 Trevor Burrus Welcome to Free Thoughts from Libertarianism.org and the Cato Institute. I'm Trevor Burrus. Aaron Powell Joining us today is George A. Selgen, director of the Cato Institute Center for Monetary and Financial Alternatives. Welcome back to Free Thoughts, George. George A. Selgen Thanks, Trevor. Trevor Burrus So today we're going to be discussing, at least in part, the gold standard, which is something that is actually associated with libertarians quite a bit. Gold bugs, a lot of kind of discussion of things like this. Before we get into some of those kind of issues about libertarians and the gold standard, what is the gold standard when people just say, we need a gold standard? What do they mean? George A. Selgen Well, I can't tell you what other people mean because that depends, but at its most basic, a gold standard is a monetary system where the basic money unit is a definite quantity of gold. So it could be an ounce or two or three or any other weight of gold of a certain purity. And, of course, a gold standard system would have actual coins representing that basic quantity or multiples or fractions thereof, and that's the most basic gold standard. But, of course, we have to think about paper money and how that fits in. And there, traditionally, paper money fits into a gold standard by consisting only of good claims or IOUs to gold where the IOUs are promises to pay definite quantities of gold, which are, again, based on whatever those standard units are and their coin representatives. So that's at its most basic. And this is a big distinction between coins, which used to, a lot of people don't even realize, were about, they actually had the gold or silver or bronze in them and they were actually valuable, correct, as opposed to bills. Yes, of course. They were valuable because gold is a valuable commodity and its value might be enhanced by the fact that it's also the monetary middle, but its value doesn't depend on that fact. It exists independently. But it's always important to recognize that as soon as you have paper money in a gold standard, you've got more than one condition for the gold standard being an effect. You have the condition for what coins consist of or the most basic ones. And then, of course, you have the requirements for paper money itself. I wanted to add one more dimension to this because not too complicated too much, but the nature of the paper gold standard, to call it that, has changed a lot in history. And the most fundamental change has to do with the extent to which governments are involved in administering paper money. As I said in the very old, earliest stages, paper money that was consistent with the gold standard consisted of real IOUs to gold that were enforceable IOUs because they were based on enforceable private contracts. Basically, if a bank issued paper notes, for example, and it dishonored them by not giving people the gold that they promised to pay, then that bank was in default and that was that. But as central banks or government-sponsored banks more generally, and governments themselves became involved in issuing paper money, when that happened, the nature of these paper representatives to gold changed even before they obviously, it obviously changed by the governments reneging on their commitments. It changed in a more subtle way before that because sovereign immunity attached to governments and to the central banks that they sponsored, or eventually it attached to the latter. And as that happened, it was no longer the case that a central bank that disordered its promises to pay gold would necessarily suffer any consequences. It became more like the government itself in that regard. And as soon as that happened, the nature of the gold standard itself changed because it ceased to be all that reliable, at least so far as its paper representatives were concerned. And that was, of course, the slippery slope to fiat money, which is what you end up with when these central banks take advantage of their sovereign immunity to say, well, we're just not going to pay you anymore. Why gold? I mean, when we talk about a gold standard, either in the past or the arguments that we should return to one today, are we talking literally about gold, should we be talking about gold? Does it really matter if it's gold or any other commodity? That depends, of course, on who you ask. It's true that there's the gold standard is of commodity standards, the one that's most well-known and most popular, particularly among libertarians, as Trevor was saying. But a lot of this is just historical accident. It should be observed that although the gold standard has ancient roots, so does the silver standard. Silver is the most clear, obvious competitor to gold and among commodity monies. Both of those metals have obviously obvious advantages over other commodities in not being so perishable and so on. But in U.S. history, for example, the gold standard as such was not officially adopted until 1900. Up to that time, we were officially, if not in practice, on a bimetallic standard where the dollar, the basic monetary unit of the United States, was defined both as a definite quantity of gold and as a definite quantity of silver. That's what bimetalism means. Now, in practice, what happened under that arrangement, both in the United States and in other countries, in many other countries that had it, was that depending on which of the two precious metals was more valuable in the open market place and how their relative values there compared to their implied official values, given the two units that define the same dollar, the two amounts of metal that define the same dollar, you would have a tendency for one or the other metal to be driven out of circulation to disappear from circulation and for only the remaining metal to be their true standard in effect at that time. And so for quite a while in U.S. history, we were actually on a de facto, if not a de jure silver standard. Then partly as a result of gold discoveries, mainly as a result of gold discoveries that made it the relatively undervalued, legally undervalued, sorry, overvalued metal. Gold became the de facto standard, though still not the only official standard