 This is Jeff Deist and you're listening to the Human Action podcast. Hey ladies and gentlemen, welcome back once again to the Human Action podcast and if you've been following along you know that we are working our way chapter by chapter section by section through Rothbard's Magnum opus man economy and state And this is really one of the few if not only podcasts out there Where we're not afraid of books and substantive economic discussion and learning so that's really the whole idea and Each week we bring on a special guest to help our listeners work through these books and make it a little more lively a little more interesting a Little more digestible And if you recall last week we had dr. Walter block with us And we had a nice little lesson from him on monopoly theory which a Rothbard made great strides with in chapter 10 of this book Writing that in the 1950s when a lot of that was very radical thinking and we're continuing now on to chapter 11 Which is titled money and it's purchasing power And I thought there'd be nobody better as a guest on this topic and for this chapter than our great friend Bob Murphy So that said good morning Bob and happy Friday. Thanks for having me Jeff I love the work you're doing on this podcast and glad to be here well I want to mention that Bob is also the author of the study guide to this book to which we have from time to time referred and We have that available at our site if you want to obtain that helps you read the book Perhaps a little bit easier But Bob I want to preface with a couple of quick Comments You know first of all that he he goes through the production of interest rates in an earlier chapter about Production about how stuff goods and services arrive at the economy He doesn't cover interest rates per se and in this later chapter about money. So I think that's interesting and second I was flipping through Human action again last night and there's no Direct analog to this chapter in human action in other words Mises scatters his treatment of interest rates and money and other things Supplying demand for money Throughout the book in a way whereas Rothbard sort of decides we're gonna take a whole chapter a long one By the way over a hundred pages and tackle this issue Yeah, so let me hit the second point you made there first. So you're right And I never thought of it like that, but you're right there going through human action There is no you can't point to where does Mises talk about? How the level of money prices or why that's the wrong way to think about it and you know MV equals PT and that sort of thing You're right. He doesn't talk about that I suppose in the theory of money and credit maybe that's that's probably where he would do something like that But you would think in human action That's would be and I think it is just kind of the style of the two books that human actions more like a Here's Mises worldview Whereas Rothbard this really is supposed to be like a treatise on economic theory and this is this is the body of economic thought And so I think that's partly the explanation for that And then the first thing you said right the in a in a Keynesian framework Money and interest rates would be intimately related and yet here because in the Austrian school Interest is you know has to do with time preference and money has to do with like the circle the quantity of money has to do with That's purchasing power things like that. So the two really aren't Fundamentally related conceptually and so that's why yes and Rothbard's book earlier He talks about how to changing the interest rate and what does that do to the structure of production? Whereas money and it's purchasing power. That's a completely separate thing conceptually Well, I want to start with talking about this concept of cash balance We had an event actually in Birmingham a couple weeks ago where we talked about this and I talked about Hut has an article which is somewhat famous called the yield from money held and as Rothbard points out here if we had a Evenly rotating economy with no uncertainty people wouldn't really hold cash balances They would just know what amount of cash they needed and when they needed it, but it is precisely When things get uncertain in America 2020 Sure feels a hell of a lot more uncertain than America 2019 that we should expect as Rothbard explains that people hold more cash and Contra our friends who believe in stimulus uber-aulis and demand side everything This actually has a perfectly rational economic and social function to have more cash when you're not sure maybe about your paycheck down the road or You know, how you know whether you're going to have a job in six months Right and this is I love this stuff and for people who are just you know Like especially young people like I'm thinking of you know teenagers who are getting into this stuff They start reading more serious economic thing I remember when I went through this and Understood what the framework that Rothbard laid out here like just how it was. Oh, wow It was just so systematic and so different. So Unfortunately, most people think of when they're thinking about money They think of it moving around the economy like in the very phrased velocity of circulation and that famous equation MV equals either PT or PQ depending on how you learned it that V stands for velocity And so the the idea is that all when it comes to money the way we they're viewing it almost like in it Like as an engineer looking at water moving through a pipe And if you think about it that is completely divorced from subjective value theory like that's not how you explain anything else in economics That's like looking at it like an engineer. And so the Austrians They didn't invent this framework, but they adopted it incorporated into what's considered, you know canonical Austrian theory Is that when it comes to money and how do people value it and how do you explain decisions regarding money on the margin? It's the same thing that in equilibrium Every piece of money is held in somebody's cash balance. So don't think of it as money is changing hands Is the essence of money? No, the essence of money is people are holding it Because they get utility from holding it and then you go through a why do they do that? And so Just right now everybody has a certain amount of cash In their wallet or their purse or wherever they keep it and just ask yourself. Why is that? And you know clearly like you say job it has to do with uncertainty in the sense that Well, I might need to buy something and Maybe I don't want to have to use my debit card or maybe I need to buy something where It's I won't want to have to you or maybe they won't take a debit card or whatever And so that's why you have cash on you just about at all times when you leave the house And so that's the essence of it and just realizing that that's why people hold so yes when situations change And it's more on the future is there's bigger threats looming or you're less sure of how things are going to go You might bulk up on that but even in quote normal times Why is it that you have 62 dollars in your wallet rather than one quarter? And it's because you say well, I might be in a situation where I would rather have more cash And especially when interest rates are positive you're