 So our topic this afternoon is monetary reform proposals. One thing I want to say just kind of we're getting started is that I'm not really going to be thinking too much about kind of the ethics related to money, because my ethics are not very good. My ethical philosophy background is not that strong. Come on, OK. I'm glad you caught us a joke, though. That's good. That's good. But if you are interested in that topic, you certainly have options available for you. I'd recommend, for example, Guido Hulsman's Ethics of Money Production are also the first part of Guido De Soto's Money, Bank, Credit, and Economic Cycles look very much into these ethical, legal kinds of questions. I'm more interested, though, in kind of economic analysis in what types of policies might we want to think about going forward to potentially solve some of the problems that arise out of the monetary sphere. So first, before you start reforming something, it's good to show that there is actually a need for reform. I think by now we already are convinced of that. I hope. So I'm not going to go too deep into these two things. But I think there are two big problems that we've pointed out over the course of this week that are very connected with the monetary and banking systems. The first of those would be hyperinflation. Hyperinflation we know is fairly rare, but it's extremely destructive when it comes through. So ideally, we would like to have a monetary system that can prevent hyperinflation from happening. The second, which is a far more common problem when we are plagued with time and time again, is the business cycle. We have found this is also very connected with the monetary and credit systems. So it'd be kind of nice if we could design a system that would prevent the business cycle or at least dampen its effects, make it less likely and less severe. So that's really the big goals from an economic standpoint that I would like to get out of any type of monetary reform. Get rid of hyperinflation or make it at least less likely in the business cycle. Now, Professor Herbner already described in a free market how a monetary system would work. We would have our entrepreneurs each producing whatever money they happen to like, an experience that has tended to be a gold-based money. If there's a greater demand for money, then we would tend to see it's more profitable to produce money. We produce more money. That's the way new money comes into the system. We've also seen this is certainly not the way that things work in our system. It's very different. We're operating under a fiat currency where, at a whim, Janet Yellen can get together with all of the FMC, call an emergency meeting, decide they want to increase the money supply, and it happens. Or we could have, as we know that banks have a certain number of reserves that they're currently sitting on. They may decide it's time to take these reserves and release them. Lend out these reserves that they're sitting on. Legally, they're allowed to do this. And this can also create these disruptions. So we need to think about, we have some idea where the source of the problem is. So let's look at some of the reform proposals that have been presented. I'm looking both at non-Austrians and Austrians as well to kind of take a broader view and see where are we kind of getting the problem right and perhaps solving it and where are we missing it. So first, if you look in the mainstream literature, kind of the big debate over the past, actually it's been several decades now, has been this idea of discretion versus rules. It doesn't make sense for us to have a group of people like the Federal Reserve, like the FOMC, get together and think about what should happen with the monetary system and then using their judgment go out and make whatever policies they happen to think would fit. I think probably the strongest argument against the system came from, I'm gonna confess, I think Milton Friedman. He had a really good line. And capitalism and freedom, as he's talking about the Federal Reserve, he was no fan of the Federal Reserve. You can get something right occasionally, even if you're wrong on money most of the time, you can at least get one thing right. And what he said was that any system where such a small group of people can cause so much harm to so many people is a bad system. Now, we can even say, maybe Janet Yellen is very well-intentioned. She doesn't seem like a bad person whenever I see her speak. She seems maybe somewhat boring. That doesn't make you bad. So she may be very well-intentioned, but as I learned watching Sesame Street as a child, everyone makes mistakes. Now normally, if I make a mistake, I pay most of the cost of that mistake. There may be people close to me. Pay a big part of the cost. When we're talking about the monetary system and they start making mistakes, we all get involved, like it or not, in business cycles or in hyperinflation. We are all victims of these mistakes. So even if we grant good intentions, we still have a problem with the system. So Friedman then would advocate we need some kind of rule instead. Let's take human judgment out of it. Mistakes are simply too costly. So let's find some kind of automatic way that monetary policy can run. That way, we eliminate the possibility of mistakes. Now, before I get into some of the specific rules that have been proposed, I do want to say just kind of three general comments about rules and not about rules in general, rules for monetary policy. The first problem with just the idea of a rule for monetary policy is a political problem. After all, the Federal Reserve is a creature of the government. Now, I wouldn't say it's a fourth branch of government, has this weird structure, connected both with the banking system and also with the government's kind of odd connection between the two. But at the same time, we know that it exists because Congress passed a law. It created it. If we want to eliminate the Federal Reserve, it would then follow, Congress is going to have to repeal that law. If we're going to replace the Federal Reserve, okay, so you see, okay, right? So Congress is going to have to repeal this one, replace it with something else. So this now puts monetary policy in the hands of Congress to decide what kind of rule we're going to use. And again, even if we grant good intentions