 I'm going to start by, kind of unusually, I'll read an epic poem that I just spent the last hour composing. I was tempted to sing it, but then I realized, no, I'm way too nervous. You might recognize what the tune should be, though. So just sit right back and you'll hear a tale, a tale of a fateful trip, of three brilliant castaways aboard a tiny ship. One got the physics Nobel Prize, another chemistry. The third was an economist, all with PhDs. Well, of course, they wrecked the ship, wrecked it to smithereens. And all they had with them to eat was a can of beans. The physicist said clearly, to open up this can will build a lever catapult out of sticks and sand. The chemist said, no sirree, that can would just get crushed once it hit that cliff face. The beans would be mush. So instead, he said, let's use Boyle's law. Fire for heat and pressure too. This plan has no flaw. The economist said, actually, that can would explode. Beans and shrapnel everywhere? To that, I say no. So let's do what we always do in my esteemed field. Let's assume we have a can opener. So what was the point of this? If you've been around economics for a while, you probably recognize the joke. And if you know old TV shows, you might recognize it's Gelligan's Island that I've rewritten. Anyway, so what is the point of this? So the idea is that as mainstream economists, we'll often just assume can openers to make difficult problems easier. And my claim is going to be that when you look at monetary reform proposals, you're often going to find that they rest on these can opener types of assumptions. Assumptions that are blatantly false, but that make it easier to decide what monetary policy should do. But in the end, could potentially create more dangerous consequences, or at the very least, not be particularly useful. On the other hand, if we adopt something like a market-based money, like generally the faculty here would support, and certainly I would support, it might be the market-based money isn't perfect by some arbitrary utopian standard, but I suggest it's better than perfect. It's good enough. It will actually do what we want money to do. All right, so before we start talking about monetary policy reform, we need to think about why would we bother reforming the thing? What are the problems that we'd like to solve? And I would suggest there are two major problems that could potentially be solved with the right set of monetary policy reforms, that is reforms in the money and banking systems. The first problem is that of hyperinflation. We know this is a rare problem, but an extremely severe one, in the cases where it happens. I would certainly encourage you to talk to those visiting from Venezuela about just how crazy things can be when you face that particular problem. The second much more common problem would be business cycles, which I think Dr. Garrison does a marvelous job, showing how business cycles in the Austrian perspective are caused by this dis-coordination from the monetary system, coming in through credit markets. So if we could ameliorate or even solve, it would be great. These two problems, that would be certainly beneficial to us. So I'm going to start by just stating the Misesian view when you read Mises what he says monetary policy should look like. He says sound money really contains two aspects. First, a positive affirmation of the market's choice of money, but then on the negative side, trying to put obstructions in the way of government's tendency to meddle in currency. So before we get into the Austrian proposals though, I want to go through a few mainstream proposals. So when we look at mainstream proposals for monetary policy reform, you get into really the big debate is discretion versus rules. So should we have a system where we have some group of experts, we might call them the FOMC and say the American system, they get together and they use their collective wisdom to decide what monetary policy should look like, or should we have a more restrictive system where it is simply by rule. It's much more predictable based on whatever happens to be. So we'll go into a few specific rules here in a minute. Before we get into the specifics though, I do want to just mention a few general problems with various rules, actually any of these rules, I'd suggest you would run into this set of basically three problems. The first problem would be political power and its connection with these rules. So the question is, can we have a system where we can create the rule but then not have it be messed with later? So how would the rule get created? There are two possible ways that I can think of. One would be that the Federal Reserve continues to exist as an institution but voluntarily adopts some kind of rule. So the FOMC gets together and says, we think that John Taylor is a smart guy, we're going to start using the Taylor rule, which I'll describe here in a little bit. So we're just going to follow that. Which is when you start wondering why we're paying their salaries, if a calculator can do their job for them, but I'm sure they're happy to collect them and following a reasonable rule, that sounds fine. But the question then is, what keeps them from changing their mind later? If the rule tells them to do something that maybe they don't want to do for whatever reason, they can just as easily abandon the rule and do something else. Now, okay, let's back away from the Federal Reserve. Suppose that we get a more radical result