money. And as I said, it was only in 1900 that gold was officially enshrined as the soul's standard metal. And finally, we should remember that there were important long periods, including from the Civil War until 1879, when we were neither on a gold nor a silver standard, but on a temporary paper standard, the greenbacks in this case. What sort of problem for those who talk about the gold standard incessantly, there's a lot of people there and I were talking about this before we record that there's just people who talk about the gold standard a lot and they're kind of quirky about how they talk about it. They can take any conversation and direct it back to the gold standard as the solution to everything on the planet. But for those people, I want to talk a little bit more about those people. I call them find another bar stool. Exactly. Well, I'm sure you get berated particularly, but what sort of problem is it supposed to solve? It seems like you just talked about problems that were created by the gold standard, especially when you found new caches of gold, that seems to be a problem. Well, let's be careful now. What I said was that underbimetalism, discoveries of precious metals of one or the other kind could disrupt the standard and cause you to switch from effectively being on one standard to being on another. But I would call that a problem of bimetalism, not of having a metallic standard per se. As for the benefits of having a gold standard to a considerable extent, they are the same as those of having a silver standard or any other stable single commodity standard. So some are better than others in this respect, and that big advantage consists of the fact that commodities, all of them are naturally scarce, most obviously those that are not reproducible like gold. So a standard based on such a commodity obviously doesn't allow limitless money creation or inflation, puts a constraint on it, but in fact the advantage is better than that to take the case of the gold standard and bimetalism for that matter. We can see from the historical record that it had a tendency, a very good tendency to preserve long run price level stability. For example, if you go back to the very earliest price level data that we have for the United States and allowing those numbers, those figures are not all that reliable, still they suggest that back at the early days of the Republic, we're talking about the 1790s, the price level was approximately what it was still in 1913. Now changed, it bounced around a lot between those two dates, again according to the statistics we had, but the long run tendency for it to come back to wherever it started was very clear in the data. So you're saying essentially no, but with fluctuation but essentially no inflation between 1790 and 1930s? That's right and that's not a coincidence, it's a feature of a commodity standard like a gold standard and it's not hard to explain. Essentially here's what happens, suppose remember that in a gold standard the price of a unit of gold is the one thing that doesn't change, so if you define a dollar as so many ounces of gold, obviously the price of that many ounces of gold stays $1. So what does it mean to talk about inflation in a case like that? It means that other prices are rising relative to the price of gold. Well what does that mean? It means that the costs of implements and materials and labor for producing gold, those costs are going up but the price of gold isn't going up, which means the profitability of mining gold is going down and that means that inflation tends to be self-limiting because the more it progresses the less profitable it is to mine or search for gold and so gold output eventually slows down. Mines can even be closed because they cease to be profitable and that puts a break on the money supply and eventually the price level will stop growing and will even come back down. On the other hand if you have a period of deflation that makes gold mining and prospecting more worthwhile and the tendency is for such efforts to result in a greater output of gold that reverses the downward movement in prices and this is exactly what happened historically. You had discoveries of gold like the discovery in California which is a famous one that are not really accidental when you look at the big picture. What happens in most cases is prices have been falling, people start prospecting harder for gold and eventually they find it. Sometimes they find a lot of it but instead of causing inflation the main effect of these discoveries more often than not, not always, is to reverse what had been a deflationary trend and so help prices come back where they were before. This long run stability of the price level is in fact a built in feature of many commodity standards and that long run stability will hold as long as the basic cost of production of gold, it has to be rising at the margin but on the long run the cost of producing gold just has to not fall any faster than that of most other goods. Does picking the commodity matter in the sense that so gold has other uses, so we use it in electronics and it can be very good in certain things and so does it, do we run the risk of if we have a gold standard of directing what might be a valuable resource to a less efficient use because people want to use it for as money and it's less valuable than to use it in these ways that could be better in the future or more wealth creating? Well, if you want to have the advantage I just described of a commodity standard it's difficult to have except by having a commodity and the commodity is by definition, something that's got a value other than its value as money. So any commodity standard is going to involve opportunity costs from employing the commodity as money rather than in other ways. Those costs can be kept at a minimum however by taking careful advantage of substitutes including paper substitutes of the sort I referred to before and if you have a well conceived and regulated system of paper substitutes and also bank deposit substitutes that don't have to be actual paper that system can allow you to have a commodity standard, a gold standard for example where the actual amount of gold employed