Does Economic Growth Require an Elastic Money Supply?
Summary
Elastic Currency Debate: The podcast discusses whether an elastic money supply is necessary for economic growth, challenging the common belief that a constantly expanding money supply is required.
Gold Standard Viability: Jonathan Newman argues that a fixed money supply, such as a gold standard, can support economic growth, as prices can adjust to the available money supply without needing constant expansion.
Banking System Critique: The discussion critiques the central banking system, highlighting how it socializes losses and privatizes gains, benefiting large banks by allowing them to expand credit without the risk of failure.
Deflation Misconceptions: The podcast addresses the fear of deflation, arguing that falling prices can be beneficial and that deflation does not necessarily lead to economic depression.
Monetary Policy Impact: The conversation highlights how monetary inflation disproportionately benefits the wealthy, who are more leveraged, while the narrative often suggests it helps the poor.
Historical Context: The origins of the Federal Reserve's mandate for an elastic currency are explored, noting how banking interests historically pushed for a central bank to protect their interests.
Alternative Perspectives: The podcast emphasizes Austrian economic theories, suggesting that any amount of money is sufficient for an economy, as prices can adjust to meet the needs of trade.
Transcript
[Music] Welcome back to Radio Rothbart. I'm Ryan McMaken, executive editor at the Mises Institute, and you should be sure and check us out on mises.org if you haven't lately. And today we're going to talk a bit about a uh elastic currency, which we're told is the sort of money that we need. Does it need to be elastic? Does it need to constantly grow or would it be possible to have a hard currency? That is the sort of money that isn't constantly being inflated away. Maybe gold, maybe Bitcoin, maybe something else, but something that isn't constantly growing. The thing is is we've got lots of economists, politicians, central bankers, other technocrats that are always arguing that if we want real economic growth, we have to have a constantly expanding money supply. So to talk about that, I brought on one of the experts, that's our own Jonathan Newman. Jonathan is the Henry Hlett uh research fellow here at the Mises Institute and he has an article recently called our economy has never needed an elastic currency. There's scarecrow scare quotes around elastic as there should be uh because you know spoiler we're going to tell you that you don't actually need an elastic currency. Uh but let's just go ahead and kind of get into an issue that I think is related and this can take us then I think more into depth on the elastic issue. Uh now Jonathan, a a um a question I often get sometimes even in real life from like real people uh that you meet like at other places that aren't libertarian events or whatever and uh they'll ask well I read somewhere that we can't ever go back to a gold standard because the money supply there wouldn't be enough gold to go around that in order to have a growing economy you have to have a growing money supply. So on this issue of like this this real foundational issue, does it matter how much money you have? Do you need uh to have a a a money supply that it's very large in order to have a good economy? And I and so let let's just kind of look at that on a real fundamental level and then I think get into some of the other specifics that you discuss in your article. >> Sure. Yeah. I mean it's a good question. It seems um like if you just take a first glance at the at the issue, it seems like if our economy is growing, it seems like we need the money supply to grow as well. It's like we've got more goods and services, production is increasing. Uh there's maybe population increases as well. Uh and so people come to this sort of natural conclusion. Well, everything else is increasing, population, technology, production, all these other things are increasing. Then that means we need the money supply to be increasing as well. And this was a a big part of the push to get a central bank is that um people wanted a so-called elastic currency, something that would expand with the quote needs of trade. Uh and the the point that I uh make in the article is that money I in spite of that sort of obvious conclusion that sort of naive conclusion that people come to uh money is an exchange commodity uh which means that prices can adjust. So if prices can adjust, it means that any amount of money will work. That any amount of money is is totally fine for uh an economy to to be healthy uh for it to grow. We can have expanded production of goods and services, increases in population. All of all of those sorts of things can happen with a fixed supply of money. Now uh gold uh was was not fixed because you know we had gold rushes throughout uh human history where we discovered new veins of gold and and that sort of thing. Uh is so it wasn't fixed but even in that case with gold the new production of gold would only happen when it was profitable to do so. So we would only get an increase in the supply of of of money in a gold standard if the if it was um if it wasn't cost prohibitive to do so. And sort of a weird thing about uh gold production in a in a gold standard is that unlike uh other other businesses that you know produce shoes or or whatever uh they in order for them to u earn a profit they have to sell the output. they have to sell the shoes to to consumers and they get that revenue and then if it's profitable then the revenues exceed the cost. So there's this last step of having to sell the thing. But the interesting thing about gold production in a gold standard is you actually produce the thing that is your revenue. So if you can make more gold than it costs you to produce that gold by paying workers, paying for land, paying for factors of production that go into gold mining and minting then