 Our next speaker is Dr. Walter Block. I mentioned that Walter was Ken Garshina's teacher, teacher of many other economists. He holds a chair in economics at Loyola University in New Orleans. He's a senior fellow of the Mises Institute. He was a student and a colleague at Murray Rothbard's. He got his PhD just up the street at Columbia University. He's the author of a whole library of academic papers, popular papers, books, defending the undefendable being, I guess, his most, his most famous work. And Walter's going to talk to us today about fractional reserve banking and a number of related topics. Dr. Block. Lou, thanks for the kind introduction. The title of my talk was fractional reserve banking, but I will be speaking about a few other things and I asked Pat to put all of them on the title and she refused because it was too long. In addition to fractional reserve banking I'll be speaking about my man Milton Friedman and his 3% rule, the present depression, a little bit about immigration and the welfare estate. I have to confess that I'm sort of not au courant with what's going on. I spent all yesterday traveling and I was reading a book. I was sort of out of pocket. So I don't know exactly what the Fed is doing except what I just heard from David. But what I gather from this is that here comes Zimbabwe or Germany in 1923. It's just a horrendous increase in the quantitative easing. Quantitative easing no more one, two, and three, but forever. I'm very much taken with some of David Stockman's reductioes at Absurdum, this idea that well, you know, if we're going to double or triple why not quadruple or quintuple, maybe Krugman will be happy for the first time. This sort of reminds me of the reductio at Absurdum we use against the minimum wage law. You know, if the minimum wage law is so good at eight or 10 or 12, why not make it 100 bucks and then we'll all be rich. Another reductio at Absurdum is what David said about if we printing money until unemployment goes down, well, the printing of the money causes unemployment to stay up. It's very similar to the rent control in New York City. They say, well, we've got to keep rent control going until the housing crisis is gone, but rent control causes the housing crisis. So it's sort of a recipe for forever going on in this way. Okay, my first topic is fraction reserve banking, which I regard as basic or crucial to what's going on here. It's just creating money out of thin air. So we have a person who has 100 bucks and he deposits it in my bank and I give him a demand deposit for 100 bucks, which means he can get that 100 bucks whenever he wants. And then because I'm a fraction reserve banker, I go to someone else and I say, okay, I'll lend you 90 bucks. I want to keep $10 as a reserve. We have a fraction reserve of 10%. And I give that person 90 bucks also with a demand deposit. And that person come to my bank at any time and demand the 90. If we keep going in this series with a 10% fraction, we get $1,000 created out of 100, but let's just take 190. Well, where did this extra money come from? It came from out of thin air. The people that favor this stuff, they're very ambivalent about bank runs. If we had a bank run, that would stop it, but then they have laws against bank runs which supports the system. There was this wonderful movie, It's a Wonderful Life, where they had a bank run. Unfortunately, they took the wrong view on free banking that was sort of supporting the system. But I was sort of rooting for the bank runner to put this guy out of business, even though he was the hero of the movie. But I guess I'm sort of out of touch with the milieu. And now we have the FDIC. Thank God for the FDIC because they'll stop bank runs. They're ready to print as much money as any bank needs to stop the bank run. So without the FDIC, we could have a salutary bank run to stop the fraction reserve banking. But with them, it sort of would just caught in forever. Now, the people who favor fraction reserve banking, and there are some Austrian libertarians who do, and they should be ashamed of themselves, they say that, well, suppose people agree to it. Suppose that the person who gave me the hundred bucks agrees to have a demand deposit for a hundred bucks and knows that I'm only keeping $10 in reserve. And suppose that the person that I lend the 90 bucks also knows this. Well, my view is that not all contracts are valid. Murder contract, I contract with Lude and murder David Stockman. That's not a valid contract. Or I agree with Deanna Forberge that I'm going to sell her a square circle. Well, that's not a valid contract because there is no such thing as a square circle or a pink elephant or anything like that. So just because people agree to something doesn't make it valid. You can agree to all sorts of weird things. It doesn't make it legitimate. There's something more important than contract in the free enterprise ethic, and that's property rights. And the idea here is that you can't have more titles to property than there is property. Suppose there are 10 million cars in New York City. I don't know how many there are, but let's take that as a round number. There are also titles to 10 million cars. Now, suppose I start printing up more titles to cars than there are cars. And now we're going to have a clash over who has the rights to these cars. That's not a legitimate kind of an operation. Now, this doesn't mean that you can't have a fraction reserve parking lot or the airline sometimes overbook. But when you have a fraction reserve parking lot, it doesn't mean that you have a guaranteed parking lot. It doesn't mean you have a demand deposit. It means that you have a lottery ticket. In effect, you have a fishing license or a lottery ticket to go look for a parking spot. But if we sell 500 tickets for parking spots and only 200 parking spots, well, then the odds are 40% you're going to get one. So what these people are really coming down to saying is that money should be a lottery ticket. They don't have the hutzpah to say that, but that's