murphy:                  Thanks, Mike, for that very thoroughly depressing introduction. As an economist, I'm going to give you guys mostly general principles here but some quick financial advice. If you ever do manage to, in your business, get $1 trillion, you don't want to stack it up like that, because it can fall over. I prefer the first method of displacement.

I'm here talking about sound money, and I understand this is a very serious topic. And I really do appreciate all of you showing up. Albert Jay Nock once wrote that the people who really need to influence society instead of trying to focus on swaying the masses, instead they should focus on the remnant. And that's what I feel like I have been doing in my career the last several years, is reaching out to the people that, if we can't necessarily prevent what's going to unfold in our country, at least when these events do occur, there should be a remnant that can explain what happened, and so that the wrong lessons aren't drawn. That's my goal at the very least is to educate you in that respect.

So there's a lot of current events that I'm sure people are interested in asking about and discussing. So just for you guys to pace yourselves, I'm going go for about 40 minutes or so. I've set my alarm here. I'm a former college professor, so I have a tendency just to keep talking. So I got this device technology to cut myself off and then we'll turn it over to your questions. Let me move this down. I'll turn it over to your guys' questions around 12:50 or so. Then I think they said around 1:15, we'll officially break. I have some books afterwards if you want to stick around. Obviously, at any point, if you have commitments and need to leave, feel free.

The discussion today is on sound money, and I think you guys understand the context, but I realize when I was tweeting that out, I had to clarify to people that if they don't have the context, they might think that means buying something with voice-activated technology. No. Sound money, we mean the adjective of sound principles, a firm foundation. If somebody says something and somebody else remarks, "That doesn't sound like a very sound idea," that's the sense in which we talk about the importance of sound money.

Historically, that's what the market's generating. We're going to talk about that in a little bit here. But then, especially since the rise of what's called fiat currency, we no longer have a sound money. So I want to just give you guys a foundation and then let you understand economically how to think through these topics. Then, later on, we'll sort of bring in more current events.

First of all, what is the importance of having money in the first place? What is it? We all vaguely recognize money is important. Certainly, individually, we all want to get more money or other things equal. That's certainly that makes you feel like you're better prepared to deal with reality. But from a social perspective, what is it that money does? Well, one way to think about it is it's a human institution that helps us coordinate our activities. In that respect, it's sort of like language. If you ask yourself, "What is language good for?" Well, it allows people to coordinate, share information much more efficiently. And money also does that. Obviously, money is different from language, but in that respect, they're similar. Money is an institution that humans have created that allows them to coordinate with each other.

Let me just build up to that and let you see what I'm talking about. First of all, think about what do we do with just trades without money or what you might think about as barter? Imagine two kids going to school and one kid has a bologna sandwich, and the other kid has a peanut butter sandwich. The kid with the bologna sandwich - you can probably guess where this is going - likes the peanut butter better than the bologna and with the other kid, it's vice versa. As long as they're aware of each other and they have no reason to doubt the sincerity or truth, they might agree to a voluntary exchange. So they walk away. There was no money involved there. In what sense, without knowing more about the situation, do we think that's a good thing as economists? Well, because they both now walk away with the "more valuable" sandwich.

Even right there, even as trivial as this seems and commonplace, believe it or not, economists didn't start thinking about that exchange properly until the early 1870s. It ushered in what was called the subjective revolution or marginal revolution in economic thought. Before then, going back all the way to Aristotle, people thought about market exchanges that if this thing trades for that thing in the marketplace, they must have equal value. Because otherwise, why would they have traded for each other?

That sounds plausible at first, but actually it's wrong. If that's the way you're thinking about it, you're never going to get anywhere. You're going to tie yourself up in knots and not be able to explain anything. So again, think about the two kids trading the sandwiches. The reason the one kid gave up the bologna for the peanut butter sandwich is he thought the peanut butter was more valuable than the bologna sandwich, and the other kid thought vice versa. So they each walked away, in their own minds, with the more valuable sandwich. That's the sense in which economists in modern times say that value is subjective.

Especially being here at the Acton, I want to clarify that, because some people are concerned. It sounds like it's endorsing moral relativism, and it's not. Value, just meaning the sense of the value you give to a good in that respect.

So that's the starting point of modern economic price theory and how you explain where prices come from in the market. Let me just hit that one more time to make sure you're seeing it. You need to know that value is subjective to make that leap and to have the proper foundation to explain where market prices come from, because if you're thinking of value as an objective thing-- for example, this is how the classical economists thought about it. This was before the revolution and economic thought.

Great economists like Adam Smith, David Ricardo, they had in mind that value was an objective thing about the object, and so if this stagecoach trade for this many units of iron ore, in their mind, it's because they have the same value. And therefore, the economic theorist was trying to figure out what is it about them that's equal?

They're obviously physically the same things. The stagecoach is the same thing as iron ore, so they searched around and they tried things like the labor theory of value to say, "Well, maybe it's like the congealed labor power that's represented and what it takes to build a stagecoach versus to get all this iron ore. Maybe that's really what it is." So they thought there was some quantity of something in the objects themselves that was of equal magnitude, and that's why, in the marketplace, they would trade at par with each other; they would have the same amount of units of money fetching both quantities. And that was the whole foundation of Karl Marx's approach to economic value.

The point is, you don't get anywhere going with that. Because fundamentally, when people trade things in a voluntary exchange, it's because each party values the other thing more than what they're giving up.

Okay, so that's the basis of voluntary trades. And you can see why that fosters friendship and harmony with people - that if they both can just trade and walk away with the better object, you can see why that would foster social cooperation. That's the sense in which commerce can be promoting society.