that we have Congress. Say we don't like the idea of this discretionary authority that we don't have a whole lot of control over just deciding what to do with monetary policy. So we're going to abolish the Federal Reserve and everybody cheers. And we're going to replace it with a monetary policy rule. Okay, but what is it that's then going to prevent Congress from stepping in later and messing with this rule? Now, I'm not saying that it's never the case that Congress can create an institution that it then finds very difficult to mess with. I think of our social security system, for example. They created it and now it's remarkably difficult to make any changes since the system itself creates this class of people, the benefit from it existing in its current form. It's not so obvious that that would be the case with any kind of monetary policy rule. Most people don't understand monetary policy at all, so getting them excited and worried about changes in monetary policy is difficult. We'll just say that. All right, so there's the political power problem. A second problem is the problem of measurement error. The reality is that all this economic data that underlies and is pulled from in order to enact these rules, there's some error involved, and that's generally the case. Basically, any classes in, say, principles of macroeconomics are going to talk about measuring GDP, something like that, a very standard measure. One of the things you should typically learn, I hope, is that we measure GDP at least three times. There's the preliminary measure that gets released, it's released first, that's what preliminary means, and there's kind of the official release that comes out after that, and then there's the revision that comes later. So this suggests that we understand that we don't measure it right the first time as additional data comes in. We make revisions to try to be more correct. Now, the problem is that when we're making monetary policy, we have to do it moment by moment, relying on the data we have. If that data is erroneous, they're going to be making errors in policy. Even following the rule itself, we're not going to be doing right because the data is wrong that is underlying it. A third problem that generally I would say is that we have to do it in order to make sure that all of those faces that they have an underlying assumption of some kind of staticness in the way the economy works. See, there's some stable relationships out in the economy that we can rely on so that the monetary policy rule will work the way we hope it will. So kind of with all three of those in mind as applying basically all of these cases, let's then look at some specifics. So the first rule, let's see where I put this. There it is. But because kind of historically it's probably the first that became particularly popular. There we go. It would be the Friedman rule. So this comes from Milton Friedman, a name that we're probably familiar with. And what Friedman suggested was that we should have monetary policy simply just increase the money supply at a constant rate each year. Generally, assuming something between 3% and 5%, something in that range will pick one of these percentages and go with it. So kind of to get to the logic underlying that, it's really all based here on the equation of exchange, also sometimes called the quantity equation. So these are two different ways of measuring spending in the economy. On the left-hand side, we think of it in the monetary fashion. So M would just be the money supply. V is the velocity of money. It's a measure of how many times an average dollar is spent in a year. So if, for example, people hold on to money for very long periods of time without spending it, then velocity is very low. On the other hand, if as soon as you hand me a dollar I go out and I spend it right away, then velocity will be very high. The same dollar gets spent multiple times. So one way we can look at it is this way, take the amount of money out there, multiply by the number of times each dollar is spent in a year. That's how much spending we have. The other way of thinking of it is the number of transactions. So there are a number of transactions that happen in the economy. Each of these transactions has some price attached to it. So multiply those prices times the transactions. That's how much spending happened. So either one of these are going to measure spending. And what Friedman suggests is that over time, velocity doesn't really change much. It's basically constant. So you could consider that constant. Meanwhile, transactions, where we could think of real GDP increase something in the neighborhood of 3%, 4% a year. So if we want to have fairly stable prices, we should have then money grow at basically 3% or 4% a year. And that would make everything balance out. All right. Now he didn't pretend that that would mean every single year prices would be stable. He understood the average growth in the economy is not the growth every single year. But one, I guess, insight that Friedman had, one of the things that I kind of appreciate about him actually, is that he understood that the monetary policy doesn't work right away. It takes time for monetary policy to work. Which means when you're starting that downturn, it's already too late to start stimulating the economy. You should have been doing it before for the monetary policy to have the effect. So he said, let's not try to fine-tune this. Let's just get things right on