 Good afternoon, everyone. I am Paul Martin-Foss, Congressman Paul's legislative assistant for monetary policy. And on behalf of Congressman Paul and his office, I would like to welcome you to the first lecture in our second series of T-talks. The first series of lectures dealt with money, what it is, and how it came to be. And the second series of lectures will build on that and explore further issues in money and banking by focusing on the Federal Reserve System. Today's lecture will explore the issue of why the Federal Reserve System was created. And we are pleased to have with us today this topic Professor George Selgen, Professor of Economics at the Terry School of Business at the University of Georgia. Professor Selgen is a renowned expert on money and banking, and the author of such books as Bank Deregulation and Monetary Order, The Theory of Free Banking, and Good Money. In the words of Don Boudreau, Professor of Economics at George Mason University, quote, there is today no finer, more informed, more thoughtful, more learned, and more eloquent scholar on issues of money and banking than George Selgen unquote. So without further ado, I present to you Professor George Selgen. Thank you for that very nice introduction. I will see Don Boudreau this evening, and I'll thank him for it as well. Thanks to all of you for coming on such a beautiful day. It's hard to compete with the sunshine, but I at least can hope to fulfill my charge, which is one of enlightening you about the origins of the Fed. It's tempting in a talk on that subject to want to go way back, at least to the days of the First and Second Banks of the United States, or perhaps further back to the founding of the Republic and the constitutional clauses that concerned money and banking, or even back to the Bank of England, which, after all, was the crucial precedent for all modern central banks. But we don't have time for that kind of thing. So I'm going to settle for taking you briefly to the period just before the Civil War to talk about what the banking system was like back then. And I'm going to do so by first pointing out to you that there's a lot of myths about what banking was like in the days prior to the Civil War, but after the demise of the Second Bank of the United States in 1836. The myth concerns the claim that banking was a fly-by-night unregulated industry and that the consequence was a lot of wildcat banking with many bank failures and so on. The truth of the matter is that, first of all, the banking and currency system of that day wasn't very good. It wasn't quite as bad as it's made out to be, particularly by the outbreak of the war. But it wasn't very good not because there was no regulation, although it's true that there was no federal regulation, but because states did regulate banks and often regulated them in heavy-handed ways. For example, the most common cause of bank failures during that time, and there were plenty of them, turns out to be state regulations that variously required banks in the states in question to buy specific assets, usually consisting of the bonds of the state governments in question to back their notes, and then engaging in such reckless fiscal policies that the bonds became worthless, that was the most common cause of bank failures. In other words, banks failed most often because they were forced to buy assets that turned out to be junk. Another criticism of the old pre-Civil War system, which is true, is that the currency was not uniform. That is, if you took a note from any bank in any part of the country, say any state, and traveled far from that state, perhaps not very far, even to a neighboring state in some cases, that note would no longer be worth its full face value in gold or silver. It would be worth something less. And this was also related to regulations. In this case, the fact that the vast majority of banks, almost all of them, were not allowed to branch by their statutes or by their incorporating laws. And as you know, it would be another 100 years before banks could generally branch, especially nationwide. So that was the most common, the most basic cause of non-uniform currency because it meant that, well, it was costly to bring a note back to its source to get gold or silver for it, and you could only get gold or silver for the full value at the source. Those costs were reflected in the various discounts from face value that these notes were subject to. By the way, the non-uniformity was not as bad on the eve of the Civil War as you might think. I know this because I actually went through the trouble of finding out the exact value of notes every bank had outstanding in 1863. I think October was the last year for which I had the relevant statistics. I left the South out because the Southern banking system by then was in shambles. I took all of the notes of the union banks, figured out what value they had outstanding, figured out what they would have been worth in Chicago or New York if you sold them to a broker and calculated the total discount from face value. Suppose I had bought all those notes in 1863 and then tried, at full value, and then tried to sell them in New York or Chicago. It doesn't matter where. What would my percentage loss have been? Anyone want to take a guess? How much I would have lost? 10%? 20? 