But the problem is if it's just barter, if it's just one-off trades like that where you find someone who has what you want and that you have what they want and vice versa, that's very limited. You can imagine much more complex original arrangements where there are three people and if you moved one thing over there and you give one thing to her and she gave one thing to you, that the three of you would be better off compared to the original status quo, but just any two of those swaps taken individually, one party would object to that. You can imagine situations like that. So individual barter transactions won't work in a situation like that where they'd be much harder to coordinate.

So that's where you start seeing money come into play. And this gives rise to what we think of as the division of labor. So a lot of this stuff is just standard things that you just take for granted in everyday life, but I'm just trying to show you how important money is to facilitate all of this.

For example, me, when I was a college professor, there were people who wanted to take my economics classes, or their parents forced them to take my economics classes. They really wanted to get their business degree, let's say. But the point is, there were people who either implicitly or explicitly valued my economics lectures, and then there were people in the marketplace that I wanted things from, like the butcher selling meat or the dentist giving dental services. But the point is, those things didn't all line up in a bilateral fashion. So without money, it would have been extremely difficult to coordinate all of that, that ultimately like maybe a carpenter who wanted his kid to get an economics lecture from me could have made a deal, the three of us, with the butcher to say, "I'll tell you what. If Murphy teaches my kid economics, then I'll do some work on [the butcher's] deck."

Then the butcher says, "Okay. Then, I'll give Murphy some hamburger meat." So the three of us are better off with that arrangement than the original status quo. But if I don't directly need work on my deck and the butcher doesn't care about economics lectures, you can see how that would break down.

So that's the way that money allows what we think of as modern economic activity where there's specialization and exchange, where people focus on what they're really good at, produce a lot of that, sell it in the marketplace for money, and then they go into the marketplace armed with their money and go find the individual sellers who have the things that they want. You're breaking up the act of selling and purchasing in terms of you do it through money.

If you think about it, going back to just that original example of a barter transaction, if the one kid gives up his bologna sandwich and the other gives up the peanut butter sandwich, you say in that transaction, "Who is the seller and who is the buyer," either you think those terms are implacable or you say, "They were both seller and buyer simultaneously. The one kid sold his peanut butter sandwich and bought a bologna sandwich in the same transaction and then vice versa." But that sounds foreign to us probably.

When we think of buyers and sellers, we think the seller is the person who is giving up real goods and getting money, and we think the buyer is the person giving up money to get real goods. I'm just underscoring what it is that money does. It separates you providing value and items to others versus you, in a sense, taking it from society. Money is the method by which we break that up. And again, why is that useful? Because it allows for coordination, a bunch of people in a grand web of performing services for society and benefitting people, giving them things they want that you're able to produce, then, in turn, you getting things out of the system. Money is sort of the regulator that helps coordinate all of that.

That's the way to think about it. I obviously can't dwell on this too much, because I have to get on to a bunch of other material here. But that's sort of the foundation I wanted to give you to think about - the benefits of money and what does it do for us. Another virtue of breaking up that transaction from you selling your services that somebody in the community values and then you coming back and, in turn, accepting somebody else's services for their property it allows you to delay the decision. It's not merely that you could say, "Okay, I know I have to pay my landlord my rent this month, so I'm going to sell my services and go paint that guy's fence. He's going to pay me money, and I'm going to go pay the landlord."

You might sell your services, paint the guy's fence, and get the payment, not know exactly what you're going to spend that money on. You just know it's good to have some money, because something could come up and I want to have that, because I might need to pay somebody down the road for something I need that, as yet, I'm not sure about. Again, that's part of the social function of this institution of money is it allows you to sort of metaphorically build up a credit, as it were, with society at large by producing things that people value, but you can postpone the decision. You don't have to come and then figure out, "What do I want to get others to do for me in exchange for that?" I don't have to make the decision yet. I can postpone it by holding money.

That's the way to think about what it is that money does, the benefits of that social institution. One last thing before I move on. As far as having the benefits of having money and money prices and what does it do for us, here you may have heard the economist Ludwig von Mises - he was sort of the mentor to Friedrich Hayek, who I'm sure you've heard of. Mises had a very famous critique of socialism. I can't get into it too much here, but basically Mises was saying, "There have been a lot of objections,"-- and this came out in the early 1900s when Mises released this objection to socialism. He said, "Up until now, the debate has centered on problems of incentives or can we trust the people in charge?" Maybe they're going to be evil, so there's that issue. Then the incentives that everybody's just splitting stuff up and it's being distributed based on some category that the rulers determine, maybe workers won't put as much effort into it. So that was the kind of objections about socialism up to the point of Mises.

Then he brought a whole new objection, saying, "Let's stipulate, for the sake of argument, that the rulers have nothing but the interest of their subjects at heart. They're really honestly trying to help society. And let's stipulate also, for the sake of argument, that everybody who gets the plan from the central planners - the socialist authorities - goes ahead and implements it on perfect obedience. They have zeal. They go to the factories because they're all good comrades in the socialist commonwealth, and there's no issue about them being motivated and working as hard as they would under a capitalist system."

Mises says, still, there's this problem what he called economic calculation. That the planners could be fully informed of the engineering facts, the chemical properties, the physical facts, and could know if we take this many tons of iron ore, this much lumber, this many labor hours, and all the inputs, transform them with the technology that we know of at this point, and produce these outputs - this many houses, this many diapers, this many cans of tuna fish, this many automobiles - even ex post, we can look at that operation and not know whether we're efficiently using society's resources. Because we would have no way of comparing the inputs with the outputs. There would be no way of reducing them to a common denominator to see are we using society's resources effectively, or should we tweak the plan, going forward, so that we can give people more happiness from the limited resources we have to work with?

