 Good afternoon ladies and gentlemen. I'm Lydia Mashburn, Chairman Ron Paul's policy director for his subcommittee on domestic monetary policy. On behalf of Congressman Ron Paul and his office, I welcome you to the first in our three-part afternoon tea lecture series on the basic principles of money. Thank you for coming. Today's question, what is money, is a simple one but a rarely asked question and as such not properly understood. Understanding money as a market phenomenon versus understanding it as a government phenomenon is crucial to understanding our economy in general and understanding the recent crises that we have faced in the past few years. To help us answer this question of what is money, we have joining us today Dr. Joseph Salerno who is a professor of economics at Pace University. He is also the academic vice president for the Mises Institute in Auburn, Alabama and he is the author of the book Money, Sound and Unsound. He will speak for about 35 or 40 minutes followed by a Q&A. Without further ado please join me in welcoming Professor Salerno. Thank you Lydia and thanks for well being here. I mean it's a great turnout and I'm thrilled to be here but as Lydia pointed out what I want to do is to address a deceptively simple question, the question of what is money. We all use it every day as part of our daily lives but if you examine it a little bit more closely, if you think about why you would accept for maybe a house that you're selling or your very valuable labor time pieces of paper with green ink on them that the materials in which of course about four cents, that might puzzle you. Why would, because you have no intention to use these notes or paper tickets directly right? You can't eat them, I mean you can't use them for wallpaper though this could use them maybe and maybe a miser like you know would want to you know line his bed and I can fondle them or something but normal people have no direct use for these pieces of paper okay. So there's a lot of other questions that come up when you're talking about money. For example why are 80% of the $100 bills that have been printed in the US outside the country being used to finance drug trade and or being used as a hedge against inflation by citizens of other countries with irresponsible monetary systems. Things like that which I won't address but the basic question of why would we accept paper tickets worth very little in exchange for very valuable goods deserves an answer. So what I want to do is to give you that answer but that answer has to be given historically okay. So we want to start from the beginning and that is what occurred before there was money? I mean if you go back to primitive times you'll find that there were instances of border you will find many of them. Even the ancient Babylonians had record the first you know records of history to talk about money but there was a time before there was money and that a state of affairs is called border where people would exchange things that they intended to use directly to satisfy their wants for other things that they valued less. So I put a little model up there and what I want to point out is that there's almost an insurmountable problem with Barta or a problem that makes it very very costly in terms of time and resources to use Barta to satisfy your wants and that is what we call double coincidence of wants. That term which seems forbidding at first really just refers to the fact that look I may want what you have okay I may want that pastry that you have okay but you may not want my watch okay you may have enough watches okay. So in this case let's say that A is desperately in need of a pair of shoes and has eggs so he wants what B has but B is allergic to eggs breaks out in highs and so on and doesn't want to hear about eggs even if the photo of them make some nauseous okay. Now that would be the end of it he would then have to begin to search and especially in an area that's not densely populated for someone else that was capable of producing shoes but if he was ingenious and persistent he would hit upon a solution that at first seems more complicated and less likely to achieve his ends but in fact is much more efficient and that is indirect exchange. A may know that everyone in that society uses salt okay this is before refrigeration. So people use it to season their foods but also to preserve their their perishable meats and so on and so forth and so he knows that there's a wide demand among people who make many different goods for salt so what he would do then would be to take his eggs to some person C okay there's a lot of C's out there a lot of people who have salt and find the person who would want the eggs in exchange for salt then he would exchange for the salt but he himself doesn't want the salt okay at that moment in time you have the emergence of indirect exchange the first step towards money we don't know when it happened we don't know what individual discovered it that way of solving the problem barter the double coincidence of wants but what we do know is then a would turn around with that salt and use it in order to exchange for the shoes that he initially wanted others will see that a solves his problem that way and then we'll begin to emulate him okay but the more people that use salt the more widely for medium of exchange the more widely acceptable it is and therefore the better a medium of exchange it is so as time goes on salt becomes in that society a medium of exchange okay it's yes it's still used directly to satisfy certain human wants but its main use becomes the facilitation of further exchanges so as we'll see then everyone is permitted to specialize because they they're confident that no matter what they produce they can always sell it for salt and then use the salt to buy all the other things they need another problem border very quickly is if someone has an indivisible good a good like a dairy cow and that person wants clothes whiskey shoes and other things