 Our next speaker is Matt McCaffrey. Matt got his master's degree in economics here at Auburn University. He's working on his PhD in economics at the University of Angère in France. Matt has also spent a couple summers as a summer research fellow here at the Mises Institute. And his topic this morning is on money and socialism. Thank you. So I should start out by saying that money and socialism are two words that economists don't often use together. But as it happens, the two concepts have a very important relationship. And the point of my talk is to try and get across what socialism is and how it might be related to money. So in order to do that, I'll explain some of the different concepts and how economists use them so that you can see sort of how they eventually fit together. These days the word socialist is thrown around a lot. So I should start with the definition of socialism to help clarify what we're talking about. We typically define socialism as a situation where government owns all the means of production. Means of production are what economists also call capital goods. And those are the factories and machinery and equipment that we use to produce the goods and surfaces that we use more directly. When these tools of production are under the control of the government, we call that socialism. In this system, government makes the decisions about what to produce for the economy and also when, where, why, and how to produce all the goods and services that we use every day. This was the system which existed in one form or another in countries like Soviet Russia and China under Mao and still exists today in North Korea. The alternative to socialism is of course the market and one of the big ideas that we try to convey to students is why the market is superior to socialism both morally and economically. In the market, private individuals strive to produce goods and services for each other. Entrepreneurs create new and interesting things which they think will improve the quality of people's lives. And if they're good at that, they succeed and they make profits. And this encourages them to do even more useful things. And if they fail, they lose their money and people choose to buy other products which they think are better. The point about the market is that producers compete with each other and if you have something better to offer, if you think you have something better to offer society, you can always try your hand at it. But what makes socialism distinct is that there is only one authority making all the decisions. Any competition that the authority might have is outlawed so people can't offer alternatives. Under socialism, the government decides how many shoes to produce and if you want different shoes or more shoes or something, you can't really produce them yourself and you can't offer to pay somebody else to produce them for you. You're simply stuck with whatever the government decides to give you. Now, just as a brief history lesson, as you probably know, socialist governments did commit some of the worst crimes in human history and are responsible for the deaths of tens of millions of people. And that is the most important reason to want to expose socialism for what it is, which is an inherently controlling and destructive social system with essentially no regard for human life. But today I wanna talk about the economic aspects of socialism and the reason I bring up the moral atrocities is because they actually share a common basis with some of the economic problems of socialism. The reason I say that is because the logic of socialism is actually pretty simple. If the government wants to control how society is organized, it can't allow dissenting political opinions because by definition, different opinions would mean that there are alternatives to government control. They would mean that there's some kind of competition between different opinions. And the essence of socialism is that it does not allow for such competition. And like competing political opinions, socialist governments cannot allow competing forms of economic activity either. Competition tends to improve things. And so any competition with a socialist government would inevitably reveal that socialist economies are inherently broken and unworkable. The namesake of the Institute of Ludwig von Mises made many great contributions to economics, but one of the most important is that he showed that socialism cannot work even under the best of conditions. Mises did this before the major socialist economies of the 20th century existed and he predicted their eventual collapse. But unfortunately, the world did not heed his warnings. But what Mises showed was that socialist economies can't work because the government planners who are making all of these decisions have no way to figure out how to run the economy. Controlling an entire economy is an incredibly complex problem because there are always millions of different things to produce and different ways to produce them. So you need some kind of guide, some kind of system that tells you whether you're doing the right thing or the wrong thing. Now, in the market, this very complicated problem is solved because you have many different entrepreneurs each handling small parts, small problems in the overall system. And as they succeed and fail in handling these problems, they get rewarded by making profits or they get punished by making losses depending on whether or not people like what they produce. So they have profits and losses as a guide for deciding how to run things. But under socialism, there's no competition and so there's no profits and losses. So there's basically no way to know whether or not what you're producing is actually benefiting people. And this is basically a recipe for chaos. In the old Soviet Union, for example, there were always shortages of basic supplies like food because the government had no way of knowing exactly how much food to produce or whether they should be producing more food than clothing or whether people had enough clothing but they needed food or whether they had enough food but they needed shoes or what have you. And the results, if you were lucky, was poverty and