realizing there is an opportunity cost there So the cash in your wallet must be doing something and as you say, you know hut spell it out a nice essay saying It gives you utility just holding it makes you feel better than not having it And that's why people are willing to hold literal currency Even though if they invested it in another asset they could earn a yield So let's say I want a ford f 150 And the new 2020s are unbelievable by the way But I I don't want to stroke that ungodly check for $50,000 or whatever they cost So in hut's conception I'm sort of buying that cash or the psychic Satisfaction I get from having the cash instead of the f 150. Is am I saying that correctly? Right. So it's a true statement just to say, you know Why is it that you refrain from purchasing on the margins because oh that additional ford f 150 in your case Maybe it means you're going from you'd be going from zero to one units of it Is not, you know, it has less subjective value to you than you value it less subjectively than the You know, if you have $60,000 in cash and you're checking account then more than the 10,000 and once through the $60,000 In terms of you know, just standard marginal value theory. That's the way you would explain it So those are true statements if you refrain from the exchange It's because the thing you're the cash you're maintaining possession of you value more highly on the margin than the thing you could trade it for Just like if you say if I don't give my bologna sandwich to Sally's For her peanut butter sandwich at school and your little kid's trading lunch sandwiches That's how you would explain so the same principles apply to money It's just with money. It's a little bit weird to think through. Well, how does money give me utility? And it has to do with its purchasing power So this is the stuff Mises solved in his 1912 theory of money and credit Like because at first it does seem a little bit contrived or that you're arguing in a circle To say oh the reason we value money is because money has purchasing power Because why does it have purchasing power because people value it? So it looks like you're arguing a circle but Mises, you know works through the kinks of that and saw that Show that it wasn't circular But yes, that that is the the way you explain things just it's subjective value theory But Bob, have you noticed they almost sort of beat you up? There's this concept, you know, of hoarding That you're not doing your fair share. Let's say you're a restaurant owner and a year ago You had that 60 grand and your restaurant was booming and you would have thought hey, we're doing great I'm going to buy I'm going to buy that forward f-150 because I want it And let's say for whatever reason you didn't and now you're later your restaurant is barely open because of covid You're doing 10% and you still got that $60,000 sitting there and you don't go buy the forward f-150 You're like man, I don't know if my restaurant's even going to make it to the end of the year That that you know the implication what I get as a lay reader of all this stuff is that This guy is somehow being seen as a bad actor. He ought to take that 60,000 and go stimulate the economy But why isn't he in other words? He's not performing any social function by hoarding it Right. Yeah, so you're exactly right Jeff that that's the you know, the very term hoarding That's what it suggests and that and Rothberg goes out of his way to say And and that's partly why I think it's so important and he stresses that the cash balance frame for just explaining in a standard equilibrium You know we talk about what what what are the prices when things settle down and you know, there's no shortages or surpluses Besides saying oh, there's not people trying to sell more apples than people want to buy apples And that's what it means for there to be disequilibrium the apple market when it comes to the money market And I don't mean like money market mutual funds, you know people use the term colloquially I mean literally cash balances in equilibrium Everybody's holding the desired amount of cash in their balance that you know Equals all the the amount of money in existence at that moment So everybody is quote hoarding cash at some point So when we say somebody's a hoarder or that he's hoarding cash What all that really means is That person is holding a larger cash balance than most of us would would do so do if we were in his shoes Right, it's not that there's some qualitative difference and that's that's the important thing to realize it's not that Oh, most of us Spend our money, but this guy over here this antisocial person hoards his that no at any moment you when you're You get your paycheck. You don't blow it one second later. You are holding it still, right? And so that's kind of the the essence of it. It's just when somebody bulks up his cash balances It's because the condition, you know, whatever it was that when he determined this is how much cash I feel comfortable holding two years ago when things seemed quote normal And now conditions have changed and he's bumped up the number It's not that he's doing something qualitatively different It's just he's adjusted like if the if the risk of fire went up in your neighborhood and people instead of having One fire extinguisher in the house now carry two Even though they might not ever use them. They just feel more comfortable Having more on hand in case that situation Similarly, if you're uncertain of the financial future and instead of having $60,000 now you have 100,000 in your checking account Your business checking account It's a similar type of thing. And so the last thing I'll say is I get it the reason that seems like that to the public it seems anti So is they think spending drives the economy? Where's the Austrian's sort of get from the classical school or carry through from the classical this idea that you know I mean production really is Fundamentally more about quote real things like what makes us wealthy is our real resources and people's technological Knowledge and things like that and money just helps facilitate those exchanges And so doubling the amount of money doesn't make us twice as wealthy. It just means, you know prices go up a lot So in a big downturn like unfortunately, we are experiencing currently a big economic downturn. We hear once again This concept of velocity of money you touched on For those who are reading along at page 831 Rothbard goes into a famous work by Irving Fisher the purchasing power of money So bob help us understand first of all in the mainstream conception. What's velocity? What's mv equals pt? What is Irving Fisher talking about? Okay, so mv equals pt Was the original so it's called the equation of exchange and it's it's not a theory. It's a tautology It's an accounting identity like once you understand what those terms mean It the thing necessarily is equal so m stands for the quantity of money like for us purposes Just think of it as number of dollars v is the velocity of circulation And so what v means is on average for whatever the time period is. So let's say we're talking about one year How many times on average does a dollar bill change hands? So that's what v is So m times v then would mean well if you got the total number of dollars