average. And the economy will generally self-correct for the details. Okay. So this sounds kind of nice. And in some of his writings, he even suggested that we could abolish the Federal Reserve and replace it with a calculator to do this job. So we could save some salaries that way as well. Okay. This doesn't immediately sound too bad. But what is it really kind of, what's the underlying assumption? How does this compare to what I would think of as a more ideal system? I would suggest we want money to act basically like any other good in the economy. That is, if people demand more of it, we produce more of it. So underlying this would be the assumption that people just want three or four or five percent more money every single year. And we're just mechanically producing that much. Now imagine if somebody proposed this with some other good. I'm tired of this chaotic shoe production we have in the U.S. Let's just adopt a shoe production rule where every year we increase the quantity of shoes we produce by three percent a year. And then we can make some equation if we want. Population increases basically at two or three percent a year, plus people might want more shoes. So on average three or four percent up a year for shoe production would work. Now this might not be a totally stupid way if say you're planning shoe production yourself. But to adopt this as a policy over the long term we would expect to have some serious errors take place. Anyway. So I would suggest that we have the same thing here. Mechanically having the money supply increase according to some predetermined rule is not going to allow the money supply to respond to money demand. We might be able to think of other applications where there are other types of proposed monies that operate along similar lines. We have a very strict fixed path for the supply of that particular money is going to follow over time that doesn't really respond to the demand for that money. I'll let you make that extension. Well there's another problem with this though that was recognized by Alan Greenspan when he was chair of the Fed. As you may or may not know the chair of the Fed has to sit before Congress a couple of times a year to report on monetary policy and answer questions and that kind of thing. Well it came one of these years he was sitting there in Congress answering questions. One of the Congress people asked why don't we follow a monetary policy rule? The way the story goes is that Alan Greenspan said well we just don't know what money is anymore. If you want to instill confidence I would not suggest that the head of the organization that does monetary policy should say we don't know what money is but when you start looking at the data that he was looking at we can understand what he meant. Right there. This is naturally somewhat stylized but we know that we generally have two major forms of money that we think about measuring in the mainstream one would be M1 which is a narrower measure of money, the other would be M2 which is a bit broader. M1 generally would include things like currency that you're carrying in your pocket or what have you or have in your mattress along with checking accounts and other types of checkable deposits. Meanwhile M2 would add into that things like small certificates of deposit savings accounts and the like. M2 is significantly larger than M1 so I was just trying to show here what the changes were looking like around that time. If you look in the late 90s we had this strange thing where M1 basically flattened. You look at M1 in 2000s almost exactly the same as it was in 95. Meanwhile M2 was going up fairly quickly so then there's very practical questions even if we believe that increasing the money supply at a constant rate is what we should do which money supply? Are we talking about M1 or M2 or maybe the monetary base or something else? How should we measure money is a question that then gets bound up in this question of if we're going to increase the money supply at a constant rate what should we do in a particular moment? We don't know what money is anymore M1 and M2 are not acting the same we don't know what to do on the basis of this rule. That's the Friedman rule. A second rule which is much more popular nowadays is the Taylor rule which I mentioned before. That's almost legible that's great. The Taylor rule I was originally designed based on trying to model what the Federal Reserve actually did but then John Taylor who created this rule did some theoretical work and said oh no there's actually a good rule it's not just that this is what the Fed has done historically so we should stick this in our models but this actually makes sense in some sense. Here's what it is. He realized that the way that the Federal Reserve functions today is that we're not really worried about the money supply directly we're interested in this Federal funds rate, FFR That's what he suggested we should do then to determine what that target Federal funds rate should be is follow this equation. The first thing we need to do is think about what the long term real interest rate should be so the interest rate after adjusting for inflation what should that be so we start with that then we add to that the rate of inflation that we observe in the economy so that would get us to a nominal interest rate which the Federal funds rate is and then we add two additional components to this based on what the economy is doing at the moment so each of these are weighted