to maintain the standard is very low just to give you an extreme case in the Scottish banking system that you fellows know I'm very fond of because it was a very free banking system. The banks got by at one point with the reserve ratios that is precious metal reserves of some thing like 1 to 2% of their total assets. Most of the money that was actually used in Scotland consisted of the redeemable notes of a set of Scottish banks and also deposits held at those same banks and for most of Scotland's history in the late 18th and early 19th century the system besides being cheap was also remarkably stable. Adam Smith writes eloquently about its properties in both respects in book 2 chapter 2 of the Wealth of Nations and what he points out is precisely Aaron the point that by saving on actual gold it allowed first that gold to be put to other uses and second people's savings to be harnessed for productive, more productive uses by being backed by productive bank loans. So in this situation just to make sure I understand the pound notes or whatever they were issuing were worth a very little amount of gold. No, no. They weren't worth a little gold. But they were redeemable for a very little amount of gold. They were backed. Now not even that. They were backed so let's take that 1% number. So you might have a Scottish five pound Royal Bank of Scotland note. What I'm saying is that if you went to the Royal Bank of Scotland its total gold reserves might be 1% to 2% of the value of its total outstanding liabilities including all its notes. But that didn't mean that the note that the note that you were holding was worth anything less than five pounds or that the bank would give you anything less than five pounds worth of gold if you sought to redeem that note. In fact of course the bank notes did circulate at their full face value just about all the time and the banks did redeem them and those things go hand in hand. If a bank didn't redeem the notes would no longer command their face value. So in other words the banks found ways to manage their affairs such that they were able to get by with slim reserves. But of course to get there they had to show their capacity to honor their promises regularly and it took a long time for them to establish their reliability. But they did so to the point where your average Scotsman the last thing he wanted was to have to hold a gold guinea. I thought it was a nuisance and would rush to his bank and get quick good Scottish bank note to take its place and that's how it was. They couldn't survive that means that if there was a run to go get your gold they would run out. Well they might have to do some quick thinking around. Runs were almost unknown almost completely unknown. Runs happen in decadent banking systems like ours today and in the past they are a symptom of a banking system that has not developed in a healthy fashion. And that's that consistent sort of the next question which both is going back to the quirky gold standard person which is something Aaron I as I mentioned we don't know a lot about monetary policy compared to other things that we know about. But it's always very interesting to me. But one reason I can be honestly say if someone comes up to me and the first thing they start talking about is the gold standard and this actually happened literally last night at a Cato reception a guy came up and said are you a fan of sound money and I pretty much assumed that the guy is going to be really quirky if a kind of conspiracy theorist in other ways and sure enough he immediately got into the Rothschilds and Luannotti and all these things and any and also you know any podcast listeners cannot see me cringing. Yeah and if you're talking about his hands over his face if you're having a conversation about I don't know police brutality they'll be like well we can't do anything unless we restore sound money and they could so here's the question. Why do you think these people are so focused on gold what is it what is it about gold and just sound money in general that makes a lot of things going on here and I feel that there's a risk of course of of lumping all people who are fond of the gold standard together with the nuts cases and I certainly don't want to do that. Some of my best friends are fond of the gold standard including some very good economists I know however it must be said that a big part of this specific appeal of gold as opposed to other precious other commodity standard certainly has to do with the fact that it was the last commodity standard in place here in the United States and there's a sense that that's the most obvious choice to go back to if we could ever have a commodity standard again there's also a lingering feeling I think among some that after all people got swindled when they suspended gold payments back in the thirties and ultimately abrogated all of the government's commitments based on gold bonds and other things and and it's confiscated private gold holdings to boot that that all of this was quite a nasty thing and that we need we need in some way to make up for it the problem with that of course is that every year that goes by it becomes a less compelling point of view it's already been you know some nine on almost 90 years 80 you know 80 plus years since this happened and and you know it gets to the point where it's almost akin to suggesting that we really ought to give all the property back to the American Native Americans which you know there's certainly an argument from justice that that that they deserve it and it would be a little disruptive and let's face it that the Native Americans who live today or that the connections that they can show to any existing property are perhaps not all that obvious in the case of gold though it's even more clear that justice wouldn't be served by trying to restore the old gold standard because among other things it would require a massive deflation to get there and that itself would be an awfully painful procedure you could try to restore a new gold standard of course where the dollar represents so much each dollar represents a much smaller part of gold but what would that have to do with restoring justice or making up for anything that