Mises was saying that is really the fundamental problem with socialism and why it's not really even an economic system per se. That was a pretty strong critique, and it's almost so powerful that when you're thinking through the logic of it, you wonder, "Well, that's just an insurmountable problem. How does any human institution deal with that? How does the market economy deal with that?"

Mises's answer was it was market prices. When you have private property and money, people exchange money against all the factors of production, land labor, and capital goods, and that gives you money prices. So the entrepreneur, at least ex post, can look and see, can ask the accountant, "How much money did we spend on the resources and how much money did our customers give us?" As long as the customers gave at least as much revenue as it cost to buy the factors so that the firm "breaks even", then that's, loosely speaking, a sense in which the market is saying, "You are at least producing as much value for the customers as the resources you used up in your operation."

It's not a perfect accounting system. There are problems with it, but Mises's point was that at least gives us some metric so that there's some guidance. We're not just groping in the dark the way a true socialist system would be. Again, a crucial element there is you need to have society using money. It's not just enough to have private property. It's not just enough to have freedom and people engaging in voluntary trades if there wasn't one commodity that was almost on every side of every transaction so that everything had a money price and you could get the common denominator that way.

Mises is saying we would not have modern civilization. He really pushes it saying private property and money prices, and the ability to engage in double entry bookkeeping underpins modern civilization. He's not pulling punches about how important this is.

I've sort of laid it on heavy for you guys about this is how important money is. And yet, it's kind of odd when you think about it. It's a strange system that as important as it is for us to use something that we call money, individually, it seems like it's a bad idea. And the way to illustrate that is to imagine if we didn't have money at first and someone came along-- it's easiest to demonstrate with what we call fiat money in particular-- and somebody says, "Hey. I want you to paint my fence, and I'll give you a bunch of these." And if you didn't really know what this [dollar bills] was, that would be crazy.

You would say, "What am I going to do with a bunch of green pieces of paper, because it's not directly valuable to me?" If you just start thinking through the logic, the reason you would do it is because you know - or you believe - that other people would be willing to give up valuable goods or services in exchange for these things. So it's an odd type of arrangement where it seems individually, it's almost irrational. It doesn't make sense. Why would you give up something in exchange for money? But you do it because you know - or you believe - that other people are going to do the same for you in turn.

Just a way to drive that home-- also, I know you guys just ate so maybe you're getting into a food coma right about now so let me try to wake you up with my parlor trick. Just think through the logic of someone tries to give you one of these [dollar bill], you'd accept it. Instead, somebody tries to pay you with this [dollar bill with a small section torn away]. You'd be a little bit hesitant. You might look and make sure, but as long as it looks as if it, at one time, had been a totally legitimate federal reserve, you'd probably take it. If it gets to this point though [dollar bill with half torn away], you probably wouldn't. But think through why.

I'm sure that there is some technical definition that the treasury puts out saying what constitutes a legal dollar bill and at what point is it no longer legal tender. I'm sure the commercial banks and those tellers are trained. But I think ultimately, the logic you would go through, somebody owed you some money or was buying something from you and tried to give you this, is you would think, "Am I going to be able to get somebody else to accept this thing." That's really the ultimate criteria. Or instead of ripping it like if people had written stuff on it. I knew a guy one time, he had this plan in his mind to educate the masses, and he was going to get his message out. So he hit upon the idea of putting his ad on dollar bills. He was going to get a marker and just write whatever his subversive message was.

First of all, that's illegal. So don't do that. But the point was, because he was thinking, "Everyone uses that. How can I get people to pass my message around? I'll put it on the money. That's the way to do it." If you think about it, if you've ever gotten paid - the cashier gives you change and it's got highlighting on it or people put something weird on it - Mark loves Erin, that kind of stuff - and you take it because you're thinking, "Well, first of all, whoever gave it to the store, the cashier took it, so presumably, I can go spend this at a store too."

I'm trying to just get you to see the logic you go through is to say, "Is this thing acceptable," is ultimately you're worried, "Can I pass this off on somebody else?" You're really not evaluating and saying, "Can I use this thing myself?" Because, no, you don't use these at all. These don't do anything for you directly. The only reason you give up valuable stuff, including your time for these things is that you think you're going to be able to do the same to someone down the road.

Another quick economics lesson, notice I used a $1 bill as opposed to a $100. The $100 would have woken you guys up, but again, people respond to incentives and as an economist, I'm not going to do a $100 bill. They're not paying me enough for this talk.

I'm just trying to get you to see, of course, here the logic of it. Now, think through what we've gone over so far. We know money's very useful as a social institution. I went through it quickly, but I hope I got you to see society as we know it would literally crumble, come to a standstill, if we didn't have money of some form that people used in almost every transaction. It would be as crippling, perhaps even more so, than if people just stopped using language.

Yet, on any individual [inaudible 00:27:06] point of view, it's almost as if using money is risky or is a bad idea. And it's sort of like, okay, if we could all agree to use money, it would be good. But for any individual to use, it's actually a bad idea, because you could get stuck holding the bag. What if you give up your time or sell your car for a bunch of money? And then what if everyone said, "We're not doing that anymore." Then you're stuck with a bunch of dollar bills that no one wants. You would be stuck.

In regimes where the currency collapses, that literally does happen, where people get stuck holding money that no longer fetches something in the marketplace, and they, at that point, regretted having sold their stuff against those pieces of paper.

That's an odd arrangement that we find ourselves in, where we're using stuff that's - you might call it - intrinsically worthless, and yet, the practice of us all agreeing to do that benefits us tremendously. So how did we get there?