80? Less than 1%. So you hear a lot of stories about how bad things were. They were bad, but it wasn't because of lack of regulation. It was because of bad regulations, and they weren't that bad. In any event, during the Civil War, there are some major changes made to the US currency and monetary system, two of which are especially important for us. Well, one, really. The other important one is the greenbacks. The US Treasury gets in the business of issuing its own currency. We go off the gold standard. That's temporary. The greenbacks will be around for a while, and then they'll be gone. So they don't have much of a role, ultimately, in the emergence of the Fed. The other change that is of more enduring significance is the establishment of a new kind of federally chartered bank, national banks. They still exist now, right? The national banks you see with that name in their title and many others that don't have national in their title. This marks the federal government's reentry into the banking business, but this time, unlike in the past, it charters lots of banks, not just one at a time. Now, here's what's significant, though, about this new national banking legislation or national currency legislation. As a condition for issuing currency, and in those days, a bank could hardly survive if it couldn't float its own circulating notes. National banks had to back their notes more than 100% with specially designated securities. Guess who's securities? This was during the Civil War. Anyone want to guess? Hmm? Yes, thank you. Got bonds of the US government. So a bank could only issue notes if those notes were fully backed by US government securities, which securities would be held as collateral in the event that the bank got wound up by the controller of the currency, which was also created, an office created by this reform. Now, what was the rationale of this currency setup? If you read the textbooks, they'll often say, well, it was done to create a uniform currency. But that's not really true. First of all, as I mentioned, the currency wasn't that non-uniform. But the more important point is this measure was very obviously a revenue measure. They were trying to sell government bonds to pay for the war. And by creating this new system of national banks, they thought they had a way of creating, of making the banking industry, the banking system, forcing it to become a new market for federal government debt. As a matter of fact, at first, the banks didn't go for it. That is, the demand for national bank charters was very, very meager. And ultimately, they had to change the law in a number of ways. But also, they taxed the state banks out of the currency business with a 10% tax. Now, this is all very significant. Because if it had in fact been true that the national bank currency was superior, as the textbooks would have you believe, then consumer preferences should have driven state bankers to convert en masse to national charters because the public would have demonstrated a preference for national bank notes and national banks that were established should have out-competed the state banks. Nothing of the sort happened. In fact, it was only by forcing state banks out of the currency business that the Congress was ultimately able to create a widespread demand for the new national bank charters. State banks barely survived this measure. And they eventually recovered by becoming pure banks of deposit that don't issue currency, which is what all banks are like today, except the Fed. OK. So how did this measure for basically nationalizing the currency, how did it perform? After the Civil War, state banks no longer issue currency. All currency other than the greenbacks comes from these newly established national banks. So was this a good currency measure? Well, we can ask that question two ways. First, we can ask, was it a good wartime measure? And there the answer would have to depend on whether it did succeed in raising revenue for the union. I'm not even going to answer that question. I'll let you, we can just assume, though some people have questioned this, that as a wartime fiscal measure, the national currency and banking acts were a good idea. But what I want to make clear is that as peacetime monetary reform measures, that is, as the basis for the foundation for a peacetime economy and a peacetime banking and currency system, the measures were disastrous. And the reason they were disastrous had to do with the fact that under this arrangement, the stock of currency, or the only potentially variable component to the stock of paper currency, is tied to the availability of government debt. One way to put that starkly is, imagine that the government retired all of its debt. What would be the maximum amount of currency the national banks could issue? The answer would be under this law, none. And if it hadn't been for their greenbacks then, which would eventually be retired, people would have had no currency with which to make payments. And in those days, checks weren't important. And needless to say, there were no debit cards. Currency was the main medium of exchange that people relied on, paper currency that circulated from hand to hand. So in fact, of course, the government never did retire its entire debt, but it came pretty close. Because after the Civil War, starting in the 1870s, the federal government ran surpluses regularly year after year after year. Cool, huh? It doesn't do that anymore, but in those days, it did. And just as when you run a deficit, the way a government deals with that is by issuing more debt. In those days, these regular surpluses were used to retire outstanding federal debt. So the government was throughout the period, roughly from 1870 to 1900 or so, was reducing the number of its bonds outstanding the federal government. But because of the currency