to Congress, which may be a stretch, but even if we grant that, I know very few monetary economists that I would trust that are in Congress. We're going to have Ron Paul draft this legislation. Somehow doubt it, right? So we're going to have people that really don't understand what's happening. Well, okay, so now what we're talking about is then potentially making a mistake that gets written into law and then we just make the same kind of mistake over and over again instead of different mistakes from time to time. You also have the problem, or even if they happen to stumble upon a good rule, we have to trust them not to touch it afterward. Now, I think recent experience does show that it is actually possible for Congress to pass a law that then they have a really hard time getting rid of. I think it's affordable care act, right? It's just kind of wild. I admit, I'm not a very good entrepreneur on my foresight, it's not very good, right? I often predict things badly. I'll talk more about this in my talk tomorrow. And I definitely thought, okay, they're enough Republicans in Congress, they're just gonna get rid of this thing and we're going to be stuck with this back and forth, Republicans take over everything and then get rid of these laws and then Democrats take everything and they come back and we're gonna have this horrific regime uncertainty in all of these industries. But no, it turns out not even the Republicans can get rid of this law despite its problems. So maybe, maybe politicians can make a law that they can't get rid of, okay? Social security is still with us and we all know there are problems with it. So, okay, maybe my political objection isn't quite so bad, okay? But there are also a couple other more economic issues as well. One is the issue of measurement error. This is, is there like a nerdier thing to talk about than measurement error, right? But whenever we make these rules, we're trying to target something, right? Whatever this thing is, we're going to have to measure. Now it turns out matching economic concepts into the real world in which we live is not a perfect thing, right? So for example, if you take say any class where they talk about money and economics, you're going to learn how we measure the money supply. And you learn that we measure the money supply in multiple ways, right? So there's M1, there's M2, there's MZM, there's the divisive money supply, which I don't totally understand myself to be perfectly honest, right? We have also proposed from our side the Austrian money supply, the true money supply, even the Austrians can't agree, right? What the money supply should be, is it Austrian or true? So it's not so clear. We know conceptually what money is. When we look out in the world around us, what really counts as what people are intending to use as money, because intent is really a big part of what's going on, right? What are people's ends when they're holding this thing? Are they intending to use it as money? It's not always obvious. When I put money in my savings account, yeah, okay, is that money that I'm intending to use a medium of exchange, or is that more of a savings instrument? It's not so obvious whether we should count it or not. So you have multiple measures, right? Now I will say from a scientific standpoint, if you're doing empirical work, we don't worry so much about these measurement errors. As long as, for example, M1, even if it's not measuring exactly the concept of money, as long as it kind of acts like money over time, right? So M1 going up, as long as that is happening when real actual money is going up, then we're okay to do statistical work, right? And yeah, we might be a little bit off here and there, but if on average, we're moving the right direction, we're probably okay, right? Similarly with things like price indices, so is the CPI a good measure of prices? Probably not, right? But at the same time, if over time, it's basically tracking what prices are doing, I can run regressions, I can do correlations, and basically get the story more or less right as long as these errors cancel out over time. The problem is that when I make a rule and I'm making policy in real time, I don't get to have my errors cancel out over time. I don't get to take advantage of that fact, right? Because I have to make a decision of based on what's happening now and the data that I have now, where there's an error, it might be I over measured, it might be I under measured, right? Over time, the over and under should cancel, we hope, right? But right now I have to decide what the money supply is. So I'm going to end up affected by these measurement errors period by period. And that's potentially a significant issue because it means that even if we replace people that make mistakes with rules, as long as we're not measuring stuff right, perfectly right, the rules are gonna make mistakes. And that's an issue. And finally, one other very important economic issue is that all these rules assume staticness in some fact, in some way. There's something that we're assuming that's stable in the economy so we can have some kind of fixed rule that is going to work for us. Okay, all right, so now having stated some general objections to the idea of rules, let's look at some specific ones. So we'll start with Friedman. Friedman is probably the best known for coming up with a rule. So let's talk about this, okay? All right, so, Friedman's rule, very famously what he says, he says we want to increase the money supply. He generally liked M2 as his favorite measure. I guess if I have to choose between M1 and M2, M2 isn't horrible, okay, fine. So we want to increase the money supply by something between three and 5% per year. Now he would not suggest that we just, each year arbitrarily pick something in that range but we decide ahead of time. He just thought somewhere in this range was going to be the right amount so we're gonna have to do more work, figure out where exactly in there is right. So to kind of get the logic of this, what he has in mind is the equation of exchange or also known as the quantity equation, right? So MV equals PT, right? So M is your measure of the money supply, right? V is your velocity, it measures how many times a specific dollar of that money supply moves through the economy in a period of time, right? So how many times is the