what it really means, that it's a lottery ticket. And that's the basis of our monetary economy, which is rather silly. Okay, the second point I want to make or the second topic I want to raise is Milton Friedman and his 3% rule. Now, if you ask Ben Bernetti, who is his mentor? Who is his guru? Who does he channel? Who does he look to for inspiration? It's Milton Friedman. And Milton Friedman has got a lot of problems. Murray Rothbard used to say that people specialize in what they're horrible in. Like Milton Friedman is good on minimum wage, he's good on free trade, he's good on central planning, except in the monetary area. But he's horrible on money, and what does he spend his time on? Money and maybe the educational vouchers, which he's also horrible on. Milton has this famous 3% rule that the Fed should increase money in such a way that the price level rises by, well, actually the price level stays flat. And he expects that the economy is growing by 3% in terms of productivity, and therefore the price levels stay flat if the Fed increases it by 3%. Later in his life, he had to realize that if that's all the Fed had to do, it would be, you know, any high school kid with a calculator, even without a calculator, could do it. And it doesn't leave room for creativity and to show that you have a PhD and you're at Princeton or something. So the point is that it's silly to ask the Fed to do that because they won't do that. Now somebody said we're all Keynesians now, and David Stockman said that Nixon said that, that's true, but Milton Friedman also said that. He has a reputation as a free enterprise, but he's just a Keynesian. Samuelson quoted him on to that effect, and Friedman objected. And what Friedman said is, what he said was that when it comes to the tools of analysis, let me, let me say this again, when it comes to the public policy prescriptions, there are vast differences between us monetarist Keynesians, he didn't use those words, and those then law fiscal Keynesians, but when it comes to the tools of analysis, quote, we're all Keynesians now. But it seems to me that the tools of analysis are more important than any public policy prescription, because the public policy prescription emanates presumably from the tools of analysis. Money is a trade intermediary, that's the essence of money, but it's also a unit of account. And I, when my kids were small, we had a babysitting co-op and we had five couples and each couple would babysit for another couple and then would get a credit so that the other couples, one of the other four, would babysit for us. Imagine if there were Milton Friedman in our condominium development who started creating extra chits for babysitting work, it would just drive our little economy berserk in a way that is now being driven berserk. There's nothing wrong with deflation, although if you ask Bernanke, that's the most horrible thing. Look, when computers first came out, they were very expensive and as they got better and more efficient, the price went down, the same with TVs, the same with air conditioning, the same with a lot of things. There's nothing wrong with a price fall. If we had a gold standard, we would have handcuffs for the people in charge. They couldn't create the money at the rate that they're doing this. You might ask, why is it that most economists favor the Fed or at least most economists that work in macro money? There's been research done on this, I think Larry White and some other people have done research on this. What they found out is that the Fed stuffs money down the throats of macro and money economists. They give them prestige, they give them a publication in their very prestigious journals, very prestigious because they've got a lot of money to make them prestigious. The whole economics profession, at least the macro money part of it, which is the relevant parts of these issues, have been bought and sold and support the Fed, which makes it harder to push against them. Let me talk a little bit about the present depression and I use that word advisedly. A lot of people realize that the thing started with the Boston Fed. What the Boston Fed found out in 91 or 92 was that there was racism in the Boston banks. Why was there racism? Because black people were not getting as many mortgages as white people and therefore it's racism and therefore we've got to stop the way that banks were determining who gets a mortgage. The way banks were determining who gets a mortgage is you have collateral, you have a down payment, you have a credit rating, you have a job, you have a fixed address, things like that, which was racist because black people, even of the same income as white people, didn't have as much collateral or credit ratings as white people. The proof that it wasn't racist is that Oriental people or Asian people of the same level had even higher mortgage acceptability on the part of the bank. If the banks were discriminating on the basis of any color, it was green. Namely they were acting in a coherent way, namely asking people, asking themselves, is this here a candidate for a mortgage likely to repay or not and if he's not likely to repay, we're not going to give him mortgage and if he is, we will. But this was deemed racism and then HUD and Freddie and Fannie and the boys or the girls or whoever they are started saying, well, you know, if you banks want to get any favors from us or you don't want to get indicted by us, you know, you're going to have to give loans to everybody. So you had this a liar loan kind of business. Well, as I say, most mainstream economists realize that this was the start of the crisis, the housing crisis. And then we had the mortgages, which were nonpaying mortgages and now people are underwater with their mortgages. Very few people, David Stockman among them, I mentioned him because he preceded me, realized that there was another thing going on also. And that's the interest rate. And as David said, and I certainly support him on this, this is a key Austrian insight, that the interest rate has