well if he cuts the cow up the dairy cow loses its value so how do you buy these different things from different people without dividing up that cow well very simply takes a cow and he sell it for salt sells it for you know 15 barrels of salt and then divide the salt up among the other specialists we wants to buy from so these problems are then solved in that way let me just give you and we know in history that many different items useful items were used as media of exchange okay which is the plural of medium of exchange which means simply the intermediary good that people buy not because they want but because they want to give it away again in the future for something more valuable which is why we hold the dollars okay and we'll come back to that cattle used in ancient Greece leather in in Rome maize or corn in Mexico a wampum the strings of beads were used in by the American Indians and you've heard the story out of whether it's apocryphal or not that the Dutch purchased Manhattan Island from the Indians for $26 worth of wampum dried fishing the Canadian maritime colonies salt was used and so was iron implements farming implements in parts of Africa wives were used wives were used in ancient Egypt before the advent of capitalism women were a little more than chattel property okay so if you weren't able to watch it if they were bobbing you while you were watching a football game you could say well you're gonna be someone else's wife tomorrow but and finally they were actually dried tobacco was used in colonies of Virginia all right so all of these things were used but a few goods came to be used throughout the world over time okay because of the qualities that they embodied as media of exchange but before I get to those goods let me just mention that there were some modern examples interesting modern examples of of money arising in emergency situations and some of you have had economics you must have heard the story of the POW camps the German POW camps American prisoners received rations from from the German captors as well as care packages from the Red Cross during World War two an economist happened an American economist happened to be a captive in a POW camp prisoner of war and recorded all of this and what he found was when people got their care packages and their rations you know every week or month there are many things in those packages it was chocolate razor blades socks underwear cigarettes and so on but if you've seen old World War two movies what does everybody do they all smoke okay and so what occurred that's representative what actually happened since everyone use cigarettes eventually people who had too much chocolate and want the razor blades but couldn't find someone with weight razor blades who also wanted his chalk would begin to exchange for cigarettes so eventually on each barracks there were each you know prison building there was posted cigarette prices of the various business services so money emerged okay and there was inflation deflation as the month wore on people smoke the cigarettes so that prices went down because we're fewer in the camp and then when the new packages came in they went up again but I found another interesting example in Iraq there was an article by a former Marine who did a seven month stint in Iraq and he was posted in a number of different farming villages and a lot of wealth had been destroyed real wealth houses cars trucks so on fishing boats and the government the people of the villages rightly so didn't put much trust in the money that was being ish paper money that is being issued by Baghdad and so what they did was they all own sheep whether you're after when you if you were after what you would have a huge herd of sheep but even the poorer families had some sheep and so what began to happen was people began to exchange sheep for other goods and services and write their contracts in sheep and repay debts in sheep but she or big and very valuable in that sort of of an economy so a second good began to emerge alongside the sheep and these villages were located near the Euphrates River the Euphrates River the water in Euphrates River was suitable for watering their crops and and and for the sheep but not for human consumption so water from the cities was generally purchased and came in in big trucks people began to for smaller purchases use water because everyone drank water especially in the summer okay and then finally cigarettes we usually smoked at night with a chai tea by the villagers and so cigarettes were in circulation so we had three parallel monies and the paper money wasn't used at all okay and this was in 2007 that this occurred okay so those are some examples all right so as trade with different regions and countries began to develop as small groups began to trade with other small groups and we began to get a network of interregional and even international trade during the Middle Ages a few goods emerged as the general media of exchange we talk about the general medium of exchange we mean that good which is universally and routinely accepted by everyone without giving it a second thought and right now the Federal Reserve note is such a good we don't think twice about accepting Federal Reserve notes or claims on Federal Reserve notes which is bank deposits in exchange for all the goods we sell and for the labor that we sell to our employers okay so it's a medium of exchange in that sense when people do not even think twice about it but simply accept it and pass it on and you you the question I asked in the beginning can be answered by pointing out that the reason why you accept these pieces of paper is because they have a pre-existing purchasing power you know that people are willing to accept them at certain prices for different things so that you accept them and then you pass them on that happened with gold and silver okay so over centuries an evolutionary process took place in which gold and silver and to some extent copper out competed all of the