hardship. And things were even worse in China under Mao where people actually destroyed their own valuable resources just to make useless things for the government. You could have whole villages melting down their pots and their pans and their doorknobs and every piece of metal that they owned just to extract an ounce or two of iron to give to the government because the government, the socialist government was constantly trying to figure, they could never really figure out what to produce. So they just sort of invented these arbitrary demands for the citizens to live up to. And it was an incredibly impoverishing system of economy. And then there were a lot, many, many stories about the economic problems of socialism. And in China's case, they're quite literally horror stories about how its economic policy destroyed the very social fabric of the whole country to give just one example, in some cases, people were so poor and resources were so scarce because of the socialist economic policy that people actually started eating each other to stay alive. And that's a vision of what it's like when you push the logic of socialism to its ultimate conclusions. The only rays of light for people who lived in socialist countries were those provided by the market because people desperately needed to provide for themselves. There were usually some kinds of black markets for goods that would develop to help people get what they needed. And even though they did help mitigate some of the problems to some extent, they never came close to eliminating all the problems of socialist economics. But what I wanna hint at with this discussion is an analogy between how socialist economies are run and how our own economy is operated. The Soviet economy, for instance, was in a state of disaster basically over the course of its entire history. The Chinese experiment with socialism was also an abysmal failure. And today, North Korea has some of the worst living conditions in the world. But if you think about that and then you sort of take a look around and see the kind of chaos our economy is in today, and especially if you think about the fact that we're constantly getting into these chaotic situations like recessions and depressions, you start to see the parallels between these more socialist countries and our own, which just has some pieces of socialism. As Dr. Thornton, I think we'll talk about in the next lecture, our own kind of chaos, like the recessions that we have, is caused by government manipulation of money by the central bank, which we can think of as a kind of monetary socialism. What I've mentioned so far are our economies which are very socialist, but it's important to point out that obviously most of the economies in the world today are not like that. What you have today is a variety of different forms of government control. Some countries have, for example, a lot of sort of personal freedoms, but when it comes to economic affairs, they're very heavily restricted. And in other places, you can buy and sell without too much trouble from the government, but your civil liberties are basically non-existent. And there are all different degrees of different combinations of government intervention. Depending on the country, you often have socialism in some specific areas of the economy while others are left relatively free. A good example would be in medical care. We've heard a lot over the last few years about socialized medicine, which is essentially the system that Canada has, where the government effectively controls the medical industry. It's also a great example of why socialist policies don't work, although it's a very sad example because when government fails at providing medical care, the immediate result is pain and death in addition to all the wasted resources and corruption and all the other problems that governments have. Sticking with the Canada example, in Canada, the most obvious example of the failure of socialist policy is to point to the waiting lines for medical care. It often takes days to see a doctor, even at an emergency room. And the waiting lines for serious surgeries or organ transplants are usually years long. So a great number of people in Canada die while waiting for transplants. While just on the other side of the border in the US, things aren't nearly as bad, although there are problems in the US as well. But the point is that all this happens because the system is run along socialist lines with restricted competition and government trying and failing to figure out how to provide for people. I mean, if you want an interesting comparison to see just how crazy the system is, you just have to look at the Canadian veterinary medicine industry, which is relatively free. In Canada, if you have a problem with your pet, you can generally get a dog or a cat treated immediately on the same day. But because the market for vets is pretty free, but the market for human medical care is effectively socialized. So it takes months or even years for a human being to get a simple checkup, let alone serious care. Socialized medicine is not the topic of my talk, but that's the sort of partial socialism I want to get you to think about, a kind of socialism that exists in one part of the economy while the other parts are left relatively alone. Or to take just another example, if the government suddenly took control of the production of iPads, we would say that the iPad industry is socialized, even though we still wouldn't have a completely socialist economy overall. And in that case, you'd see all kinds of problems in the production of iPads as well. But this brings me to money, because money is one of those areas of the economy that we might also call socialized in a way, because it is entirely out of the hands of the market. Money in its various forms is produced by a banking system that has no legal competition. We can't all just produce our own money, right? We have to use the money that's printed for us by the government. One way to think about the problems of government controlling money production is to realize that money is produced just like other goods are, or it should be at least. As GP was pointing out earlier, money is