Let me just quickly run through the explanation that this economist called Carl Menger gave in the 1870s. Carl Menger, if you care about the history of ideas, he was the founder of what's called the Austrian School of Economics. Earlier, I had eluded to Ludwig von Mises and Friedrich Hayek. I know you guys have heard of Hayek. So this school of thought they belonged to, if you want to put a label on it, is called the Austrian school because the founders came from Austria believe it or not. Then Carl Menger was the founder of that. He was the first person in that line who wrote a treatise on economics and then people got in line.

Just like there's a Chicago school, a Keynesian school, there's this thing called the Austrian school. It's very free market. And for the stuff we're talking about today, I think the Austrians have the most to offer for the lay person to understand how to think about money and banking and quantitative easing and all of the stuff that's going on today.

So how did Carl Menger explain the origin of money? He said, "Well, let's go back, think about we started in a situation of barters." He's imagining people have private property but no money yet. So they engage in voluntary trades, but there's no money. People don't know it. And Menger first walks through and says, in contrast to people who advance a state theory of money, saying there must have been some wise king or some tribal elder who just one day dreamed up the idea and said, "Hey everybody. Let's start using these shells as money. Every time you want to sell something valuable, take these shells in exchange. Then you can use that to buy what you want."

That was a prevailing theory, but Menger said, "That actually doesn't make much sense." First of all, historically, we don't have any record of that. You would think if somebody actually invented money, that might be worth noting somewhere. Maybe it was Eddie Money who came up with it. Younger people don't even get that, because who's Eddie Money? He used to be this, back when they had these things called CDs, there was a guy...

First of all, there's no record of it. Whereas we have records of people from antiquity with wonderful ideas of philosophy and mathematics and science, there's no record of anyone inventing money. Menger said that's because that would have been impossible for someone who, if you hadn't grown up in a society using money, it would be almost inconceivable to think it through, partly for the reasons I said. On the face of it, it sounds like a nutty idea. If you grew up in a barter society and someone said, "Hey, let's just all agree to start using these things on one-half of every transaction even though they're not directly valuable to us," that would be kind of crazy.

Menger was operating in a tradition now of explaining what's called the spontaneous order. The philosopher, Ferguson, he called it things that are the product of human action but not of human design. There are a lot of social institutions like this. When these ideas germinated, people had a religious framework, so they thought it was things that God had designed but that man sort of stumbled upon and had this wonderful, providential thing occurring where people are doing stuff in their narrow self-interest, seeing two feet in front of them, but yet, the whole result of that is this wonderful flourishing of human society. So the people who developed this stuff, that was where they were coming from.

With money, that was the same kind of explanation Menger was going to give. So he wanted to be able to tell the story where people could start out in barter, and then nobody is planning on inventing money. They didn't even know what that concept was, and yet, step by step, people acting in their own immediate self-interest, how do you end up eventually with people using money?

I'm losing time here, so I'll have to go through really fast. But the idea is start out in barter. Even here, Menger said, even though there's no money yet, there would be goods that had different degrees-- the way they translate it into English is to say salability. In our parlance, we could probably say liquidity or marketability. Even back then, if you imagine someone going to the central market where people are meeting and trading with each other, let's say you're bringing something like a telescope. Maybe you're a craftsman and you build a telescope that's got very fine instrumentation and so forth, so that's a very valuable thing. You're not going to give it to somebody for a handful of berries.

But on the other hand, it's not very liquid. It's not very marketable. There are not many people who go to the marketplace every day looking for an exquisite telescope. Walking through the logic of that, Menger was saying if you can't find someone in that day who has precisely what you were hoping to get-- maybe you were hoping to get two horses with it-- if you don't happen to find someone who has two horses, who goes to town thinking I'd really like to get a great telescope today, what are the chances of that? It's probably not going to happen. He said, but instead, what if you find someone who has a bunch of eggs, let's say. They were going to town with a bunch of eggs, saying I really would like a good telescope, so they're going to give you 5,000 eggs for that telescope, you might agree to that because you know that the eggs are much more marketable than your telescope as long as it's close enough and the exchange value that you're not really taking a bath on the value of it.

The point is you would be willing to trade away things that are very illiquid or unmarketable in exchange for things that are more liquid, more marketable as a stepping stone, as a means to obtain your ultimate objective. There, you're not trying to create money. You're just doing what's in your own immediate interest. So Menger said if you've got that logic of that where people would go to the marketplace and they don't immediately see what they want for a direct one-off, bilateral transaction, they might compromise and trade away what they want and accept something else as a stepping stone, then you can see that process could snowball.

Things that traditionally are very marketable and have other attributes like that they're durable, they're easily divisible, the community can recognize their quality pretty quickly, things like that, people would be willing to accept those precisely because of their initial advantage in marketability, so it would snowball. Once more, people were willing to accept those. Their marketability would increase. That would make them even more desirable. So if you just think through the logic of that, you could see how one or a few commodities that originally were just valued for their direct industrial or consumption purposes, people would accept because they knew they could then trade them away to somebody else.

That's what would be called a medium of exchange. And then if it gets to the point where everyone in the community is willing to accept that thing, that's what money is. I know I went through that pretty quickly, but the point was Menger tried to explain this is how gold and silver, in particular, emerged as the market's monies because they satisfied a bunch of properties and various dimensions - like eggs would be better than a telescope. But also, you don't want to be going around with 5,000 eggs. They could break on you. You could only keep them for a little while, and people might not be able to evaluate the quality of the eggs. And eggs are not uniform, whereas an ounce of gold is an ounce of gold, and you can divide it. If you had to make a transaction and just cut it in half, you could do that. Whereas, if you're using cattle, let's say, it's hard to make change with cattle.