other media of local media of exchange so that they became the world money now I'm just very quickly talk about the qualities of a good medium of exchange first of all as you saw in the Iraq example they have to be generally acceptable they have to be widely used in that society that's the first quality it's extremely important gold and silver were used in almost all societies and cultures as religious rituals for ornamentation as jewelry to embroider the dresses and suits of the nobility so everyone accepted them but second they were also highly durable that remember when you accept the medium of exchange you don't want to deteriorate overnight that's why cigarettes for example aren't a good medium of exchange because they used up in their natural function because you want to hold them until you find attractive opportunities on which you want to spend spend those the gold coins with silver coins so just keep in mind that almost all the gold that was mined when let's say Jesus of Nazareth walk the earth still in existence today even six even even if you go back to being recorded history almost all the gold and silver ever mine are in existence today except that which has been lost by fire gold can be melted and can be lost in a fire or sunk in ships so gold is extremely durable but if that's so why isn't iron a good medium of exchange iron did serve as a medium of exchange for a while but was outcompeted it's enormously durable very highly durable well there's a third characteristic that's very important and that is that it must be portable easy to carry now you can say well a ton of iron is just as easy to or an ounce of iron is just as easy to carry as an ounce of gold but the key is the good must have a high value to weight ratio okay so if you wanted to buy a lawn mower at Sears or at Walmart or something that cost 300 dot had a price of $300 you would have to bring you know just a very small amount of gold okay let's see so at 60 maybe a fifth of an ounce of gold but you have to bring in a ton of iron okay so iron wasn't very portable you said a very low value to weight ratio so it was outcompeted also must be highly divisible that if you can divide up pieces of gold into very small pieces without them losing any of their value you cannot do that for example with precious gems which were used as a media medium of exchange okay if you if you break up a diamond it loses its value okay into small pieces so that's why precious gems were outcompeted and every everything everyone must be homo every unit must be the same as every other unit identical to the to the other unit so every ounce of gold ever mind is exactly the same in all its physical properties as every other ounce of gold which we call homogeneous that's not true of diamonds in fact diamonds are precisely desired especially for engagements and so on because no diamond is like any other diamond just is no snowflake no two snowflakes are exactly the same okay so when something's exactly the same then it's easy to to to recognize the value of it whereas since each diamond is different the value would have to be appraised at purchase and it would be highly expensive and finally has to be easily recognizable in those old cowboy movies and I'm not talking about cowboys and aliens but the older westerns you so when when a gold coin was passed in the old west you would see a cowboy biting down onto it well the gold leaves teeth marks because it's malleable it's easy to work with whereas fool's gold which looks very much like gold I don't know what chemical element it is but it looks very much like gold is very hard so it was either easy test or some chemical tests that allowed you to quickly and inexpensively find out if you were dealing with the counterfeit or not okay so the bottom line in all this is that money was not invented was not invented wasn't created by the state there wasn't some wise old benevolent king that said my people are suffering from from a lack of coincidence of wants and therefore I must get all my wise men together and solve this problem and then they would get together and say yes we have to use salt or something like that that's nonsense that's not the way it happened nor was there a big town meeting in which which let's say all the Virginia colonists got together in a town meeting and made a contract that will all accept tobacco leaves dried tobacco leaves as money it's not the way it happened either okay it would it happened as a result of a market process which was embodied the actions of millions of people over time all seeking their own benefit all seeking to solve the problems of indivisibility and coincidence of wants and in doing so motivating others to follow their example so that over time money arose from on the market government had nothing to do with it okay it stepped in much later and actually distorted the monetary system later on I'll let me mention one other thing here and that is could money come into existence as a paper fiat currency fiat meaning issued by the state fiat the Latin word for this must be or this is my will okay you will use this paper no it couldn't and the reason why it couldn't is because if you issue a piece of paper let's say you trusted me completely okay you knew me trust me despite the fact that I'm from New Jersey and my name ends in a vowel you still thought I was very trustworthy okay so I came to you and I said look here's ten Salerno's can I have your pen or can I have your watch well even if you trust me you wouldn't accept it because what the hell is it worth there's no past history okay but with gold silver salt iron there's a past history there's border they were exchanging for other things on the border so you had an idea of what they were worth and that's what why money must come into existence as a useful market commodity and cannot be imposed from without by the state now let me just mention some of the the benefits of money first of all and very importantly it serves as a unit of