average dollar spent is the idea, right? P would be some measure of the overall level of prices, right, and then T would be the number of transactions. Right, so really this is, you can't object to this equation in itself. You can object to how useful it is because really all we're doing is on the left-hand side this is a measure of how much total spending is happening thinking about it as money, right? Here's how much money is, money there is, here's how many times we spend each dollar, because that's how much actual spending is happening. Other side, here's how many transactions there are, here's what the price for each transaction, it's just another way of measuring how much we're spending, yeah. So then he uses this right from a theoretical basis and says well, like we know the velocity of money is constant so put a little bar above it, right? And that just doesn't move over time, right? Meanwhile, transactions, right, this would be somewhat connected with real GDP, right? Roughly, right, so we know that that increases something in the neighborhood of 3% to 5% per year. Oh, that's a real coincidence, isn't it? No, it's exactly the logic. He said, so we would kind of like to have a price level that's basically stable, right? So if my goal is to stabilize this thing, then that means to make the whole equation balance, the money supply should increase by 3% to 5% per year. There's that, it's fairly simple arithmetic, okay. Right, so sort of the problems then with Friedman's view. The first is just the reality that velocity is not in fact constant. If you want proof of that, go to FRED, it's Federal Reserve Economic Data, just type M2 velocity and you'll find out certainly since about 2007, velocity in the United States has been very far from constant, right? It totally tanked, right, right around the time of the financial crisis. There's just an empirical fact. You would think an empiricist would get this right, right? But no, velocity isn't constant, right? So that means this isn't actually going to work in trying to stabilize what he's trying to stabilize. But there's actually a more fundamental problem with this and that even if he's right about this, we still need to think about how is this new money coming into the economy, right? I would suggest odds are good. He's still planning on putting in through credit markets. If he's still putting it in through credit markets, that new money is going to come in just as Professor Garrison described. It's going to suppress interest rates temporarily, but temporarily is good enough, right, for us to cause distortions in the capital structure and business cycles, right? So I don't mind Friedman's rule if all we care about is hyperinflation, increasing the money supply by a small amount each year, probably not going to hyperinflate. But if we're also worried about business cycles being the more common problem that we have, right? It's not clear it's going to solve it for me, okay? So there are other rules out there as well. One of the more popular at the moment is the Taylor rule. I will confess, this is probably my favorite of the mainstream rules. So I might actually be inclined to almost defend this one, right? So the idea of the Taylor rule is that we're going to have an interest rate target. We know that this is actually more or less how the Fed operates now. It has some level it wants a specific interest rate to be at. And you calculate what this target should be, right? Based on various economic conditions, in particular, inflation rates and what they call GDP gaps, right? Being more or less the state of the economy, right? So if the economy is booming, then there's a gap between actual GDP and potential or trend GDP over in a boom. So in that case, we should increase interest rates. If we have high inflation rates compared to what we want them to be, for some reason, 2% is the goal and I don't know, right? So if we have higher inflation than that, then we need to increase interest rates, right? Okay, on the other hand, if these things are lower, so inflation is too low or perhaps even negative, then we should lower interest rates or if GDP caps are negative, right? So we're falling below economic potential, right? Then in that case, we should also have lower interest rates. Now, kind of interesting to me is the history of how this rule came about. It really started with John Taylor who I actually kind of like reading him. He's kind of a fun guy to read. He gets very upset with what people have done with his rule, too, because they start taking out GDP gaps and putting in unemployment and that kind of stuff. He yells at Paul Krugman about this. Takes out actual inflation, puts in expected inflation. He's, ah, it's not my rule. It's my rule. I get to decide what it is. Anyway, right, and I'm inclined to agree with him. He should be able to decide. It's named after him, right? This feels a little bit arrogant, but okay, right? So anyway, right? So originally, as he developed this rule, what happened was he was just doing some standard macroeconomic modeling in the mainstream. He was doing a bunch of mathematical stuff. He realized he had to have some way to model what monetary policy does, right? And he figured it makes sense, right? That interest rates should be connected to these two things, inflation and the state of the economy. That's what we believe the Fed responds to, right? So in order to model what the Fed does, I'll just look at the data. Look what their, what looks like their targets are. Look at what inflation rates have done. Look at what GDP gaps have done, right? And then I'll just run the statistics, find out what they've done, right? Now you may notice this doesn't sound like you're making a recommendation. It just makes it sound like you're describing what has happened. And that is exactly right, right? Originally, the Taylor rule was just supposed to be purely descriptive. He wanted to put this into a model so he could figure out what interest rates would do in his model, right? But later on, he did further work and showed that the rule that he found that interest rates seemed to follow actually had some kind of nice properties in it, right? For example, he would suggest that if inflation goes up by 1%, we should increase interest rates by more than 1%. What this is supposed to do then is to put a stamp down