 What I'd like to do today is discuss three things. Present discounted value, fractional reserve banking, and the Austrian business cycle theory. But before I do, I have to brag a little bit. I'm probably the only person in this room, if I'm not, please raise your hand. Who shook the hand of Ludwig von Mises? Ah, we've got a few. But unlike these guys, I never wash this hand. So it's a little dirty. But if you shake my hand, you channel Mises. Whereas these guys, they wash their hands. The other way I want to brag is I once played chess with Hayek. And I beat him. Of course, the way I play chess is I tell my opponent, go look over there, and I grab the queen. Then I beat him. OK, so what is fractional reserve banking? What is present discounted value? And what is the Austrian business cycle theory? I have here in my hot hands a dollar bill. What am I bid for this? I'll give it to you in a year from now. I'm not giving it to you now. But I'll give it to you in a year from now. But I promise I will. And let's forget about inflation. Whenever I do this sort of a thing, when I think of Cartman of the TV series, South Park, you can trust me. Nobody trusts Cartman for anything. Well, the profit-maximizing bid on your part would be minus infinity. Namely, I have to pay you an infinite amount of money for you to accept this dollar in a year from now. But if we forget about negative numbers, the profit-maximizing bid on your part would be zero. You're going to offer me zero, and I'll give you this dollar in a year from now. But what is the bid such that no profits will be made, no profits, no losses? And for that, you can't answer the question. It's a trick question. You have to know the interest rate. Without the interest rate, you don't know how much you should bid in order to not make a profit nor make a loss. And by the way, that's what the present discounted value of a dollar is, the bid such that you don't make a profit, you don't make a loss. Well, if the interest rate is 3%, forgetting about rounding errors, $0.97 is the right amount. Because if you take $0.97 at 3%, you'll get a dollar. So if you bid $0.97, you'll neither make a profit nor make a loss. If you bid $0.95 or $0.96, you'll make a little profit. If you bid $0.98 or $0.99, you'll make a little bit of a loss. If you bid more than a dollar, you're crazy, because you could have the money right now and put the money in the bank. So that's what the present discounted value is of future income streams. OK. The next issue is, suppose the government lowers the interest rate from 4% to 3%, or it's done artificially. Now, if it could be done, well, let me start again. What sets up the interest rate in the first place? Well, according to the Austrians, it's time preference. Some people are very impatient, then you get a very high interest rate. And other people look for the long run and you get a lower interest rate. And the interest rate that prevails in society is the one that takes in everyone's participation. So we now have an interest rate of 4%, which means that the present discounted value of $1.96. And what the government is going to do is lower the interest rate from 4% to 3%. How are they going to do it? Two different ways. One way is our favorite institution around here, Ron Paul's favorite institution, the Fed. The Fed just buys up some stuff, puts more money out there, and the interest rate falls. Another way is fractional reserve banking, another institution which is not really the favorite of people around here and certainly not of me. So what's going on with fractional reserve banking? With the Fed, it's easier to understand. They just print more money or buy some stuff with the money that they printed up and we're off to the races. And if you think of a supply and demand curve with interest rates on the vertical axis and amount of money on the horizontal axis, more money means the supply curve shifts to the right and you get a lower interest rate. So one way to go from four to three is the government increases the money supply. Another way is they don't have to do that. We just have to have fractional reserve banking. So what's fractional reserve banking? Fractional reserve banking is, Mr. A goes to the bank with 100 bucks and he deposits the 100 bucks. And the bank gives him a checking account for 100 bucks and he can spend that 100 bucks on demand. At any time he wants, he can buy $100 worth of stuff with his check. Or with his credit card either way. And then what the bank does is it lends, the bank is B, A is the first guy, B is the bank and it lends out $90 to Mr. C. The fraction now is 10%. Namely it owes Mr. A 100. It keeps 10 and it lends 90 to Mr. C. And it gives Mr. C a checking account and now there's $190 worth of money where there used to be just 100. Thanks not to the magic of the market, but to the magic of fraud in effect. This is fraudulent because the bank is committed on demand to give people 190 bucks and it's only got 10 bucks, right? And then Mr. C goes to bank D, is in David and deposits his $90. And that bank takes $9 out of the 90 because it too has a 10% fractional reserve and we go on to the races 81, 72, 63, down to the last thing. And the equation for that is the amount of money is $100 divided by the fraction. And the fraction is 10%, so 100 divided by 10% or by one tenth is 1,000. So when the process works its way out, we have $1,000 worth of money, extra money. And with that is the second way that the interest rate can go from four to 3%. Now, in order to make fraction reserve