Just think through the logic of what types of goods people would really prefer to sell their stuff for to hold as a stepping stone, you can begin to see why the precious metals, gold and silver, were so highly valued.

You can even go to the extreme and say, "Well, how come there wouldn't be platinum or something even rarer?" That's because it was too rare. Especially back then, it wouldn't be convenient to walk around with platinum coins. They'd have too high of a purchasing power. There would be too few transactions that would be worth having platinum coin. Any major purchase you wanted to do, you could do with gold coins or you would have them on deposit with the bank and do a check. The same going the other way. Silver coins were for loose change as opposed to people walking around with a lot of copper coins or bronze or something, because that was too available. Those were the reasons historically.

Let me transition now. I've got a few minutes here. Very briefly, I want to talk about the classical gold standard and then how did we get to the present situation. I'm showing you how the state did not invent money. That was not a product of government. That was a product of the market. It emerged voluntarily, spontaneously from people's individual transactions. But of course, as we know now, we're not using gold and silver. We're using pieces of paper. That happened historically. Nation states had their own respective sovereign currencies - the French franc, the German mark, the U.S. dollar. But they were redeemable in gold and/or silver depending on the time period. That was how people knew what the value of a dollar was, because it was defined as a certain weight of either silver or gold.

Then that redeemability would be suspended during wartime. Then finally, it was totally abandoned in the U.S. ultimately, and 1971 was the final closing of the gold window.

That's historically how governments got people to use what we think of now as national currencies that are not backed up by anything. It was a gradual process to sort of ween them off of the market's money of gold and silver.

The virtue of the classical gold standard was that it restrained inflation. Just to give you an example, in the 1920s, $20.67 in U.S. currency would get you an ounce of gold. If you presented that to the U.S. government, they would legally have to give you an ounce of gold. That was probably what made people value the dollar. In Great Britain, it was 4.25 British pounds for an ounce of gold. So if you run the math and divide through, that's why the anchor price was $4.86 for one British pound.

So in the currency markets, if the federal reserve inflated too much, printed too many dollars, then the U.S dollar would sink against the British pound in the currency exchange markets. Then there would be an arbitrage opportunity. At some point, it would make sense for speculators to present dollars to the U.S. government, get actual gold, and then ship it across the ocean and deposit with the Bank of England and get pounds. Then when you run through the numbers, if that discrepancy got big enough, you would end up making a pure profit on that transaction.

The point was that under the classical gold standard of any one country inflated too rapidly relative to every other country, it would set up this arbitrage opportunity and speculators would attack the currency, and gold would get drained from that country's vaults and get deposited in the other ones. So it provided a check that no one country could inflate too rapidly. So that was why many classical liberals liked the classical gold standard - not because they cared about the yellow metal per se, but it was a check on government. Just like a bill of rights guaranteeing freedom of speech was a check on the government being able to suppress negative opinion. By the same token, a lot of people viewed the classical gold standard as a check on the government's ability to what they would call debase the currency.

I've talked about sound money, historically where it came from. What are the problems with unsound money? Why is it important to have sound money? Now that, especially we're in this age of fiat currency, the huge problem, of course, is ultimately if governments just inflate too rapidly, the currency can collapse. We've seen that happen in inner war Germany. We've seen it more recently with Zimbabwe. So that's not some phantom boogie man. That really has happened historically. And that's incredibly disruptive to a society to have the currency literally collapse. Even short of that, just to have what we would call chronic inflation or excessive and unpredictable price inflation, when you have that, it reduces the advantages of using money in the first place. Ultimately, all those things we talked about of being able to sell your services for money and then down the road, spending the money on other people's services, the ability of money to fulfill that function gets degraded when you're less sure about what its future purchasing power will be and the limit if you had no idea what it was going to be worth or if you knew it would be worth nothing, then there would be like having no money at all.

And that is what would happen. Society is where the money would collapse. They would, first, revert to barter and then quickly they would just bring in money from an outside country. They would use dollars or they would go back to using gold or what have you.

If I've gotten you to see how important it is to use money in the first place, you can see why what's called the basement is bad, because it degrades the quality of the money. It sort of reduces its effectiveness. However, there's also an element of - I don't know if you want to call it morality involved. But I think it's wrong just to focus on the pure technical aspects of it, and especially being here at Acton, I want to play this up a little bit. Whether or not, you've seen absolute fall in the purchasing power of the money, none the less, if some institution has the ability to create money out of thin air, so to speak, they can transfer purchasing power to themselves away from everybody else.

So if you're thinking about, again, the social advantages of everyone using money, and it provides a coordinating mechanism so that you provide valuable services to people and then they give you money, and then you go out and later on, you buy stuff or things that you value. It's a way for us to provide services for each other but broken up over time, and it just helps coordinate more complicated interactions involving multiple people. Well, if there's some institution that can just generate new money literally off a printing press - just print up $100 bills and then go out into society and buy things, it's not obvious what they're contributing. So there's that element.

Even if, for example, since 2008, a lot of us were warning people that, wow, the federal reserve's creating a lot of money. The dollar could be hurt by this. During the Q & A, I'm sure a lot of you will have thoughts on that. Then that didn't happen thus far. It's not that there was gasoline rising to $20 a gallon. So a lot of critics said, "Ah. You guys were worrying about price inflation and look it didn't happen." So these rounds of [inaudible 00:43:42] have been fine. But no, the point is even there, clearly the government was able to acquire goods and services, go out in the marketplace and bid things away from other people who had been working and saving and investing, because they didn't have the ability just to create new dollars out of thin air the way the federal reserve metaphorically does.