with 0.5 so there's the inflation gap so how much difference there is between the actual inflation we're observing here he's talking about price inflation versus what we want inflation to be so say 2% so if say we observed over the past year 3% price inflation where we want it to be 2% this would suggest we take that gap that's 1 multiplied by 0.5 so we add another half percentage point to the interest rate what our target should be and then we also have this element for the output gap that is how much difference there is between GDP as we measure it and what we believe the trend GDP to be so if for example we have a boom in the economy so we believe where say 3% points above what trend GDP would be multiply that by 0.5 3 times 0.5 is 1.5 I can do arithmetic if I try so we add another 1.5% then to our Federal funds rate now when we start using this you can see where it would kind of act the way we normally if you take a macroeconomics class the way we generally think that the Federal Reserve acts inflation goes up interest rates go up in response inflation drops interest rates fall in response we have a boom that is the output gap grows in the positive direction we raise interest rates in response output collapses we have a recession interest rates fall in response this is all what we would expect so it's not surprising that he found something like this I was actually surprised mostly that we needed the historical work but 5.5 actually came out to be basically what the Fed has done historically though with some exceptions alright so I would say as rules go right if we're stuck with this kind of idea I may be just too nice I've not gotten old enough yet or something I don't know this doesn't feel like a totally terrible rule mostly because I believe that if we had a market based system we would generally see interest rates kind of act the way this rule tells us that is if inflation goes up I generally would expect you would see higher interest rates making them do that feels like a fairly natural response in terms of the direction similarly it's believable to me that if the economy is doing really well we might see interest rates rise in response to that now I would not work through this mechanistic way but thinking about time preference so the economy is doing really well I feel really optimistic I think the economy is going to be even better in the future so if I think I'm going to be really really wealthy in the future I'm not that hesitant to spend now as I become more present oriented an increase in my rate of time preference interest rates will follow and also rise in as far as a boom in the economy leads to this kind of confidence in the future and therefore a willingness to spend now this feels like it's actually moving us the right direction however the problem is that when we look at things like interest rates they're right but the magnitude to be right too there's no reason to believe at all that a one percentage point in the output gap that an appropriate market level or market based change in the interest rate would be 0.5 where did this come from and even if it is 0.5 today there's no reason to believe it will be 0.5 tomorrow people can respond differently over time to these changes in their level of income or what have you even if we're moving the right direction now there are also another couple criticisms about this that even those that would like to use this rule would also acknowledge one being that very first term what should the real interest rate be in the long term I don't know either and it turns out even the professional economists that use this acknowledge that we don't actually have a good way of knowing that so underlying this is this estimate similarly inside that output gap is trend GDP well like we can extract a statistical trend right but that doesn't necessarily tell us that that's what GDP would be at full employment or however you want to define this more precisely so there is a certain amount of estimation in here which naturally then would also include error now there is some evidence though that we should pay a lot of attention to this rule just very recently I think it was two or three days ago Jerome Powell was talking to Congress and as part of his comments I brought it up here on the Federal Reserve website he posted what his comments to the Congress were toward the very end he says for guideposts on appropriate policy the FOMC routinely looks at monetary policy rules that recommend a level for the federal funds rate based on the current rates of inflation there we are and unemployment unemployment being very closely connected with the output gap and if you go in and look at they also provide a written report and look at on their website they have basically five different slightly different versions of things that look like the Taylor rule that are certainly inspired by what Taylor did so if you do want to understand how central bankers in the US right now think about monetary policy the Taylor rule is very significant somehow they're not really considering him very seriously it seems to be on the FOMC another option which has gained some traction is inflation targeting the idea behind inflation targeting is that you have really a discretionary authority but they declare a specific inflation target that they're going to try to hit the country that made this rather well known was New Zealand they had relatively high rates of inflation for some period of time but they