 About a year or so ago Bob Murphy and I started discussing a project about money mechanics and it came from a Fed Federal Reserve publication which has been out of print since the 90s which attempts to explain sort of the plumbing behind both central banks and commercial banks and their interplay with fiscal treasury and it's pretty complicated and there's sort of a knock on Austrians is that we live in a theoretical world but we don't much understand how banks actually work. So Bob took on this project and has done an absolutely remarkable job. It's actually on our website basically complete in form where every chapter is a clickable link. There's a landing page to it and we're going to produce it in a written form and distribute that later this year. So not only is it going to the history and origins of money with a lot of menger and mises, he goes into history of the gold standard, again the plumbing and mechanics behind all of this but then he has sort of separate treatments of inflation and shadow banking which I'm sure many of you are familiar with, the extraordinary kinds of monetary policy we've seen since the crash of 08 and now hyperdrive since the crash of well the engineered deflationary crash of 2020. He discusses MMT which is obviously a seductive and trendy theory which is going on right now, cryptocurrency. So it's really a remarkable short course in money all in one place, one landing page and for those of you who have a particular interest in it, I really encourage you to check it out because I think it's going to be a very important product for the Mises Institute and I'm very, very pleased that Bob was willing and able to do it. So please give him a big round of applause. Well, thanks Jeff for those kind words. And so, yeah, as Jeff says, this is available right now. If you just Google my name and find it at the Mises Institute website, you'll see it and he says each chapter is clickable. So what I'm doing in this talk is I thought I would just summarize some of the pertinent points from this rather than trying to go ahead and give like a summary of each topic. Instead, I just picked a few of them and I'll elaborate someone on them. So this is what we're covering in this talk. U.S. commodity money history. Do textbooks get the bank credit creation backwards? Talk a little bit about the Fed's balance sheet. There was a redefinition of M1 that occurred back in the they retroactively did it so that where the redefinition kicks in is of May of last year. We'll talk about that and then they abolished the reserve requirements. All right, so those are the things I'll try to cover in this particular talk. But like I say, there's a ton of stuff in that book that you can go to the clickable links and see. OK, so let me talk about this. So in terms of understanding money mechanics, you know, as Jeff said, the original vision was sort of to say, hey, we've been teaching in a certain way, does, you know, does the new paradigm affect things? So those new things are in there. But the reason I want to talk about this is there's obviously an affinity when the Austrian tradition with hard money and, you know, commodity money and me, I would encourage you if you like that stuff, but you've thought like, oh, wow, there's a lot of history there. And gee, I don't really, you know, the stuff about the silver and buy metalism and all this stuff, it's too complicated. I I tried to boil it down. So I would say if that stuff is always interested, you try giving the chapter I did here a chance because there is a lot of interesting things in there from a hard money perspective. So, for example, and this is something when I was younger, the way I thought it worked was that, oh, the US government always printed green pieces of paper, you know, with presidents on them and that set a certain number of dollars. But you could just turn those in and then get a certain weight of gold or silver and actually that's not eventually that's what it meant. But historically from when the Constitution, you know, the constitutional republic, as it were up through about the Civil War, the US federal government, what they would do is say, you bring us gold or silver and then we'll stamp them into, you know, legal official coins denominated in US dollars. So to be clear, there was one in the War of 1812, specifically, it was the year 1815, there were treasury notes that has a quasi-money status. That was the only exception to this claim, just if you want to be a purist about it. But generally speaking from, you know, the Constitution up through the Civil War, with the, you know, the actual money, the base money in the US were gold and silver coins denominated as dollars. And if you wanted paper notes, it was that banks would issue them. Right. And so what that was technically was a claim on the actual money, which was, you know, the gold or silver coin that, you know, the government had authorized as being legal tender. OK, so that's just to give you an example of what I mean. So you might see sometimes you could read Rothbard or, you know, Joe Salerno talks a lot about it, that you may think of, oh, the gold standard is the government prints pieces of paper and then you can turn them in and get gold based on some, you know, redemption rate the government announces. And I'm saying that's historically the gold standard was much stronger. Like they thought of the dollar. So the coin eject of 1792, for example, the dollar was defined as a certain number of grains of gold or a certain number of grains of silver. All right. So it wasn't that, oh, yeah, we're printing paper dollars and we pledge to redeem them at this rate. It's like, no, what the dollar was