To the extent that you think there is any sort of moral element involved and there is an issue of money coordinating, people giving valuable goods and services and rewarding production and thrift, having an institution with the ability just to inflate, at will, only as long as it doesn't completely destroy the dollar. Again, there's that element too.

You saw this in the culture when they had the bailouts, remember, in the fall of 2008. Then there were jokes circulating afterward. I heard ads on the radio about a used car dealer saying, "Come down and get your bailout. Zero percent financing for three years." People were throwing around the term bailouts to make it sound like don't worry if you screwed up. It's fine. Somebody will come in and rescue, because this stuff isn't real. That was the idea it was fostering, that if all these investment banks could make all these loans and these mortgages all blow up and, "It's okay. The fed can just create trillions of dollars and literally paper over it. Don't worry about it. That'll fix the problem." That is not a good thing for people to internalize if you believe in sound money and economic law and think that there are scarce resources that we have to economize on. Just that idea getting out in the general public that creating massive amounts of money can solve these problems, and geez, if only Bernanke would have printed a little bit more, then my life would be so much better, I think that's a very dangerous idea.

The last thing here, and I need to stop. I'll turn it over to you guys, questions, is the business cycle. So thus far, I've been talking about just thinking about money, per se, and if the state institutions create more money and sort of reduce the value of the dollar, and in particular, do it in an unpredictable manner, why that could sort of degrade the whole function of having money in the first place. But there's a more insidious mechanism that this guy, Ludwig von Mises, talked about. And he said that historically what happens is the money comes in through the banking sector. It's not just that the government prints $100 bills and goes out and spends it and buys tanks and gives unemployment benefits and so forth.

What actually happens is the new money that's created enters the economy through the banking sector, through banks making more loans. And so the first thing that really gets affected, the first price, if you will, is the interest rate gets pushed down artificially. Because that's where all this money historically comes into the economy - through these mechanisms. The problem there is it gives a false signal that the low interest rate gives this appearance of prosperity, stimulates a boom that can last for a few years. And then when the banks chicken out and stop inflating so much through the credit markets, interest rates rise. Entrepreneurs say, "Oh, actually maybe we shouldn't have expanded so aggressively." They start laying people off, and there's a crash.

So what we think of is the normal boom/bust cycle on market economy, Ludwig von Mises and Friedrich Hayek - that's what he won his Nobel Prize for, for this theory - we're saying that's actually the state creating money that's coming into the economy through the credit markets. That's what gives this familiar boom/bust cycle. That's not a natural feature of the capitalist system or the market economy. That's because of the distortions caused by new money coming in through the credit markets and giving a low interest rate that gives this false appearance of prosperity.

It's not just generalized what you would think of as inflation, but it's also the business cycle itself. Why do we have these wild upswings, then crashes? At least the people who have subscribed to this school of thought would say it's because of not having sound money anymore, that when the government has taken over this function, this thing that was originally created in the marketplace, one of the insidious effects is what we think of as the business cycle.

I will stop there. Thank you, everyone, for your attention. I guess we'll turn it over to Q & A.

Mike Cook:                             My colleague, Nick, will be right there. So if you have a question, just raise your hand. This microphone, you just have to kind speak right into the very top.

Question 1:                            Professor, thank you very much for your talk. Why didn't all this monetary expansion lead to more inflation. I thought it was going to as gasoline prices rose. Or did it and we didn't notice it? What happened to that inflation?

Robert Murphy:                  Let me just repeat that. He's saying why didn't we see prices rise with all the creation of money? Great question. First of all, just for people to understand, it really depends on what number you look at. But in terms of the direct amount of money that the federal reserve can directly create and control, Ben Bernanke, when he was still the chair, in just one year, had doubled that. The dramatic way of saying it is Ben Bernanke inflated more than all previous fed chairs combined just in that one year, going by the end of 2009 there.

So then, the question, what happened. There's a lot of different things. Just to give you a quick answer, one main issue is that a lot of that new money that the federal reserve created did not lead to more money in the hands of the general public. It's a complicated mechanism. If you guys took a macro class in college and you saw how new money works its way into the system, it was probably a pretty scintillating lecture; I'm sure you might remember. But where they had the multiplier that if somebody deposits $100 in the bank and then the bank goes and lends out 90 of it and then they go and lend out 81 of it, and then a new $100 in cash in the economy gets into the banking system, has its multiplication process of pyramiding, that didn't happen, because the commercial banks just sat on that new money.

I don't want to go off too much on a tangent here, but just to get you guys to see how what the authorities were telling people in the fall of 2008 was completely not the same as the truth. That's the diplomatic way of putting it. They were telling everyone, "We hate bailing out all of these rich bankers. We hate these guys. Just because we used to work with them; they were buddies. But we hate bailing these guys out. We're doing this to keep credit flow in the main stream." That was the whole point of doing the TARP and what the federal reserve was doing. They wanted to make sure commercial banks kept lending money so that small businesses could meet their payroll and stuff like that.

But literally, I think it was October 2008, the fed changed policies and started paying interest on reserves. What that meant was, if commercial banks kept their reserves parked at the fed as opposed to making more loans, the feds started paying them. That was a new policy. They hadn't been doing that prior to 2008. So when the feds started buying all these assets and putting new reserves in the banking system, the fed also started paying commercial banks, saying, "As long as you don't lend that out, we'll give you more money." It sort of hurts the narrative of why would they do that. There are technical reasons for why they did that, but that's one main explanation.