times the Number of times the average dollar changes hands then those two multiply together mean Okay, so changes hands within a certain arbitrary time frame like what calendar year? Sure, okay And and so that so m times v then would mean how many times during this calendar year, for example Did dollars change hands? So it's like it's measuring like total spending and then the right hand side is p times t P is the average price level so for all transactions on average What's the price level that you know was was prevailing and t is the number of transactions? So the average price in a given transaction times the total number of transactions is also going to be the total number of dollars changing hands If you think through what that means, so that's why the equation is necessarily equal And so then if you once you realize that then you can say things like oh So if we doubled m And v doesn't change that means m v doubles so that on the right hand side You know that that's got to double and so if the number of transactions stayed the same then p would have to double But on the other hand like if the amount of transactions went up then p doesn't need to go up as much You know so you can say things like that or if doubling m Goes hand in hand with velocity getting cutting half well then prices don't need to change Okay, so once you have that equation you can sit there and say things like that But again mises and then Rothbard following him Rejected that there's lots of things wrong with that framework. Like I said, one of it is there's there's no subjective value in there It's just looking at the economy the way like an engineer or mechanic would um, but also beyond that like those v and P those are like the what does it mean that the average number of times a dollar changes hands? That's The only way you would know what that is is a is a placeholder in that equation Right, in other words, that's kind of this weird Thing that no individual no individual actor in the economy cares about how many times on average does a dollar change hands Right, it's just kind of a thing that you would plug in that equation to make the equation balance So it's a very mechanistic Framework and it also I think one of the reasons mises didn't like it too is that So the equation is necessarily true. It's not a theory. What is a theory is when you say things like Hey, I think in the long run money doesn't affect Output or the number of transactions. They would just affect p. So therefore doubling m doubles p in the long run, right? So that's a theory because you're assuming certain relationships among those things and mises thought that that was Too many economists too readily just assumed a proportional or a change in m would proportionally affect prices When in reality he thought no it the money enters the economy in specific entry points And that causes distortions And that's like the basis of his theory of the business cycle if it were the true that new Quantities of money entering the economy affected all prices simultaneously and proportionally. You wouldn't have the Austrian business cycle So so mvv equals pt is is correct It's a tautology of sorts, but but so the point here from our perspective anyway or Rothbard's perspective I should say is that velocity is kind of a bogus concept Right that the only yeah, yeah, so I mean you you can define it like what does it mean? But nobody would use it and in fact Really when you define what do I mean by you would really just be saying? Oh, well what v is is pt divided by m Right, so it's not like it has this independent Existence is a conceptual thing that you know, you'd be carrying around with you and see oh when I plug in this equation Look at how it relates everything out. It's really, you know, that's all you really mean by it Is in relationship to the other variables in that equation Right and I think hoppa even talks about this in his article about hut's article Which I mentioned earlier the yield for money held that this idea of money circulating I mean right now let's say money is in my either cash balance in my pocket or in my checking account electronic blip somewhere on a computer in a server somewhere actually in a cloud somewhere I guess and so It's sitting there and I go to I stop by walmart and my way home and get some Diet Coke Okay, so it goes from my balance to to walmart's but it does that mean that it's it I mean when I hear velocity it makes me think of one of those experiments with mice where if you put the same amount of Mice in a smaller area they sort of ping around each other more and it sounds like that there's this this implied Notion that more velocity is better and we want everybody pinging around and and we want walmart to immediately take that $5 bill from jeff and go spend it somewhere else and that this is all beneficial, but that's that all sounds like motion not action Yeah, exactly right and that's that's kind of what I was getting you're thinking of it in terms of mice I think of it in terms of the the the metaphor it raises for me is Looking at the economy like a bunch of pipes and there's water going through it And that's how they're viewing the money the money's moving around and hey if the money's not moving around then Something's wrong. We're going to be stuck in a in a slump and you're right So the the hoarder is a villain in that framework Because oh the feds doing what it can it's printing new money and injecting it But these hoarders are just sitting on it. So that's you know negating the beneficiary beneficial effects of this inflation um And right so the cash balance approach in contrast Is not analyzing things in terms of money moving around it's saying Take a snapshot at any given moment in the economy Every dollar bill is in someone's possession Right. So even when you're so people are thinking of it as like you say your example jeff You buying something coke. I think you said it from walmart The kanesian approach is viewing it as you you know, you giving money over to them and that's stimulating sales and whatever but Originally you decide you had the cash balance then things change and you decide you prefer the coke But walmart is deciding it would rather have your cash than the coke on the margin Right. So walmart is taking the cash into its possession. So it's not that at any moment There's money in circulation to be contrasted with money sitting idle and cash balances And that's that's kind of the the distinction between the two approaches that I think it's much more helpful To to understand, you know, why is it that people would be content to hold money in their cash balances? What what function is that serving and once you realize that Then everything falls into place So one of the things rothbard talks about in this book is of course the supply Supply of money and he goes into a lot of demand curves and that sort of thing um But the overarching point that I get from his discussion Which is also one that I think he gets he makes quite simply later on in his career And what his government done to our money that great little essay Is that you know, we don't care per se about the supply of money, right? Prices can adjust you can have a a big supply or a small supply that's And we'll get into this later purchasing power