just like to say a foot was 12 inches. It's not that they said, oh, right now the exchange rate between inches and dollars is 12 to one. It's like, no, it was it was a much more fundamental thing. They were saying this is what the unit consists of. OK, so on the one hand, you might say, what's what's the big deal? Why are you stressing this distinction or this nuance? But I'm just trying to get you to see how the idea that, you know, the money was not a piece of paper was was much more deeply imbued back then. A little bit on this in case you've read some of this stuff. So at the time, you know, why would they do this? Why did the coin eject of 1792 define the dollar as a certain amount of grains of silver or gold? It was because this was what was called bimetalism, as the name suggests, meaning it's two standards. And notice that that was exactly a 15 to one ratio. And the reason they picked that is because at that time, that was roughly the market exchange rate between gold and silver, right, that gold had about a 15 times more, you know, in terms of per weight market value and the global markets. So what Congress was trying to do, the rationale with this is they were trying to make it convenient to have dollars of different sizes or I should say money denominated in dollars of certain sizes based on, you know, the transaction. So if you needed to buy something expensive, you could have a $20 gold coin, right, and that would be a larger, but then in terms of getting change back and, you know, smaller purchases, you'd have smaller, like a $1 or a fractional, you know, a quarter, meaning one quarter of a dollar, right, that's why it's called a quarter silver coin, right. And so that that was the rationale. And the reason they get again, they locked in the 15 to one is because at that time that was roughly the correct ratios. They were trying to respect, you know, the natural or the market relation. But then what happened, and this is where Gresham's law comes into play, is once they had locked that in, and Mises talks about this a lot. He says that when governments tried to enact a bimetalism standard or a bimetallic standard, in practice, it would be an alternating monometallic standard. Okay. And so I'll say that again, and then I'll explain what it means. So what Mises claimed was governments historically, when they tried to enact legislatively a bimetallic standard, in practice, it would be an alternating monometallic standard. And so what happened is, you know, they could pick an exact exchange ratio in terms of saying our sovereign money, you know, whether it's the German Mark or the French Frank or, you know, the U.S. dollar, if it's defined both in terms of gold and silver, and they, you know, they have to pick some kind of ratio between the two, in practice, the market exchange rate's going to fluctuate. And so if it goes too far in one direction, then with this ratio, necessarily either gold or silver is overvalued, and the other one is undervalued, and so everybody naturally, when they have to make a purchase, is going to spend the thing that's overvalued, right? They want to get rid of the stuff that the law is making more valuable than it really is, as it were. And likewise, you're going to hoard, you're not going to spend the ones that is being arbitrarily penalized, right? So for modern people, just to get a sense of what this means, just to put it in real terms, many of you probably know in terms of U.S. coinage, if you have like a quarter or a dime that was issued in 1950, there's actual silver in that. So if it's a quarter, the silver content of a U.S. quarter that was coined or minted in 1950 is worth much more than 25 cents. So you would be silly if you went to the store and the merchant says, oh, that'll be $1.25, you wouldn't take out a dollar bill and then that quarter and pay for it, you could, but that would be silly, right? Because you would be giving up an object that was worth much more than 25 cents in terms of the silver content. You would use a different quarter that also has stamped on it 25 cents, you know, legal tender, but doesn't have 25 cents worth of silver in it, right? So likewise, back when the coins were genuine silver and gold, if something cost $10, you would use coins to pay for it, you would put down coins that the metal content was actually worth less than $10. If you were to melt them down and sell the metal, as opposed to coins that if you melted them, the metal content would be more than $10, right? So that's what I'm getting at. And so Gresham's law, the way it's distilled or summarized is to say bad money drives out good. And that's what they're getting at, that they're saying that the money that's being overvalued is the one that gets spent and is in circulation and everybody holds back and sits on the money that's being arbitrarily penalized in terms of the legal tender laws and so forth, all right? So that's what would happen. So in the U.S., it flipped. Like I say, initially, this really was the right ratio, but then the ratio moved up to about 15 and a half to one, you know, the actual market ratio around the world. And so that, you know, made the U.S. sort of like on a de facto silver standard, and then things moved the other way. And so then, you know, so it was one coins were all in circulation. Then it went the other way towards where it's 60 and the U.S. changed the definitions more towards 16 to one. And then it flipped the other way. And so what they over, what they had been overvalued. And so then it flipped and the coins that were in circulation switched around. So the U.S. ended up being on a de facto gold standard. And then this led, this gave rise to, I'll