just a very desirable good that emerges from a process of many different exchanges. So even though we don't use, say, iPads as money, it's helpful to think of money as a good liken iPad, because then it's easier to see that it's the production of money isn't much different than the production of the things that we use money to buy. And this is actually one important reason why governments support using paper notes as money instead of commodities like silver, because if people use paper, especially paper covered in the symbols and the promises of government, it's much harder to see what money is supposed to be. And it's much harder to see that in a lot of ways, money is the same as the other goods that we buy and sell. With just a paper note, it becomes much easier to believe that money is something that is invented by government and that only the government can really produce. And the influence of these kind of subtle ideas about money is tremendously important. I can't emphasize enough that the idea of government control of money is one of the most vital that you can educate yourself about as far as economics is concerned, because the influence of central banks like our own Federal Reserve System is absolutely enormous. And unfortunately, the problem of government control of money is one of the last things economists are usually willing to acknowledge. In fact, a lot of economists who support free markets in general and would never endorse any kind of official socialist system support this sort of socialism in money, as we might call it, and they actually even argue emphatically that it is absolutely necessary, but it's not. If we take the lesson about how money is similar to other goods, we can see a flaw in the way a lot of economists think about money in banking, because as I said, on this topic, economists are often very inconsistent. For example, if we were to say, look, the shoe industry is just out of control, we need the government to control all production of shoes, we need to socialize shoes. Most economists would be very opposed, and they would argue that if the government controls the production of shoes, it will end in disaster, and they would be right. They would point out all kinds of problems which would emerge if we socialized the shoe industry. But when it comes to money, economists just forget that all these problems of socialist planning exist. Economists don't even think twice about this problem, it's just assumed that money is so different that government, and especially a central bank, has to control it. Now some economists would also say, they might respond by saying, look, it's exactly because money is so important that we can't let the market handle it. We can't let private interests control this thing that's so vital. But if you think about the logic behind this, it's actually sort of crazy, because the argument really boils down to saying something like this. Money is so important, it's so vital, that we need to centrally plan it. It's so important that we have to control it using the methods of the most disastrous system in history, the most disastrous economic system in history. But the overall point that I wanna make is that you can have a government authority controlling the production, just as you can have a government authority controlling the production of iPads, you can have a government controlling the business of money production as well. And for a long time now, this has been done through what we call central banks. Basically, the way central banks come into existence is that government selects one bank or a group of banks to be the leading banks in the economy, and it gives them special privileges to separate them from the competition. And then those banks try to steer the economy of the country in various ways. In the US, the central bank is the Federal Reserve System with its chairman, Ben Bernanke. Now, because the central bank is a bank, the way they try to manage the economy is through controlling all the different aspects of money. So the Fed, for example, can increase the supply of money in the economy and it can set certain interest rates higher or lower if it wants to encourage people to save or spend, and it can encourage other banks to lend in various ways as well. But the result of this kind of policy is that the central bank manages the money of the country in a very top-down fashion, and through managing its money, manages much of the economy in general. And the Fed is the only entity that can do this. The central bank has effectively no competition, and that is what we might say that money production in the US is socialized. There are no markets and no competition in these highest levels of money production. Now, as important as it is to criticize the Fed, it's just as important to make sure that we do it for the right reasons. And the reason I bring this up is because there are some faulty ideas about what the Fed does that are floating around out there that lead to some mistaken criticisms. One of these is that some people might try to tell you that the Federal Reserve, the central bank, is a private bank because the different banks that comprise the Fed are nominally private or quasi-private, technically. And so some critics will complain that the central bank and the Fed, it's evil, but it's evil because it's just another greedy private corporation and it doesn't take the public interest to heart. And if only we could just make the Fed a public institution, we could have a good old-fashioned democratic monetary system. But this kind of thinking is just a confusion about how the Fed actually works. For all intents and purposes, the Fed is a government institution. For example, the chairman of the Fed and the board of governors, they're appointed by the president and they're confirmed by the Senate. And if you had any other corporation in the economy that had its CEO and board of directors appointed by the government, people would immediately say, oh, look, the government just controls that organization. And then people would be effectively right in saying that. And the same thing applies to the Fed system, which is not a private organization in a way that matters