is what matters this the supply per se is not the thing Right exactly in and so there's different way and again a lot of this stuff Like the classical economists had this wisdom and then you know, just their value theory was flawed and that you know Manger had to had to fix it So yeah, there's different ways of phrasing but rothbard says things along the lines of Any amount of money or any quantity of money is optimal in the sense that it can fulfill the functions of a medium of exchange And so the idea is like like in contrast with any other good, whether consumption or production good You know, if we double the number of cars in the economy That would be a good thing We would be richer if we double the amount of coal we had or so forth Of arable farmland But to double the number of dollars we had that doesn't make us wealthier all that would really do in the long run is make Prices go up a lot And so that doesn't make us wealthier. So that's the idea, but yet notice money still serves a function It's not that money is useless. It's just as you say, jeff once prices adjust to the quantity of money Or the supply of money Then it's able to fulfill all the important functions that that money does for us Whereas with other goods that's the more of it you have other things equal the the better it is So I mean if there's more cars Then that that's good for car consumers and bad maybe for detroit automakers But the you know the gains to the Winners are better than the losses to lose where with it with money It's you know, it best it's a wash and if it's unexpected It might lead people to make miscalculations because they don't realize what's happening And so actually it makes us worse off So and also with this stuff too We mean money in its role as a medium exchange. So like gold is the money obviously, but they're more gold. There is The more dental fillings and jewelry and and things like that people can get so that's good But in terms of gold just serving as being in coins and serving as the money The more of it you have that doesn't make us wealthier That would just mean prices quoted in gold ounces would be higher than they otherwise would be Well, here's a possible point of confusion sometimes in a charge that is Leveled at austrians, you know people mistakenly think because austrians view inflation as a monetary phenomenon and price increases as a later symptom That we are somehow adherents Of the quantity theory of money and there's a couple points Places in human action where mises debunks this and so we understand or I just want our audience to understand that A huge increase in the supply of money Doesn't necessarily mean, you know an old iphone 4 can still be deflating in price and value in people's subjective Conception that that price can still be going down because nobody wants an old iphone regardless of how much new money Is coming in so we don't believe in a quantity theory of money Right and there's different things that people mean by that phrase. So like a very weak version just saying The level the the side the height of various prices is related to the quantity of money. Okay, yeah Austrians would endorse that view But right, but if you have a very mechanistic view saying if you increase the quantity of money by 20 That means in the long run all prices go up 20 or at least an index of prices go Right, that's the kind of thing that mises took pains to to say no, we don't believe that he always referred to the driving Force of money or the non neutrality of money and like I said, it's particularly important For people to realize that if they like the austrian school because mises whole theory of the business cycle relies on that Mechanism the fact that when new money enters the economy through the credit market It it distorts interest rates first before you know distorts the other prices And that's what gives rise and mises viewed the unsustainable boom So the the austrian theory of the business cycle is only possible because mises believes in the non neutrality of money meaning A very simplistic version of the quantity theory of money has to be false So when we think about that when we say money is never neutral Rothbard takes pains here to point out. He says well, first of all You know, let's say congress creates some new stimulus You know another round of stimulus late in 2020 because everybody's unemployed and people aren't paying the rent and mortgages It's absolutely horrible and congress will probably do that by the way And trump is trying to do that by executive order to help his own election chances So this is not uh rhetorical Okay, this is happening Let's say there's some huge federal stimulus passed here in the next couple months Well, first of all rothbard points out as a technical or practical matter even in a digital age today Which he couldn't have imagined in the 50s writing this It never ever enters everyone's cash balance sheet at the same time and we we don't know where everyone is We've got dead people getting checks. We've got, you know, little toddlers without an account I mean, it's just an absolute mess with 320 million people So so as even today as a technical or practical matter that can't happen So some people are going to get the money quicker and sooner And and of course that happens in a very different way with like wall street bankers who get lots of new money earlier In more roundabout ways in more monetary policy ways than fiscal policy ways, but But he goes Rothbard goes a step further. I thought this was interesting I hadn't thought of this which even if you could do that Even if you could magically say we're going to double the amount of of us currency And everyone's going to get it instantaneously at the same time, you know, everyone's Everyone that that restaurateur with 60 grand is all of a sudden going to have 120 tomorrow Even if you do that, you know, it would still be non-neutral because some people would spend it sooner rather than later And so they would in I suppose avail themselves of There there might be a rush to go out and avail yourself of the current price level before it goes up Right exactly. Um, so let me just for people to try to understand Rothbard's logic there So I think everybody realizes if the government just printed enough dollars so that everyone had a million dollars It couldn't possibly be the case that we all just be millionaires next thursday Right in the sense of what we think of as a millionaire now and the stuff that that person can afford That couldn't you know, because there's not going to be more houses or more cars or more, uh, You know cruise lines and whatnot the things that you might go spend the money on there's not more of those available So clearly it can't be that everybody can just quit their job and retire That can't be true. So what What would actually happen to make that not come true is that oh gee if everybody got a million dollars tomorrow They would go out and try to spend it and clearly the prices of everything would go way up So that in the new equilibrium Bread would be whatever a hundred dollars a loaf and so on so they're having a million dollars in the bank Actually wouldn't be that much anymore and on average people couldn't be better off And so at best all it would be is a wash on average