move on to the next slide here, but I don't want to get bogged down too much in this, but just to connect some of the dots for those of you familiar with U.S. monetary history, you may have heard of what's called the crime of 73. And that is when in 1873, the U.S. government began demonetizing or continued the process of demonetizing silver, and they ended eventually what was called the free coinage of silver. So again, the way this worked historically, back in its heyday, is the government wasn't just creating the money. They were saying anybody who wants more dollars, bring the U.S. mint a certain weight of gold and we will stamp them into gold coin, official currency, according to these ratios or silver. And so then they stopped doing that eventually with silver and that later was retroactively when the silver interest realized what the problem, they had called it the crime of 73. So William Jennings Bryan, who was famously his cross of gold speech you may be familiar with. So he was in favor in the late 1890s of resuming what's called the free coinage of silver. And what that meant was, hey, let's go back to the policy of the way it used to be before the crime of 73 when people could just bring actual silver and then get stamped into U.S. currency, the silver coins that were legal tender and that counted as real dollars. Whereas up, you know, at that point, you couldn't do that anymore. So just to think through the logic, so you may know that William Jennings Bryan was a populist. He was a friend of the indebted farmer and, you know, an opponent of the Wall Street fat cats. And so how would that, the economics of how does that line up? Because if what was then what would happen is given the prevailing, you know, exchange ratios they would have used at the time, if they had resumed the so-called free coinage of silver, more people could have taken a weight of silver that was worth less than a dollar, taken it to the mint, stamped it into dollar coins. And so that would have allowed that, you know, it would have inflated the number of dollars, right? And so prices would have risen. And so if you're a farmer and it's hard for you to make your mortgage payments to the bank because you mortgaged your farm, this is a way to, you know, inflate the currency. And then so that makes it easy, you know, raises agricultural prices makes it easier for you to make the payments to the bank and it tends to hurt the creditors if this is unexpected. Okay. So that's the way all the stuff interplays. But in case, like I say, you've heard phrases like that, like the free coinage of silver, that's the kind of thing they had in mind. Okay. So now completely different topic in this, in this book that I did for the Institute, do the textbooks get it backwards. And so here what I used as a springboard over the years, there have been a growing chorus of critics who have said, yeah, the way you go and learn money in banking and open market operations in a typical economics class, if anything is exactly backwards. Okay. And then this line of criticism was actually crystallized recently. So this thing that I've got a screenshot here of this money creation, the modern economy by these authors, this is a publication from the Bank of England. All right. So this isn't, you know, some crank website. This is a pretty serious institution that, and they summarized all of these alleged myths that you would find in the standard textbooks. So let me just spend some time on this slide. I tried just you folks realize to like boil us down into PowerPoint, but it was going to be too difficult. So I'll just verbally walk you through this stuff. So quick review, you know, how does, how would you learn in a normal textbook? And so here this is what like Rothbard would do in the mystery of banking or just any area where Rothbard goes through and explains this is how the Fed and the banking system interact with each other in order to inflate the number of dollars. But it's not just an Austrian exposition. This is how, you know, standard textbook would teach this stuff 20 years ago, regardless of whether you're Austrian or not. And so again, the claim is going to be where I'll go in a second with this is the allegation is that this isn't how the real world works. This is just what economics professors tell you. So very quickly to review the standard story, again, that you would get in Rothbard, that you would get in a normal economics class 20 years ago is that, oh, the central bank, if they want to lower interest rates, what they do is they engage in open market operations. They go out into the financial markets, they buy some assets, let's say, treasury securities. In so doing, the Fed, I'll just deal with the US example, the Fed, when it goes and buys more treasury bonds, let's say, from a private dealer, the Fed effectively writes a check, you know, it buys a billion dollars worth of bonds. So the Fed effectively writes a check for a billion dollars, gives it to the seller, that seller goes and deposits it in the bank. Now that seller's bank account, let's say it's Bank of America, their account balance with the Fed goes up by a billion dollars. So at this stage in the analysis, the Fed's balance sheet, its assets have gone up by a billion dollars and new treasuries and Bank of America's reserve account with the Fed now is a billion dollars higher. And so in that transaction, the Fed just created out of thin air a billion new dollars in base money, right? Because it's not like there was a piggy bank somewhere that Powell had stockpiled and then that went down by a billion. When the Fed ever since 1971, when the US dollars not redeemable or anything, the Fed can