The other one is, people are panicked. So the demand to hold very liquid assets went up, so people wanted to hold larger cash balance, so that's another reason. Then, ultimately-- here, I think they're wrong-- people believed Bernanke and now Yellen, when they said, "Don't worry. We're going to suck this stuff out of the system if price inflation gets out of hand."

So people thought, "Okay. They're in charge. They're not idiots. They're not going to let this thing turn into the 70s." So we were in this weird equilibrium where they pumped in a bunch of money, but as long as everyone thinks they're going to suck it back out at some point, then they're okay trading at the usual prices.

Question 2:                            Thank you very much, Professor. There's an understanding that internationally the dollar is considered a means of exchange, that other countries or even on the world market, the dollar is recognized as something that is used as the world's money. There's been information that's come out from sources and so forth that that is coming to an end, that other countries either want to take that over or the weakness of the dollar is going to force them to take it over.  Could you address that and identify what the background is of that?

Robert Murphy:                  Sure. Just to paraphrase the question, the U.S. dollar, at least since 1971, has been considered the world's reserve currency. So the U.S. dollar is fulfilling what gold used to fulfill in the classical gold reserve. Central banks around the world will hold-- when they say hold dollars, they don't mean actual like those pallets of $100 bills. They mean probably treasuries. So that's claims from the U.S. federal government saying, "We will pay you this many dollars at certain maturity points down the road." So those are considered pretty safe claims on U.S dollars. And that's what a lot of central banks around the world have been using even as regular investors in other countries that use different currencies, historically, the U.S. dollar has been considered pretty safe currency as far as they go. If you were in a country that had problems with inflation, you wanted to have dollars backing it up because you thought that was relatively secure.

So as the gentleman eludes to, in recent years, particularly since 2008, more and more people have wondered, "Is that going to last," because people can see the writing on the wall. And it's gotten to the point where every time the economy hits a road bump, people say, "Look to the federal reserve. What's the fed going to do?"

That's part of what I was trying to get at there in the tail end of my remarks - that the culture itself has shifted. It's hard to remember what it was like before, but the fed used to be really boring. It's still boring now. Don't get me wrong. But the point is now, it's also boring and sort of insidious, whereas before, it was just boring like the weather or something. People didn't really care much. "The feds back there. They make money." But now, it's coming into its own. The way I put it is that Ben Bernanke was the FDR of central bankers, where the understanding of what it was the fed was supposed to do in society transformed radically during his chairmanship.

If you remember when California, a few years ago, was in trouble and the state of Illinois with their bond issues, people were openly saying, "I wonder if the fed will come in and just start buying them?" As opposed to buying European bonds and so forth.

Going back to the question, a lot of people were wondering if the feds are just going to keep creating new dollars every time a crisis emerges. At some point, is the dollar going to crash? Again, it's this weird game of chicken, where China, for example, has more than $1 trillion in dollars and nominated assets. Because back in the day, that was how you, as an Asian country, sort of proved to the world your finances were sound as you hid a stockpile of dollars that you could peg your own currency to.

Then they realized in the 2000s that that actually wasn't a great move anymore, because the dollar was weakening. But if they just said to the world, "We're not using the dollar anymore," the dollar would crash and their portfolio would shrink.

It would be like if Bill Gates all of a sudden realized that Microsoft was not a good stock to own. He would be in an awkward position. Like, how would he unload that without scaring everybody. It's the same kind of thing with these major central banks that have historically been stockpiling dollars and nominated assets. They want to diversify out of it, but they don't want to spook people. There's that element of it.

And you do see little hints here and there of countries doing things. They'll call them sovereign wealth funds and stuff like that. They'll do stuff like, "We're trying to capture higher yield investments and we're going to invest in real estate or commodities." What that means is, "We're not going to invest in U.S. treasuries so much anymore. We want to diversify out of that." But they don't want to come out and say, "We're shunning the dollar." They're going to say, "We're looking at this other stuff."

It's like they're breaking up and they're saying, "It's not you. It's me."

Question 3:                            What's been the incentive for the creation of Bitcoin and where do you see that going long term compared to the dollar and other common currencies?

Robert P. Murphy:             Okay. I apologize. This wasn't intentionally false advertising. I was going to talk about Bitcoin. I just was running out of time there. Bitcoin is a digital currency. You guys are people who see this when it's posted online. I have an article called The Economics of Bitcoin, and I'm Robert Murphy. If you Google that, you'll find a fuller treatment.

The way it works is-- this is the analogy I came up with. It's as if there are a bunch of accountants with ledger books and they have the integers one through 21 million, and it's like people can own the numbers. You could own the number eight. What does that mean? It just means all the accountants who use this system agree-- they have columns like one, two, three, all the way to 21 million and they have this row of who's the current owner. Right now, Jim owns the number eight and then Jim can go up to somebody and say, "I want to buy your car. I'll give you the number eight for it." The guy gives him the car and then the people change the ledger and say instead of Jim owning it, now Sam owns it. Sam's the one who sold the car.

So it's kind of a weird thing, but if you could get to that system where people just agree on these public ledgers where all the accountants are keeping tabs with a giant spreadsheet about who owns which number right now and you can buy and sell real goods against these abstract things, that could work. It sounds crazy, but remember, if you were talking about selling stuff against green pieces of paper, that sounds crazy too if you weren't familiar with it.

That's idea. And the virtue of Bitcoin or other digital currency is there's no need for a trusted third party. Here, we're worried about the people who issue U.S. dollars, if they get reckless, then they might print too many of them. With Bitcoin, that system I just described, I obviously can't get into it right now. But the way it works in terms of the cryptography, mathematically, you cannot inflate Bitcoins. They just get created at a predetermined rate, and so that would be the ultimate hard currency.