and then But what the Austrian point about the non-entrailing money is it's not merely that everybody is the same Some people could be better off. It's just there must be losers as well. And so when you think through, okay Well, how does that happen then in practice? It's got to be the case that okay as prices start rising those who quickly run out and spend That new influx of money like if their quantity of cash doubled They might be able to go out and hit the stores and buy things before prices in general have risen And so they do benefit right so if you got your million dollars first and went out and bought a bunch of stuff And then everyone else in the country got a million dollars You actually would be better off. You might be glad at that experiment, but everybody else clearly on average would be worse off So so that's that's the idea and so as he says it's There's two problems with the the doctrine of the neutrality money number one is It's it's actually not true that everybody's could proportionally have their cash balances rise by the same amount Instantaneously, but as you say Jeff, even if that did happen still because people are different Some would spend it You know more quickly than others and they would tend to gain whereas the people Who were slow to the draw? Prices would start rising while they were sitting on their cash balances And so it would lose the way to think about it is their assets locked up in currency If there's 30 price inflation, they would take a bigger hit than the people Who weren't holding much of their wealth in the form of actual currency when the prices were rising So that's another way of thinking about why is there's winners and losers? That's if that helps people for it to click. That's that's one way of thinking about it Well, if we're right if mises is right that money is never neutral. What are the implications of that for? I think mostly well-intentioned people advocating things like mmt Modern monetary theory and a universal basic income for example Have they grappled with this? uh I think yes and no so Yes, in the sense that I think the mmt people would say right. We don't think it's neutral We think it's going to help it's going to make us richer to dump new money in the economy But I think know in the sense that what the austrians mean by that when you explain Well, how is money not neutral? And they explain all the ways it can distort things and how it you know changes relative prices But doesn't actually create more real wealth and so forth You know, it clearly mmt people don't get that because if they did then they would be against the the proposal So I think it's just their view of how the economy works Is so fundamentally different from the austrians the mmt people think That we can have idle resources just languishing for decades on end Because there's not enough demand if only the government would create more money Whereas the austrians realize that we'll know that the reason during a recession There's quote idle resources is because of the preceding boom And if the authorities just that you know stayed out of it and let prices adjust Those resources would get reallocated to where they're supposed to be And then you wouldn't have another boom bus cycle. So the the mmt people keep Sowing the seeds of the of the of the next boom bus cycle if we were to follow their proposals But but again, so it's it's actually the chicago school who are the hyper Like new money is neutral people thinking that oh, yeah, you You you can't even have a like a boom is not even a sensible concept depending on which chicago person you're talking about So I guess the mmt people I'm guessing Would say money's not neutral. We can use it as a force for social good Mm-hmm. Okay Well, if anybody out there is not up to speed on mmt, which is something that actually is gaining traction in a political sense I would I would argue bob wrote a great Review of a of a new ish book by professor stephanie kelton called the deficit myth And you can just go to mises.org and Google that and you'll find bob's excellent review, which not only reviews the book But really lays out what mmt is and and does a good job You know a a good job of respectfully Addressing and considering the arguments that the mmt years make so that that's the kind of thing where I think we can provide value In having these kinds of debates uh So bob, you know, we've talked about cash balances. We've talked about Uh, the money supply. We've talked about the non-neutrality of it So what what I think most of our listeners care about of course is the purchasing power of the money they do have so Talk us through this Rothbard takes pains to point out that the purchasing power of money Is is a different concept and differs from the rate of interest So on the one hand, we're talking about supply and demand for money And on the other hand, we are talking about time preference when it comes to interest rates So so conceptually, how do we separate these two things? okay, sure, so Yeah, the purchasing power of money Or as you can think of it as the price of money And maybe this is a good way of distinguishing, you know, these two things that Rothbard's worried that people often conflate So colloquially people will say oh, yeah interest is the price of money Because they think of it as if I need to get more cash. I got to go to a bank and borrow it and they're going to charge me interest But that's actually I mean more technically that's the price of borrowing money Okay, so the price of buying money like what would that even mean? It's like, oh, what what do you have to exchange in order to become the owner of more money? And when you think of it that way, it means, oh, you're selling goods and services, right? So the store when it's selling diet coke forever five dollars for a certain amount You know, they're buying money at the rate of five dollars per this many number units of coke And so that so what the purchasing power of money is is just the inverse of standard prices So that's the kind of weird thing when it comes to money. That's the everything else's price is measured in money Or quoted in money Whereas the price of money when you say well, what's the price of a ten dollar bill? Well, it would be ten dollars. So that's not what people mean. That's obvious It means what can you go out and exchange a ten dollar bill for in the economy? That's what its purchasing power is And so then, you know interest rates Again, it's it's not that interest isn't what you have to pay to become the owner of money It's rather, you know, what do you have to pay to rent money if that's the way you want to think about it? And that's a different thing and so For example, if they Double the amount of money and prices in general rise a lot again I'm not going to say prices double because that would assume money is completely neutral But if the interest rate originally is 10% and all of a sudden they double the quantity of money It's not that oh once things settle down the interest rate is going to be 20% You know because because it's it's like both sides of the money have become weaker, right? So think of it this when you're borrowing money If money becomes weaker because of inflation Then there's two things going on that the the money