it's profitable. Okay. So I know there's sort of a lot of technical details there, but what the implication of that is we only get more gold production when market conditions dictate that it's it's an economizing use of those resources, that it's not wasteful to to make more gold. I mean, this is something that Christopher Hansen and I uh talked about in a paper is is that we we can't call gold production in a gold standard inflation because here it's it's responding to market. people are actually getting the thing that they want. They've they've indicated through the the value of gold and the value of the factors of production in gold production uh that it's this is a good use of our resources. We want we want the those factors of production to be used for making more gold as opposed to something else. Now to get back to your question about u do we have enough gold like suppose you know tomorrow the uh US government says we're going back to a gold standard so some people might wonder do we have enough gold and the answer is yes so if if we were to go back to a gold standard it just means that prices would have to uh change they have to be different than than what they were before we might have they might be like tiny little gold coins you know that that that actually might impose some difficulties in in in using actual physical gold for transactions. Uh but the thing is uh if we have a banking system that uh can put some gold in a vault and then issue notes that represent the weights of gold in the vault, you can you can trade tiny little fractions of an ounce of gold uh with either pieces of paper. And there's also this uh new phenomenon um like there's one company called the gold pack that's uh creating these uh gold foil bills. The it looks like it looks like currency. It looks like you know cash. Uh but it actually has a layer of gold on the back of this. Why it's called a a gold back. Um I I can't remember the exact weights that they put but they have different denominations but it's perfectly feasible. It's it's technologically easy to transact with even tiny amounts of gold. Now, in a worst case scenario where we can't get, you know, small enough sizes of the of the money in the in the case that we're talking about now, gold, uh then often times what you see is people uh switch to two two um goods being used as money. So like we've seen throughout history, it wasn't just gold that was used as money, but gold and silver and sometimes even u less scarce metals like copper for example. And so so what does what does this mean? It means that we can we can make do with any amount of money that we have since since it's an exchange commodity since we trade with it and make prices in it. All all that needs to change is just prices themselves. we don't need to change the supply of money in order to facilitate more growth or to facilitate a growing population or something like that. >> This is a point that Serno has often made, Joe Solerno, our academic VP, um which I don't think gets emphasized enough, which is that in a well functioning economy, in a truly private economy, the natural tendency in prices would be to go down, >> not even to be flat, right? We often talk about how oh even 1% you know the 2% inflation goal that the Fed uses is bad should be 0%. But even really it could be negative right we don't even know that 0% is the proper target for price inflation. And if you just think about how the prices of many electronics and things have gone down usually those things that are not super government regulated the prices go down. It's the stuff that is more government regulated like education, healthcare, and stuff where the prices go up constantly, but it's also just being bid up. The prices are being bid up constantly over time because there's more money being created all the time. And I just remember this question is, you know, it's way older than me, but just even like in undergraduate economic classes, I think I was at Misesu or some Mises event back in the 90s when I was a kid. And uh the one of the other students asked, "Well, I mean what a loaf of bread then if we just had like this stable amount of gold, a loaf of bread would be like, you know, a fraction of a cent to buy given the current price of gold and all that stuff." And right the the professor, whoever it was, he's like, "So you're overcoming scarcity. Like what's the problem? So now you can buy a loaf of bread for like a quarter of a cent." It's not like that is beyond our logistic abilities to handle that problem. But people present that like it's a big problem. And I it's it's it's odd to see why that's a problem. But people become accustomed to just thinking in these terms, right? Well, we obviously we need more money. And I think that takes us to the next question then is right. So we've covered kind of this basic issue of it doesn't matter how much money is in the economy and Mises covers that, right? Like he basically just addresses this issue, right? Any amount of money is the correct amount of money. >> Correct. Yeah. And that's emphasized by both Mises and Rothbar. to say whatever the total amount of money is that's perfectly feasible. It's perfectly acceptable. We we don't need changes in the supply of money uh for for any reason. >> And just on a practical level, right, uh gold is very divisible, right? As you were saying, we could have tiny fractions of it and use them through a variety of innovations. Um but we constantly encounter this every time we hear from the central bank and we hear from just right important people talking about banking and the money supply. We get hit with this whole philosophy about how there has to be monetary inflation in order to maximize economic growth or in order to have a sufficient amount of economic growth. Like what how old is this idea? this this idea that gee the the economy will stagnate if the money supply isn't growing. What's give us a little bit more about what ar what the argument there is. >> Well, yeah. So, I think uh so