decided they wanted to get this under control so they declared we're just going to have 5% inflation in a couple years we're going to do what it takes to get there and they found sure enough they actually got really close their inflation rate came down really really fast and without a whole lot of economic disruption which was kind of surprising so there was a lot of popularity from that you've also seen other countries of UK adopted something very much like this as well as they were facing 5%, 6% levels of price inflation they brought it down around 2% you can also see elements of that in the Federal Reserve statements nowadays they're very clear they're targeting 2% inflation you never saw that kind of clarity from somebody like Alan Greenspan who seem to have gone out of his way to be unclear as much as possible so we have inflation targeting it's another option so what's the problem with that well here I would suggest that measurement problems become extremely important how do we measure inflation oh CPI well yes but what about PCE what about the GDP deflator we have a number of different measures so we're kind of back in a similar boat here so if we're trying to target inflation we don't always see all of these different measures move in lockstep sometimes they move in different directions so we could imagine at some point somebody appearing before congress as the head of the Federal Reserve saying we just don't know what prices are anymore which may be more disturbing than not knowing what money is just don't know what prices are alright so that is a potential problem here with this system and I'm not claiming that I'm pointing out all problems if you think but what about this problem too you're probably right the last one I want to mention would be NGDP or nominal GDP targeting this one Scott Sumner is the one who is most associated with this idea but there are also some people who are associated with the Austrians that would consider this to be a reasonable solution specifically Horwitz and Luther have taken this position calling this a second best solution to monetary policy it's maybe not their preferred plan but something that is reasonable so the idea behind Scott Sumner's rule here is we have nominal GDP which we can measure as price level multiplied by the number of transactions does this feel familiar so the idea is we want to stabilize this perhaps have it increasing at a fairly low rate at 3-4% a year that kind of thing we'd have some specific target for this now if we think about this turning it around to that MV sort of notation I can understand why Austrians are getting behind this idea so if we think in terms of MV so if we want to stabilize NGDP and say velocity falls what do we have to do to make things equalize we have to increase the M the money supply has to go up when velocity falls so what does it mean when velocity falls people are spending money more slowly so put another way I'm holding money for longer periods of time so what doesn't increase in the demand for money look like well I think part of that would be that I'm holding money for longer periods of time now part of it is that I'm trying to sell stuff and work more and that kind of thing but once I get money I hold onto it for a while so I think it's not unreasonable to say that as V drops that is a sign that the demand for money is increased in response to that what happens with the NGDP rule we increase the money supply we found it this is nice on the other hand if money supply if money demand drops velocity increases I'm spending money fast because I don't really want to hold onto it velocity goes up well we have to drop M people don't want the money we end up removing money from the system under this sort of setup now this feels pretty good it's getting things moving in the right direction again we're increasing money supply in response to money demand that's really good or doing the opposite as necessary so what is this missing I suggest this this misses if we're assuming the current structure of how money enters the economy we're missing all of these distortionary effects through the credit market we're increasing the money supply under our current system well the Fed creates the money puts it into the banking system so we still have business cycle effects happening here even if things are moving in the right direction because of the way that money enters at that single point we still have problems in terms of the business cycle now I'd suggest that if say we're doing something like mining gold we don't have the same problem think of how money under a gold mining system enters the economy so who does the money go to first that's the people that are mining the gold physically doing the labor also the people owning the gold mines well where did they spend their money I would guess that gold miners and people that own gold mines aren't that weird they're kind of normal people so they're going to spend the money basically the way anybody else would so we don't see this big concentration like we do in credit markets when we increase money supply as we do under our current system so this may not be terrible if we're going to take as given the risk to come through credit markets but it is still inferior to the good enough system of having something like gold or some other commodity now let's move then for the last 15 minutes or so looking at some Austrian proposals so I've broken these down into two broad categories first looking