laws enacted during the war, when the government wanted to issue more debt and get somebody to take it, the stock of currency now could not grow. In fact, it had to shrink because the bonds that banks needed to back the stuff were becoming scarcer and scarcer and scarcer. Also, the rules for a bank to get new currency were such that, quite apart from it becoming harder and harder over the years, it was very awkward. In fact, it was entirely uneconomical for banks to get hold of bonds to secure more note issues only for the purpose of meeting temporary demands for currency, for example, during the harvest season. The harvest season back then was the time of peak demand for currency. You needed it to pay the people moving the crops who were mostly itinerant laborers who certainly didn't know anything about bank deposits and checks. So the currency was what people at the time referred to as inelastic. It couldn't adjust for the general growth of the economy. Instead, it was tending to shrink. And it couldn't adjust at all for short run changes in demand, especially seasonal changes, harvest season changes. This inelasticity of the stock of currency in the US economy was the ultimate cause, or a crucial cause, not the sole cause, of a series of very serious financial crises during the last half of the 19th century, which were not accidentally known at the time as currency panics. Currency panics because suddenly there wasn't enough currency to go around. By the way, if a bank couldn't issue enough of its own notes, it had to part with gold reserves. And that meant they would have to contract credit. So an inability of a bank to supply all the currency that its customers needed when they came to convert deposits in the currency, for example, or if they needed loans, would translate into a credit crunch. There were major crises of this kind. In 1873, though that one had other elements as well, 1884, 1893, and 1907. And the trend was for them to get worse and worse. Now, I have only one picture to show you, but it's a crucial picture because it helps to drive home a very important point I want to make, which is these currency shortages and crises where unique products of the way in which we regulated our banks and the way in which we regulated banknotes, which prevented the supply of bank-created currency for being at all capable of meeting the needs of the economy. And what this chart shows, it shows two plots. The smoother plot, which is descending for most of the period, and by the way, the period at the bottom covers 1880 to 1900. The smoother plot is the left-hand scale. And it starts at about $300 million and then descends to a little less than half of that by 1890. And you'll notice it doesn't have any sawtooth pattern. The second plot is the one that's rising with a distinct sawtooth pattern. And it goes with the right-hand scale, which is similar to the left, but about 1 tenth the magnitudes. Well, if I didn't tell you anything else about this chart, except that both plots refer to two different economies and that the 1880s and 90s are periods of rapid economic growth in both. And in both economies, there's a significant harvest season where the demand for currency peaks in that season is roughly from August to November every year. Which country would you say has the more scientific currency system that seems to be adjusting with economic needs? The one with the sawtooth pattern or the one that's rising on the whole or the one that's shrinking with no sawtooth pattern? It's a rhetorical question you don't have to answer. The right scale and the sawtooth pattern are Canada's. The left scale is the United States with its bond-secured currency. As you can see in the US, and we had rapid economic growth, the currency stock falls to loses more than 50% of its value in the 10 years of 1880 to 1890. And behind that decline is the fact that the Treasury is retiring the bonds that, because of old Civil War legislation, are supposed to back every outstanding national bank note. And the supply, as you see, has no seasonal adaptability. It's just not worth it to banks to take the stuff out if they can't leave it out given the costs of abiding by the regulations. Canada, in contrast, has a currency supply that seems to be adapting quite naturally to the needs of a growing economy with a substantial peak demand for currency every fall. Now, you might wonder, what has Canada got here? Perhaps it has an enlightened central bank that is regulating the money supply to make sure that there are no shortages. And by the way, Canada avoided all those major crises that were plaguing the US economy. But if you thought that it was because of a central bank, you'd be wrong. Canada didn't adopt a central bank until 1935. And if anyone wants to ask me later about the politics behind that decision, I'm happy to answer. But in this period, it not only has no central bank, what it has is a competitive and largely deregulated currency and banking system. Now, largely deregulated. They had a charter system, and entry into Canadian banking was restrictive. But they still had a couple dozen banks and they were allowed to branch anywhere and to back their notes with general bank assets. No special securities had to be purchased to back the notes. This competitive system with very little regulation, apart from regulation limiting total numbers of banks that were allowed into it, automatically provided a fluctuating supply of currency that didn't grow excessively but adjusted according to changing needs over time, both secular and seasonal and