 Okay, why don't we go ahead and get started? Is this volume good? You guys can hear me all right? All right, great. So I am Robert Murphy and I am giving the talk today on Rothbardians versus Free Bankers on Fraction Reserve Banking. Before I jump in, let me just say this is the first time I've spoken to you guys. So we like to joke around or whatever, but this really is the best week on land as the caveat Tom gave of the year. And I really do encourage you to try to get enough sleep so that you're not groggy during the sessions and you really just wanna absorb as much out of this week as possible. I know on the faculty's side, we get really excited just watching you guys go through and knowing that some of you, it's your first time, like, oh, they went to this lecture, this, you know, it's like how much you're learning in terms of being trained in the ways of the Jedi Knights and so forth. So it's good. Also, I should mention for those of you who aren't used to what you may not appreciate, I mean, I'm sure you enjoy as it's occurring, but just to stop back and reflect, it's a conference, a seminar, or a week long thing of a bunch of economists, and most of them are pretty good public speakers, right? I'm not talking about David Gordon, but you see, and so that's also something, and it's great, it's like a competition, right? The each person, they really prepare, I mean, you notice like Harman when she was up, she was like, oh, I had to work on a joke or whatever. So it's really good that just we, you know, we're really trying to engage you guys. I do have one quibble with Tom's talk, and of course, Tom's a phenomenal speaker. He gives everybody fired up. He gets me really energetic and wanting to, you know, go do some Austrian economics out there, and I'm very grateful for everything I've learned from Tom's public speaking. I just wanna say that officially. The one thing, though, that he says this a lot, he uses, he, once he heard it from McCloskey, he has this as his sort of pet example. To me, it seems out of sort of odd. He used to remember us talking about the Burgundy people out in the vineyards who would have to hibernate because it was, you know, they were so poor and they could, to me, sleeping through the winter sounds awesome. I don't know why that's supposed to be the example of how horrible things used to be. I mean, I could go socialist if it means we get to sleep. All right. Okay, so for this talk, this is a new one. This is the first time I've given this. So let me just, I guess, apologize on the front end. It's tricky to do a talk like this with only 45 minutes with you guys because some people here are literally not even economics majors, right? They're philosophy or history or whatever. And, you know, some professor told them, hey, you might be interested in this conference. So I can't really jump into the nitty gritty detail. So if you're somebody who has read a lot in this debate, I'm not gonna get into the technicalities here, but what I am gonna give you is, I think, a way to approach it and see it perhaps from a new perspective. And there's a lot of things in this debate that even to me, and I'll talk, I'll give you the specifics in a minute here as I go through the talk, but just to sort of frame it on the front end, that I misunderstood a lot of what Mises said in this debate and I was confused and I thought there was some, you know, he vacillated and then now, because I recently debated George Seljan on this stuff, in preparing for that, my eyes were opened, right? And it really was, I was reading things and seeing him in a new light. And I was like, oh wow, that makes total sense now that I see it from this perspective. So I'll at least give you that. So basically what I'm trying to do is introduce the topic, obviously, for those of you who don't know anything about it, but for those even who are seasoned veterans in this genre, I will try to give you a way of going and looking at this stuff so when you do further reading. So for those who don't know, this is probably the biggest dispute within Austrian circles. So people who call themselves Austrian economists, it's probably the biggest technical dispute at least of the last 20 years. It's certainly one of the top two or three, but I would say it's the most heated one where it really is just a technical issue as we'll see. So Fraction Reserve Banking, let me make sure I don't lose anybody right up front. Fraction Reserve Banking means a commercial bank when someone comes and gives them a $100 bill, a green piece of paper that goes into their checking account that the bank, I don't wanna shock anybody, they don't just put it in the vault with your name on it. They lend out a bunch of that money and so when you say how much of the, what's called demand deposits are on reserve, it's only a fractional amount. It's not 100% reserves. Whereas 100% reserves means for those types of bank accounts that are supposed to be immediately demandable where the customer shows up and says, give me my money that you were just holding for me, then they have it all, they're able to redeem it upon demand. Okay, so that's what the argument is over and then as we go through it, I'll show you there's different nuances and part of what's happening in this debate I think is people are talking past each other but there really is legitimate clash as well. So those are the kinds of things I'm gonna try to outline for you in this talk. Okay, so first of all, note on quotation marks. You'll note in the schedule and then here, they have these, they have it in quotation marks and even you might hear, I will probably stop doing it just to not be obnoxious about it but a lot of times when you'll hear Rothbardians speaking they will say versus the free bankers and they'll inflect their voice to show you that they're putting it in quotation marks or I mean they might even go full doctor evil like free bankers. For possible people online or foreigners maybe, this is from the Austin Powers movies and this is the villain and he would do things like we have developed a laser beam and then he would go through and talk about his latest plan for world domination. All right, so why are we doing that besides just being obnoxious? The reason we're saying they're free bankers or they're talking about the free banking position is that actually