banking work, it's illegal to question the veracity of a bank, start a bank run, say, hey, I'd better go to bank B or bank D and get my money because they've only got so much money and they owe so much, you do that, you can go to jail because not only is that libelous and we libertarians also have a view on libel, but this is especially evil thing from the point of the central bank and from the point of the state. So that's fraction reserve banking. Okay, so now the rate of interest goes down from 4% to 3%, which means that investments that used to be worth, what an investment is is an attempt to get a dollar in a year from now, right? A one year investment is an attempt to get a dollar in a year from now by paying 96 or 97 cents or whatever it is. You're gonna invest something and you're hoping to get a dollar. Well, it used to be at a 4% interest rate, you had to put in 96 cents. Now, at a 3%, you have to put in 97. Namely, you have to put in less. Namely, this encourages one year investments, right? Everyone with me? At a lower rate of interest, you're more likely to invest for a year duration because you have to put in less money now. You only have to put in 97 cents. Sorry, you only have to put in 96 cents whereas before you had to put in 97 cents. Everyone with me on that? Okay, well, that's not good. It's not good that we have more investments than we had before because the savings rate hasn't changed and the investments come out of savings. And it's as if we have a business where we need 10 bricks, we've only got nine bricks. There's gonna be a problem that we're gonna have too much investment because people are now investing more for one year projects than they were before. So this isn't hunky-dory, this is a problem. However, that's a minor problem, a one year duration. It's only a 1% increase. Namedy, the difference between 96 and 97 cents is roughly 1% differential. But if you look at a 20 year investment, the differential is 25%. You know, I wanna revert to the Bible. Yay, though I walked through the Valley of Death, I have my interest rate tables here, so I fear no man. So if you dare question my numbers, I've got the interest rate tables here. 30 years, it's a 33% differential. A 60 year investment, it's double. And a 100 year investment, investment's almost triple. So what this does is it biases the structure of production, namely the length of investments. It biases it toward long roundabout methods of production, which the savings rate of the people just doesn't justify because that hasn't changed. The only thing that's changed is illicit fraction reserve banking and the government creating money. Now, now we're getting to the Austrian business cycle theory. I hope I've convinced you of what present discounted value is and what fraction reserve banking is. And now I'm ready to launch into the Austrian business cycle theory, which is a little different than the Keynesian. See, for the Keynesians, it's sort of like there's a car on a very narrow road and on this side rests unemployment and on this side rests inflation. And the car is sort of wonky and it's gonna veer into one or the other side. And if it veers into the unemployment side, we gotta pump up something. And here you get right wing Keynesians and left wing Keynesians. The right wing Keynesians, the Friedmanites, the Chicagoites, they're the ones who say, well, it's monetary policy. If the car, the economic car, is veering toward unemployment, let's get the money supply increased. That was Milton Friedman's and Anna Schwartz's view of the Depression of 1933 or whatever it was. Namely, the Fed didn't create enough money. So those are the monetary Keynesians. Then you've got the fiscal Keynesians. Those are the left wing. Don't ask me why one is left and one is right. That's a whole other issue. But then you've got the fiscal Keynesians and say, no, no, no, if you're in unemployment, you gotta have deficits and spending and stuff like that. Arthur Burns was once asked at a conference, well, suppose you have unemployment and inflation, namely stagflation. And he said, oh, well, then we'll have to resign. Now, this guy was in charge of this stuff. He was also my teacher at Columbia when I was getting my PhD. The problem with him is that all he would talk about was politics, Dick Nixon and he were buddies and he had lunch with Dick Nixon and yack, yack, yack about Dick Nixon. So I wasn't learning macro money. This is before I became an Austrian. So I went to Albert Marble Malthardt, another teacher who was talking about money macro, but I couldn't understand a word. So I was schizophrenic. I'd go from this class to that class and thank God I became an Austrian and learned a little macro money but it was rough during that time. But that's a very powerful critique of left wing or right wing Keynesianism, namely stagflation. What happens if you have both? What do you do? Do you pump it up or not or what? That's one difference. But getting back to the Austrian business cycle theory, the Keynesians look upon the boom as good. Everything is full employment and everyone's prosperous. We look upon the boom as getting drunk last night. And we look upon the next morning when you're sick and throwing up as helpful. I mean, it sounds a little perverse, I admit it. I can now add a new chapter of my next defending the undefendable book, the person throwing up or something. I don't know, I'm not sure how that works. I'll have to work on that one. But we look upon the depression as the good thing because now you're