pricing okay it allows you to to compare prices against one another with and also as a unit of economic calculation it allows businesses to calculate their revenues costs profits and losses in a border economy let's say there were only 1,000 goods that means there would be 499,500 prices to keep track of because each good has 999 other prices because each good potentially can be exchanged for any of the other 999 goods in a money economy money is always one half of every transaction so if there were a thousand goods there's a thousand prices there's not 499,000 prices now that's just 1,000 goods the average supermarket in the US today has 27,000 items so there's millions and millions of millions of different border prices for those goods if they were exchanged against one another there'll be no way to have a supermarket okay on the border also on the border there's very little specialization that is people specializing in those things in which they are most productive which is what raises our standard of living and the productivity of labor so greatly and the reason is the following let's say I'm an economics professor and I want let's say a Wall Street Journal well how do I get it under border okay there is no money so I can't sell my services for money I have to go to the guy and give him a 10-minute economics lecture something like that which he probably doesn't want to hear so he wouldn't give me the Wall Street Journal anyway okay or if I want breakfast something similar I have to stand there and you know talk talk to the the waitress or whatever so you see the problem okay and there's a third problem the third problem that money solves is that you can't produce large durable consumer goods or or capital goods because how's the entrepreneur gonna the employer gonna pay the workers let's say you're producing cars I mean are you gonna pay the workers in cars are you gonna break up the cars and try to pay them you know every two weeks or something like that that's impossible or if you're producing something that's not even a consumer's good like oil or steel are you gonna give them you know 10 pounds of steel or a barrel of oil they don't want that so we would have a very primitive economy on the border and money solves that problem okay now now again no one set out to solve all of those problems no one set out to invent money again happened as a result of the interaction of hundreds of millions over time of individual human minds so what is the monetary unit okay well since money comes into existence as a commodity as a useful commodity most commodities circulate by weight or by volume ounces of gold a pounds of silver barrels of salt well money circulates by weight that is the unit of money is a unit of weight of a specific commodity and even when the gold standard in the 19th century came into existence and by then we had names for different national currencies it was still a unit of weight let me just let me just take three different currencies the French Frank the British pound and the American dollar they actually were simply names for units of weight and let me just give you an example of that okay let's just stick with the pound and the dollar for about a hundred years a dollar was legally defined as one about 120th of an ounce of gold that's an approximation okay and the British pound was defined from 1821 to 1931 when written one off the gold standard as one fourth of an ounce of gold they weren't different monies they were the same money now the exchange rate for all the 19th century now we use to exchange rates I was in Austria so I was continuously watching the exchange rates between the euro and the dollar last week to make the most advantageous exchange of my euros for dollars and back to dollars and so on and it was it was changing all the time every day but for 100 years it was stable the exchange rate between dollars and pounds were was approximately four dollars and eighty six cents per pound some people say that under the gold standard many economists say that under the gold standard we had fixed exchange rates but an exchange rate is a price between two different things the pound and the dollar in the 19th century were not two different things there were different weights of the same thing so it's wrong to say that's an exchange rate that's determined not by the laws of economics but by the laws of arithmetic okay in the same way that the exchange rate between a quarter and nickels is five to one because a quarter is defined as one fourth or point to five or 25 cents of a dollar and a nickel is defined as one twentieth or or five cents of a dollar okay so since the quarter refers to five times more of a dollar than the than does a nickel five nickels exchange for dollar well for a quarter well the same is true here okay the pound has approximately had approximately five times the amount of gold that that in it okay that it was defined as and therefore was five times more valuable than the dollar that's not true today all national currencies are different things now because they're issued by different monopolists different monopoly central banks what was the money supply under the this what we call a commodity standard money developed as a commodity as a useful commodity so we called it commodity money today we call money fiat money because it's a piece of paper or it could even be this bottle the government or the US central bank as a legal monopolist that can print money can put in the space here $10 or $20 and it would be legal tender it can use this eraser it can use my shirt it can use anything it's not necessary to use paper but under commodity standard there was one thing that was the commodity that was the money and that was the physical commodity itself okay so the money supply was the total quantity of of the of the commodity that was in monetary form the total amount of gold in the country that was in the form of bars which is called bullion and coins or even gold dust was used in