at currency and then looking at banking so under currency there are really two main proposals that I've seen one is to revive the gold dollar both Mises and Rothbard had plans for how we might do this so we know that we're under a fiat system right now how do we move from this fiat money to a more gold based currency well they have slightly different plans but they're kind of similar Mises suggests that in the first step what we need to do is stop issuing paper dollars so no more paper dollars going to be issued those that are out there still circulate that's fine and we also as we're going through this process the Fed and the treasure are not allowed to just start selling gold they hold the gold they have for a while and we watch when the price of gold stabilizes under the system we then establish a parity between the two and we say if you bring in this many dollars we'll give you an ounce of gold based on what the price was the previous day say that's going to be the ratio between the two or we can do vice versa bring us an ounce of gold and you get the paper dollars in exchange so effectively what we're doing is taking the dollar turning it into a money certificate backed by gold and you can exchange between the two say at any bank or the Federal Reserve what have you he suggests setting up a conversion agency so it's a separate institution to do this it doesn't really make a whole lot of difference as another part of this he said in order to prevent the government from then just messing with the system say changing this ratio arbitrarily people need to get used to using the monetary commodity on a regular basis so we would need to have not just us using paper like we're already doing but also us introducing alongside that using the actual coins same made out of gold he suggested we should eliminate all large bills which he called five dollars and up he was writing in a specific time when five dollars meant something different than it does now but replace these with gold coins five dollars and up we're going to make a gold coin so I was doing some math based on recent prices of gold and I was able to stabilize basically where they are now how much would these things be worth so I have right here in my hand that's an American dime an American dime weighs something a little bit less than two and a half grams it's about 2.3 grams it's a little bit less than a tenth of an ounce if you know you're latin you can probably understand why a dime would be about a tenth of something so a dime a little bit less than a tenth of an ounce I think it's like 0.08 or 0.09 something in that neighborhood so it turns out right now this little thing so I might not want to use gold as the coins that we're carrying around but on the other hand if we made this thing out of silver pure silver that would be about a dollar fifty okay so we could actually use silver coins and replace everything five dollars and up say with the appropriately sized silver perhaps gold coins for relatively large currencies as that seems possible Rothbard had a slightly different approach something that wouldn't take nearly as much time to implement I suggest because we're not going to have to wait for the price of gold to stabilize under his system he doesn't particularly care if it's stable it turns out so he says this is simple we know that the Fed has a bunch of gold holdings they're continuing to report them on their asset statements assuming they're not lying about this they have a bunch of gold holdings we know what the money supply is under various measures pick one of these measures say here's the redemption ratio take the money supply say it's measured by M1 or M2 divide by the amount of gold there in the vault that's the conversion ratio then if everybody says oh I really want the gold and hands in their dollars that's fine we have the gold there it'll take some time to deliver it we can get it to you it's not a problem so we don't have to wait for the stability of the price of gold so I was doing some math there based on different measures if you're using say M2 I like M2 among the government measures it's not too bad it turns out the ratio between our $14 trillion of M2 and the 261 million ounces of government and federal reserve held gold that ratio comes to $54,000 an ounce that's significantly above the current price of gold so we would have to acknowledge this would change things in terms of the value of a particular ounce of gold but at the same time you'd expect that if gold adopts some more monetary use it is actually more valuable than if we're just using it to make rings or what have you so it would change things certainly on the other hand if we used a more narrow measure say I looked at some of the Austrian money supply measures if we use something like the true money supply 1 being the narrower it'd be something like $14,000 an ounce so a little bit roughly 10 times what the current price of gold is so we are talking about a significant increase in the value of gold if we adopt that system another system which is actually the one that I'd prefer because I'm not much of a radical I'm not I'm ashamed to admit it in front of this crowd though you're generally proud of it anyway it is a system of currency competition and I suggest this is also one that might be easier to get through politically I believe we have someone in the audience who is in fact working toward this feel free to talk to him afterward so the idea of currency