on the economy, it will prevent hyperinflation, that kind of thing, right? So it was kind of this weird thing where first he said, oh, this is what the Fed has done. Oh, and turns out apparently that's a reasonably good rule in certain parts of it. Of course then he starts screaming at the Fed recently as after the financial crisis, they lower interest rates too far. Before the financial crisis, they were also too low for too long. So he starts using this rule very much in a prescriptive manner. Now, why do I say that I don't mind his rule so much? In some ways, I feel like it tries to kind of mimic the sort of things that the money supply might try to do. You notice how hedging, how much hedging I'm doing here. I noticed Dr. Herbner's in the room, so. I don't wanna say anything wrong because I was a student back in the day. And so, any errors are my own. Trust me. I generally find it's a good rule to agree with Dr. Herbner because he's typically right. Anyway, let me make the argument, though. So suppose that inflation rates are going up really, really fast. Based on the argument that we made on Monday, oh, I made on Monday, that suggests that the demand for money is interest rates are going, not interest rates, inflation rates are going up really fast. That suggests demand for money must be falling. Or at least it's not rising as fast as the supply of money is. Money is losing value fairly quickly. So a sensible thing for us to do when the demand for money falls is to clamp back on the money supply. You don't provide as much of something if people don't want it. Well, what does Taylor suggest? Under these conditions, you should raise interest rates. How do we raise interest rates? You decrease the money supply or slow its growth. Okay, so we're at least moving the right direction. Now there's no guarantee we're moving the right amount. Or at least moving the right direction. That sounds nice, right? At the very least here, we're admitting that money demand might possibly change, though implicitly we're admitting this, or Friedman doesn't, right? That's a step in the right direction. One could make an argument, maybe, right? That in a boom, maybe the demand for money is possibly decreasing, maybe. That one's more of a stretch for me. So I can't make that as strongly, right? But at the very least in responding to inflation, okay, the Taylor rule is at least pushing us the right direction, it seems. We still have the same problem, don't we? He doesn't suggest, right? He actually very explicitly suggests this is what the Fed should do, not that we should eliminate the Fed. Just rather, I don't know, he just likes having these people on payroll, I guess. So we should pay these people to pull out their calculators every couple months, right? Plug in his rule and say, oh, here's our interest rate target and then we move on. All right, so, all right. Anyway, let's just keep going, because time may get away from me. All right, so another idea that is out there now is inflation targeting. Inflation targeting is also fairly popular and actually in many ways, I'm going to have the same lack of objection that I have and also the same objection I have to exactly what Taylor's rule was, because inflation targeting would suggest if we have higher rate of inflation than what we really want, right? Then we need to clamp down on the money supply. Well, high inflation indicates the money demand is falling, clamping down on the money supply may in fact make sense. Again, it doesn't tell us how much, right? But it also has other problems, right? First is that generally when inflation targeting is talked about, what we're talking about is we have some medium or long-term target for what the rate of price inflation should do over time, Okay, right now, so I need to make policy now to determine what the rate of price inflation is going to be three, five, 10 years from now. This seems to take a great deal of foresight. There's also an accountability problem here, right? So this is not quite so automatic as Taylor is, right? So instead what we have now, right? So we know what we're shooting at. We're shooting at this level of price inflation somewhere out there, right, three, five, 10 years from now. But how we're going to do that seems to require a great deal of judgment. Wow, right? So while it may be true, right, that we don't have strictly a discretionary system and that the Fed can just kind of decide to do whatever it wants, we at least have a specific goal that they're shooting for, right? They still have to use a lot of judgment and how they're going to attain that goal. And that seems to be the kind of thing we're going to run into the same kind of problems that discretion on the whole is going to have, right? Everybody makes mistakes. Even if we trust them when they say what this inflation target is that they're actually trying to hit it, right? They very well may make mistakes in the meantime. Now you also have here a number of measurement problems as well, right? So how do we measure the level of price inflation to know whether we've been successful or not, right? You know, you take principles of macroeconomics most places and they say, well, we like to measure price levels and you learn about CPI, PPI, GDP deflator, maybe the PCE, right? I'm very much reminded, you know, back in the day, this was actually jumping back a little bit to Friedman's rule. When Alan Greenspan was chair of the Fed, he appeared as he has to before Congress, one of the times, and reportedly, I haven't actually looked up the transcripts. This might be made up, but I'm going to go with it, it's a good story, right? Well, apparently, right? Somebody right in Congress decided they wanted to ask Chairman Greenspan this question, and apparently they were very influenced by Friedman, and they said, well, like Chairman Greenspan, why don't we just follow, say, a Friedman rule where we grow the money supply by three to 5% every year? And Alan Greenspan got a very sad look on his face, which required no change, right? And he said, well, we just don't know what money is anymore. One would think that if the chair of the Federal Reserve doesn't know what money is, we have a problem, right? But what did he actually mean, right? Because Alan Greenspan is very good at just saying things, then you have to spend forever figuring