cyclical. It was a good system. In contrast, as I pointed out, in the United States, we had one crisis or after another and everyone understood that these crises were due to the bad manner in which our currency system was regulated. And this of course led to calls for reform, especially after the 1893 crisis. The reform movement that ensued after that went through two distinct phases. The first phase was something that has come to be known as the asset currency movement. The second phase was originally known as the reserve bank movement, but of course it was a movement to establish a central bank. I'd like to tell you about both phases of the currency movement because you can best understand how we turn to the idea of a Federal Reserve system by understanding why the alternative wasn't successful. The asset currency movement took Canada, in fact, or a system like Canada's, as its model for reform. It was essentially a program for deregulating banking and currency. It called for repealing the bond-backing requirements that dated back to the Civil War and letting banks back their notes with the same general assets they used to back their deposits. In other words, no special collateral requirements. It also, in some of its manifestations, called for abolishing the 10% tax that had been used during the Civil War to force state banks out of the business of issuing notes or force them to convert to national charters. Finally and crucially, the asset currency proposals mostly included proposals for allowing banks to branch, not only within states but nationwide. They were 100 years ahead of schedule in the sense that it would take about that long for similar legislative reforms to actually become successfully adopted. Why did the asset currency people want branching? Because they understood that the reason why the Canadian currency supply could go up when it needed to by virtue of the lack of special bond-backing requirements but also came back down when extra currency was no longer needed was the presence of a widespread system of bank branches. Each branch was like a little vacuum that would suck up excess currency when it was no longer needed as rival banks found it very easy and convenient to return items to each other the way they might today through a clearinghouse. So branch banking was seen as a way to make sure that banks freed from special restrictions on their powers to issue notes were nevertheless forced by competitive forces with the help of widespread branch networks to mop up extra currency when it was no longer wanted by their customers, by the public. Unfortunately, that branch banking element of the asset currency reform proposals turned out to be the proposals political Achilles' heel. You see, the fact is that something like a dozen different bills were presented in Congress all involving these reforms, asset currency measures. You can read all about them. They tried and tried and tried again. But they all failed because of opposition by special interests to branch bank opposition that I probably don't have to tell you too much about since it continued in one form or another as I said for another 100 years. But the basic political story was this. There were two groups actually who opposed these measures and one group that was in favor but outnumbered. The group that favored asset currency was mostly Midwestern city banks who saw these reforms as a way that they could spread their branches and get a foothold on the banking business to the rest of the country. Of course, the political economists were also behind these proposals because they thought that they would result in a more stable and crisis-free monetary system. But opposed to them all, and especially to branch banking, where Main Street, of course, where the small independent banks thought that they would get crushed by larger banks spreading out from Wall Street and, ironically, Wall Street. Wall Street banks opposed it because under the unit banking system, the only way other banks everywhere in the country could get access to the New York money market was by using them as correspondence, which was really good business. If those other banks could have branches in New York, it would be put to the correspondence system and bad news for the Wall Street banks. So Wall Street lined up with Main Street and they voted down these measures. It was as a result of this that roughly at the time, just following the panic of 1907, attention shifts in the reform movement away from the asset currency idea, which fails politically towards the alternative of a central reserve bank or simply, as we would call it today, a central bank. This movement starts with the establishment after the panic of the National Monetary Commission, which is appointed to study alternatives and publish its results. Like all commissions appointed by Congress, it, of course, knows what it's gonna conclude before the studies are actually conducted and it has been more or less taken over from the start by proponents of a central bank. The central banking solution, the solution that was ultimately embodied in the Federal Reserve Act, is there's nothing magical or mysterious about it, basically it boiled down to this. Instead of removing the shackles from the established national and state banks and allowing them to issue more currency free from the restrictions that had prevented them from doing so before and also introducing branches, this new reform, the Federal Reserve Act in particular, will establish another bank or system of banks that are uniquely privileged in not being