western towns or gold nuggets so all of those things constituted the money supply so let me just talk a few minutes before I end about how how did the money supply behave under commodity money did we have inflation did we have deflation well with in the case of gold the only time the money supplied increased was when new gold lines with this well when gold was mine okay so it increased very slowly over time every once in a while it would jump because new sources of gold was discovered in Australia in the 1870s in California 1849 in South Africa in 1896 and so on or when a new improved technology for extracting gold was developed okay so there was very little inflation in fact there wasn't deflation there was a fall of prices since gold increased very slowly and the money supply increased very slowly the increase in goods and services okay real wealth was was faster and so as a result what happened was as the supplies of goods and services shifted out there was an increase in the supply of these things in relation to money and money's what lies behind the demand for these things prices actually fell so to take an example even though the money supply is being increased very rapidly and has been increased very rapidly since World War 2 we still found that if goods and services in certain sectors of our economy increase more rapidly than then then the money supply price are going to fall and we're all going to benefit from those falling prices so take the example of computers a mainframe computer produced by IBM in the 70s cost about three million dollars and a personal computer today cost five hundred dollars the personal computer is faster and has more memory okay so we've had tremendous drop in prices now did this deflation cause any sort of problems in the computer industry fact no in 1980 there's about a half a million personal computers shipped by 1999 20 years later despite the fact that prices had come down from 20,000 to less than a thousand for personal computers you had 11 million or 22 times the amount of computers shipped so falling prices when they occur naturally on the market as a result of goods and services being increased due to changes in technology improvements in technology and in capital that raises labor productivity brings about a very benign or benevolent benign what we call growth deflation okay so that's actually what happened in the 19th century so just to end up with just a few of the statistics very simple in 1800 a dollar that was one dollar in 1800 it only took about 79 cents to purchase what a dollar in 1800 could buy by 1913 113 years later the value money had gone up about 27% in other words what you could buy 1800 for a dollar only cost you 79 cents to buy in 1913 what you could buy in 1913 is if the Fed came into existence for a dollar doesn't cost you less it costs you much more cost you $22 today so under the commodity standard the value of the gold dollar went up by about 27% because prices fell very gently under the fiat standard that's controlled by a central bank the Federal Reserve system the value of the dollar has shrunk to about a nickel of what it was worth in 1913 when the Fed was established okay so basically what you got for all countries on the gold standard during the 19th century was a very slow decline of prices which meant that all the fruits of improved technology of increased investments in machines and other labor productivity increasing type investments all of those things were spread to the whole population whether your salary was going up or not in money terms because prices were going down as they have with computers your dollar became more powerful so if you've gone if you go back to a commodity standard you'll find that over time the value of money would rise so under the gold standard eventually the governments I didn't get into this so hopefully that would be covered the government's began to get involved that they took over monopolies of the mints and then they debased the coins they made them small lower and lower and wait the Kingswood would call back the coins to recoin them and then they would if it was one full ounce let's say King Nickwit was you know the king of some realm and so the first thing we do is put a name on the coin you know in his face when he took over the mint and he would charge people a lot of money to get their gold mint into coins that's called seniority so that monopoly price for getting your your gold coin gold coin so in any case what would happen then is every once in a while the coins would get worn or new King would come in and want to put his face on it so they call the coinage back so instead of giving you a full ounce of gold back they would only give you a tenth of an ounce of gold and they would put the same name on it one knit so what what they would do is in effect increase the money supply by 20% because they would keep that 20% that they stole from from the people who were turning in their gold coins and mint them into their own coins so they could pay for their more palaces wars mistresses and so on over time after and after the printing press was discovered they found that an easier way of creating money that was less costly was simply to print paper get up set up a central bank and the first central bank that was set up in that fashion was a bank of England 1694 get the bank to loan them money to pay for the wars and so on and then the bank would promise to pay back the notes that the king spent in gold and so people got used to paper money over time we still had a gold standard but to get to your question by the 19th century it wasn't a pure commodity standard anymore so the central banks would keep maybe 20 or 30 or 40% of the notes that they issued in the form of gold and then you had private banks beginning to start and they would hold not gold itself or they hold very little gold but they'd hold the notes of the central bank so eventually all of the gold which backed up the money became centralized in the