you're borrowing is weaker But and so you might think that oh so the interest rate should come down But then that also means the money the the dollars you're paying for the interest are weaker also So there's no reason in other words if the original Interest rates 10% Once things settle down the new equilibrium unless time preferences have changed because of the redistribution of wealth You would expect the interest rate to still be 10% in contrast You know if a car was $20,000 and they double the amount of money In the economy then when things settle down you'd expect that car to be You know it might not be exactly 40,000, but it would be a lot higher. So that's That's the thing and just I encourage the listener to think through that that there's no reason that the interest rate In the long run is going to be higher or lower because there's more money in the in existence And that's because the interest rate is measuring like money exchanging It's like present dollars changing for future dollars So the fact that dollars become weaker doesn't change that ratio Yeah, here's what strikes me is strange bob about a lot of our economist friends on the left, which is that on the one hand they want to Deal totally in empirical data and they're dismissive of praxeology and the idea of studying human action What humans actually do Based on axioms or deductive knowledge But on the other hand, they're a little dismissive of this idea that incentives matter You know the mmters want to say, oh, you know this you you create all this new money And there's not going to be any x y or z as a result. So that strikes me as odd because if you take Your example earlier if everyone gets a million bucks, you know, we're all a millionaire In terms of our nominal bank account People might respond very differently there might be a little old lady out there who's been super frugal her whole life Who wouldn't change a thing wouldn't do a thing with that million dollars It would just sit in her bank balance because it's just who she is She's very very frugal And there might be some sort of loud brash spendthrift kind of guy He's always got flashy cars and watches or something like that who immediately burns through the million And then it's still borrowing money, right? It's you know, so he's still affecting the market of interest rates with his own high time preference for stuff now So it's it's not so easy to just engineer the economy. I think the way a lot of a lot of Krugman types and mmt types think that's so that's my comment Yeah, I think you're You're right about that and I mean I'm using a different example or analogy to it But it is funny that yeah the people who say oh, you know the these right wingers They think that taxes drive behavior, but no, I mean there's look at the tax rates in the 50s and 60s and today But yet They're all agreed that oh if you want to get people to reduce carbon dioxide emissions We got to have a carbon tax like that's just straightforward So in certain contexts, they understand full well that when you tax something you get less of it Or why do we have to have so-called sin taxes? Well because smoking's bad for you. That's why we got to have really high Tax rates on cigarettes and so forth So they get that in certain contexts But then you know when it comes to taxing work effort for some reason they think that incentives don't matter Well, there's this section in this chapter about Where Rothbard deals with really sort of the nuts and bolts of banking You know 100% reserve banking and warehouse banking and he explains to us the concept of fiduciary media And then he goes into Other types of commodities that have money attributes Well, like a certain like we might say us treasury bonds and that sort of thing But what struck me as I was reading through this again bob is first of all, it's a good little tight Explication of a lot of the concepts that people may be a little fuzzy on you know The sort of a little the slightly more mechanistic aspects of banking and full reserve versus Partial fractional reserve and all that sort of thing But what what really sort of frightened me is thinking he's writing this in the 50s imagine today when we talk about shadow banking For example, there's not a lot of literature there out there on shadow banking One of our summer fellows a couple years ago wrote a pretty lengthy and dense article on it But you know the the amount of money substitutes out there unbacked money substitutes in the form of like goldman sacks Bonds and derivatives and all that I mean, we may have no idea how bad it is We may not even have a clue as to How much Sort of money Is masquerading out there and how much debt is is acting on an awful lot like money until We have a really nasty crisis that that was just what I took away from that section is that it might be frightening right so Yeah, just to to respond to that so it's funny because you somebody might think money that's purchasing power in a chapter in that why the heck is roth we're talking about fraction reserve banking and it's because Yeah, the framework for how do you analyze money? It's purchasing power is the supply of and demand for money And then so that in the supply of money If there's fractional reserve banking there is a very legitimate sense in which commercial banks and this is I'm distressing this because I even didn't fully get this when I was younger It's not just that the federal reserve right now post 1971 can create new dollars Even bank of america when it grants a loan Creates dollars at a certain level like measuring in terms like m1 for example if people know those monetary errors So it can't create what's called base money or legal tender money, but It certainly claims on bank of america if you think you have money in your checking account There's a sense in which that's money even though it's not money the same way that a hundred dollar bill is And so with under fractional reserve banking banks themselves by making loans Can expand the quantity of money? And in what's mis is called money in the broader sense And so that's why that stuff's in this chapter And so I think you're you're right jeff and rothward did get into it and say well What about certain like gems or something that he called quasi money? It's interesting so it is interesting to really nail down. What's the definition of this stuff? And you know, it's it's not that any financial asset is like money like there's there's specific criteria for it But I think you're right so the And I got into this I had this guy rowing gray on my podcast jeff when we went for like two and a half hours And he was talking about this stuff And so I think and he was bringing up things like well There's private credit creation like if your local bartender, you know, lets you run a tab That's private credit creation and then it and so I think the fundamental difference though is Or at least it's a it's a quantitative difference Is that Certain things are not widely accepted in the community is that kind of contains their impact. So the reason commercial banks being able to issue loans Is so is the source of the business cycle and mises framework Is that the community accepts claims on bank of america at par with actual currency right when you swipe your debit card It's