getting rid of all those investments that never should have been made. The long roundabout ones that were not justified by the savings rates of the people. Whereas they see, oh, the depression is very bad. We've got to stop the depression by, you'll never guess what, adding on more money, creating more of a business cycle. So we are a little bit outside of them. But the key element for understanding the Austrian business cycle theory is not a matter of too much investment or too little investment. It's rather a matter of the wrong kinds of investment. Too much roundabout stuff. So we're very different than the Keynesians who think it's too much or too little. We're saying it's neither too much nor too little. It's rather the proportion of short-term, middle-term, and long-term investment. That's very, very important for the Austrians. Whereas the Keynesians, they just have the letter K, A-B-C-D-E-F-A-J-K, and it stands for capital. And what they mean by capital is how much capital. Whereas for us, it's not a matter of how much capital, it's a matter of what kind of capital, short-run, middle-run, long-run. So yes, if you lower the interest rate from four to 3%, it doesn't do too badly for a one-year investment, but it does horribly for a 30-year investment. Those have to be deprecated or written off the books, which is painful, which is like the morning after getting drunk. Okay, what are the other differences between them guys and us guys? Another difference is they have this hatred for gold. Gold is evil. Gold is a barbarous relic. That's what Friedman calls it. You know, Friedman had a TV series, Free to Choose, and yet whenever people were free to choose, guess what they chose? Gold, sometimes silver, but I mean, many things have been money. I don't know, cigarettes in prisoner of war camps, and calorie shells, and all sorts of stuff, which leads me to the question of why do we have money in the first place? More basic question, why do we have money because of the double coincidence of wants? I have a chicken, and I want a pickle. The odds of me finding a guy who's got a pickle and wants a chicken are slim to none. I mean, I can find plenty of guys who've got a pickle for sale, but they might not want a chicken. And I've got a chicken and I want a pickle. So it's a double coincidence of wants. So what I do is I take the chicken and I buy salt. Why salt? Because everyone, this is before refrigeration, right? Everybody wants salt. So I trade in my chicken for salt, and now I take some salt and I go to the pickle guy who doesn't want salt. He wants a bicycle, right? But he'll take the salt because he knows that the bicycle guy will take salt because everyone takes salt. Because you needed salt to preserve food. So salt becomes a money. All the money is, is it trade intermediary? A way of smoothing trade? And we absolutely have to have trade. If we didn't have trade, we'd have no specialization in division of labor. I mean, if you had to make everything for yourself, most of us would die, right? So we have to specialize. But if you specialize, then Don Prince, all he has is medical services. He can't eat medical services, right? So he's gotta trade those medical services for a chicken or a pickle or a bicycle or whatever he wants, right? Don't sit near me because I'll pick on you. I'm kidding on that. So we have to have money. And now salt is a pretty good money, but there are problems with salt. It's very cheap. There are certain things that are really good monies and other things aren't. Bananas aren't the good money. They get rotten too quickly. Diamonds are a very lousy money, even though they're very valuable, not like cement, which wouldn't be a good money because you need so much of it to conduct business, right? The problem with diamonds is that if you break a diamond in half, I think the two halves are equal to one eighth of the total size of the diamond. I might be a bit off on that. Diamond experts will correct me on that, but you lose a lot when you break a diamond. And it's tough to break a diamond because they're very strong. Whenever there was a competition, gold and sometimes silver won out. Gold is a soft metal, and you and I might not be able to tell the difference between gold and something close to gold, but experts easily can tell the difference so there's difficulty to have fraud with gold. So why does the government hate gold? Why does socialists like Milton Friedman hate gold? And I use the word advisedly. I mean, look, on many issues, Friedman was a great guy. Minimum wage, free trade, rent control, excellent. He sort of exemplifies Murray Rothbard's rule that the bad guys specialize in what they're horrible in. I mean, Friedman was great on dozens of issues and he specializes in two, where he's horrible. One is vouchers and the other is money. So the reason that the government doesn't like gold is because they can't print it. So how does government get money? Well, there are three ways, taxes, but everyone knows who's doing the taxing. Even Biden can't say that the private enterprise is taxing. I mean, people are stupid, but not that stupid. They realize that it's government that's doing the taxing. The second way is borrowing, right? And everyone knows who's doing the borrowing. And the third way is printing money. Thanks, I'm just about out of time. So let me just summarize. We went over present discounted value. We went over fractional reserve banking. We went over Austrian business cycle theory and I hope we had some fun. Thanks for your attention.