central bank so it maybe had 10% backing up let's say there was you know 10 million dollars in the economy there was only one million dollars worth of gold in the central bank so that if everyone came and demanded gold or even a significant portion of the population because they didn't trust the paper money the whole system would collapse literally like a house of cards okay so there were problems under even the gold standard because the banks could produce create paper money and lend it out pushing interest rate down and causing inflation to occur and at that point when prices went up people began to buy goods from other countries where the prices were lower but other countries didn't want the paper they wanted gold so at least on the gold standard the central banks would start to lose gold as people turn in their dollars to pay for their imports from China and so on at that point everyone would begin to get fearful that they wouldn't get their gold back so the central banks had to stop inflating so the gold standard was called the golden handcuffs because if the banks got too inflationary gold is thought to flow out people would see that the clients of the banks would deposit their money would see that and they're beginning to get nervous and then that would increase the outflow of gold because people would rush to the banks so to prevent that from happening they always nip the inflation in the bud so after 1933 we went off the gold standard almost all every country did they tried to reconstruct it after World War two in 1946 it was called the Bretton Woods system it was a brainchild of John Maynard Keynes and of Henry Dexter White or Harry Dexter White who turned out to be a Soviet spy he worked for the US Treasury and that system was a phony gold standard normal people like you or I or our grandparents and parents could not redeem their dollars for gold at the state of price of $35 per ounce only the only the the foreign central banks and governments could do that but the US continued to inflate to pay for the to the pay for the Vietnam War and then also for the war on poverty under President Johnson and as a result of that we began to lose a lot of gold to the rest of the world initially people were willing to hold US dollars because we had most of the gold at the end of World War two and since our old people couldn't get hold of that gold they couldn't convert their dollars the rest of the world said you know what there's more than enough gold to to accommodate all the outstanding dollars but we caused the Fed to pay for government deficits created so much money during the 60s that by the end towards the end of the 60s I think there was something like 12 billion dollars worth of gold that we had and foreign foreigners held 80 billion dollars so that's when the French under de Gaulle and the Germans wanted to convert their their dollars en masse into gold and and we we basically blackmailed the Germans and tried to blackmail the French by saying you know we have to remove our nuclear umbrella we have to stop protecting against the Soviet Union if you do this it's going to cost us a lot of money in any case Germans back go up the French dropped out of NATO and at the end of the whole story we still were losing gold like crazy so by 1971 we had about two months two weeks left of gold and so president Nixon then this it's 40 years is past August right yeah stepped to the podium and said he's closing the gold window so we reneged on a solemn pledge to the rest of the world that we made 1946 and the whole thing collapsed from 71 on there was an enormous inflation because now there was no more danger at all of losing any gold yeah the answer the first question is yes and the answer the second question is that's very very difficult but I think you could accomplish the first few steps in that direction a few of the things that you could do is is to allow people to buy and sell gold without any capital gains taxes without any sales taxes excise taxes remove all the taxes on gold and silver so that now people could use them if they wanted as a parallel currency at the same time allow people to hold Euro deposits in American banks and Swiss Frank deposits so then the American government would have to be looking at the fact that their deposits of dollar deposits are losing popularity vis-a-vis these other alternative monies so that's one way that you could begin to go back in that direction and in the meantime stop the inflation yeah I bet you're absolutely right and repealed legal tender was so people could make their contracts in gold silver and they would have to pay them in gold and silver because legal tender allows you pay your any debt you owe in paper money it forces the creditor to accept the paper money yes well remember that there's not enough of anything in the world to satisfy well the human wants for it that's why we have prices for things so if the prices right what we in under the Soviet Union at the end even a simple item like toilet paper was in short supply if you saw the movie Moscow on the Hudson people were lining up the toilet paper because the price would kept so low well the same thing is true with gold at some price of gold there'll be enough to back the dollars and so on and also I think silver would be used in smaller transactions yes so you're saying basically commodity money often goes up in value comes more valuable that's the flation and fiat money becomes less valuable through inflation how come a lot of talking heads blame the Japanese recession because they're confusing depression with deflation if you if you look at it there was little there is a little deflation in the Japanese economy but the money supply was almost always increasing okay so you really can't have a deflation without without a full money supply unless there's a big increase in the demand for money that people are frightened of the future and want to hold it which which happened here in the US in 2008 during the financial