subject to those restrictions. And so when the other banks can issue currency, they come like the little fellow in Oliver with a bowl to the Federal Reserve System and say, please, sir, may I have some more? In fact, the way this actually works is through the mechanism known as discounting, which in those days meant this. Suppose you were a bank, a national bank, and you wanted to issue more currency, but there were no more bonds to be had to allow you to do that legally or to be had at a decent price. Then you might have plenty of other assets on your balance sheet, right? Like commercial bills. Under the new rule, you could bring commercial paper to the Fed, they could discount it for you, which is then buying it temporarily at a discount from face value, and then they would issue Federal Reserve notes to you. So what you have is a kind of asset currency except only these privileged banks, right? The 12 Federal Reserve banks are allowed to produce this stuff. It sounds like it should have the same result as deregulating the other banks, but it doesn't because the Fed is a monopoly and it's not itself subject to any competitive pressure. Makes all the difference in the world whether you have a few dozen banks all competing on an equal footing issue and currency and then sending excess currency back to each other for settlement versus the central bank with a monopoly when it issues notes, nothing automatically brings them back, it has to take steps to bring them back. So the problem with the central banking solution is yes, the Fed can get it right. It can issue just the right amount of currency to make up for the lack of ability to do so by the other banks. It can also issue too little or too much. And there's nothing automatically to prevent it from making those mistakes. I wanna say one other thing about the founding of the Fed because I can't help raising this point. I'm not a conspiracy theorist. I actually rather dislike conspiracy theories because I think that they are, well, not parsimonious. Mere stupidity explains plenty. You don't need to appeal to conspiracies. And in fact, conspiracies get it wrong because they assume that the people involved are all smart enough to actually know the consequences of what they're doing. But there was an element of conspiracy in the creation of the Fed because Nelson Aldrich, who was the senator responsible for heading the National Monetary Commission, secretly did hold this meeting at Jekyll Island with a bunch of Wall Street bankers after promising that Wall Street was definitely not gonna take this over. And those guys drafted the Federal Reserve Bill and they would have kept it secret forever if somebody hadn't snitched in the 1930s. But the fact is that the actual shaping the Federal Reserve legislation was done by a bunch of Wall Street bankers and nobody on the actual commission had any role in it except Aldrich itself. That bothers me as a non-conspiracy theorist. It oughta bother you too. But nevermind, how did the thing actually work? Well, in a word, rather badly. How did it work with respect to prices? From the founding of the Republic until the founding of the Fed, the price level had of course moved around a bit, but actually it ended up more or less where it started and it was very rare to have inflation of more than 4% or deflation of more than 2% or 3%. The exceptions were periods like the Civil War when the gold standard was temporarily suspended. After the Fed's founding, right from the get-go during World War I, you have very rapid inflation. You may think that the 70s were the worst inflation rates for the United States of the 20th century, not so. There were some months between 1914 and 1920 when the monthly inflation rate translated to an annual basis was over 25%. We didn't have anything like that in the 70s. Prices then fell dramatically during the Great Depression under the Fed's watch. And, but then starting in the 70s, especially once the last link to gold was severed in 71, the price level more or less became unanchored and now prices are roughly, oh, I don't know, 23 times what they were at the time of the founding of the Fed, some large factor. And ours is one of the better central banks on that score. What about cycles? I have a paper with two colleagues, one from Georgia and one from George Mason on how the Fed has performed. It reports all of these statistics that I'm summarizing here very quickly. It's called, has the Fed been a failure? With regard to cycles and fluctuations, if you go by the most reliable new statistics of output concocted by some very good economic historians, in particular Christina Romer, who you should be familiar with as someone who was the president of Obama's Council of Economic Advisers for a time, those statistics show the following, that certainly if you include the whole Fed period and compare it to the 30 years before the national currency period, the volatility of output is greater and the number of cycles and their average duration is higher. But here's what's really surprising. Even if you take out the period between the two wars, even if you take out the Great Depression and the crisis of 1921, there's hardly any improvement in the cyclical performance of the U.S. economy, hardly any. In fact, if the recent crisis is fully factored in, I suspect you could show that there's a slight deterioration. Finally, what about banking crises? The Fed would like to have you believe that it solved the problem of banking crisis. That's getting harder all the time, of course, but the reality is quite different. The