competition was proposed by Hayek with the nationalization of money and also Hans Senholz who I have connections with through Grove City College in his book Money and Freedom Money and Freedom Senholz lays out a list of things that we need to do in order to create currency competition I believe if I recall correctly his list had 8 points of those are already halfway there 4 of his points have already been established by changes in our law so the 4 then that would remain would be first just allow people to use whatever currency they like in contracts so if I want to use US dollars we can continue to use US dollars if I want to use Euros let us use Euros, that's fine if we want to use say ounces of gold that's fine if we want to use Rothbard Memorial coins made of silver we can do that as well whatever you want to write the contract and that's fine let people agree to it second would be free entry in currency so allow anyone who wants to create their own currency to do so third eliminating legal tender so at this point while it's true that you and I could write a contract where I agree to give you Rothbard commemorative coins in exchange for your car if it comes down to it and I want to hand you US dollars you are legally required to accept those as long as it's a debt contract in any way so if there's this delay in payment you have to accept that's what legal tender means so eliminating legal tender is actually not that radical in spot transactions I can already say no I'd rather not take dollars it's only in these debt contracts that this really applies so it feels really radical to most people to explain how narrow legal tender really is and the fourth thing is honest minting by weight not by nominal value so if you buy coins that are issued by the treasury say a silver dollar one ounce of silver it has one dollar on it which means it's legal tender value so if I go and try to spend it, it's worth a dollar of course the silver in it is worth something like 15-16 dollars add the mint value to it it's closer to 20-25 dollars there's no way that I'd want to actually circulate this thing I might buy it as an asset to hold because I think silver's going to gain value or something like that but it won't be used in a monetary way so all we have to do this is remarkably simple just put the weight of the coin on there leave off a dollar value so here is one ounce of silver .999 pure we already print that stuff on it just leave off that one dollar or just leave off that 20 dollar on the gold coin it's drastically under values the value of the gold that's inside of it that's really all it would take and that would then make all these coins that already exist and for all we care under this system let the treasury keep minting these things sure why not and then people could begin to use them alongside the other currencies that exist without them being at a disadvantage turning then in the last few minutes to banking as I'm going to abbreviate this quite a bit because I know that you've gotten a full lecture about Seljan and White from Robert Murphy so I guess I'll say there so fractional reserve free banking we don't like it I don't like it either I'm sure Murphy gave you good reasons why not although I would encourage you if he didn't mention this so if he did not mention this you need to hear this so you look up the paper how would the invisible hand handle money it's available on JSTOR I think the Mises Institute has a JSTOR account so if you're signed in through their Wi-Fi you should probably be able to get to it there's a math error in it so look between I believe it is equation 6 prime and 7 see if you can spot the math error you don't need calculus you need like 8th grade algebra alright and then read where they've made assumptions that makes it totally not matter because they made the thing constant but whatever so all I want to say about fractional reserve free banking is that fundamental error really is twofold first they confuse money demand with time preference so their story is that if people want more money they go to the banks they take out more loans or this is going to drive up interest rates just wanting more money does not necessarily mean I'm going to go out and take a loan I could do other things I don't have to take out a loan to do this I don't have to pull down my savings in order to do this either I don't have to sell off assets I could just do things like work more this is an option so an increased demand for money compared to what? it's not necessarily compared to future goods relative to present goods so there's that fundamental confusion a second problem is that it treats money demand as purely exogenous it's something that just happens to change and does not respond at all to things that banks might have control over so for example it might be that banks can convince people to hold more money by lowering interest rates possibly lower interest rates sure I might want to hold more money then under those cases like hold actual money rather than going out and buying bonds for example if interest rates are lower I might be more inclined to do that type of thing so if that's true if it's true that people will respond to interest rates then money demand is not purely exogenous that means the banks are not just passive they could potentially induce demand for their own product by decreasing by decreasing the interest rate and thereby push out more money into the economy the money was not originally demanded