happened in the past the argument for doing anything like that for any renewal of the gold standard in my opinion has to be based on its advantages starting today and not on any claim that it would redress past injustices so as soon as you put it that way then you also I think are compelled to to say that we might also have to consider we should consider all other alternatives for reforming the present system instead of treating gold as being in any way sacrosanct by guns or by guns if gold is a good choice today and if there's a good way to implement it now well by gosh let's fight for it but if there are other better alternatives we can think of today the fact that gold was once our monetary our standard monetary metal is itself no reason to to argue for restoring it to that role are there any countries today that are still on a gold standard no well is that did that happen I mean I again I'm picturing quirky gold standard guy in my brain but did they kind of all slowly move off of it because they were constrained and wanted to inflate their currencies or they could or would it be impossible for a gold standard country to exist in a world where everyone else has doesn't have a gold standard well I think to a considerable extent the last statement is true but but what actually happened was that most of the countries that were on the gold standard went off in the course of the the Great Depression now it should be said that in fact those countries most of them originally went off the gold standard during World War One and then between World War One the Great Depression to the extent that they got back on a gold standard they did so often in a kind of jury rigged sort of way so that this this gold standard that was reestablished these gold standards reestablished after World War One where Rube Goldberg contraptions compared to the stand gold standards in effect before World War One and they were very fragile in any event the depression caused it all them all to break apart one after the other and in fact although the United States left the gold standard itself in 1933 it did so only partially it never allowed its citizens to again convert paper money into gold however it did resume gold payments for foreign central banks and it continued to do so in its capacity as the supplier of reserve currency under the so called Bretton Woods system so the U.S. in in remained to a limited degree on the gold standard until it was finally taken off completely in the early years of the Nixon administration so is so in fact we remained we were the last gold standard country though we were so only in a to an extent that was much more limited than had been the case before the Great Depression now a lot of people would describe the going off of the gold standard as I mentioned that that it was it was governments I mean conspiring with the Bretton Woods attacks on Bretton Woods but governments conspiring to break the boundaries the break the confines that gold put on their ability to inflate the currency in order to do more spending and more pernicious thing is this accurate would you say to some extent well there's no need for the word conspiracy well just kidding I guess as the fact is that that in the case of Bretton Woods what happened was the U.S. had found itself its dollars being treated as the official reserve currency of other countries so the gold standard for all those other countries survived only in the sense that their currencies were convertible into dollars which were ultimately convertible into gold not but not by us citizens but by foreign central banks and foreign authorities so what happened though was what what you might expect to happen in a situation like that being being in the position of supplying the world's reserve currency means that a central bank can issue more of its liabilities can expand and doesn't face any immediate necessary request for redemption because this IO user themselves being treated as reserves gold may be the ultimate reserves but reserve but but for a while at least other central banks would be happy to sit on the official reserves and not on not turn them into ultimate reserves of gold well though as prices rose in the 60s because the Fed was issuing more money in part owing to fiscal pressures from the Vietnam War first in the great society afterwards or along with it the the the French in particular started to cash in their gold chips and this is what broke down Bretton Woods because our IOUs the Fed's IOUs the promises had expanded but its gold reserves were limited and ultimately to prevent to avoid running out of gold they suspended payments much as they'd done the 30s but this time for foreign governments as well and that was that so now the real the real problem here isn't conspiracy it really boils down to the different status of a central bank compared to a private bank as I mentioned before a private bank simply couldn't say well we're not going to pay you anymore or even we're going to devalue even today you go to your bank of deposit forget about deposit insurance that's not the point but suppose you go to your bank and you say I'd like to to cash I have a thousand dollar deposit balance and I'd like to have my money back now what that means today is that that bank owes you a thousand dollars worth of Federal Reserve currency but suppose it said you oh I'm sorry we've had a devaluation so your one thousand dollars of deposit credits are now only worth five hundred dollars in Federal Reserve now so well no they can't do that that's called default that's failure they close this there's no two ways around it and this is how it's always been for ordinary commercial banks they simply don't have the right to decide to pay less because their liabilities are true genuine liabilities promises to pay their their solemn promises the courts insisted they be honored okay or there are consequences but a central bank it took time for people to realize this because there was a long period when central banks were not really sovereign entities they were private and they acted like private firms but eventually they as they got more and more let's say cozy with governments they acquired the character sovereign immunities