that's a bit of a misnomer in the sense that it's because the people who use that term, right? So the distinction is the Rothbardians who are for 100% reserve banking versus the so-called free bankers who many of them call themselves Austrians but what they say is, hey, we're not central planners we don't want the government to regulate it let banks choose whatever reserve ratio they want. Okay, so they gotta follow their contracts if they say to their customers, hey, whenever you show up and you wanna pull money out of your checking account we'll be able to give it to you and if there's a bank run and they get caught with their pants down then okay, they should get in legal trouble just like any entity, any firm in the economy that doesn't live up to its contractual obligations has consequences but we're not going to at the outset have some regulation on the banking sector saying you have to have 100% reserves, right? So that's their position so that's why they call themselves hey, we're free bankers we're not gonna micromanage the banks and have them set their particular policies just like how much should they charge for a checking account or what should the rate of interest they pay on deposits be we're not gonna tell them that we're free market, laissez-faire people so who are we to tell them what reserve ratio to hold, right? So that's where they're coming from with that label but as we'll see the Rothbardians the ones who are 400% reserves they are saying, and I should say you can be a Rothbardian not be for 100% reserves but in this just for convenience I'm gonna use those terms interchangeably where they're coming from is many of them think it's actually fraud and I'll get to that in a minute and for sure they think that it sets in motion the boom bus cycle, okay? And so like for Murray Rothbard himself his position was that in a free society because he thought fractional reserve banking was inherently fraudulent it wouldn't be legal, right? And it wasn't, you know that wasn't like a status perspective just to give you a silly analogy Rothbard would also say in a free society going in and at gunpoint robbing a convenience store would be illegal and it would be silly for someone on the other side to say, oh, so you want the government to regulate the use of ski masks and shotguns? Ooh, I thought you were libertarian you see how that would be kind of like we talking about I'm just talking about the, so likewise if you think that 100% or sorry if you think fractional reserve banking is inherently fraudulent and oh by the way it causes the boom bus cycle then you can see why you might say in a free society the courts wouldn't uphold that and da da da and then it would be a sort of you know offshoot to say, okay given right now that we don't live in a free society and we don't have free market judges what should government policies be and there you know you can have all kinds of positions you could think in a free society the legal system wouldn't uphold it but given that what we are right now I don't want the Federal Reserve coming in and regulate so there's all sorts of nuanced positions you could have but I'm just pointing out this is why standard Rothbardians actually bristle somewhat at the label free banking but you know the name the label stuck so we gotta use it. Okay also I want to point out there is a tendency and this is something that I didn't even fully realize until recently sometimes if you'll read especially like online debates where it's more casual of free bankers going head to head with Rothbardians on this issue you will get the impression or someone might explicitly say it oh yeah only those cranky Rothbardians support or endorse 100% reserve banking like who the heck don't they know this is modern banking give me a break everybody since the 1800s knows this is how modern banking and finance works give me a break you Neanderthals okay and so I'm saying that is demonstrably false that perspective you could maybe 100% reserve banking is a bad idea but the idea that that is just something that these cranky Rothbardians endorse is demonstrably false so there have been plenty of reputable big shot economists throughout the decades who have also put forth proposals for 100% reserve banking including Frank Knight Irving Fisher Hayek Milton Friedman and by the way for these two here what it's referred to in modern parlance is the Chicago plan if you just talk to a random economist and say first of all why are you talking to a random economist that's kind of weird but if you did and you said hey what's the Chicago plan and you didn't even give any context many of them would probably say oh yeah that's the thing about enforcing 100% reserve banking right okay so I mean that's how well-known that phrase is that that's what the Chicago plan means right it's not about sending arms to Pinochet it's the Chicago plan of banking I didn't say that did I? All right so okay Milton so Hayek also again that might surprise you he has passages and to their credit like guys like Larry White acknowledge this you know they say yeah I think Larry actually has an article on I forget the exact title but it's something like how come Hayek didn't agree with us on this I mean he's normally so good you know it's something like along was like where he's going through and explaining this is where Hayek was coming from just as a matter of history of economic thought but again it's demonstrably false to say it's only those cranky Rothbardians and the people you know in Rothbard's wake who might think this Hayek has places where he flirts with these ideas Friedman also for a period and then more recently even Edward Prescott okay after the 2008 financial crisis he was doing the circuit he had he presented at the Jackson Hole thing I think you know where the people meet for central banking and we had a proposal for basically 100% reserve banking okay because they all all they're coming from different perspectives obviously it's not that all these people you know it's not that Prescott read human action it was like wow I've been a fool my whole life and that's that's not what happened but my point is this idea of tying instability in financial markets in the broader economy to the practice of fractured reserve banking is something many economists from different lines of thought have said so