for us today. By the way, if the president or we're to announce that starting tomorrow, the CEO of Google is gonna be appointed by Congress from now on, people would be pretty outraged. But this comes back to the idea that people think money is so different because even though it would be a huge concern if the government started appointing the executives of all private corporations and many people would cry socialism, people still believe that money is somehow different enough that the ordinary rules just don't apply to it. We're so used to this idea that government must have control over our money and that government must nationalize or socialize money that nobody really thinks twice about it in this. Yeah, so the Fed is not a private organization and it's mistaken when people complain about the Fed as if it was just this greedy private corporation that just needs to be made public. As one of our friends, Tom Woods, likes to put it, the problem with the Fed is that it's not socialist enough. So, and there's one other claim that's sort of along similar lines that I wanna point out as well. Some people also say things like, what we really need to do is just make the Federal Reserve accountable to Congress. The Fed has a lot of independence. There's very little formal oversight over what it does. So people just say, oh, well, look, if we could just allow Congress to sort of oversee things, they could keep things on track. But of course, this is also a very bad idea because I hope I'm not bursting anybody's bubble, but you don't want to put the control of the money supply of the country in the hands of people whose job it is basically to win friends and influence people. Because it turns out members of Congress don't always have the public interest at heart. Sometimes they do things out of their own selfish interest. So that's another sort of mistaken attitude that people take towards central banking. But in any case, the point being that a lot of people have a mistaken idea that the Fed is somehow not part of the government because in name only, it's sort of not. But in practice, it's very much a kind of government agency. And what I'm getting at with this discussion of central banks and the Federal Reserve in particular is that they are a very significant form of partial socialism. Remember, if the government socialized iPads, that would be bad for that industry. But at least there would be some parts of the economy, some other industries, which wouldn't feel the full effects of government control. But money especially in one way that I'll talk about. Because we use money to exchange, money is one side of all the exchanges in the economy. It's connected to everything that's bought and sold. So to socialize money is to have a kind of influence not just over one industry, but in a sense, all industries and over every single exchange. So when you put government in charge of the printing press, you unleash all of the terrible aspects of government control and bureaucracy on the most important commodity in the economy. And the results are predictable. Government prints money to win front and influence people. The purchasing power of money declines. People become even more uncertain about how to plan for the future. And of course, when money declines in value, the wealth that people try to keep in the form of money declines as well. And in the worst cases, as Danny pointed out, it can be just completely wiped out. Reckless money creation also encourages also the sorts of other undesirable behaviors that encourages people to become debtors and to borrow far beyond their means. Because remember, if you expect that government will continue to print money and that the value of money will decline over time, it's a good idea to borrow money now because then later on you can pay it back when it's not worth as much and you effectively gain. And so the borrowers get rewarded while the lenders get punished. And these are just a few of the more obvious ways that government messes up money management. But also maybe more significantly, government control over money tends to lead to socialist policies in other areas as well. As I said before, money is connected to everything. And therefore, so is the banking industry. Because banks lend the money for things like large investment projects. So they're very closely connected with the large industries that are trying to invest and grow the economy. And this is enormous network of borrowing and lending that runs all throughout the economy. Normally there's nothing wrong with this because entrepreneurs often need to borrow money to do things like research and development. But the problem arises when you have a central bank because it ties the decisions of businessmen and bankers to itself instead of to consumers. The central bank has its own goals and motivations which are not related to providing useful goods and services to people. Big investors end up depending on the big banks which in turn depend on the central bank, which is the source of a lot of new credit for everyone all along down the line. So central banks end up tying the interests of large corporations to the interests of the banks. And that's one way in which they gradually expand government influence in the economy because everybody is borrowing from the large banks in one way or another. And if you're borrowing money from somebody, you better be careful to do what they say. Also because they can influence the supply of money and the interest rates for borrowing, central banks can push people to borrow money even when it's not really a good idea to and thus expand this network of dependence. And of course it's a lot easier for government to do all this when the money it's producing is just pieces of paper or electronic entries in a computer than when it's a hard commodity like silver which you can't really reproduce. So it's through manipulating the supply of money and the supply of credit that central banks like the Fed get their hooks in just about everything. And it's interesting that even very socialist economists realized this. A long time ago, one Marxist economist even said that if you wanted to socialize the economy