out what he meant. Well, if you look at M1 and M2, the two major measures of the money supply at the time, they weren't acting the same, right? One of them was being extremely stable, the other one was growing, right? So the point he was making is that what I do with monetary policy is going to change based on which of these two I choose, right? One would expect we'd have the same problem, because I know I've looked at PPI, I've looked at CPI, I actually think that they're kind of cool to watch how they move relative to each other as we move through the business cycle. It's kind of neat. Look at that sometime. So which one we're targeting is going to have an effect on how we're running monetary policy, because they don't act the same way, right? Here we have a very significant measurement problem in that we don't actually know, right? Which of these is a better measure of prices? There's no, if we knew we would stop using one of them, right? So we're gonna have to make a decision, right? So additional judgment, bringing in additional problems. Okay, the last kind of, some people in the mainstream have suggested this, there've also been some Austrians, or at least Austrian friendly people have suggested this target, that is the NGDP target, or targeting nominal GDP. The people that proposed this, many of them would call themselves market monetarists. For those that know their economic history, you know the term monetarist is very connected with Milton Friedman, and in many ways what they're trying to do is correct my first objection to what Friedman is doing here, right? So we have MV equals PT, I'll write it again, because I have nothing else to do. There we go. And what they say is, well if we want to really run the economy right, why don't we just stabilize this on this side, right? So that'll keep prices multiplied by the number of transactions, so total spending constant, and then what will happen is that money supply is going to have to move opposite what velocity does, right? So maybe we don't want this to be constant, maybe we want it to grow by three or 5% a year, take your pick, right? It doesn't really make much difference to the analysis, right? At the very least any changes in velocity which we know do actually happen, right? We should offset then with changes in the money supply, right? So suppose that there is this weird time where velocity collapses because we have a financial crisis and people want to hold on to money because they're nervous, hypothetically, right? Well in that case, it seems like people want to hold more money, well in that case we're going to create more money. That last statement looks like people want to hold more money, let's create more money, is in fact exactly the way we want an ideal system to work, right? Oh, we found the ideal proposal, right? I don't believe that, but apparently you don't know me very well, right? So what is this missing? Again, like a lot of these rules, like the direction feels about right, right? But what does it miss? First thing it misses, how is this money getting into the system? When we have people like, for example, as I was preparing this lecture, I looked up a paper by Steve Horwitz and Will Luther. I was drawn to this paper because I actually know Will Luther, he's a nice, seemingly intelligent person. I said, okay, I don't want to just criticize this view on the basis of critics of this view, right? It's kind of unfair to criticize Keynes, for example, just reading people that criticize Keynes, right? You want to find out what did he actually say? Are we being fair? So let's pull out Horwitz and Luther and see what they actually say, right? Are we being fair to them, right? And what they suggested, they said, well, this rule is pretty good if we're stuck with something like a central bank. This is kind of what they would consider a second-best rule, okay? Okay, well, I guess I'm with you kind of, I don't know if this is second-best, right? But certainly not as good as eliminating the central bank. So okay, we've at least got that ordering right, okay? And so what exactly is the problem with this? First, this new money has to get in there somehow. Well, for conceding, let's let the central bank still be there. It's still the central bank injecting the money, right? It's still going to come in through the credit system. We still get the suppression of interest rates. We still get business cycles, right? Okay, this is not actually moving us the right direction of where we want to go of, eliminating that particular problem or at least limiting it as much as we can, right? All right, so even though, right, in some ways this feels good, we still have this problem of we just keep putting money in through the credit system in all of these systems we're looking at. And so that feels like a rather significant issue. All right, so let's move on then to looking at some of the more Austrian proposals. So here, when I originally kind of practiced this in my hotel room last night, I found out this lecture took me 70 minutes. I thought I need to make some cuts and restructure things, right? So when I look at the Austrian proposals, then I'm kind of arranging them into two main areas. And we'll look at a couple of proposals in each of these areas to kind of get some idea of how Austrian speak about how we should do monetary reform. But first, let's look at the issue of money itself. So what should we do with money itself? Do we, for example, just love these Federal Reserve notes? No, we don't, we don't. Now, what we should do about it, though, there is some disagreement amongst Austrians. So for example, one proposal is to try to revive the gold dollar. So take this paper money that we're already using, it's already in use, already established as a money and let's try tying it back to gold. After all, what that should do, if we tie it strongly enough, it should help prevent hyperinflation. We can't just produce more gold, right? And again, if we're careful with what we do on the banking side, this might handle business cycles, but we need to get to the banking side to make that particular case. Two people that made this case for reviving a gold dollar would be Amesis and Rothbard, two names you may have possibly heard of. Now, they have slightly different plans, though, for how they're going to do this, right? So