by that economy they created this demand for it and we therefore end up with the business cycle again at the same time I don't want to be too hard on the free banking folks they like getting rid of the central bank sounds good we know under that system how much you're going to try to push out additional money that isn't backed by reserves is going to be limited so I do think it would be a significant improvement over the system we have also if we can tie to this as they often do eliminating the various subsidies there are these bailouts and the like that go into the banking system that also would be a great improvement in getting banks to avoid risk Mises actually calls this type of system kind of a second best scenario so then in the banking system what I would tend to advocate along I think with many people here is a 100% reserve system so they take money to the bank they put it in the vault I come back to the bank to get the money out they take it out of the vault it's that simple so the way deposit banking would work is exactly the way I think many people have some sense that it works if they've not thought much about how banks make money and can manage to pay them interest on savings accounts I put my money in the bank they put it in the vault and we take it back out at the very least this is how Jimmy Stewart thought that his depositors thought things worked it's a wonderful life come on it's the most important scene it's the bank run that's true in every movie with a bank run scene in it so Mary Poppins and it's a wonderful life most important scene is the bank run you have the wrong idea about this place like we have the money back in the safe but we don't we lent it out to someone so to build their house so to build their house a 100% reserve banking system it is actually in the safe everybody could come to the bank and take all the money out at once no problems now there are several people who have advocated this system I first want to point out the non Austrian advocates there are people like Milton Friedman who actually suggested that a 100% reserve system would be a useful thing to have now he was mostly worried about how fractional reserve banks mess with the money supply he had a different motive for this but nonetheless advocated the system John Cochran who is from the University of Chicago if I recall correctly has also spoken favorably of this Lawrence Kotlikoff as well even our favorite economist that writes columns for the New York Times Paul Krugman has gone so far as to say a 100% reserve banking system is worth talking about I don't ask for much so we have the idea this might possibly be something that would work now we have straight up advocates as well amongst the Austrians naturally Mises Rothbard and Richard De Soto would fall under this Mises kind of takes a slightly different approach to this in suggesting we need 100% reserves for all future deposits I think Mises was very aware of kind of this idea of transition potentially being difficult so let's let things be the way they are now but in the future any money that we deposit has to be held in 100% reserves I have actually suggested is a paper that I wrote that not that long ago just 10 years entitled 100% reserves now came out as a Mises daily I'm sure you remember it as your 8 or 10 year old self was looking at Mises.org where I observed that after quantitative easing they made Mises' plan really easy because the banking system actually had enough money in reserve that was just holding on to to back every single dollar in our specific their checking accounts so every single dollar of M1 is actually back to 100% reserve after quantitative easing at that point in December 2008 so I looked it up and right now there are about 2 trillion dollars sitting in reserves in the banking system if you add up all of the demand deposits other checkable deposits they're about 2 trillion dollars so it was true 10 years ago we could do 100% reserves immediately without necessarily creating any problems at all for the system as a whole and it's still true now banks are still holding the level of reserves that we could just declare yeah go ahead and hold those 100% reserves for anything that would be counter to M1 that's what you need to do and we wouldn't have banks having to scramble to find reserves they already have them there which is kind of amazing but even if they did have to scramble I would point out that if we just take this banking approach alone under a fiat currency we can create reserves at whim so even if banks were looking at 10% being held in reserves the Fed could say all we're going to just multiply our reserves by 10 and by the way you have to hold them now it wouldn't have to create any change in their behavior at all except it restricts them going forward with their ability to extend credit so very easily we could eliminate the ability for credit expansion to happen and thereby ameliorate the business cycle so I'm going to finish then with a kind of long quote from Hans Sennholz from his Money and Freedom so I hope that I've convinced you that sound money and free banking are not impossible they're merely illegal this is why money must be deregulated all financial institutions must be free again to issue their notes based on ordinary contract use whatever money you want 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 freedom of money and freedom of banking these are the principles that must guide our steps thank you