crisis so even though the money is going up the demand to hold the money and not spend it was going up by more so so that can cause prices to fall but that only happens during crisis situations and so for the most part Japan didn't what all the American economists were urging them to do they ran big deficits and they increased the money supply but they are a very productive economy so they never really had much of a recession they had what's called a growth recession the rate of growth went down their economy shrunk only for a few quarters okay so I would say that the main problem with Japan is the fact that it's labor markets are extremely rigid it's business organizations are tied into government and aren't flexible and there was actually a very good article about all of this very recently and I can't remember what the last in fact I gave it to my class a few days ago and had to do with the fact that Japanese companies are looking down on this new this new startup firm this new firm I think it's called Uniglo which is selling a lot of clothing throughout the world like a low-tech product and that's what looked down on in Japan and people are dismissing it but the guy who owns it Yan'e or Yan'e is the second wealthiest man in Japan now and he's broken or the whole Japanese model he's hired foreigners and he's po he's poaching he's going to other companies trying to bid away good talent which is isn't done okay so I think it's the rigidity in Japanese economy that that has a lot of government intervention that that really caused that recession okay China had had falling prices for a long time and they were growing like crazy so what but they you know because they were very very entrepreneurial yes okay you're asking a good question the first part of that question is that the Fed has increased what's called the monetary base that is the reserves of the bank and currency and the banks because of the of the bad business climate aren't let aren't lending them out to the extent that they could lend those reserves out okay they're holding what's called excess reserves they're allowed to lend out 90% of all their deposits but they're not doing that okay so you're right if things pick up and that money is lent out and also by the way they're discouraged from lending it out by the fact that the Fed is paying them a quarter of a percent on holding that money at the Fed rather than lending it okay so that could cause an enormous inflation but what the Fed could do to offset that is try to to begin to sell off some of its assets that it has purchased and mortgage back securities and so on and begin to absorb those extra dollars from the banking system because when it sells things to the banking system the banks have to pay with it with their own reserves so so that's a question you know what the Fed will do and I think we'll try to prevent that sort of inflation the other part of your question is people people themselves holding money investors and not investing because they're fearful of the costs of potential costs of Obamacare care what's going to happen the taxes as a result of the trillion-dollar deficits we keep racking up and all of those questions that kind of spending is is good for the economy in other words then people begin to take up risks to invest in in actually producing goods and services and that will actually cause prices to fall all the things equal yes yes if we had taken it away before that we would have never had a great depression so I don't mean to be flipped but the point is that during the 1920s the Fed expanded the money supply it between six and seven percent per year and it didn't show see most American economy all American economists believe that the true indicator of inflation was consumer prices okay whereas the Austrian economists who who observed America who came to America such as a Hayek the Nobel Prize winner and Mises from in Austria they pointed out that the American economy was growing tremendously during the 1920s okay we had electricity now coming into general use refrigeration was being developed cars were being mass produced after World War one so there was tremendous industrial activity prices should have actually fallen a great deal every year but prices didn't change between 21 and 28 prices stayed about the same when they should have come down tremendously what caused them to stay up the inflation the Fed was was inflating the money supply the money was being lent out by the banks pushing interest rates down causing people to speculate the stock market drive up real estate prices so my response to freedom would be that had they not had that power prices would have naturally fallen as they did during the 1880s and 1890s and we wouldn't have had a crash that led to the to the depression and and for the reason why it was extended and this will be talked about in another lecture is because the there was a lot of legislation that prevented prices and wages from falling to meet this the fact that people look people didn't want to spend during the depression they were afraid of the future so yes there was a downward there was a deflationary pressure but the Fed if the Fed tried to stop that they would simply reproduce the problem so that would be my response I mean whether or not I mean it's a very short time period to give you that but there's a lot more to be said yes again that's a good question and I'm not sure how much that confuses depression with deflation okay if the depression occurs it means that the relationship between prices are wrong that is costs are too high in relation to selling prices so businesses don't want to invest so by holding up wages and holding up a price of agricultural commodities and so on during during the great depression the new deal prevented the reestablishment of profitable margins so I let's put it this way anything a monetary policy can do and you're right maybe in a short run if you inject the money to the economy you could push prices up so that