just do whatever it wants, right? There's no constraint on how much stuff it can buy. There's no legal constraint. OK. And so that's the way the story proceeds. And then according to the standard orthodox economist's exposition of how a central bank pushes down interest rates, the story says, OK, so now Bank of America has a billion dollars in new reserves and let's say the reserve ratio is only 10 percent. So of that billion new reserves, Bank of America only needs to keep a hundred million in the vault or on deposit with the Fed and that nine hundred million is now excess reserves and it can go lend that out to its customers. And so how does the how does Bank of America induce nine hundred million dollars more in loan activity, right? If before we were in equilibrium, now it wants to lend out nine hundred million dollars more. How is it going to do that? Well, it could either lower credit standards, you know, give to borrowers that before it would reject or it can lower the interest rates asking. And so by lowering the interest rate, you know, you move along the demand curve for loanable funds and more people or people want to borrow a greater volume of funds. OK, and so that's the way economists, like I say, 20 years ago would have explained this is how the central bank, if it wants to, pushes down interest rates. It buys assets, creates more reserves, banks then say, oh, we have excess reserves, let's lend them out. We got a lower interest rates. And that's how the central bank pushes down interest rates. Going the other way, if inflation is getting too high, by which they mean price inflation, then the central bank gets nervous. They want to raise rates. What do they do? The mere image of that, they sell assets off their balance sheet. The central bank does. So in the US case, the Federal Reserve sells bonds. The people who buy the bonds from the Fed have to write checks when that check clears with their bank, the bank's reserves with the Fed go down. Now that bank realizes, oh, we're short on reserves because there's reserve requirements. That means we need to shrink our outstanding loan portfolio. And so as people pay back loans, they don't roll it over as much or they call in outstanding loans. And so the total amount of credit contracts and by shrinking that, you know, the supply of reserves and supply of credit, it tends to raise interest rates. OK, so that's again called open market operations. That's totally standard stuff. That's the orthodox story. So that's what the critics have been alleging for years. The economics professors get totally backwards. They're saying, no, in practice. And so here I'll just summarize some of this perspective. We'll say in practice, that's not what happens if you go talk to an actual banker like someone who's been in a meeting where banks bankers are considering, you know, our loan portfolio and what do we think? They say nobody ever asks, hey, do we have access reserves? That that's that's not how bankers think in the real world, how they think is, is this a good loan? Like we've got these applicants for mortgages, you know, whether it's commercial or residential properties. And does this look like a good loan or not, you know, these particular terms? And if so, let's go ahead and make that loan. And then, yes, as an afterthought, if it turns out we're short like legally, oh, gee, we don't have enough reserves to satisfy our legal reserve requirements. Then we go out into the federal funds market as a bank and we just borrow it from where we need to. And so that's what the federal funds market is. And that's what the federal funds rate is. If you're familiar with that term, it's the interest rate in that market. So commercial banks borrow from and lend reserves to each other. And so a bank that has access reserves can just lend it to another bank that has deficient reserves. And that's how they satisfy their reserve requirements vis-a-vis the Fed, for example. OK. And so that's one of the things in this book or in this report from the Bank of England that they're saying is so notice that's that's the opposite way. And they also say the central bank doesn't set interest rates. OK. Or rather what they say is the central bank doesn't set doesn't alter the quantity of reserves. Instead they use it they target interest rates and that the commercial banks through their activity endogenously determine how many reserves are in the system. That's actually the way they put it. OK. And so they say that's that's different from how the textbook says it's oh the central bank if it wants to engage in expansionary policy buys assets and floods the system with more reserves. And then the banks say oh more reserves let's go make more loans. And again then again the critics are saying no no in reality it's the opposite. If the banks want to make more loans they do that first. And then because they made more loans they go out and they find the reserves to sort of satisfy them legally. OK. So you see how the cause and effect is totally flipped. So what I know how do I respond to that in the book is I say actually both narratives are internally consistent. It just depends what you're holding fixed and how you're you know imagining the central bank is operating. So the commercial banks as a whole they do they cannot create reserves. So to say oh if Bank of America has a bunch of good applicants for mortgages you know the real estate market is hot and they want to make more loans and they go ahead and do that and then as an afterthought they scramble and borrow more reserves. Well that assumes there must be some bank out there that has reserves to lend to them. But if all the banks collectively are doing