you know in light of all these people who have favored 100% reserve banking I think Adam Sandler would say not too shabby okay I want to just keep doing references until only one person's laughing by the end all right so some of the Austrian participants in this debate George Selgen and Larry White are the two big guns in this Steve Horowitz also has a book on this you know for the free banking position you could say versus so I'll list just something there's there's tons of people and this debate has raged literally for more than decades so I'm just giving you some of the people that are actually you know at this seminar this week got Guido Hulsman you've got Walter Block you've got Joe Salerno oh wait a minute honest mistake that's actually Eric Clapton but I meant to put up a Joe Salerno post you've also got the present Murphy now what I mean by that is I in my current incarnation think this because this is something new I told you I was debating George Selgen just to happen a few months ago and so it was my preparation that I come to my present position over the years when I was younger I actually was in favor of fractional reserve banking and then it was just over time I mean obviously I thought banks can do whatever they want and if 100% reserves is what they want to do fine but over time now and especially like I say in preparation I have moved I went from just thinking something's really weird when I learned the accounting of it I was gonna do it for you guys here but it would take too much time and if you don't know how balance sheets worked it would be completely mysterious to you but if you know how balance sheets work and you go and look at what banks do when they engage in fractional reserve banking it is freaky that's where this phrase creating money out of thin air comes from let me just say this that's not something that only fiat money central banks do in the modern legal and regulatory framework there is a legitimate sense in which commercial banks can create money they can make decisions that make M1 go up if I put it that way okay so just make sure you realize that this is not something that only central banks do this is something that commercial banks do okay and so that's so now I'm on this side whereas before I was so I'll put young Murphy over here and now I'm gonna show a picture it's before the beer just so I do look different I just want to mention I was studying a lot didn't get out the side very much so in all seriousness let me just this brings up an interesting point too so I was you know a grad student I was here as a fellow like some of you are you know here I went to all the Mises use once you know I was the right age and it kept coming and people knew I was okay with fractional reserve banking at the time right it's not like that I got excommunicated or something all right so there's this idea that this is a cult and that you know we can't deviate from Rothbard's line or else that's really not true okay that I mean when you're a group of people who like certain scholars who are not well known outside of you know certain circles or who at least aren't cited you welcome like someone coming and who wants to criticize Rothbard something that's great right so finally someone who's read Rothbard appreciates he's worth responding and criticized criticizing you see what I'm saying so again if you're new here and you've heard rumors that you're not allowed to disagree with Rothbard that is that is really not true and I just want to officially say that okay so another misunderstanding or misconception is that 100% reserve banking wouldn't even work right that banks couldn't even exist in a system like that and I've even heard professional economists when they first encounter the idea that oh my gosh there's some Rothbardians out there who are in favor of 100% reserve banking and they recoil and say you know what that's how banks work how else would a bank make money so let me make sure you see where they're coming from first before I show why this isn't correct this objection so the idea is you go to a bank and you you know give them a thousand dollars it's in your checking account and they're paying you interest on that a paltry rate especially in modern times but you know recent times but you know they give you an interest rate and then if the bank isn't going to take that money and lend it out to someone at a higher interest rate and earn that spread how can the bank stay in business right how could checking accounts even be possible how are they making money if you know how they're going to pay you right so that's the objection they're thinking that's how banks work their credit intermediaries what are you talking about 100% reserve banking that doesn't even make any sense all right that's like saying McDonald's you know can't charge you more than they pay for their resources or something what how's that possible so there's two distinct functions that commercial banks serve and you have to keep them at least conceptually distinct to see how this is possible so what the reason there's confusion is that in our modern environment with fractional reserve banking where you know the legal system's fine with it and so on that it gets blurry but there's two distinct functions so the first one is that banks could have demand deposits that they're offering to customers so that term demand means you know your money can be returned to you upon demand that's what it means and the point of that would be for convenience or safety right that you have let's say you got $10,000 in currency that's risky to just to keep on your person or even in your house in a safe you know there could be a fire somebody could break in and so that's one function that the bank serves for the community is they have much more secure vaults they have insurance they have armed guards and blah blah blah and so you can go ahead and put your money there it's just a safer place to keep it and then there's also the convenience that they have an ATM network around the world they have agreements with restaurants and whatever merchants and so just with your bank card you can either go to an ATM get cash all over the place or you can just be somewhere and swipe your card right so it's just an easy way to keep track of where your money is being held in your name so you can spend it in a very convenient