number, if we need to divide the historical period here between 19, sorry, say the 1870s when the national banking system is up, to 1914, the founding of the Fed, and then the next division, 1934, which is when the FDIC is in place. If you compare the incidents of bank failures and crises of the first two periods, that is the period without the Fed and the period with the Fed, but without the FDIC, crises get worse, not better. The number of bank suspensions gets much worse, not better. After 34, the record starts to look better, but it is evident that this is a result of the FDIC, not the Fed's presence. At least that's what the statistics suggest, and we can very well understand how the FDIC put an end, at least for a while, to bank runs and panics. But until it was created, the Fed itself had a dismal record with regard to both things. Okay, so now what? I guess I should conclude, and I'll be a little ahead of schedule, by saying that all of what I've said to you doesn't necessarily mean we should end the Fed. What it means, though, in my opinion, is that we should be doing, we should seriously consider doing, what people were doing after the Panic of 1907, which is talking about whether you can come up with a better arrangement than the one you've got. We should have a discussion like that, too. We should have another National Monetary Commission, preferably one that doesn't already know the answer before it goes out and studies things. But what we need is an honest, serious discussion of whether the Federal Reserve system really is the best of all possible monetary systems. I, frankly, doubt it very, very much. I see nothing in history that should compel us to take that view. I think we could have done better than the Fed, at least in theory, if not politically, back in 1913. And I think that it's quite possible that we could do better today. Thank you very much. And now I am invited to ask you to ask me questions for another 15 or 20 minutes, and I'm very happy to try my best to answer them. Yes, sir. I think they're very real. I think it's very important, though, to distinguish between the risk of future inflation and the question of whether inflation is, in fact, a problem we should be fighting now. I know a lot of people who think the Fed should tighten more now, but I think that the idea of tightening in anticipation of a problem that hasn't arisen yet is a very bad idea. They tried that in 1936, and it didn't work well. But as for the risk being there of a future outbreak of inflation, it is, and it's very serious because the Fed created massive amounts of new basic reserve money during the crisis and its aftermath, and those reserves are now sitting there in a banking system that, for various reasons, is not prepared to part with them. But as the economy recovers, which it seems finally to be doing, there's a very, very great risk, perhaps we shouldn't call it a risk, but a prospect that bank lending will be revived. That will leave the Fed with a major mopping up operation that will require not only its using every instrument it has at hand to try to see to it that excess reserves don't turn into excess spending and inflation, but it also will need a great deal of political will to do the job that it has created for itself. So this is something we have to really worry about. I've already seen evidence, and you have perhaps two of the Fed jockeying to try and rationalize inflation. Oh, we're moving our inflation target up. Oh, well, the CPI is really biased. When you start hearing talks like that, you know they're preparing the stage for making excuses when headline inflation starts to go well beyond what originally were said to be the limits that the Fed would protect over here and then back there. You said the period that's up on that screen was a period of significant economic growth. Yes, it was. Yes. I've seen some statistics that would agree with that. However, doesn't that period also contain a large part of the long depression? Ah, the long depression. I was gonna ask that, can you explain exactly what was going on? Yes, sure. Why it's referred to as the long depression? Oh, that's a lovely question for me. So there is this myth, I'll come right out and say, of something called the long depression, which in the United States is sometimes said to have been a depression that lasted from 1873 to 1896, which would be this whole period. And yet the statistics show a lot of growth interrupted by crises as I've already told you. What's going on here? I'm afraid what's going on here is that some very naive people have assumed that because prices were generally falling during that period at a modest rate on average of perhaps 2%, that therefore there must have been a depression because everybody knows that when prices are falling, when there's deflation, that's depression. Well, everybody knows it, but it ain't so. Because in fact, throughout most of history, most deflations, mild deflations, haven't been depressing at all. They've been periods of rapid growth where falling unit costs simply were allowed to be reflected in falling product prices. In other words, most stuff looked like computers look in recent history. The exceptions were episodes famously the 1930s, 1921, and of course the recent episode of 2008, 2009. Those have been exceptional cases where deflation was associated with depression. The theory of the long depression emerged after the Great Depression when political economists and economic historians got it into their heads that any deflation must be a depression. And so they started