the same thing they can't all borrow access reserves from each other. Right. If each bank is short you know the commercial banks do not have the legal ability to create more reserves. Only the central bank can do that. All right. So what is true though is if the central bank if its policy is to set an interest rate like to say we want the federal funds rate to be five percent. Now let's say all of a sudden the real estate market starts booming and the commercial banks start making more loans and because of that now with a given amount of reserves that the you know the Fed controls are insufficient for all the banks to satisfy the reserve requirements because their loans are going up and now the banks are trying to borrow from each other and the federal funds market and that pushes up the Fed funds rate to seven percent. Now the Fed looks at that and says oh the actual federal funds rate is seven percent our target was five if the Fed wants to push the actual Fed funds rate back down to the target then they have to go buy assets and put more reserves in the system to push it back down. OK. So you see how it's really just holding fit you know deciding what are you assuming the central bank is doing. It's still true that if the Federal Reserve wants to lower interest rates it buys assets and floods the system with reserves. Everybody agrees with that. It's just you know you could think of it that way or if you're thinking of it is not what the Fed's doing is picking the interest rate it wants. Well yeah if that's the way the Fed's operating that it is true that what the banks do the Fed sort of passively adjust the reserves to accommodate you know the needs of business. OK. So it's again both narratives are internally consistent and they're both useful ways of thinking about it and just but just be aware that there's it could go either way in terms of you know this is how things work. So it's not that the critics and the way they explain things here shows the textbooks are wrong. It's just saying this is a different way of of thinking about it. All right. Let's look at the Fed's balance sheet here. So this is the first QE. This is QE 2. This is QE 3. And that's what happened from the Corona virus. All right. So you can see the huge expansion how much that dwarfs what was unprecedented you know after the financial crisis. And you can also see it wasn't just a one time increase. It's still going up monthly and you can see like even that the the rate that you know the the angle of that line is pretty steep right now. OK. So that just gives you some idea and you know for those of you who are foreign you might not this might not be so much on your radar but what the Fed was doing back in that first one was just terrifying people because you can see how unprecedented that was at the time you can see the you know the line was just going up gradually over time and then a huge spike at that time that was an unbelievable increase but you can see how that's now been dwarfed by what the Federal Reserve did just since last March. All right. So that's in terms of just the quantitative shift beyond that though there was a qualitative shift in what the Federal Reserve has been doing. So this started aggressively back in the wake of the financial crisis and then they just up the ante with the pandemic. So what I mean is it's not just that the Fed is buying a much higher volume of assets. It's the type of assets that the Fed is buying is vastly different right. So I don't have a slide here but if you go and get the you know the the chapter in the online version I have some charts showing the composition of the Fed's balance sheet and how that's changed over time. But historically before 2007 the Fed typically just bought U.S. Treasury bonds right and the idea of the Fed for example going and buying bonds issued by major companies or buying stocks on Wall Street that would have been you know a huge scandal because they would have said there's a huge invitation for corruption there. You don't want central bank officials based in the New York Fed going out and being able to effectively prop up stock prices of individual companies because you know that's such a huge invitation to corruption and yet that's now where we are the Fed right now and sometimes they it goes through like a broader financial vehicle that has these things packaged in it but still nonetheless the Fed can now ultimately or indirectly own things like credit cards, student loans, car loans all sorts of individual companies bonds ETFs that are you know broad based in those things. So all sorts of things that the Fed before would not be able to buy now they can do it and also there's sort of an implicit admission that what they're doing they know is a dubious legality is because technically the way they did this stuff starting back in 2008 like let's say the Fed wanted to buy some mortgage backed securities. The Fed didn't just go out and directly buy those assets because again that the statutory language authorizing the Federal Reserve and giving it the legal authority to buy assets wouldn't allow that right. It wasn't clear you could do that and so and but the Fed had broad powers to make loans right and so what they did is they created these LLCs that were called made in lane and that's because just like there's wall in terms of the geography of Manhattan there's wall street and then made in lane is right near there and so they have like a made in lane LLC that since were limited liability corporation. So they create this legal entity and then the Fed loans money to the made in lane LLC and then the made in lane LLC goes out and buys mortgage backed securities right. So the