a role to play. It has a microeconomic role to play. It's a price of a sort and it relates long term and short term. And if it's screwed up, if it's artificially lowered, then long term investments look better relatively speaking than they would otherwise at a normal or at a market rate of interest. Well, what kind of things are long term in the sense that either it takes a long time to make them or they last a long time? Well, houses and cars would be one of them. So the crisis, the Austrian sea was created, yes, by these racist kind of things and giving people free mortgages, one they didn't deserve mortgages and they couldn't repay it, but also by messing around with the interest rate, artificially lowering the interest rate, which leads entrepreneurs improperly into long term investments which are not sustainable when the savings rates of the people are taken into account and which always has to come in and undermine those investments. Milton Fried, Ludwig von Mises was once asked, what's the key determinant of a capitalist society from a non-capitalist society? And he thought for half a second and he said, capital markets and the stock market. And David was saying that this is very true, that the way the Fed is orchestrating things, the capital market and the stock market, bond market are being misconstrued and interfered with and this really strikes at the heart of capitalism. If you mess with housing or unemployment, it's bad, but it's more peripheral. This is the very essence of the free market system. Sometimes people wonder, well, should we get rid of the penny? I think in Canada, they're getting rid of the penny. In the US, they're thinking of getting rid of the penny. My response is, don't get rid of the penny, get rid of the Fed, because the Fed is making the penny worthless. If you take the 100 years before the Fed was created in 1913 and roughly the 100 years since the Fed has been created, what the Fed was supposed to do is preserve the value of the dollar and reduce the oscillations of depressions and inflations and things like that. But if you look at the 100 years before and after the Fed, the oscillations before the Fed were very, very minor, whereas the oscillations after the Fed are very major. So they failed in that job. And then if you look at how they preserved the value of the dollar, well, the dollar was worth, say, a dollar in 1913. It's worth something like three or four cents now. So they've dissipated about 96, 97, 98% of the value of the dollar. This is why Ron, Paul, and other people are calling not only the audit, the Fed, which is maybe a good first step, but to end the Fed. Let me talk just a little bit about Keynesianism, which animates everyone. You know, for the Keynesians, if the economy is going too slowly, we have to hit on the gas pedal. If the economy is going too fast, we have to hit the brake. Arthur Burns was once asked when he was the chairman of the Fed, well, what happens if both occur? If you have an inflation and unemployment, if the economy is going too fast and too slow, and then he said, ha ha ha, we'll have to resign? Well, they should all resign and we shouldn't have any Fed because the Fed is central planning. I mean, have we learned nothing from East Germany and West Germany, from North Korea and South Korea? You'd think what we've learned is that socialism and central planning doesn't work. But the Fed is central planning of a very important part of the economy, the monetary sphere. Every thing that we do except for barter, every interaction, half of it is money. So this is sort of the heartbeat of the economy and we have the Sovietization of it. It's time we got out of the Sovietization of the monetary system. Let me now talk about immigration. This is sort of a potpourri of subjects. I want to talk about a few different kinds of things. There's a problem among libertarians. Should we have free immigration or not? And the obvious problem with free immigration is that if you had free and open immigration and you had a welfare state, well, then people would come here and get welfare. And that wouldn't really be a very good kind of a system. We'd be inundated with people as Margaret Thatcher would call it. The shurker is not the workers. So people say, well, if you have the welfare state, you can have free immigration. Well, my answer is, well, get rid of the welfare state. Then we can have free immigration. But still, the problem would be, well, then you have masses of people coming here to take advantage. People start talking about 1 billion Chinese or 100 million Chinese would come here. My other insider answer or response to that is what you have to do is privatize things, privatize everything. My motto is, if it moves, privatize it. If it doesn't move, privatize it. And since everything either moves or doesn't move, privatize everything. And then if somebody would have come to the country, this country, they would have to have permission from somebody else beforehand in order to have the right to come there. See, there are really three things that go on in international trade. One is the free movement of goods, free trade. The other is the free movement of investment, also good. And the third is the free movement of people. And what the critics of open immigration, such as Murray Rothbard and Hans Hoppe said, is that there's a difference between the free movement of goods and the free movement of investment on the one hand. And on the other hand, the free movement of people. And what's this difference? Well, in the case of the free movement of goods, you have to have two people that agree to it. You know, if I'm going to export a good to you, you have to agree to import it and vice versa. And the same with investment. If I'm going to invest in your oil well in Venezuela, although I think I should do that, but if I were going to do that, you have to agree to accept my investment money to buy a share in your oil company or whatever. The problem that these people, the critics of free and open immigration see with