of Germany, all you needed to do was take over the six largest banks in Berlin. Of course, for the socialists this was like a great thing and they often applauded when banks expanded their power and even said, look isn't it great that central banks are becoming more powerful and more widespread because they're doing all the work for us. We don't need a revolution of the workers anymore because the banks already finance everyone in the economy. So all we need to do is control the banks and then we'll control everything else and then we'll get our socialist utopia. And I don't usually quote the followers of Karl Marx, but in this case they do happen to be correct about the socialism part, not the utopia part. And the broad idea is very relevant to us today. Now when you make these kind of arguments, you often get accused of being sort of needlessly paranoid. And in a sense, you can see where people who make this criticism are coming from. It's true that we're not gonna wake up tomorrow morning and find out that overnight we transformed into Stalinist Russia. By the way, I wrote that comment on Tuesday night and I almost deleted it because I thought if there's one day that we will wake up, it's gonna be tomorrow morning, but fortunately it didn't happen. But the slow creep of government just continued as usual. But to get back to the argument, we're not making an unsupported claim that having a central bank means that tomorrow we'll wake up to a Stalinist dictatorship. What I wanna focus on and what I hope you take away from this is that it is a historical fact that as central banks have increased their power, government has grown increasingly socialistic alongside them. And this has been especially true in the US. The two forces, government-controlled banking and government control of the other parts of the economy, support and reinforce each other. The process of central banking makes possible virtually all of the terrible things that government does today. The whole process of money creation and government expansion is driven by a kind of logic of increasing socialism. Because governments cause economic problems and since governments never meant they're wrong, they always believe they can solve the problem they caused. If only they can get a little more or a lot more of your money and as long as they can get that little bit of extra control they want over the economy. They always need a little bit more to solve the problem. So they're constantly on the lookout for ways to increase their own influence. But this can actually sometimes get difficult for them because government needs to fund itself. And it's very difficult for government to fund itself extensively through taxation because when you get taxed, you can see right there on your paycheck, okay look the government is taking X percentage of my money and that tends to upset people. So relying on taxation puts serious limitations on what government can spend. And this of course is where the central bank comes in because it functions as the money creator, the financier of government. And there's an especially devious aspect of this because as I said it's easy to see the effects of taxation directly on your income but the effects of creating money to fund government activities are a lot harder to see. We don't always have very clear cut cases like for example the hyperinflation where everything just collapses all at once. A lot of times the changes are subtle and occur over time. So central banks give governments not just a way to fund their activities but a way to hide them as well. Because printing money has less obvious effects than taxing money directly. And the result is that over time central banks become a very, very effective way to help government expand all its activities especially when it comes to controlling the economy. So just to sum up I just wanna make two more points. The first is that sometimes these big issues like central banks seem very abstract and far away but they are incredibly important to learn about because quite literally our whole way of life can depend on the decisions of people who run organizations like the Federal Reserve. These institutions that rarely if ever get mentioned during a presidential debate let alone actually on your ballot somewhere. I won't give you a lecture on voting because I'm sure you've heard it all in the last few weeks but I do wanna ask you to truly take an interest in some of these issues and do research on your own and try and find out about these problems. And whatever you do please don't do what far too many people do which is to use these conventions of our society like voting as a substitute for educating yourself. We think about that every minute. The second point I wanna make is that the policies we're talking about are not due to the influence of particular political parties because all the major players support central banking and want more government control over our lives in general. The absolutely vital point and the one that the founding fathers of this country and other thinkers realized is that these threats to our liberty and our economy rarely appear overnight. The problems we face often involve slow changes to our lives that nobody really talks about and the result is that before you know it everything is different and what's worse the change happens so slowly that people don't even think of it as odd. Maybe you know this old urban legend about how if you put a frog in boiling water it jumps out but then if you put it in cold water and heat it slowly it'll stay in and eventually it'll just die. It's actually not true but the urban legend you get the idea. That's basically the situation we face with the increasing amounts of government intervention in our lives. And we have to learn how to jump out of the water so to speak. Whereas government changes often slowly we need to change our government as quickly as possible. Most importantly by ending socialism in all of its forms but especially in money. In other words we need to let the market bring all of its benefits to our money just as we let it benefit us in all the other areas of our lives as well. So with that I say thank you for listening.