of governments themselves and at that point they could say as the Fed said in in 1970 sorry we're not going to pay and nothing happens the bank doesn't get wind down wound down it doesn't get closed the shareholders take no losses there's no inquiries there's no liquidation there's no receivership none of that happens and of course what that means is the temptation for central banks to accommodate governments when the governments lean on them is great because the repercussions for the central bankers are are minimal and this makes a huge difference and that's what happened in the case of Fed in the in the 70s and many other central banks before and since that although they start out with a commitment to a fixed exchange rate whether metallic or otherwise could be some foreign currency fixed exchange right there's not much holding that thing together because there's not many penalties born and by a central bank that dishonors these commitments and this by the way to segue this one reason why I'm restoring a gold standard today would be very very difficult so that brings up the question two of the relationship between the Fed and a gold standard and maybe we sort of need to explain exactly what the Fed does but they're often talked about together and you say well we have we used to have the gold standard now we have the Fed but we had a the Fed and a gold standard at some point and that's possible maybe not desirable but it's at least possible absolutely a central banks can coexist with metallic standards but they don't tend to do so for very long for the reason I just explained the fact that there are no serious repercussions for central banks at least once they obtain the the status of sovereign entities were treated by the courts as such at that point the jig is pretty much up it's just a matter of time before the promise ceases to be worth anything so which is the which is the first problem if you were if you were to central banking is the first problem if you if you had to which one do you need to what domino do you need to fall first to start getting matter to fix our monetary system okay so let's just step back a bit uh the the that you can have a gold standard without a central bank and you can have a competitive banking system like this goddess system where the banks are all commercial banks they issue the paper money but there that's a commercial promise just like your modern bank deposit and that will hold together that will be that will tend to endure them will be bank failures uh and so on but there won't be or there will be there will be of course some banks will fail but but uh there's no tendency for the whole system to give up on the gold standard at the same time uh there may be crises of course but the nature of the underlying contracts is such that it's actually rather difficult to not have the thing stay together because you'd have to rewrite contracts and unless you're talking about sovereign entity entities that's not so easy to do as soon as you monopolize currency issuing privileges in a in a privileged institution uh whether you call it a central bank or not you're already on the slippery slope where the the longevity the survivability of the metallic standard that it's all supposed to be based on is now in doubt because as soon as sovereign immunity attaches to the promises then there's a grave risk that they'll be dishonored and eventually they will be and that'll be that um so going back uh to the question you know how do you uh fix things that's a very difficult question uh and now there are really two different questions what should we do to fix our present monetary system and what would we have to do to get a metallic monetary just standard back in place they're not as i said hinted at before the answer to those questions are not necessarily the same uh indeed i personally don't think going back to a metallic standard is uh uh worth even worth trying i have to be very careful because i i don't want to uh overstate the case i certainly don't want to dismiss contrary arguments by reasonable gold gold standard fans and there are plenty of them but here's what i see is the problem in order to affect a change to the gold standard first of all it isn't enough to do as some people have suggested to merely make it legal for people to own gold and open bank accounts based on gold uh some of those to some extent these things are legal first of all but even if there were no barriers to the use again of gold as a as a monetary medium to no barriers to private coinage to having banks that have gold deposits and so on the problem with the spontaneous development of a new gold standard is the same problem faced by any potential arrival to an established monetary standard it has to it has to compete with a well established standard and it confronts massive network disadvantages or disadvantages of network economics in doing so what that's a fancy way of saying the a monetary standard is as useful as the size of the network of people already using it it's rather like it uh being on a telephone system or computer network in that respect so this is like what say bitcoin is dealing with it's only two people use it but now more and more people use it well yeah and i'll talk about that in a second i was going to allude to bitcoin because it's a good case in point in any event if you've already got a standard today in the us we have the fiat dollar administered by the fed that's accepted pretty much by everyone not only by everybody in in the us economy but by large numbers of people elsewhere that's a tremendously large network and a very hard one to compete with and even though even if it were true that a gold standard once established in place of the fiat standard would be better in some respects it doesn't follow that it's better right away to any individual consumer because its small network size alone makes it inferior right so that's why uh i'm i'm very doubtful that any degree of liberalization of choice of laws to provide for choice and currency would itself suffice to cause a parallel gold standard to take off any and eventually to replace what we've got so that that thing aside can i keep going if you still have time