fashion okay so and by the way that's why I'm actually not calling this a warehouse right here because it's actually better than a warehouse or it's doing more than a mere warehouse does right if you put grain in a silo or something it's not that you can go all over the world and get a machine that spits out grain right and so you can see how what they what banks do with with demand deposits is actually goes beyond what the term warehouse might suggest okay the other distinct conceptual function is time deposits for credit intermediation right so banks do also act as credit intermediaries and think of this as a savings account or like a certificate of deposit a CD that's what that stands for if you heard of banks you know selling CDs with a certain associated interest rates or yields okay so here you might go to the bank you've got a thousand dollars that you want to lend out and earn interest on so you go to the bank you buy a thousand dollar CD and what that says is the banks promising you obviously I'm just making these numbers up they'll say in 12 months time the bearer of this note this CD redeems it and gets $1,050 okay so there's the implied 5% interest rate on that for the one year loan and then they take the thousand dollars and they go lend it to somebody else presumably for more than 5% a year and so there's where the banks earning the spread and that's where the bank is connecting the savers and the borrowers right because this again is a genuine social function that you've got in society you've got a bunch of people who want to borrow money like a young couple they both have good jobs so they know they have a future income stream they want to buy a $300,000 house right now they don't have $300,000 right now but they over time have plenty of income coming in they think and then you've got thousands of people in the community who want to save $500 a month let's say and put it somewhere where it's going to earn interest it would be a huge coordination problem for those thousands of little savers to all pool their money to give a mortgage to that one couple besides just them all coordinating it would be very risky if that one couple if they lose their jobs and default on that loan all those people lose all their savings or a portion of them and so that's where the bank is the middle man if you will so all the savers in the community can put their funds with the bank it's very safe and then the bank makes a bunch of mortgage loans and other business loans and so forth the other borrowers and the bank has credit officers, credit officials who ostensibly at least are good at assessing risk and so on and charging the appropriate interest rate and so forth okay so that's the textbook function of a bank serving as a credit intermediary and obviously other financial institutions do similar things it's not just commercial banks but a commercial bank could do that so those are distinct things and under 100% reserves banks would have to charge for their warehouse services just like other storage facilities okay so that's the answer when people say how could a bank make money if it's not engaging in fractional reserve banking if we're talking about the time deposit so notice what the thing with the thousand dollar buying the thousand dollar CD you don't have access to that money for the year if you need cash you can go sell the CD the open market you might find someone else in the community who's willing to pay you money but there's no guarantee and it's not that the bank gives you the money right the bank is saying when they issue that CD and the numbers I dreamed up they're saying we are taking this money you're giving us it's our money now you're lending it to us we just owe you payback in a year if it's a certain interest rate okay whereas with a demand deposit the deal is you're giving us this money and you can show up whenever you want and we'll give it to you all right so my point is in that first scenario yeah the bank would have to make its money somehow but that's not impossible it's very convenient to have checking accounts and people would be willing to pay for that right we don't know how they would do it maybe the bank would say every time you use a check or swipe your debit card we charge you 50 cents or something you know who knows maybe they charge you a percentage up to a ceiling maybe they would just charge you an annual fee so long as you didn't use it oh you know a certain number of times who knows but right now people pay fees to use an ATM or if you use an ATM that's not your bank's ATM you pay a little fee it's right imagine someone saying well ATMs wouldn't work because you'd have to pay money to get your own money but people wouldn't stand for that that's crazy no if it's a very convenient thing people pay for it that's how markets work okay so another distinction that I want to make so this is now where we're really getting into the heart of this debate the way Austrians engage in it is the fraud versus economic consequences so Rothbard and some of his followers particularly Huerto de Soto in his book on money and banking Hoppe stresses a lot I think Walter Block and co-authors stress this point they say that fractured reserve banking is inherently fraudulent and to do so they rely both on logic and history okay so here I'm not gonna I'm just gonna mention this so I'm not personally like dismissing this and saying this is wrong or this is irrelevant I'm just saying this is not something that like when I debated Seljan I didn't happen to get into this thing alright but I am just mentioning there is this train of thought within these camps and where they're coming from just to give you an idea is they're saying just think about it it's by its very nature there's something odd about fractured reserve banking where you're depositing a good money with somebody that's holding it and you have a title, a claim to it and then if they lend it out to somebody else it's like there's two people in the community who both think they're the owner of that same piece of property and notice it's not like shares of corporate stock right so there's nothing illogical about two partners being 50% owners each of a company you know there's nothing weird about that but what they're saying is you can't have two people who are 100% owners of the same property and yet there's