I mentioned in the article that it was mentioned in the Federal Reserve Act uh that the goal of the Fed was to furnish an elastic currency. That was like on the I think it was the first sentence of of the act. It's like just describing what is this thing that we're creating. It's something that will furnish an elastic currency. And I think uh part of the reason that that was put in there is because people had this recent experience of banking panics. So pe people uh saw that uh banks were were going under and they were losing their deposits. Uh and so they the they came to the wrong solution basically. of of course you know people in the Misesian and Rothbartian tradition would say well no the solution is to have banks keep 100% reserves or at least higher reserves uh so that they so that you don't have these banking panics where banks are are collapsing because depositors are running to the bank trying to withdraw their uh checking accounts. So, so instead of coming to that solution, uh, of course the the banking interests uh, at the time they they of course they really wanted to maintain this very profitable endeavor that they had going on with fractional reserve banking. Uh, but they also they also knew that banking panics were unpopular. Uh, and banks themselves don't like to fail. So the people who own banks, they don't want their banks to fail. And so instead of coming to the sort of the more difficult solution of okay there has to be some limits on how much bank credit is expanding uh we we have to impose higher reserve requirements or or at least clear up the contracts associated with banking. um they came to the opposite sort of uh conclusion, the wrong solution, which is oh we just we need uh we need a central bank that can coordinate bank credit expansion and also they can bail out as a lender of last resort. they can bail out these um failing institutions. And that way and that way we can uh pro protect the banking system from from collapsing um as as sort of this you know periodic cycle throughout the the 20th centur excuse me the uh 19th century where we had banking panic after banking panic and so people were sort of sick of that and the solution that they arrived at was this was this wrong one. In terms of the the history, you know, that's a good question. Um, I'm sure you can like go back into the history of economic thought and you can find uh even even before Adam Smith, before Richard Canton, people talking about how uh talking about changes in the supply of money and and what the consequences would be. But I do know that in the in the progressive era there were these very strong powerful uh banking interests that were they were very much interested in a central bank that would furnish an elastic currency and the goal was to protect the banking system. So another point that I make in my article is that but by by going with that solution instead of going to a full reserve banking system by going with a solution where we have the central bank that's a lender of last resort and that's coordinating bank credit expansion what they're doing in effect is they're just offloading the the risks and the costs of bad banking practices to the public. So now in instead of a a bank failing because it it uh had lent too much, it had expanded fiduciary media too much, instead of a bank failing and then uh better banks take its place, now we just have this uh this case where everybody is having to bail out. So all taxpayers and all money users because a lot of it is financed through inflation are are the ones who are paying the costs of of bailing out these these bad banks. So it's like we're now in this situation where everybody is now bearing the costs of the bad banking practices in the in the banking system. >> And it sounds like the banks knew what they were doing right when when they were calling for this elasticity right in Rothbart's work. He doesn't he's he's not naive enough to think oh these these bankers who wanted this new central bank that would be mostly answerable to the big banks JP Morgan and such that oh it was a mis they didn't realize what they were doing right they didn't know that they were socializing losses privatizing gains basically right like so much of corporate welfare works and but Rothbart has a you include a paragraph of his from a history money bank in the United States and he says the complaints Points of the big banks were summed up in one word, inelasticity. The national banking system they charged did not provide for the proper elasticity of the money supply. That is, the banks were not able to expand money and credit as much as they wished, particularly in times of recession. In short, the national banking system did not provide sufficient room for inflationary expansions of credit by the nation's bank. What's interesting here is that the he keeps mentioning, right, he's not mentioning the central bank here. He keeps mentioning the private bank's ability to expand the money supply. And I is there an issue here where really the issue at hand was this would allow the banks to take more and more risks and without that coming back to destroy the bank because then they would have the lender of last resort, the central bank, right? What what was the private I just want to get a little bit more of an explanation about how did the big banks benefit privately in terms of maybe stock prices in terms of the owners benefiting from this ability to expand the money supply? What kind of what was the mechanism there that brings them great ability or great benefits from expanding money? >> Well, one thing that occurs in a in a free banking setup. So suppose we have fractional reserve banking. So that's that's allowed and it's and it's going on but we have free banking. So there's no central bank. What that means is that uh you have uh bank competition and so if one bank uh happens upon a lot of the liabilities of another bank. So you know people take their loans from one bank and deposit it in another bank either through a