i have a follow-up question okay so um then what's the alternative the only alternative is that there should be an official attempt to reinstate the gold standard right well what does that mean the only sense i can make out of such an official attempt is that they there would be a legislation that would tell the fed to once again make its dollars redeemable into club into gold and then equip it with the necessary gold reserves the treasury could usually do if the gold is in fort nox that it claims is there for example pick the right rate of conversion and so on now though there are two problems or two possible problems there is a rate of conversion such that you could make every unit of money in the economy a hundred percent backed by gold or every federal reserve dollar on the fed's books a hundred percent backed by gold but that would almost certainly entail a very dramatic change in prices and deflation it just look at it this way right if we take the present price of gold and figure out and compare that to what amount of gold we would have to make the federal reserve dollars worth if they were each to be fully covered like one so it's about a thousand dollars an ounce right so a dollar would be one one thousandth of an ounce you have to take the amount of gold that the treasury could provide to the fed and the amount of dollars that a fed liabilities that presently exist and imagine what the price of gold would then be one way or the other you're going to have a very disruptive change if you do that now if you allow for fractional backing of gold then of course you could do it without that disruption but then you'd have this other problem like the scottish did your same oh yeah some fraction but then you'd have another problem because it's the fed and the fed no longer has credibility no one would trust the fed if you told me that as of tomorrow the federal my federal reserve notes in my wallet i could go to the fed and get a certain amount of gold for them i'd go and i'd get the gold because i know there's absolutely no chance that the fed's gonna revalue its notes so that they they end up being worth more than the gold and then i regret what i did but i know for sure that there is a positive value i don't know what it is that the fed's going to do what's what it's done in the past and it's going to devalue or suspend and turn back to fiat money more over i know other people are thinking this so they're going to go and even if the fed wasn't planning anything between us we're going to force it to devalue we're going in other words we're going to stage what's called a speculative attack as what brought down the tibet and the ruble and british pound and milling other the other fixed exchange rates in the past not to even go back to previous gold standard devaluation so so spontaneous order won't do it 100 reserves forget about it official fractional reserve based gold dollar won't last as far as letting alternative systems so we're not we don't talk to government the government doesn't formally switch to a gold standard or any other currency with you know the government of grace adopts the bitcoin or whatever but we you know it kind of emerges and develops in parallel is there a point at which it can't become the the kind of default system that everyone's using because of income taxes like the government has to at some point we have to pay taxes the government so the government decided it's only going to accept dollars it's never going to accept bitcoins it's never going to accept gold or whatever these alternatives are then were kind of locked into using those yeah that you remind me that I meant to say something about bitcoin as an example if bitcoin is fascinating because it's taken it does have a foothold in the world of currency but let's face it it's tiny compared to the dollar network more over right as we speak other blockchain type cryptocurrencies that have noted the advantage of the established network money are competing effectively with bitcoin for payments remittment remittments and and other things that bitcoin does very efficiently uh and doing it successfully by by being dollar based but on so on Aaron's question though like if let's say something happens where bitcoin let's talk about I mean for example venezuela right now was experiencing hyper hyperinflation and it seems that something like bitcoin if they they could be using that in their you know to get around the currency but when they have to pay taxes they might have to use the i didn't want to draw the question or if there's employer tax withholding that my employer has to pay me yeah well the answer is that why it would never be able to take over first of all um it's true that when you have a crack up hyperinflation like venezuelas that of course is the one exception to the rule that the established network money is is is is preferred to others because the depreciation rate is so bad that the demand for that the network is no longer attractive right that happens it's very rare and by the way some gold standard fans seem to be looking forward to a hyperinflation in the united states so that that can happen here that's another solution to getting to gold that I rather uh would avoid would rather avoid and I don't like it not because it might not work but because I just wouldn't want anyone to have to go through it um and I certainly don't think it's something we should wish wish for uh but um but uh that's for the tax argument people I think people have uh uh many people including economists vastly exaggerate the role that uh receivability of a money in taxes plays in driving the general uh uh acceptability of that uh money it's true of course that that governments are big players in their economies and to that extent they are big contributors to the network effects so yes if a government accepts it and if it's official money or an official money in payment of taxes it's going to give a big advantage to that compared to other monies but but uh although governments are big there are other big players and so tax receivability alone is not by any means usually sufficient to guarantee that the money that's so receivable will will outcompete others remember that uh