a sense in fractured reserve banking in which that happens so you put your money in a checking account someone says hey how much do you have in there how much could you get you could put it in and check your balance this is $1,000 you think you have $1,000 in there but if the bank has taken 900 of it and lent it out to someone else and that's literally currency now in that guy's wallet if you say to him who owns that $900 in your wallet he's gonna say I do and yet there's a sense you're still walking around town thinking you have $1,000 in your checking account so there's a sense in which you think you own that $900 okay so that's where they're coming from they're just saying it's a matter of logic that doesn't make sense and so we shouldn't be surprised that they would continue if weird economic consequences ensue from entities engaging what is clearly illogical transactions okay that you can't build something up on irrationality it would collapse okay so that's where they're coming from also in terms of history so here I'm not qualified to render judgment on this but there are Scott again DeSoto's the I think probably the best text to start with at least on this saying that there was the tradition coming from the common law and going back to Rome and so forth about the difference between different types of contracts like bailment contracts versus loans and things like that and that it was a deliberate attempt by authorities to sort of give encouragement to the financial sector and financialization where they decided in legal cases at some point I think the change happened like in the 1800s I could be wrong about that where they all of a sudden said that oh when you deposit money with a bank you're really just lending them the money and so notice there's a distinction there right if you some of you are students you know how if you're gonna go home for the summer you put your stuff in storage like you know if you're moving out of your apartment near your college but you're going home and you have some stuff there and you put it in storage it would be weird if you learn later that the people running those storage facilities were renting out your bicycle or they were renting out your winter coat and they were like no no no but by the time you got back here we had it back in there so what's your problem you know we didn't default on our contract you lent it to us right and you would say no I wasn't lending it to you I was you were storing it for me you I was putting it there for safekeeping okay so DeSoto and others they make the claim that legally speaking that was what the understanding was like in the middle ages let's say as banking started to develop and then it was at some point a shift in the legal treatment of it and they're claiming and Hulsman gets into this too in some of his writings on this and they're claiming that this was not you know some cool laissez faire thing and the judges just in the common law tradition saw the light and started rendering opinions that made more sense they were saying it was a deliberate intervention so you take that for what it's worth but that's where they're coming from whereas the free bankers so for one thing they appeal to common knowledge and they're just saying give me a break everybody knows if you think about it for two seconds that the commercial bank isn't keeping your money on deposit how are they paying you interest duh everybody has seen the Jimmy Stewart movie it's a wonderful life where there's a bank run everyone knows bank runs are possible so clearly this isn't how can it be fraud if everyone knows what's going on right so that's one element and then with the history they will say things like look it it's never been illegal to have 100% reserves it's the market test banks have gone through and issued fractional reserve banking clearly consumers apparently prefer to have their money on deposit where there's a chance that they show up they won't have their money but they earn interest rather than a totally safe 100% reserve bank where they would have to pay fees to keep the thing running okay so that's what their position is okay so what I found helpful when I was getting ready for my debate with George Seljan on this stuff is Salerno is you know he's kind of just taking a middle ground here and he's saying look I'm not talking about the fraud stuff what I'm gonna focus on are the economic consequences of fractional reserve banking so whether you think it's fraudulent or not the undisputed matter of Salerno things in the Austrian tradition is that issuing what's called fiduciary media so let me just tell you that phrase so fiduciary media this comes out of the Misesi in treatment of money and banking the idea is that there's these things called money substitutes so you've got the real money like gold let's say gold coins and then a money substitute would be a claim on the money that everybody is sure is you know is defensible is gonna be redeemed and it's immediate you know so it's not something saying I owe you 10 gold coins in 12 months it's saying the owner of this piece of paper can present it at any bank branch let's say it immediately received 10 gold coins so that would be a money substitute now within the class of money substitutes there's money certificates which are backed up 100% by reserves in the vault and then there's fiduciary media so if a bank issues so people put 1000 pounds of gold let's say on deposit with one bank and they issue out claim tickets to 1100 pounds of gold then 100 of those tickets or 100 pounds worth of those tickets would be fiduciary media okay so that's and it's also called credit expansion when a bank does that when it issues new fiduciary media entering the economy that's what Mises calls credit expansion okay so so Salerno is saying credit expansion is what sets in motion the boom bus cycle in Austrian business cycle theory now I think actually you guys haven't seen that lecture right isn't that later is it today or tomorrow from Garrison on Austrian business cycle theory okay so don't be confused and this is something that I wasn't even fully cognizant of until later on is that there's a tendency and I would do this like if I'm on a radio show talking about the housing bubble I would spend most of my time talking about what Alan Greenspan did and then Ben Bernanke did and it