Amesis, in his 1953 edition of Theory of Money and Credit, has a couple points of exactly what we should do to move toward having a gold-based dollar. The first step is to stop issuing paper dollars. No more of that, just stop. Secondly, any gold the Fed or the Treasury currently holds, they have to hold on to through this process or it's going to create disruptions as you'll see in the next step. So the idea is once we do these two things, right, so don't sell anything to the Fed and Treasury, stop the issue of paper dollars, what he expects will happen is we'll see a stabilization in the price of gold. Once the price of gold is stabilized then, we can establish a conversion agency that is going to say, okay, we guarantee now, if you bring in that number of dollars to us, right, we'll give you an ounce of gold in exchange or vice versa, you can bring gold and then we'll give you that number of dollars. He also suggests, so this is just, this is the kind of thing Freedmen say is fixing the price of gold. That's why I didn't like the gold standard, it's just fixing the price of gold. And it kind of almost feels that way except that we realize it's a redeemability. So you can't actually go and change this back and forth. All right, another point of this is that he suggested eliminating all large bills, which in his mind was $5 and up. Prices have changed since 1953, I suspect we'd have to revise that number upward. But the idea being, he wanted people to get used to the idea of using gold as money. So for these large transactions where it's reasonable that you might actually be able to see the gold that you're using to buy the thing, then have people get used to it. I just bought a new van recently. The amount that I paid for it, I'm not going to confess because it's embarrassingly low. But I could have at least seen the gold that I was handing over to the dealership in order to get this particular car. So in Mises's mind, it would make sense, this transaction should happen in gold. So let people get used to holding these gold coins, let people get used to the idea that gold is in fact money. So let's undo the damage that was done by pulling gold out of the system and getting people used to paper. Just undo that. Rothbard presents a somewhat different view which has actually significantly faster in how we can achieve this. And Rothbard suggests a system that I call simple division. Where he says, let's look at the money supply, whatever money supply we think we want to have backed by gold. The Fed has gold holdings. So do the division, find out how many dollars are out there for each ounce of gold that's in the Fed's gold holdings. And there's our exchange ratio between the two. So each ounce of gold, if you bring in an ounce of gold, okay, we'll give you however many paper dollars according to this ratio, you can bring in your paper dollars and we'll give you the gold. Now this has the benefit that if the people decide to, we could actually totally eliminate the Fed's gold holdings and it wouldn't actually be a problem. We hand in all of the dollars, all of the gold leaves Fort Knox, and then we use that as money directly. This is not necessarily disruptive if that's what we've decided to do. It's not so obvious we can guarantee this under Mises's scheme. There's no time necessarily to where the price of gold ends up and the amount of gold we actually have. And so this seems like a kind of nice system. It's actually a system that I heard someone in the room, specifically Dr. Herbner advocate to Congress when he was called there, I think probably by Ron Paul, I would guess I had to talk about monetary policy as a very workable system that we could actually do. The other major proposal that has been offered is the idea of currency competition. So this has been offered, for example, by Hayek and the denationalization of money, also by Hans Sennholz and money and freedom and also in many other writings. The idea here is really not necessarily to cause any fundamental change to the paper currency we're using, but rather just to allow people to make a choice about what kind of currency they use. Because you find out when you really start looking to the monetary system, we don't actually have this choice. There are many places which we are blocked from having choice in money. So allow people to use whatever currency they like. If I want to start using euros, okay, fine, let me start using euros. If I want to start printing, angle heart dollars in my basement and I can convince people to take them from me, okay, we can use that, why not? So what is it that's blocking this? First, there is no free entry in currency in most modern economies. We've seen this proven, for example, with the case of the Liberty Dollar. Many of you probably have not heard of this because the feds clamped down on it. There was a man that decided he wanted to start having a silver-backed currency and he had kind of a clever but confusing scheme for how this is going to work. I don't know that it had good longevity to it, but the idea was he wanted to try to keep one Liberty Dollar very close in value to one American Dollar. That way you could very easily go into, say, small shops and convince people to take the Liberty Dollar instead of the American Dollar. I suggest that probably part of that part of the plan was part of what got the feds mad at him because they suggested that he was trying to create confusion in the monetary system and that was going to be a significant problem for him. And so we ended up being put in jail for trying to enter into the currency market to compete alongside the dollar. Another thing that we have standing in the way is legal tender laws. And so with legal tender laws, you look at any American dollar, it says this bill is a legal tender for all debts, public and private. So it means if we enter into a debt contract, then, say I as the creditor, if I happen to be lending to you, I have to accept dollars in exchange. Now interestingly, legally, this is not necessarily true in barter. I could say, no, I'm only willing to give you this pen if you give me your watch. And I will not, in fact, accept dollars for this pen. It has to be your watch. That's a spot transaction that's okay. But when it comes to debts, that's no longer the case. So why is it that we should be banned from