if enough people prefer other monies they can always they can always uh treat the official money as something they buy just for the purpose of paying taxes let me make an analogy suppose occasionally you like to buy some goods from France all right what do you do well when you have to do that you go and you get a money changer to give you some francs and you buy the goods from France the same thing could be done let's say if an economy where the government's got some crappy money and it says you don't you can only use this to pay your taxes and everybody else prepares to use bitcoin well most of their purchasing and stuff they're doing with bitcoin but every once in a while they go and buy some you know uh has been as well and uh stuff just just to pay taxes with and that's its only use and they just do these spot exchanges right it's not going to do much for the value of the stuff it's just gonna you know they're going to be in and out of it and that's that so people should not uh or exaggerate the extent to which governments merely by using the power of determining who can what can be used to pay taxes that they can prop up their monies to any considerable extent that way it's a it's in my opinion that's a fallacy though it's one that's that economists too many of them cling to so we've discussed the problem and the gold standard and the problems with putting it back into place and then we have this concern of as you brought up of inflation and currency collapse and a lot of a lot of people who talk a lot about monetary policy especially the ones who corner you in bars and stuff like this uh talk about you know you know you better get your money into gold because in two years the dollar is gonna gonna absolutely collapse and they do kind of seem to wish it's gonna happen sometimes there's a thin line between uh saying that that's inevitable and wishing it would happen but how how scared are you of this i mean we you know is this something that you think is a possibility if we keep going the way that we're going in terms of the way we print money and the way that we have a fed is this something that you're like yes i mean do you have gold buried in your backyard george come on that's what i want to know and i want to know where it is if i do uh actually i i don't because i don't have a backyard well i have a backyard back in athens if i have gold there i don't know about it it's possible you know i could be the next sutter mine could pop a bit property could be the next sutter's mill for all i know but no i didn't put any gold there um well look the answer to that question would depend would vary depending on what country the person you're talking asking it lives in here in the united states do i think uh that we're in for hyperinflation anytime soon i don't i don't uh fortunately our institutions are such that um the public's dislike of of inflation does in fact translate into the the fed and the government between them to consider them as a unit are not not prepared to put up with the backlash they would get if they were to allow a lot of it at least not under present circumstances but what so what do you see happening in the in the short and maybe biggest stage a short run in the long run real dad but in the short run with the system we have what is the even if we don't have the you know we're going to say we should have the gold standard what is the biggest danger that in fact i i just just wrote an op-ed about what i consider to be the biggest danger this morning uh and uh it's um it it is it is indeed a danger of excessive fed monetization of government debt and deficits but uh the reason it's a danger and a bigger one than we've had in the past is precisely because this time around it's possible the fed could do these things and not generate the inflation that would would in turn cause a backlash and and its capacity to do that its new capacity is a result of its ability to pay interest on bank reserves which is a power it gained in the course of the last crisis and has been using ever since and so far it has used that power uh as a device that allowed it to buy or add 3.7 trillion dollars to its balance sheet without causing inflation i don't want to give the wrong impression it had a lot of help from the fact that it was after all dealing with a depressed economy and exceptional liquidity demands but in principle paying interest on reserves is also a device for containing uh or rather for containing inflation by by simply encouraging banks to pile up reserves instead of lending them what i'm worried about is that in the future a fed pressured to monetize the government's debt and we are after all looking forward to a trump administration that could cause that debt uh to go way up by trillions of dollars in the decade uh the fed now that it's armed with this new tool might be more inclined to cave in to pressure from the administration to monetize debt knowing that it has this tool by which it could prevent that monetization from resulting in inflation essentially by uh causing the banks to pile up reserves so what what what it does what it does that is basically shunts the public savings from bank lending to productive industry and other purposes to lending to the government so it's grabbing the savings and the same the government grabs the savings in the same way it would if they were outright inflationary finance but ironically enough the fact that this is going on is is actually less obvious to people than it would be if there were inflation because in order for them to recognize what's happening they'd have to be cognizant of the accumulation of bank reserves the decline in bank lending and the multiplier and all that and the role of interest reserves that's a lot for people to digest it took them a long enough time to figure out that inflation was related to deficit financing and to therefore object to it uh it's it certainly would take them a long time to figure out this new method of shunting scarce savings to the government uh in order to gobble up paper over its deficits and i'm really worried about that if you've enjoyed listening to free thoughts this past year i 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