leads you to believe the Austrian business cycle is about central bank policy so certainly central banks can exacerbate it but Mises developed his theory of the business cycle even before the Federal Reserve existed and the US had had business cycles financial panics or depression with a small D before then like in the 1800s so Mises clearly thought the business cycle was not merely something that central banks cause it was something inherent in a certain practice in the banking sector which of course central banks amplified and exaggerated but the point is Austrian business cycle theory in the way Mises and Hayek developed it is not about central banks screwing things up it's about how if there's credit expansion that can make interest rates artificially low okay so that's what Salerno says that's really the technical economic issue at play here sure let philosophers and legal theorists also debate the legality or the possible morality what have you of fractured reserve banking but I Joe Salerno I'm an economist that's what I'm talking about here okay so let's so now we're you know we're homing in on this so the nuanced position of Mises so there's an apparent paradox here that Mises at times condemns fractional reserve banking in his writings yet elsewhere he praises free banking okay and so and this is what confused me when I was younger and I was at least open to the fractional reserve banking position I thought you know the people in that camp would offer a lot of quotations from Mises and they would say look at Mises is on board with us it's just you cranky Rothbardians who don't get it and it looked pretty compelling to me at the time and I was like yeah I mean he's praising free but he said I don't have the quotes at my fingertips but he says stuff like even in human action he also says it earlier he says things like you know laissez faire should never have been abandoned in banking that the only way to ensure stability in the financial sector is to have a return to free banking that's free banking is the only thing that can avoid the recurring boom bus cycle okay so if you're something like Larry White or Seljan that looks like a slam dunk you know you're quoting Mises endorsing free banking what's the problem but then the 100% reserve people the Rothbardians in this tradition can also point for example here's one so this is from human action right so it's not like I'm going to when Mises was an angry young man or something this is the mature Mises you know he's so upset about how they lost the trench warfare he can't believe it all right so human action the scholars edition this is from page 439 footnote 17 let's not overlook footnote 17 all right I'm sick of people overlooking footnote 17 page 439 this is Mises the notion of normal credit expansion is absurd issuance of additional fiduciary media no matter what its quantity may be always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle okay so he's writing in his very Germanic style you might have that might be hard to hear and translate but he's saying there's no such thing as a normal credit expansion any issue of new fiduciary media sets in motion the trade cycle okay that's what Mises is talking about by the way that wasn't just my voice doing it Mises it really does have quotation marks he says the notion of normal credit expansion right and so he himself is doing the Dr. Evil thing also my latest plan to overcome Austin powers I would have the commercial banks issue normal credit expansion right excuse me Dr. Evil what is it number two there's no such thing as normal credit expansion always sets in motion the trade cycle people I've been frozen for 30 freaking years here I haven't read human action throw me a bone I'm only quasi-Austrian okay the six of you have seen that movie really like that part all right Guido just walked in and I'm like he's not gonna he's gonna wonder what am I doing all right okay so what's the resolution here it's a paradox Mises on the one hand seems to agree with guys like Salerno and Rothbard who are saying any credit expansion causes the boom bus cycle hang on let me just I don't want people to think I'm being slippery Mises concludes that footnote by saying of course if the additional amount issued is not large neither are the inevitable effects of the expansion okay so and this also ties into where Mises is coming from why he's not contradicting himself so he's saying any credit expansion sets in motion the boom bus cycle but of course if it's a tiny little credit expansion it's gonna be a little business cycle right so that's what his position is and so how can it be that he also has those passages where he endorses free banking and so the answer is and this is where I saw the best expression of this in Salerno but all you know others believe this as well where and I'm saying he reconciles all and I'm putting it in question marks just because I'm not claiming I've read every single thing Mises ever wrote but on all when I was you know the months I was preparing for that debate with Seljan and I was reading of the various things for Mises once I had this possibility in mind everything made sense that Mises wrote throughout his career because he he has all sorts of things like if you look at the what's we is called the theory of money and credit the current version of it there's essays that are included in there that came out later and he has proposals for like how to return to monetary stability in the United States or some hypothetical little country somewhere and you know he has various things talking about well they should freeze the the lock in the price of gold in terms of their currency and then insist on 100% reserves from that point forward and so I'm saying all that stuff like his classic canonical treatment in human action his earlier stuff and the theory of money and credit his later you know policy proposals if you will and all that stuff this makes it all make perfect so again it doesn't mean he's right we're not saying that oh because Mises said it's right but it's just showing there is a consistency there and so the the point is he was saying that yeah credit expansion the issue of new fiduciary media so you know fractional reserve banking that necessarily causes the boom bus cycle and the way the Austrians talk about if you think about it that makes sense