feds and we didn't buy mortgage backed securities we were talking about that would be illegal we don't do that okay. So that's partly what they did and there's like a law review articles that I you know I cite in the thing where it's not you know some libertarian with an axe to grind just legal professors saying that this is arguably illegal what they're doing here but at the time because people were convinced the world was collapsing that all the feds here to save us thank goodness that you know a lot of people didn't didn't raise you know raise objections to say hey I'm not sure the fed can even legally do this but I'm just saying that's technically what they did to help quash the dissenters and the people saying you just you don't have the authority statutory to do this stuff all right. So that's partly what they did okay. There was a redefinition of M one all right. So this let me explain what happened and then I'll talk about this chart. So the fed made a sort of obscure what they did is they changed there was a certain regulation and the fed tweaked that such that if you had a savings account. So in the U.S. like there's distinction between checking and savings account and historically there was really a distinction there a checking account was a demand deposit it meant that was money you had immediately accessible to you whereas a savings account is the name suggests that was money that was more of a time deposit that was supposed to be oh you know if you're a couple and you have your your accounts at the bank the checking account is the stuff you put in so that when you go and buy your groceries every week you pay the rent what what have you you use your checking whereas the savings account is all we're putting money aside for that vacation next year or put money aside for the kids college and that's what you'd put in the savings account and so there was a distinction the savings account typically paid a higher interest rate and again there were supposed to be limits on it once you put the money in the savings account it was harder to get at because that was your savings right so that was the idea but over time the distinction became blurred and it was real easy especially you know with the rise of online banking and things where you could just go and you know online to your account just move money from your savings kind of your checking account and so this distinction kind of fell away and but technically there was a limit that you could only do it six times a month I believe up till last year and then the Fed just got rid of that requirement too and so then from that point forward even savings account you know there was no there was nothing in practice to distinguish the savings account balance from a checking account balance and so that's why in terms of these monetary aggregates savings account balances before 2020 or before May of 2020 used to be part of M2 but not part of M1 but then because of this regulatory change which went into effect in May of 2020 now there was no distinction between checking and savings accounts in that respect they were just as liquid and so that's why they're saying now okay savings accounts now have to be included as part of M1 so this is the chart of M1 and so if you just looked at it in isolation you'd see this huge jump and then you would know that oh don't be freaked out about that you know Glenback or somebody would say but we insiders know that that's just because of a definitional change but it's kind of sneaky because M1 even under the old definition really did spike at that point so I don't know Joe Solano has an essay on this stuff where he gives some of what he thinks are the ultimate reason like why are they doing this what's the point of this so he doesn't stress this one this is just my I'm just throwing this out there it's conceivable they partly did this because it masks what actually happened to M1 right in other words people seeing this huge jump are going to say oh well that's right when the redefinition occurred and dismiss it has merely a redefinition but I'm saying no M1 even under the old definition really did jump a lot right in this time period too so the Fed really did the banking system really did allow a huge expansion in M1 even according to old definition and the way to see that which I've done in this chart is as I put M2 in there right so that's this one okay so again M2 was not affected by the definition change all they did was they changed the grouping so something that before was M1 sorry was in M2 but not in M1 now becomes part of M1 but M2 the definition has not changed at all and you can see how much that jumped up going into the you know the pandemic or the the fear over the pandemic last year okay so that's one way of just explaining what what happened in case this was on your radar also let me mention I won't dwell on it too long here and I think I will have a few minutes for your questions at the end of this talk but one of the chapters in this understanding money mechanics because we deal with hey wasn't there supposed to be hyperinflation you know after the rounds of QE weren't a lot of these right wing types hard money types of warning about the dollar collapsing Zimbabwe wheelbarrows of cash and that didn't happen so you know what's the story and so one of the ostensible reasons for that that you know people who were warning about QE and then looked like they had egg on their faces one of the defenses they'll give is to say well it's because the money stayed bottled up in the financial sector and it didn't get out into the hands of the public and they give various reasons for why that might have been the case and I'm but I'm saying that's