series of transactions or just directly. It means that those other banks now have an incentive to go redeem those those banknotes. in this case, bank notes at the issuing bank. And that that means a draw down of reserves for the issuing bank. And if it's severe enough, if they don't have enough reserves to cover all of those, all of the clearing that needs to happen, that bank that issued all of that fiduciary media would then go out of business. So there was so that was actually a a good check on on bad banking practices. That was a good check on you know overissuance of fiduciary media because there was this threat that other banks would would come and and and redeem our our notes and we would have this big loss of reserves. So so that that was that was a constant threat for the banks in in a in a free banking sort of system. But what what the banking system got with a central bank is now there's a coordinator of that whole system. So now everybody can increase fiduciary media in the same proportions which means that if they're all doing it then when it comes time to clear with one another then there's not as severe of a threat uh that one particular bank would go under. Of course there's always the threat that depositors will run on the bank but there's less of a threat that other banks that you're competing with will will be able to put you out of business because everybody is issuing fiduciary media. So, so when it comes to clearing time, uh, if both banks have issued a lot of fiduciary media, they clear with one another and they settle and there's not there's not a big, you know, net loss of reserves for for any one individual bank. So, that that was one of the main things that the banking system by grouping together and Rothbart you uh so you read that one uh paragraph from um from his history of of money and banking in the US. uh but Rothbart points out that e even though these banking interests had uh like different concerns, they had different interests, you know, one was more heavily invested in railroads and so they want a certain set of things from the US government, another one was more invested in steel production and so on. Uh however, they all coincided. They they were all in favor of of a central bank. And so it just shows how the the all of these individual banks they had an incentive to group together to to cartilize and cartilize under a central bank that would be this coordinator and also serve as a lender of last resort. Rothbart says although these financial blocks usually clashed with each other, they were as one on the need for a central bank. Even though the eventual major role in forming and dominating the Federal Reserve system was taken by the Morgans, the Rockefeller and the lobe forces were equally enthusiastic in pushing and collaborating on what they all considered to be an essential monetary reform. So this is I mean this is a classic case of of of businesses who are in competition with one another realizing that there are particular benefits to be had if they group together cartilize and actually become regulated by the by the federal government in this case under a central bank. >> Yeah. That's remarkable that somehow they've managed to flip the switch or the script on that. And we're often told that um that monetary expansion is bad for big corporations and bad for rich people and it's good for poor people because it's based it's based on this myth that poor people are deeply in debt and and take out all the debt and therefore benefit from a depreciating currency because they pay it back in depreciating dollars. The reality of course is that rich people take out way more in debt and benefit many times more proportionally than poor people from a depreciating currency. And then we see that at work right now over the last 20 years. It's the top end of the economic scale that's gotten richer and richer beyond belief. >> Yes. >> While normal people don't see that much of appreciation in their few assets. Uh and so yeah, of course, if you have a little loan and you're like a low-inccome person, you're paying it back in depreciating dollars, but you're also paying all the inflation on the other side. So it doesn't end up in any sort of net uh increase to your standard of living. But when you own as huge amounts of assets and prices on that is constantly inflating through monetary inflation, plus the fact that you're running all your businesses based on debt. >> You always see this from rich guys. they're they're always like running their newspapers, right, were famous for this. They were all like way massively overleveraged uh during the great recession and a lot of them had to sell out and go out of business. Uh but before that happened, all the all the rich guys were telling us what brilliant investors they were because they kept earning all these huge returns on all of their debt. And then that on the one on the few occasions that interest rates actually went up and stuff, it turned out they weren't actually that brilliant after all. But they were benefiting hugely from this ultra low interest rate and high monetary inflation environment. And yet we're just told that no, if if you want solid money, if you want low inflation, you want higher interest rates, you must be against poor people. So it's amazing just how they've managed to seize control of that that whole narrative and this takes us then I think to the flip side of things which is and this is the last question too right and you it's the issue of this deadly fear of deflation >> right that that we're constantly told that you have to have a constantly inflating money supply in order to have economic growth and so the worst thing that could possibly happen is deflation and why is that like if there actually was deflation. Would there be good things to go along with that? What would economic cycles look like if deflation were actually allowed to happen? Because central banks never allow the actual deflation to persist for any significant period of time. What if