right because what what is the the boom bus cycle and again if you haven't heard it yet you wouldn't know but that's the lecture that's coming up later is that the interest rate is not doing its job right the interest rate is supposed to somehow you know indicate the relative scarcity of savings versus potential uses I'm speaking very loosely here and so if the interest rate is artificially low that's the wrong price it's going to set things in motion right if the market prices have to be right for them to do what they're supposed to do so the interest rates artificially low that's going to do something bad and Mises elaborated and said the bad thing is it sets in motion an unsustainable boom okay so the point is it makes perfect sense that way a credit expansion would do that that's how there would be in a sense it's like people think there are more savings than there really are and it makes sense that banks issuing more tickets more claims on money than people voluntarily relinquished you know it fits together so there's not some weird arbitrary position it makes perfect sense that Mises would think this okay but why is he then endorsing free banking well because again remember what free banking means and that's why I was saying there's the quotation marks there's a I'm a free banker if what that means is I don't want the Federal Reserve Micro Managing Bank Policy I think the best thing to do is have completely separate banking in state and money in state and just you know let the chips fall where they may and we can speculate on what would happen in a totally libertarian legal framework but for right now yeah I don't want the government regulating banks and Mises says you know he says at least one spot I don't know if it's in human action it might be somewhere else but he's saying because if even if the government came in and engage in 100% you know a rule about 100% reserves and by the way his views on this changed over time I told you he does have proposals where he does want the government to at least announce this rule but as far as regulating banks he does at least at one point in his career say the public would then trust that that was going to solve the problem and then the next time there was a serious crisis the authorities would throw on the towel because you know they're cowards and they wouldn't be willing to do the hard thing and insist on 100% reserves even though there was a crisis and they would go ahead and allow inflation and then you know that would spoil it so Mises thought the best long-term approach to limit fractional reserve banking is just to you know not have the government involved at all and so the banks that are engaging it too aggressively are going to go under and Mises has a great argument that we can't get into here I spell it out in my book choice if you want to get get that and just look at the chapter on money and banking Mises has a great argument about how if one bank tries to inflate too much its reserves quickly get drained to all the competing banks and so that at least would keep any individual bank in check and then the system as a whole couldn't get too risky because then some new person would open up a bank with a higher reserve ratio and all the the reserves would go to that bank so Mises thought if you had laser fare and banking where you're regulating as much as you regulate pizza shops then at least that would contain the excess as a fractured reserve bank it wouldn't be 100% reserve banking there would still be little boom bus cycles but at least it would contain the major part of the problem so I think if you think that's what he means and you go and read his stuff it makes perfect sense and there's no there's no inconsistency it's not that on Tuesdays he seems to favor Larry Larry White and George Seljan on Thursdays he switches to Solerno it all makes perfect sense again he might be wrong we're not saying because he said that he's right but I would say if you believe in Austrian business cycle theory it's kind of awkward for you if both Mises and Hayek think that credit expansion causes the business cycle again I think it's pretty convenient for our point of view so all right so so what's the free banker response on this point okay so and this is this is neat so even if you don't care about this stuff per se you like you know if you're especially like a grad student and you know you're not doing this stuff or your dissertation I would recommend reading enough of this debate to at least see what Seljan says like in some of his longer pieces on this so like his book like treatment on free banking where he directly addresses this so to their credit they don't just dodge this question and it's a pretty nuanced issue and so the reason I'm saying you should read it not because you care so much about fractures or banking because thinking through what his position is it does force you to really sit back and just like how does an economy work how does how does the credit market work and what happens when loans are made and there's credit you know and investments and saving and what's the definition of saving and it gets into some really interesting thought experiments like when I was preparing for the debate and I was reading Seljan's position which ended up being more nuanced than I had expected I really was like pacing around my apartment until 2am like wait a minute I'm picturing guys making loans of fish and stuff and it was great so if you if you don't want to do that then don't read this stuff because it occurred to me that some of you might think that sounds horrible I would rather hibernate for three months all right so so what Seljan says is so he agrees he says yes there's there's two distinct things going on we the free bankers can lay out the conditions for equilibrium like so they could the profit maximizing amount of fraction reserves that a commercial bank will engage in if there's no external regulation okay so they have one train of thought to say take any particular commercial bank in a system of what they call free banking and then what would its reserve ratio be it wouldn't be zero percent because then if any customer showed up ever and wanted to take his money out the bank would go out of business right the word would spread in the community they don't have our money and they would be done for on the other hand