So as an economist, the reason I'm fascinated by Bitcoin is not just as a concept, is it is the ultimate hard currency in that respect, in terms of the limited supply. Because even if you're using gold and silver, again, they're much safer than green pieces of paper, euros, or what have you, because it's hard to go dig up more gold. Whereas the fed can create $1 quadrillion tomorrow if they really wanted to where you can't just get a bunch of gold like that.

Strictly speaking, if humans go out and get an asteroid that has a lot of gold, they could mine in it and you might get an inflation in terms of the gold stock. Or there could be a breakthrough in alchemy and somebody in his basement could figure out, "If I do this, all of a sudden I can turn lead into gold." We could imagine that ultimately, in the long term, using gold as money even might not be secure, whereas these digital currencies, they can mathematically have predetermined quantities. For me, that's the economic appeal of it.

I think the white paper for Bitcoin came out in 2008, when they started doing the first transactions in 2009. So it kind of did historically emerge, come on the scene right when more and more people were worried about the future of state-issued currencies. So I think that certainly explains a lot of the initial appeal of it and why people were giving it a second look.

Question 4:                            Since most of us are here because of our faith, and we're also tying economics to our faith, I'm asking you to stretch a little bit. We have a society now in the United States and worldwide that we have borrowed much more than we can really-- you can talk to this. I'm just a layman. We have borrowed much more than we can really manage. This is worldwide. Top to bottom, not only in our nations but our society, we are in hock to whatever. The United States along with many other countries, most other countries, is borrowing more than they can pay for. Where do you think that leads a society, and how, as a Christian portion of the society, how can we speak to those in terms of the right and the wrong of it?

Robert Murphy:                  Great question. Again, I apologize. The opening that Mike gave and how it's depressing, you can imagine since 2008, I've been going around just sowing despair everywhere I go. And normally, I'd like to just talk about puppies and kittens, but I'm not qualified. He's exactly right. The figures are astonishing. The ones that Mike was showing, I think that was like the outstanding treasury debt. That's the one that's in the 17/18 trillion mark in terms of the actual amount of people owning explicit U.S. treasury bonds and bills and notes that the government owns. But stuff like social security and Medicare obligations, that's not included in that public debt figure.

So if you've heard people say, "Using this gap accounting, the U.S. government actually is in the hole $200 trillion," that's where they're getting those figures from. They're treating it as if the U.S. government were a company making pension promises to its retirees and you'd have to put those on the books somehow and value them. If you use those techniques that any private business would have to apply to it, that's the sense in which the U.S. federal government is in the hole, depending on the time window, the discount rate used, blah, blah, blah, something like $200 trillion. That's a lot of money.

The issue is, first of all, I think you're right that we got to that point partly because people, I would say, looked more and more to Washington to take of them. So that's a twofold thing.

On the one hand, of course, there's the personal responsibility and sapping of individual initiative which is regrettable. But I think also with the way you get out of that is you have to build up a sense of community again and remind people, look, it's not enough just to wag your finger at somebody and say, "Hey, it's your own fault. You should have saved for your retirement. Don't expect the next generation to bail you out." But also, people are legitimately in need that there needs to be community social institutions that they can turn to. I think that it's a two-prong thing that people in our society now, it's regrettable, yes, they first and foremost look to the state to take care of them. But it's kind of hard just to go purely cold turkey. So I think as much as religious institutions can reassure people that look, it's not that they would be literally dying in the streets before they replace this.

The other thing is it's not just a matter of convincing people it's going to happen. There's no way the government is going to fulfill those obligations. They're in a sort of limbo now where people think, "Well, the fed can just create the money." They know they can't possibly tax people enough to service the debt that they're on the hook for. But again, there's this weird limbo where people now just think, "The fed can do." They can just create money and there's no downside to that as long as we don't see prices going through the roof. When that illusion snaps, the government is just going to have to default on those things or they're going to raise taxes or extend the retirement age, a combination of those measures.

On one side, that's going to be good. Then reality will reassert itself, and I think people will snap out of it and realize that we've been living in a sort of dreamland for a few decades now.

The last point I'll make on this question is he's exactly right. One of the manifestations of this has been the U.S. trade deficit. If you look at the statistics, that really mushroomed in the late 1970s and then beyond, and that's not a coincidence. When the dollar became the world's reserve currency, if you think about it in a sense, it's like the U.S. owned a big gold mine and everyone's using gold. A gold miner just creates gold and gets all sorts of goodies, because he's creating the money everyone's using. While at the same token, the whole world is using dollars, then the U.S. can get away with creating all these dollars and sending them abroad and getting cars and TVs and all sorts of other things without having to work for it. That's a nice deal while you can get it, but then the point is if it reverses, then all of a sudden, the dollar crashes and people send the dollars back for goods. Then people say, "That will create jobs."

Yeah, but you can create jobs too by not going to the store. If you just grow your own food and make your own clothes and pull your own teeth, you're creating jobs for yourself, but it's a pretty low standard of living. In a sense, we have been living on borrowed time. And yes, there's definitely a moral element to that in the extent that people know there's a virtue of thrift and a providing for the future and not looking for a handout. All that's stuff that the modern sort of progressive would look down their nose upon and say, "Come on. Stop moralizing."

That's legitimate. I think that's going to make a comeback, and I would just encourage people to be there with social institutions that give some alternative to people to not make it look like the alternative is the state taking care of people or people dying in the street to show them that's a false psychonomy.

Mike Cook:                             Thank you very much, Bob. Ladies and gentlemen, can you join me in thanking Bob?


Modifié le: mardi 19 mars 2019, 08:00