writing about the long depression. They should have written about the long deflation. It wasn't, in fact, a long depression. And there are whole books. There is a book, in fact, that's been out there for some time called The Myth of the Great Depression, which is not about the 30s. It's about the so-called long depression. That book is mostly about England where the same false theories circulated because the same deflation was noted during the same time. But there's a very good University of Virginia PhD dissertation dealing specifically with the American case. There was no depression. There were short depressions within that period, but there was no long or first great depression. Yes? Thank you. Well, I've already mentioned, I made a lot of hay about Canada and there's obvious reasons for picking on Canada. It's geographical proximity. It's having had close trade relations. In many ways, apart from its much smaller scale, the Canadian economy sort of looks like the US economy and therefore it seems reasonable to think that a system that could do a good job there has a good prospect of doing a good job here. But Canada's was by no means the only example of a well-working currency and banking system that avoided major crises. If I were giving this talk in England, I'd be talking about the virtues of the Scottish system, which was, again, a less centralized system that had many banks issuing notes until 1845 that had hardly any restrictions on note issue. And they had no central bank, unlike England, which of course had a central bank which had many privileges piled up in it and the remaining English banks were deprived of similar privileges. So the Scottish system was another good example. A lot of work has been done on it. There are other examples too that have not been researched as much in Northern Ireland, Switzerland. But rather than go off into a long list of these other systems, I would simply say this, that any serious attempt to get a grip on our monetary system and its historical problems or to reform the system with something by turning it into something better has to be informed by a wide variety of historical experiences. One of the things that bugs me about most American economists, monetary economists, who write about money in banking in the United States is the vast majority of them don't seem to know anything about the economic history, the monetary history, the banking history of other countries. And so they cannot see the things that you can see if you just look. They can't see even what you can see from a simple chart like this. They've never looked. They think you can figure everything out that you need to figure out by only looking at one country. You cannot do that. You cannot do a good job. In its essence, the National Monetary Commission was a good plan because it was charged with looking at all the different countries' experiences so as to find all the necessary clues to sound reform. The problem was it was politically a setup from the start. And as I mentioned, the commissioners themselves ultimately played no role in shaping the actual legislation that was adopted. So it shouldn't be done like that. That is, instead of it just being a dog and pony show, the research on other countries should be taken seriously. Yes? You mentioned your fear over inflation with the other scenario. Mm-hmm. And there are similarities there of the realist comparisons between the United States and Japan. Well, I think that the Japan scenario is precisely the one that was worth worrying about these last couple of years. But I think as the recession ends, it becomes less relevant and less of a concern. And so I think that recovery, of course, is something we all welcome, but at the same time it should cause a shift in our fears in a more inflationary direction. That is not because recovery causes inflation. This is the kind of talk that I really dislike. However, recovery in this case can mean a revival of bank lending that results in all these excess reserves suddenly being dispersed into the economy like so many hot potatoes and that could be very inflationary. Personally, though, I don't like to make forecasts. I don't think that Japan scenario is in our future. I think the inflation scenario is something that might be. I can't imagine the Fed taking such aggressive steps to counter inflation should it break out as to bring us into a Japanese-type deflation. I don't think that's likely either. I think if anything, they won't do enough to stop the inflation. Yes, sir? I have a question about the Canadian system during that period. So it seems like every time there was a higher demand for currency during harvest season, the banks would sell bonds? No, they didn't have any bond thing going on. All they had to do was the simplest thing in the world. If I had a blackboard, I'd show you, but I can even describe it. So the point of a Canadian bank is it has no special assets. It has to be holding when it issues notes compared to when it has deposits outstanding. So imagine, you should never do this on camera, right? Imagine a balance sheet, right? And this is assets and liabilities. And the assets are just commercial assets, right? It could be some bonds there, but whatever the banks like to invest in, right? Whatever they consider to be sound loans, investments. And on the other side, you have deposits and outstanding notes. Here's the thing. If all the depositors came and said, we don't want deposits anymore, we want notes, the bank would just switch the liabilities and it would have no other balance sheet