strictly speaking that's not correct right that I mean there are reasons that the banks didn't lend as much as they otherwise might have but M1 or M2 whatever when you're looking at went up tremendously in 2020 as this chart shows and even after you know going into 2008 2009 2010 they rose at much faster rates than they had before okay so just be just be careful if you're if you know if you're trying to deal with a critic who says oh you guys were worrying about hyperinflation it didn't happen don't just say oh because the public didn't get their hands on the money that no according to standard definitions the supply of money in the hands of the public did go way up after the financial crisis and then certainly after this it's just you know retroactive that the demand to hold money went up even more or went up almost as much and that's why you didn't see prices explode but you know looking at that you might have thought gasoline should be $20 a gallon right now so gasoline did go up a lot in the last 12 months you know and measured in US dollars but not that much and so I'm saying that the public did shift its demand like they wanted to hold more actual cash and that makes sense right this pandemic hits everybody's you know doesn't know what's going to happen there's a lockdown in addition to hoarding toilet paper and paper towels what else would you want US dollars that's a good thing right I don't mean that you use it instead of toilet paper but you know I'm saying right so maybe you should I don't know but you get what I'm saying so it that does make sense and so you could see how you know the authorities would have passively accommodated that if you want to use real antiseptic language the way you know some people who think everything works fine that's how they would describe it but regardless of your interpretation I'm just saying make sure you know the facts that M1 M2 did explode over the last 12 months and you can see they continue to grow rapidly okay another change that alarmed some people that happened just recently is last year the Fed got rid of reserve requirements so in this chart you can see required reserves going back several years and they went up so this is the financial crisis in 2008 and so why did the required reserves they go all the way up and then they fall off a cliff right so that line there that vertical line is not just the edge of the graph that's showing required reserves going back down to zero right that's what that is alright and so that happened last so it's I tell other people the other economists and they don't think it's a big deal but I think this is funny that last year the way they announced this it was a Sunday it was in March so if you think back you know early March when more and more people started to say hey you know there's this thing from China and it's coming around and then all other people say oh that's racist don't talk like that and then all of a sudden it flipped to oh my god this is you know why is Trump a more ignoring this stuff he's a monster and the Fed on a Sunday evening had an emergency you know meeting and they announced various measures about how we're going to deal with this you know emerging pandemic and they had a press release and at the bottom of the you know the standard like FOMC notes or something and at the bottom there was this paragraph that said in addition to the above measures the Federal Reserve also took other steps to bolster liquidity and did it including changes to reserve requirements and then elicited some other things and which is a throwaway line and said for more information see the Fed's website and there was like a footnote or sorry a hyperlink but if you click that it didn't take you to further explanation about yeah what are these other measures to bolster liquidity of which you speak it just went back to you know federalreserve.gov okay so that was kind of a dead end but then if you went to like press releases that section if you knew where to look then there was another press release or addendum given to the you know the thing that had said mentioned that as a throwaway line even though it wasn't linked and then if you look at that it listed like five things in the very last one said oh yeah starting next month reserve requirements are 0% alright and so I that's to me that seemed weird but no one else cared but anyway so that's the way they actually announced this and so historically in the US reserve requirements were roughly 10% alright give or take and so what this is saying is now there's no reserve requirements so to be clear this wasn't binding at the time the way economists use that term right so there was there were access reserves in the banking system as a whole right because the Fed had bought so many assets starting in late 2008 and banks hadn't made proportionally as many loans so there was all sorts of access reserves so banks already were fully satisfied so whether reserve requirements are 10% or zero but that didn't affect it's not that you know that this changed it it's not that by doing this now banks could do something they weren't allowed to do the week before because banks were already had were awash in reserves but I think partly why they did this was to open the door you know down the road when things go back more towards normal now they've gotten rid of the reserve requirements so that's just but whether that's why they did or not I'm just pointing out that's what they did okay let me end with this particular slide and maybe I'll have time for one question this is something I covered in the in the chapter and I think it's useful because especially in the wake of the financial crisis you know there's things