not that the grocery store says wait a minute If you're going to pay with bank of america claims You know this hundred dollar tab is going to be 110 whereas you give me a hundred dollar bill Then once they were good, you know, it exchanges at par. So whereas if you went in and said, you know what my bartender It gives me a thousand dollar line of credit. And so let me just transfer 200 of that to you They would say what are you talking about, you know, they wouldn't even accept that so So that's the kind of thing. So yes with the shadow banking stuff We would it would be empirical in the sense of you'd have to go and see certain Like short-term loans or whatnot or credit That institutions offer like how how much is How widely is that accepted and so on and it may be that yes, there are these huge pockets of it And it's it's not something you could know just by definition You'd have to go out I think and look and see how widely is this stuff Accepted because it mises, you know, he talks about that that that's That's why he comes up with this term fiduciary media that and he says There's a sense in which hey, you know a claim on a bank that's immediately redeemable and the community doesn't doubt it at all Is a medium of exchange that's widely accepted. So why don't we just call it money and he's as well because it's a claim You know, it's an interesting thing. So that's why he comes up with this framework But yeah to the extent that some of these other things became widely accepted then I guess Yeah, you'd have to roll them also into this notion of fiduciary media and they could in principle cause the boom bus cycle Well, us treasury debt isn't a claim on a bank per se It's more a claim on the united states itself and its treasury, but I mean there are trillions of Nominated in dollars, but there's trillions of us treasury Trillions in us treasury debt held by all kinds of pension funds by all kinds of big investment funds By all kinds of central banks around the world and I would argue that they they hold those almost as quasi money Right as a as something that's not quite as liquid as the dollar, but awfully close. I'm am I thinking about this correctly? So, hey, this is just me. I'm not I'm not wouldn't bet my life on how would Mises Mises or Rothbard talk about it But I think the the thing you got to be careful about is are they immediately redeemable? and so Certainly short term like a you know a treasury bill that's going to you know come do next week or something I think that would be You know much more of a money substitute than you know something that's long-term in other words mere liquidity If it's not denominated So this is what i'm trying to say that if you go to sell a 30-year treasury bond That's you're not guaranteed what you're going to get in the market for it right if interest rates change The current market price of that thing adjusts. So so that I guess that's that's part of the of the issue Um in terms of you know, is it how much of it is a is a substitute for money? But but yes, especially when interest rates are low very short-term treasury debt is It for many investors virtually indistinguishable from just holding reserves with the Fed right that you know like a Treasury bill that's going to mature next week that is going to give you a thousand dollars When interest rates are basically zero percent That's almost the same thing as having a thousand dollars in your fdic backed checking account Because both of them in a sense are going to be a thousand dollars one week from now So so yes when interest rates are low that there is a sense in which a lot of this stuff becomes pretty close to to money So bob we're almost out of time, but I want to talk about what perhaps makes money good or bad I think you know, we all know about money in places like the former's in bobway in argentina in 99 and 2000 I mean sometimes money goes bad. It goes wrong And austrians in you know people who are pro gold standard people who are pro crypto tend to talk about the hardness of money We want a money where the supply can't be quickly increased by politics or by fiat and so We think that you know huge fluctuations in and fast fluctuations, especially In inflationary situations are a bad thing and we don't want that to happen to people We want them to be able to save hard money that will actually retain value over time So there's this whole concept of hardness, but on the flip side Both mises and rothber here say, you know, we have to you know, we don't want to to worry about stabilization of money We don't necessarily think that there should be a role For the state or the central bank in in trying to maintain that purchasing power In other words, the price of money should fluctuate freely vis a vis that 12 pack of diet coke Just as much as as any other two goods or services. So there's a little bit of attention here that i'm getting Yeah, exactly and so mises and it's a real subtle point, but he would stress and say that Prices don't measure The value of goods and services or you know that they can they don't measure the value of money They consist in money And you know first like what is that even what distinction is he's trying to make and it and he would stress that money Is not a measuring rod of value, right? And so there is this idea and I've seen like Um Even nowadays a lot of like people on the right who are very, you know, big fans of gold and so on They might to try to get the reader to understand this to be like, hey I mean, you know if the government's going to establish weights and measures and you know You wouldn't want them changing the definition of a foot now It's 13 inches or like how long an inch is changes on you And so likewise when they debase the currency that's kind of changing the measuring rod of value and that's And and even though you understand where they're coming from and the desire to stabilize things and have this fixed Mises point was no conceptually you're misunderstanding in the terms of subjective value theory There's no such thing as saying you know something that's a stable quantity To measure value because value is this subjective thing you can't measure it the way you can measure physical length Which is you know this extensive quality Uh feature of the objective world whereas, you know, value is is in your mind um, and so so it's a Even though yes Rapid fluctuations in the purchasing power of money spook people and that's why they Recoiled and longed for money of a stable purchasing power Mises would stress that conceptually that that's incoherent like you go ahead and try to find what you mean There is no such thing that because again, uh, you know, you could measure things and say Oh the dollar is always a certain weight of gold But if there's massive gold discoveries Then you know that lowers the exchange ratio like you know makes the dollar or sorry gold on the margin less valuable relative to other goods and services And so there's no way of getting around that and even if you held the quantity fixed Like with bitcoin for example, you know once you get to the 21 million there's not going to be more bitcoins But then as other goods and services continue to have their output increased that's going to make Bitcoin other things equal more valuable on