implications. The liquidity is the same or reserve ratios the same. They're just swapping liabilities. That couldn't happen under the national banking system because a switch from deposits to notes, right? People moving out of deposits in the currency meant that the bank was obliged to come up with more bonds on its asset side because the law said it had to have bonds for notes, couldn't have whatever assets it already had for its deposit. And then there would be a scramble for bonds or if they're just too expensive and by the end of this 1890, they're commanding a $30 premium over par. Then the banks would say, well, we just can't get hold of these bonds. It's not worth it. And the customer would say, well, give us some gold. They go, please, don't make us give you gold. Well, we need something and you're obliged to give us gold. And out would flow the reserves and down would flow the supply of credit. So the key difference is the Canadian system didn't work. Right. The Canadian system worked because it wasn't regulated. Right? The Canadian system didn't work because it was. But remember, this is why I took things back to the Civil War. Why is this regulation on the books? Right? You're bound to ask that question. Well, because once upon a time we needed revenue, we needed to sell bonds to pay for a war. But it stays there. Think about that when you pass a law. Right? It might stay around. Long after the contingency for which you design it has passed, then what? Will it then be worth it? This one wasn't. Yes, sir? U.S. Traders, what are the implications and how are those implications different from those of the U.S. default? Well, there really isn't an answer to that question because there's many answers, depending on what it is you're shifting towards, right? It's all well and good to talk about getting rid of the Fed, but it means nothing unless you talk about what it is you're gonna put in its place. And unless I know what that would be, and I don't, right? I have written about, in that paper I mentioned to you, we talk about some possible alternatives, some which would involve going back to a form of gold standard, but some which would not. But every one of those alternatives has, provides, implies a different answer to your question, which is a great question. But the more fundamental question is what would we replace the Fed with if we moved away from it? And I'm afraid that we won't have time to cover that ground. And it decided to move to central bank because he didn't want us to reserve. Oh, yeah, you remembered that. And it decided to move to central bank because he didn't want us to reserve. You pointed to the Canadian situation as an example of where you didn't need a central bank in order to have a stable banking system and currency system. Right, what happened is after, first of all, Canada did very well with its monetary system during the first years of the Great Depression. Canada suffered very badly on the whole, don't get me wrong, but it was bound to given its very, very close trade links with the United States. It's utter dependence on the performance of the US economy for that of its own. But for example, two facts. The US of course was plagued by bank failures during the early years of the Depression. A third of our banks were wiped out in three years. And that was the proximate cause of a massive collapse of the money supply, about 35% if you go buy one standard monetary statistic. That's a big collapse. Throughout the entire 1930s, Canada had this many bank failures. This many, in the 20s it had this many. And the money stock in Canada during the first crucial three years fell 13% as opposed to 34% or 35%. So this is an indication that the monetary system in Canada, weathered the Depression relatively well. Nevertheless, the Depression created a substantial increase in agitation, especially in Western Canada for inflationary policies. Partly that was driven by the fact of the Depression itself. Partly it was driven by the increasingly popular views of a certain major Douglas, the social credit theorist. Anyway, this guy was a kind of monetary guru who said everything would be solved by having social credit and more paper money and blah, blah, blah. As a way of heading off this populist pro-inflation movement, the Bank of Canada was created as a sort of SOP. The idea was to please the commercial interests who wanted nothing to do with major Douglas and his ideas, but at the same time create a political agency that could be sold to the populists as something that might give them some more inflation if they really asked nicely and that sort of thing. And this is why the Bank of Canada was created. It was not an institution that was needed or bound to improve the performance of the Canadian monetary system. There is in fact an article, I think in the Journal of Money, Credit and Banking, it might be the journal of political economy with the intriguing title. Why did the Bank of Canada emerge in 1935? So it's a question, and the answer has to do with the populist movement. Any other questions? Anyone else? That's it. That's why we have the Fed. Thank you all. I want to thank you, Professor Seljman, for session enlightening and thoughtful lecture. And thank all of you for attending today. I hope that you'll join us for our next two lectures. In March, we'll be dealing in depth with a topic, what does the Fed do? Followed by our third lecture in May on what is the Fed's future. Thank you all again for attending, and I hope you'll join me in another round of applause for Professor Seljman.