businessmen believed that there was profit to be made but a better way that's only a short run solution because then the costs catch up again the better approach a better solution to that is the microeconomic solution take getting rid of all government legislation such as special privileges to labor unions minimum wage laws price supports for foreign products that keep costs up you said that computers were so much cheaper right now so are you saying that they should be even cheaper than that yeah I would love them to go down to a nickel no I'm sure I mean but theoretically if we were still under the gold standard yeah I mean prices yeah sure I mean price of a car it's a very good question price of a car was $350 in um see yeah in 1915 and 1916 right if they would sort of be mass produced um and maybe they should be that much or a little bit less or whatever um yeah I mean prices would be going down sure in other words the the actual absolute price doesn't matter it's always the relationships between prices if your salary doubled tomorrow but prices tripled you would be you'd be worse off not better off right but if your salary fell by 10% and prices fell by 15% you'd be better off so people have to get away this illusion of just looking at what's happening to the height the actual height of these nominal prices it's always the relationships between prices yeah I think you're talking about what you're saying yeah I mean at one point to the falling prices become an issue for the producer I mean we see that with agriculture right you know sometimes like potatoes and those are they produce so much of it that they almost become you can't make a living on producing it anymore okay there's two parts to answer that that question that's a good question um the first part is that in in in industries that are growing like computers their costs are coming down faster than the prices are dropping that's why the computer industry is expanding even though prices are dropping okay so there are industries like that you don't have to worry about as long as costs are falling no matter how far prices fall as long as costs are falling too and and they're producing more because it's now more profitable you're going to have growth the problem comes comes let's say with farmers there are too many farmers in other words we are supporting inefficient um farming because what happens is as there's farming technology develops some of the smaller farms are unable to take advantage of that and would go out of business normally as prices come down okay we don't let that happen with all our our farms subsidies and so on so that's a market adjustment that needs to happen we used to have 200 years ago maybe 97 percent of the labor force worked on farming and we barely and we could barely feed the whole United States you know how many people are what proportion is involved in farming today one and a half percent so we've all those jobs went elsewhere and that's fine because farming labor is so much more productive today because of capital investment technological improvements so on but that doesn't mean that in some cases you're going to have firms going out of business as a result of these low prices okay but if those prices aren't manipulated anyway then that's that's giving a signal that look we have too too much too many farming goods and not enough of other goods so if we didn't have these farming subsidies um there would be no need for a price for because naturally the farm there would be less farmers right in other words the prices would be right the more efficient farms would expand as these other forms are out of business in terms of if the prices for computers could drop to say i don't know maybe two dollars a computer right but right now they're able to make a decent amount of money charging say a thousand dollars a computer why wouldn't they simply charge still a thousand dollars a computer because they could get enough people to buy them competition because the other guy's gonna a bold point pen when it first was introduced in 1946 sold for twenty five dollars now in today's world that's two hundred dollars or something like eight times as much um you know people would leave them out on their coffee tables just as you know that you would leave a bmw when you're just to show you affluent within two years that price came that was went from you know twenty five dollars to two to two eighteen cents or something like that and the cost had come down to like ten cents because of the fierce competition you can prevent that from happening if you pat allow patents and crap and stuff like that but um but otherwise you're just gonna have that's what you had with with um with computers but why wouldn't that competition i mean occurred now as well why wouldn't someone it is occurring but why would the wire press is lower because there is lowest cost so permit them to be look if anyone can enter if anyone can enter and no one is entering it means that there's some sort of equilibrium right that that return rate of return is is is what everyone is satisfied with okay but now somebody find an even cheaper way of making it so that they can increase the return to themselves they'll enter and they'll sell a slightly lower price and and then the others will have to adopt that new technology or go out of business okay thank you i'd like to thank you all for coming today this is the first again in our three part series the next one will be occurring in october the third one will be in november october's lecture will be on what is constitutional money we will be looking at what how the constitution looks at a dollar and what those ramifications are for the economy and then in november we will be discussing what is it about money that causes economic crises how did we get into this financial mess that we're in now so i hope you will join us for that details will be coming shortly and thank you again for coming and please let's give another round of applause for dr.