immigration of people is that you don't have a bifurcation or you don't have two people agreeing. You just have one guy sort of initiating and he shows up and says, here I am. Well, that's because we don't have full private property. If we had full private property, nobody could show up unless they had some sort of permission to be on someone else's private property. And I think that that would solve that problem as best we can solve problems on this side of the Garden of Eden where we are limited to imperfection. Let me talk a little bit about the welfare state. There's a lot of talk now. Obama wants the 1% to pay their fair share, even though the top 1% pay, what is it? 70% of all taxes? I don't know the exact numbers, but the 1% pay an inordinate amount of the tax level. And then you have a lot of people that pay no taxes at all and have the right to vote to get the 1% to give them money. They say that no man's life or his property is safe when the legislature is in session or that what is it? The Congress is a futures market in stolen goods. Well, that's what you have when you have overwhelming government and when you have this welfare state ideal. Now, what's going on with that? Why do even economists who are much better than sociologists and much better than literature people on campus at least in terms of adherence to the market, but even mainstream economists, not Austrian economists, but mainstream economists buy into this and support it and provide some sort of linear or intellectual coverage for the welfare state. And what it is is diminishing marginal utility of money. What does that mean? It's a big word or a big bunch of words. What it means is that you get more utility out of your first dollar than you get out of your last dollar. Your first dollar is for food and things that keep your life going. And your last dollar, you can light up your cigar with a $100 bill. And if you're rich enough, because the last dollar means very little to you. Notice that the Austrian view would say that you can't really have cardinal utility of this sort, namely you can't count utils because there are no units of utils. Whereas only Austrians insist that the only way of looking at utility is ordinal utility, namely ordering, like I like this tie better than this watch, or I like the watch better than my pen, but you can't say that I like the tie at 10 utils, the watch at 5 utils and the pen at 1 util, and therefore that this is worth twice as much, the tie is worth twice as much as the watch or anything like that. And you certainly can't have interpersonal comparison utility where I like the tie at 10 utils and you like it at 5, and therefore maybe I should grab your tie and then utils would be increased, but that's what they're really saying. What they're saying is that if you take $1,000 away from a rich guy who has many thousands of dollars and therefore values the last thousand to a very small amount, and you give that thousand to a poor person and he values it at a great amount, therefore this forced transfer of income from the rich to the poor really increases human welfare when we count it interpersonally. And mainstream economics does support this sort of a thing, and as I say it's only the Austrian school of economics that would cast great aspersions on this. One, you can't count utils and two, you certainly can't make interpersonal comparisons. The way that I like to counter this is say okay, well one reductio ad absurdum that I try to use when I'm debating someone on this, I say well you know my opponent here, he's got a suit and tie, I'm sure he's got a house, he's got a car. There are people who are starving in Zimbabwe or in Africa or in Latin America, why does he have all these things? Why doesn't he act consistently with his theories, namely he's guilty of hypocrisy? I remember I tried to reductio ad absurdum once against I was debating someone in environmental economics over overpopulation and I said my opponent who's coming up to the lecture podium in a minute says there are too many people we have overpopulation. Well he has it within his power to reduce the size of the population by one, and the fact that he's standing there shows that he hasn't availed himself of this opportunity, so if he doesn't take his theory seriously what should be? There was a hostile audience but I got booed at that. But that's one way to deal with these people, how do you deal with people who have this view that we should have class warfare and we should take money from the rich? One way to deal with them is to say well money is one thing but let's talk about something even more important. Let's talk about IQ points. Suppose there were a machine where you have a 150 IQ and this guy has got a 100 IQ and you put both of you in the machine and you flip the switch and now you both come out with 125 IQ, namely a medium point halfway between the 150 and the 100. Would you get in that machine? Would you put your kids in the machine also with 150 IQs? What do you think of the idea of forcing everyone into that machine, namely let's have really egalitarianism, let's have real equality not just in terms of money which is superficial and is based on IQ in the first place to a great degree. Let's have IQ redistribution and their answer is oh well that's too theoretical, we can't do that and I said but you know imagine we could have a machine like that in 500 years we probably will have a machine like that too theoretical. So I said how about eyes? I noticed you've got two eyes. There are people who are blind and have none. Why don't you give them one of your eyes? Now it's true if you are missing an eye you don't have good depth perception you might not be as good driver or something but you know you live with one eye and the person who's blind would gain a lot of utils by getting one eye whereas you would lose only that amount of utils by losing an eye and they don't much like that. So I recommend that to you for your consideration. I think I'm about out of time so I'll thank you for your attention.