the market. So there again, there's there's no way of Of locking that in and part of what there would be is rough where I try to get across there Is you're thinking about it wrong if you think of money is measuring value That's not the way to think about it like money exchanges for goods and services So all you know when there's a transaction is The person who gave up the money valued the goods and services more than the money and the seller valued the money more than the goods and services There's no equality there. It's not that you know When you buy something for a hundred dollars, it's not like you laid A dollar measuring rod and then said oh, I can lay it end to end a hundred times to measure the value of this thing That's not what's happening there What is showing is you value the thing you bought more than a hundred dollars That's why you agreed to the trade and the seller valued your hundred dollar bill more than the thing he gave up So there's two inequalities of value. It's not that exchange doesn't indicate some measurement of value going on So the buyer and the seller of any good or service have their own subjective values and they arrive at what we might call an exchange ratio But that doesn't express it value per se Right. I mean to I mean you could say if you buy Whatever a computer game for a hundred dollars That indicates the market value of that game is a hundred dollars or if you buy a share of stock for a hundred dollars You could say right now the market value of that stock is a hundred if you want But their market value just means the price, right? You're just you're just kind of you know using language loosely It does not mean the subjective value in the person's head Be or mind I should say because that's again, that's that's a subjective thing that you can't measure in principle It's like saying do you value your best friend 26 percent more than your second best friend? It's not just that oh, how could we know it's that that question really doesn't even make any sense And of course I bring this up because there have been efforts across the west Over the decades and even in the united states to try to come up with some sort of stabilization Of the currency whether by legislation or by acts of the central bank or whatever and and I guess bob in a sense when there there was an edict that even under a gold standard of the united states that Gold would exchange for 35 dollars an ounce at a fixed exchange rate that that You know wouldn't in and of itself guarantee Is stabilizing the purchasing power of the dollar right exactly so You know mises was a big fan of of gold as money and you know so you could quibble like what does that mean? He wants a gold standard or whatnot, but Yeah, so you could Limit the the quantity and the the function of that so clearly having the dollar Severed from gold which will you know completely happened in 1971 That unleashed Money printing and so the the whole rationale for the gold standard from a hard money perspective is It's you got to use real resources to dig up more gold and so that's going to be a check on it So you know next thursday, it's not the quantity of gold is going to quadruple Whereas j powell could quadruple the number of dollars in existence by next thursday if you wanted to And so so that's the the rationale, but what mises You know stressed was even if you did have this fixed exchange rate between like the dollar and and gold That would certainly limit the inflationary potential of the authorities and you know kind of keep their hands tied But it wouldn't be locking in and saying ah now we finally have a fixed measuring rod of value the way to You know it's to say oh no a foot is always 12 inches and if we have like a canonical Measuring rod somewhere in the smith sony and to show people this is what one foot really is And now we're making rulers that you know We try to get real close to this to hand out to people so they can measure stuff That's not what you're doing when you say the dollar Exchanges for gold at 35 dollars an ounce even if you obeyed that pledge Because the gold itself Could you know change in value if all of a sudden there were a bunch of like I say Mines discovered or some aster you know elan musk figures out how to Mine more gold from asteroids or whatever Prices around the world you know things What used to take one ounce of gold to buy might now take two ounces of gold to buy just because the gold becomes more plentiful So that would mean the dollar relative to everything else would lose half of its purchasing power Even though it was still locked in the dollar to gold is this fixed ratio the u.s. Government guarantees it Even if they maintained that promise You can't Have gold always exchanging for the same against other goods and services Because gold is just a commodity and value is subjective So you can't force people mentally To value things on the marge in the same way and if you did that would be a disaster That was the other thing mesas pointed out. He said the logical implications of you wouldn't want to have A fixed money because then it wouldn't you know people would be locked in stasis You want to have people able to change their valuations as conditions change Well ladies and gentlemen, that's all the time we have today. It's really a fascinating chapter I mean there's there's so much we could go into here. I hope you that you are reading along Again, we will link to the book itself in beautiful html format so you can read this book at no cost Via a beautiful layout at mesas.org We'll also link to the store where you can purchase either the book in paperback or hardcover form And also bob murphy study guide with a 10 discount using the code h a pod for human action podcast And I think we'll go ahead and link to this article from hut called the yield for money held because that'll That's very interesting historical footnote and it'll help you understand why Increasing your cash balance when things seem uncertain is actually there's nothing wrong with it So it's important to to uh to understand that Next week, we're going to be getting into the really fun part of this book the later chapters Which unfortunately were published separately at first called power and market and uh all the ways in which government intervention Excuse the economy and messes things up. And so this is really rothbard expanding and categorizing Some of that section in human action called the hampered market economy And and really taking it a lot further and we're going to have a great guest doctor patrick newman As we begin to get into the end of this book. It's been a long journey Also next week. We're going to have a great Books podcast with jeff booth who's maybe a name you haven't heard He's a vc and a tech entrepreneur, but he's written a really interesting book called the price of tomorrow Which which argues that deflation may actually be our savior despite all the depredations of government So be sure to stay tuned to the human action podcast. We want to thank you bob murphy for joining us today and everybody have a great weekend The human action podcast is available on itunes soundcloud stitcher spotify google play and on mesas.org Subscribe to get new episodes every week and find more content like this on mesas.org