if the the central bank just like sat back and said, "Oh, prices are going down. We're going to just let it play out for a little while. See what happens." What what would that look like? >> Yeah, you're you're right. A lot of people have this uh deflation phobia and Mark Thornton, my colleague, he's in the office right next to me. He coined this term for deflation phobia. Let's see if I can pronounce it correctly. Apop liththerismosphobia. Apop liththerismosphobia, which is just a great term. It's the the fear of def uh fear of deflation, irrational fear of, you know, falling prices. So, I mean, people have this fear for a variety of reasons. I listed a couple. Uh, one one that's uh is so silly that I I didn't even bring it up in this article is this idea that if prices are falling, consumers will stop spending because they're always expecting prices to be lower next year or something like that. So, they're going to delay they're going to permanently delay their spending. But, I mean, this is just the silliest argument. So this came up recently uh on social media and uh I I posted this this uh now famous image that shows you know different industries and the price increases in those different industries and of course as you as you mentioned there's been tremendous inflation uh price inflation in particular industries like healthcare and obviously asset prices u education all of these sorts of things. So prices are increasing there. But then like you look at other industries like TVs and consumer electronics where prices have consistently fallen by a lot actually. Uh which is sort of surprising to see uh in this environment where we have you know consistent monetary inflation. And so my question I can't remember exactly how I phrase it but my question was uh I think it was uh did people stop buying TVs? Because you know prices of TVs have have fallen dramatically. So like now you can get you can get a massive uh TV like these 75 in TVs, 85 in TVs uh for the price of of a small relatively small TV, you know, 10 years ago or 20 years ago. Uh and of course the technology is completely different. The quality is is much better. They've got all these all these new things that they're doing with TVs. But of course people haven't stopped buying TVs. people people don't stop buying things even when they expect prices to fall. So I I didn't even address that in the article just because it seems silly. We like we have time preference. Like we need to eat like we we need to eat today. It's it's not like uh if I expect grocery prices to be, you know, 50% lowered next year, then I'm going to stop buying groceries today. It's like it's just sort of a silly argument. Okay. So what are the more serious uh arguments? uh one one argument uh from the people who have this apop liththerismosphobia is that depressions coincide with deflation. So there's this, you know, statistical correlation that when there's a depression, there's also a deflation. And and so one thing that I did in my articles, I I listed off a few uh bits of reading that people could do. U and one of them was from Pavo Risa where he showed that it's actually there was this big anomaly in the statistical correlation that all these deflation phobic people focus on and that is the great depression. In the great depression, of course, there was a depression u but we also had deflation. Uh and he shows how that that actually didn't occur broadly that it's not always the case that we have uh price deflation during a depression. And uh moreover uh there's no clear there's no clear like causal link. It's it's difficult to say that deflation causes depression. So these people who think that we should be afraid of of deflation, avoid deflation at all costs because they're associated with depression, they're it seems like they're uh confusing a symptom for a cause and also they're they're putting too much focus on one particular case where there was severe uh decreases in output and a decrease in prices. So so sort of put that one aside. And the the other one that the uh deflation phobic like to trot out is uh the debt deflation which you mentioned earlier. And so I also listed some reading about that. And of course you made a great point that it's it's not necessarily the the poor, the people on the outskirts who who are the ones who are hurt by uh price deflation because as you mentioned oftentimes it's the rich, the people who have lots and lots of assets uh who are very leveraged. They're the ones who have taken on a lot of debt to purchase those assets. And they're the ones who who benefit from unexpected uh uh inflation because not only did their asset prices rise, but also the real costs of their debt payments uh decrease. But of course, um like even if you sort of put that aside, uh there are plenty of ways to structure loan contracts such that uh it's the debt payments are actually tied to some price index statistic. And and there are there are certain you know investment vehicles like that where uh if if there is a big bout of deflation then there would be an alteration in your debt payments. And of course you know lenders are okay with that as well because they would rather get paid than not get paid. And so if if the extent of price deflation was such that somebody would not be able to make their debt payments of course they would be happy to renegotiate come to new terms so that they do get paid as opposed to not get paid. So, I I dealt with with th those are the I I dealt with two of those. But those are the sorts of things that the deflation phobic bring up and I just showed it's there's nothing there's nothing to worry about. We we should we should celebrate decreases in prices. We we we should that's a that's a wonderful thing because that means that we're producing more goods and services. It it means that uh we're we're able to accomplish more of our ends. We're able to have a higher standard of living. Uh the same amount of income can go further. This is something that should be very