Seljan says it wouldn't be 100% reserves that's too safe the bank could you know have 99% reserves and make more profit than in 100% reserves and yeah there's a slight chance there could be a bank run and they would run out if they only have 99% of the you know checking accounts stored as cash in the vault but come on where the chances of that happening and so they're saying when the bank optimally picks its reserve ratio balancing the risks of a bank run and running out versus the extra profit from making more loans because the banks the more they lend out why does a bank want to engage in fraction reserve banking because they make more money right if they take a ticket and lend it out and say you always you know 1.05 of these tickets next year that .05 is pure profit to them or it's pure income to them free and clear they can destroy that ticket and so now that claim that excess claim on the cash in the vault is gone but the .05 and interest that they earn is theirs free and clear it's not that you know they got to be careful with that so they're earning legitimate and well I don't see it legit they are earning income in terms of the accounting once you just overlook you know the weirdness of it and so that's why they would do it okay but again there's a there's a risk the more they do it the risk you know and so there's like a game theoretic treatment that Seljan and White can engage in and they have it published you know in mathematical journals talking about this stuff what's the optimum thing and what's the Nash equilibrium blah blah blah blah okay and then he says there's another sense of equilibrium in which the voluntary savings of the community corresponds to the amount borrowed and invested and that's a different notion of equilibrium and he says but it just so happens the two are always going to line up at least in a free banking regime where you know the government policies are what we say and he says that I can't reproduce it here because it's too complex but he's saying that when somebody in a community wants to on net accumulate more claim tickets issued by the bank that person's saving right because he's earning income he could go spend it but instead he wants to accumulate tickets that's an asset so he's engaged in savings and that's the only time when it would be profitable for a bank to issue more that tick more of those tickets when on net the community wants to hold more and hence the banks engage in monetary inflation precisely when people in the community want to save more so they're saying see that there's they're claiming that keeps interest rates where they should be that it would arbitrarily make interest rates go artificially high if we insist that on 100% reserves because then people are scrambling to hold more of these tickets because they want to hold more money for some reason and then they can't and so then you have to wait for prices to fall and there's this painful sluggish adjustment process okay so that's where they're coming from they would also point to historical examples of what I'll say is close to free banking for example Scotland and Canada during the specified years and they'll say and these were remarkably stable okay so they got two pronged thing they're going to do the theoretical treatment which I can't get into I actually have some articles under review right now but it's more of a technical argument where I think they're wrong when they say that first point I mentioned but I'm just saying it is a subtle point it's interesting to consider the second point I think is very weak so they also appeal to history and they come if you've seen the debate that I did with Seljan let's just say he's not a very timid man okay and so he has these sweeping things and it sounds like you know he's obviously done much more research on this this is his baby this is his area and so he'll make sweeping statements like oh Scotland during these years with a free banking era was remarkably stable and the same thing Canada in the late 1800s when they switched over was very unregulated and open entering did a remarkably stable okay so for Scotland Rothbard points out for example there were a period more than a decade long when the banks suspended species redemption right they just said no you can't turn into the tickets for gold so that's kind of awkward that's not what's free banking supposed to be it's supposed to be they run the risk if they inflate too much and they can't redeem it then they're done they got away with doing it for more than a decade and so clearly there's something going on there where that wasn't free banking so that's one thing and it's kind of weird that it takes the Rothbardians to pry that out of the free bankers when they should be announcing up front and center as far as Canada this is the last point I'll end on here so Seljan pointed to this book the Canadian banking system 18 so this guy wrote this in the late in 1895 this expert on Canadian banking and Seljan was saying this is the authoritative treatment shows that banking in the late 1800s what I George Seljan would say is one of the best examples of free banking we have in world history and it was remarkably stable so I'm looking through the table of contents I hope you guys can see this this is the last point I'll mention so I'm looking through the table of contents to see this remarkable stability how this is a challenge to the Rothbardian position in the chapter on this says banking under the confederation 1867 to 889 first one the expansion depression 1874 to 1879 bank failures and losses the bank I mean this could have been Rothbard's thesis right like you could have done this instead of the other bank panics so again so I think here again part of it is they're talking passage of what George means if you read through it is the this author actually is proud of the performance and he says most depositors got their money back right and so that's this he's saying not too many people lost their money outright and so that's why Seljan thinks look at this this thing came through you know because in George's mind we always have business cycles but look at not too many people lost their money this is remarkably stable okay whereas the Rothbardians are saying this is exactly what we said would happen how is this a you know a refutation of our position okay thanks everybody