like the Dodd-Frank Act there's what's called the Basil Accords that you may have heard of and one of the things that's often stressed is oh they're beefing up capital requirements for banks and I think sometimes you know if you're a student especially like you don't understand what's what's that is that a reserve requirement what does that mean so I just had this simple example I'll go through it real fast here and if you want to see more of the details you can you know click on the and read through the chapters but here's a hypothetical bank balance sheet on the left hand side it shows the assets of the bank it's got six million an actual paper currency sitting in the vaults four million dollars is the bank's deposits with the Fed right so electronically the Fed says ah yes Acme Bank you have four million in your account with us and it's got ninety million dollars in mortgages right so it has lent out ninety million dollars and and that money was spent right so that all what the bank is actually holding is the you know the IOU like the legal claim on the people who owe the bank money over the next thirty years let's say and those are valued at ninety million right so there's a hundred million in assets the bank holds terms of its liabilities it's got ninety five million dollars in customer checking account balances right so of all its Acme Bank's customers they have checking accounts and if you add it up how much collectively do those customers think they have in their checking account with Acme Bank the numbers ninety five million so from Acme's perspective that's a liability we owe these people ninety five million notice they couldn't satisfy them they only have ten million you know they only have six million in the actual vault and they could get four million like that from the Fed if they needed to but if all ninety you know if ninety five million people want or they want to withdraw ninety five million Acme doesn't have it right so there's that issue they're vulnerable to a bank run I'm just pointing that incidentally and then the other five million is and that's it right and so in terms of to make the left and right hand side balance that means there's five million in equity right so the people who own Acme Bank the shareholders they have five million in equity based on these numbers okay so in terms of formal reserve requirements if this were before the Fed phased them out back if if Acme needed a ten percent reserve requirement the way you would compute that is you'd say there's ninety five million in checking account balances so if Acme needs ten percent of that that's nine point five million does Acme have nine point five million in reserves yep they've actually got ten million right they got the six million in the vault and the four million with the Fed counts that's as good as money in the vault legally speaking so that's ten million so they actually have five hundred thousand in excess reserves right so if some other bank was short and needed money Acme could lend them five hundred thousand and still be good with their own you know visa their own reserve requirements however in terms of the Basil Accords that say you have to have at least eight percent equity meaning that the capital to total assets ratio with these numbers no they wouldn't be because they've only got five million in capital meaning shareholder equity like assets minus liabilities over a denominator of a hundred million in assets right so their capital ratio is only five percent and since the Basil Accords insist on at least eight this bank would be under capitalized okay so you see how so those are the distinction that's different to reserve requirements and capital requirements so yep Acme in the grand scheme is okay in terms of customers showing up and wanting to take out some of their money they've got oh we got you know ten percent we got more than or we have yeah more than ten percent but in terms of if the market value of those mortgages goes down just a little bit it could wipe out the capital of this bank right because they only have five percent capital ratio and so Acme Bank could go bankrupt if the real estate market crashes even though they're okay if an unusual amount of people want to withdraw their money because they have so much in reserves right so that's the distinction between those two things all right let me I have time for one quick question yes so how much of a CPI increase do you think be required for the Fed to personally increase the one-star rate seven point two three percent he asked how much would CPI need to go up in order for the Fed to raise interest rates to um it would have to be I mean again I don't know a number it would have to be a lot though let me just mention two other things real quick so the Fed has I didn't cover it here but one of the other shifts they made last summer is they switched to average inflation targeting meaning they're saying it's okay if the economy runs hot if it's making up for past undershooting just on average we want to hit our target so that's why right now even though inflation even according to their numbers is like five something percent the headline number and then even with the core blah blah blah three percent or whatever they're not tightening because they're saying no no we just want to say on average and so you know since we think we were undershooting now that's what we're going to do so answer your question I think they did that to give themselves rhetorical leeway that they can let the economy run hot and not be violating their own targets so I think it would take a pretty big CPI number for them to then say oh yeah we better start tightening okay thanks everybody