this? Economically, if I have to accept dollars in exchange for any debts that I give out there, but then I have a pretty strong incentive to just use dollars all the time. So it enshrines the official currency, the legal tender in people's minds and also in people's behavior, so that then it becomes very difficult for any competition to come in. So eliminate legal tender laws. Now that doesn't mean that people have to stop using the dollar. It might be that they still find it perfectly acceptable to continue making debt contracts in dollars. Maybe people will just keep using dollars left and right just as we do now. Maybe these competing currencies won't actually be able to compete very well. That's possible. But at least here, now we know that that is what people have chosen rather than what has been enforced upon them. Another thing that specifically Sennholz suggested was having honest minting. As it is now, the US Mint does still mint, silver and gold coins. You can buy them as collector's items. And they do actually have a legal tender value printed right on them. And that value is a very small fraction of the melt value of the metal that's inside. I actually have, I admit, I don't hold much physical gold or silver. I'm not wealthy enough to own any gold that I could potentially see. And I have like one silver coin and it sits in my desk. I actually got it. I think it was right after I got back from Mises U as a student. So I've had it for a while and it has gained in value. So I'm not one to say put all your money into silver because it kind of stopped gaining in value a few years ago, but that's okay. But it has printed on it, one dollar. So if I go into the grocery store, I can in fact spend this, something like 99% pure silver coin, I can in fact buy something worth a dollar with it. And it's a one ounce silver coin that if you melt it down, that silver is worth about 15 or $16. So it makes absolutely no sense for me to go out and try to use this thing as a money. Rather, I just want to buy it either as an investment as I think it's gonna gain value in the future or perhaps these things kind of fun to have silver around. So it's actually kind of a consumption good. So you might buy it for these reasons, but there's a significant barrier there simply because they put that one dollar on the coin. If all it had on it was one ounce or 0.99 ounce silver suddenly becomes much more useful. Because now we can make an argument, well, this silver is actually worth $15, $16. And if you take this, it has some nice properties to it. So it's very durable. You don't have to worry about this getting shredded up or something like that. So we could start making an easier case, but as long as that $1 on it, as long as that $20 is on an ounce of gold, absurd. It's like almost 100th, the actual value of the gold inside that coin. It becomes very difficult to use the thing. So very simply, we just want them to change the minting plates. Get rid of that $1, get rid of that $20. Just tell me how much gold, how much silver is in that coin. And then if people want to use it, they can use it. It's very, very simple. So you may notice that currency competition is not really asking much of the legal system. We're not saying we need to start paying our taxes in gold. No, you don't keep using dollars for that, go ahead. The government wants to keep paying all the six, it's expenses in dollars. Go ahead, that's fine. Now you might find if people decide they don't like the dollar, it's gonna be a lot harder for you to actually buy anything for the government. So maybe we have some idea of why these barriers are there. All right, so those are these two big proposals. First, reviving the gold dollar, tying the dollar we have back to gold. Secondly, just allowing for currency competition. So then let's move into banking with the remaining time. So here again, there are two proposals. One is the idea of fractional reserve free banking. Now here Professor Herbner has already given something of a critique of it. I'll add just a little bit to it, mostly in the area of jokes, actually. So here I was looking at that paper from Horwitz and Luther. And Horwitz and Luther lay out, okay, this is what we're advocating, but they actually specifically avoid telling you how their system works. They say, if you wanna see about the mechanics of how this works, here's the paper that you need to read. And it's Seljan and White, a paper, and I love this title. How would the invisible hand handle money? Very clever, published in the Journal of Economic Literature which is a very well-respected journal. It's one of them published by the American Economic Association. It's A, A plus journal by most rankings. So very, very good. So they're, okay, I'm in for a good one, probably more math than I wanna read, but this is gonna be a pretty good paper. Let me tell you first, I ran into a significant barrier as I was trying to read this paper. Here's what it was. Okay. So what they end up boiling down to, it ends up the Journal of Economic Literatures less mathy than some of the others. So it was really this one big equation. So they're looking at the level of reserves, that's R, the banks would want to hold under this system of fractional reserve free banking. And they say this is related to B, you don't really worry about B. B is just some parameter. It ends up it's actually meaningful. They hide the interest rate inside of that. Yeah, it's true. B is actually a ratio where the interest rate is in the denominator but they wanna hide that. Sigma, at some level of how much variation are we going to see and how many withdrawals we have versus deposits. How much instability in effect is there out there in the banking system? There's MV that should feel familiar to you. We just saw that. And it actually came from that other equation which is significant here in a minute. And then the number of transactions also should feel significant. And for various statistical reasons that it's more mathematical reasons that ends up coming in as a square root. Then they say, well, we need to do now in order to show how this is going to work. Oh, this is actually where they end up. I made a mistake. So I guess I should forgive them because I'm going to criticize them for making a mistake. So what they said originally was, I can reconstruct this fairly easily. Oh, don't forget the B. There we go. So they had this equation where it's related to the price level and the number of transactions. Then they say, let's get rid of the price level. So MV equals PT. So we need to solve this thing for P, plug it in and we end up here. All right. How many people have had an eighth grade algebra? There's a problem with this. That was missing. So I said, oh, this is in the Journal of Economic Literature, one of the most respected journals in the economics profession. And referees read this thing and didn't find this. And it could be, maybe there's a typesetting error, but then I go forward in this paper and they end up plugging something in for T and treating that as one half. So made the same error again. Although weirdly, the stuff they plugged in, they actually end up with a negative sign in some of the stuff because they do division. So they keep acting like it's one half later in the paper. So okay, I'm gonna nail them because clearly this is significant. Then they say, so what we're going to do is assume the level of reserves in the economy is constant. These things are constant and this is constant. It doesn't matter what that exponent is if the thing is constant, right? So what did they just do, right? Well, we're back there. We can see now why Luther and Horowitz liked the system because it's like the system before with NGDP targeting because what they think is the best system ends up on the same exact grounds theoretically. That is it's all about multiplying M and V multiplied by each other, right? So that means when for example, velocity falls, right? These people really want to hold a lot of money in order to offset that, right? Just for the math to hold, we're going to end up increasing the money supply. But how does this happen in a free banking system? The banks create additional fiduciary media, puts it into credit markets, suppressing interest rates, ultimately creating business cycles, right? So it doesn't solve the problem, right? All right. So one last system, right? Which this one I can describe fairly briefly. That is full reserve or 100% reserve free banking. I'll still use this term free banking because I want free entry. Anybody who wants to open a bank, I'll let them do that. But they have to operate by holding 100% reserves. Any money I put in as a deposit, right, securely for me to then come redeem at any point that I wish in the future, they have to hold on to all of that money that I'm putting in. It's 100% reserves. It ends up there are lots of non-Austrian advocates of the system. Moten Friedman actually suggested this is a good system. Why? Because he wanted to control the money supply. He can't give the banks any freedom to mess with it like the free bankers would, right? So he liked 100% reserves. John Cochran from the University of Chicago also has recently suggested this is a good system. Lawrence Kotlakov who is not an Austrian, but a lot of his work I find is very friendly to a lot of the things we say, right? He also has come out in favor of the system weirdly, right? Paul Krugman has gone so far as to say that this system is worth talking about. One step at a time, okay, so that's good. Ends up, the system was also advocated by many Austrians by Rothbard, by Mises in 1953 in that theory of money and credit. That was another part of his proposal in addition to re-establishing the gold dollar and also Jesus Huerta de Soto. So all of these suggested that we need to establish some kind of 100% reserve system. Now Mises did take the view that 100% reserves, we may not impose it immediately, but rather going forward any deposits you make the bank has to hold on to it. So we're already on a fractional reserve system. Let's just not make that worse, right? Then we won't get further disruptions in the economy in the future. Now I actually wrote a paper about this, and I don't think too much of this as Mises' daily article, this was not an academic paper. It's purely for a popular audience called 100% reserves now. This was right after the financial crisis, December of 2008. And what I observed, I just started, I was looking at things like the money multiplier and so on. Wait a minute. Because of how active the Fed has been in injecting reserves into the system and because of how hesitant banks have been to actually lend anybody money, we actually have over 100% reserves in the banking system at that point. So 2008 I observed the Fed could actually just declare everyone has to hold 100% reserves. It wouldn't cause any disruption in the system because everybody's already holding 100% reserves. So now naturally times change. So I looked just today at the most recent data because we're recovering, surely banks are lending out money, surely the Federal Reserve has removed some of these reserves. We don't need them to stabilize the banking system at this point. So based on our last data, which came from a week or two ago, depending on which of these numbers we're looking at, we currently have $2.2 trillion in reserves held by the banking system. When you look at demand deposits, so things like checking accounts, $1.5 trillion. So we could literally, I don't recommend doing this because it's illegal to recommend doing this. But if we did happen to decide to go all, take all of our money out of our checking accounts, it's actually there. We could still, almost 10 years after this was first the case, we could still implement 100% reserves immediately without having to put this, Missessian proviso, just going forward. We could do it right now. And it wouldn't cause any disruption whatsoever. So I like to close here, as I'm slightly over time, with a quote from Hans Sennholz from Money and Freedom. This book is available in the bookstore. He says that sound money and free banking are not impossible. They're merely illegal. That is why money must be deregulated. All financial institutions must be free again to issue their notes based on ordinary contract. In a free society, individuals are free to establish note issuing banks and create private clearinghouses. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. I'm going to interject here. What's so special about banking that we need to regulate it? Freedom of money and freedom of banking. These are the principles that must guide our steps. Thank you. And...