populist, should be something that like you know everybody uh is uh not just okay with but would want like we want cheaper goods and services. We want things to be uh more affordable. But for some reason, we've all been convinced that deflation is this big scary thing because of the real value of debts or because people would delay consumption spending uh or because like I said, there was this great depression that also had a big bout of price deflation. Those would make good bumper stickers like uh celebrate deflation, deflation now >> because yeah, we got our work cut out for us because right the propaganda the central bank propaganda has been so effective that people I think even if they know almost nothing about monetary economics they associate deflation in their minds with credit crunches with the great depression with all that stuff and I think the the uh mainstream e economics profession has been extremely effective at sending that message. >> Yeah. >> Yeah. >> It's uh for all the reasons you outline though, right? It's just it's something else entirely. And and this is something I guess that Rothbart has had to combat forever and Mark Thornton of course came up with that term that that unpronouncable word. Um so we just hear it all the time. What what about deflation? And then nobody then there'll be no one will be able to borrow anything. no one will be able to buy anything because it's a downward spiral. That's often what I hear about donations. Everything spirals downward. Everybody loses their job >> and then no one can buy anything. >> But man, that's that's just an incorrect narrative and we just got to keep coming back to it over and over again. But >> yeah, a lot of it goes back to you mentioned the downward spiral. A lot of it comes back to the Keynesian thinking that uh we need aggregate spending to to be maintained and and in in the case of a depression that requires you know monetary inflation or expansionary fiscal policy deficit spending to maintain the level of aggregate spending. uh but like if you understand what money is you know of course the Austrian school has a great handle on that like what is money what is the nature of money uh and also a great handle on how the banking system operates then you you come to this conclusion we don't need big increases or decreases in the supply of money to to balance with the so-called needs of trade that's that's exactly what prices do prices adjust since money is an exchange commodity >> all right well that'll be it for this episode of Radio Rothbart. Thank you, Jonathan Newman, Henry Hasslid, research fellow here at the Mises Institute for joining me today. We will be back next time with more, so we'll see you then. [Music]
Does Economic Growth Require an Elastic Money Supply?
Summary
Transcript
[Music] Welcome back to Radio Rothbart. I'm Ryan McMaken, executive editor at the Mises Institute, and you should be sure and check us out on mises.org if you haven't lately. And today we're going to talk a bit about a uh elastic currency, which we're told is the sort of money that we need. Does it need to be elastic? Does it need to constantly grow or would it be possible to have a hard currency? That is the sort of money that isn't constantly being inflated away. Maybe gold, maybe Bitcoin, maybe something else, but something that isn't constantly growing. The thing is is we've got lots of economists, politicians, central bankers, other technocrats that are always arguing that if we want real economic growth, we have to have a constantly expanding money supply. So to talk about that, I brought on one of the experts, that's our own Jonathan Newman. Jonathan is the Henry Hlett uh research fellow here at the Mises Institute and he has an article recently called our economy has never needed an elastic currency. There's scarecrow scare quotes around elastic as there should be uh because you know spoiler we're going to tell you that you don't actually need an elastic currency. Uh but let's just go ahead and kind of get into an issue that I think is related and this can take us then I think more into depth on the elastic issue. Uh now Jonathan, a a um a question I often get sometimes even in real life from like real people uh that you meet like at other places that aren't libertarian events or whatever and uh they'll ask well I read somewhere that we can't ever go back to a gold standard because the money supply there wouldn't be enough gold to go around that in order to have a growing economy you have to have a growing money supply. So on this issue of like this this real foundational issue, does it matter how much money you have? Do you need uh to have a a a money supply that it's very large in order to have a good economy? And I and so let let's just kind of look at that on a real fundamental level and then I think get into some of the other specifics that you discuss in your article. >> Sure. Yeah. I mean it's a good question. It seems um like if you just take a first glance at the at the issue, it seems like if our economy is growing, it seems like we need the money supply to grow as well. It's like we've got more goods and services, production is increasing. Uh there's maybe population increases as well. Uh and so people come to this sort of natural conclusion. Well, everything else is increasing, population, technology, production, all these other things are increasing. Then that means we need the money supply to be increasing as well. And this was a a big part of the push to get a central bank is that um people wanted a so-called elastic currency, something that would expand with the quote needs of trade. Uh and the the point that I uh make in the article is that money I in spite of that sort of obvious conclusion that sort of naive conclusion that people come to uh money is an exchange commodity uh which means that prices can adjust. So if prices can adjust, it means that any amount of money will work. That any amount of money is is totally fine for uh an economy to to be healthy uh for it to grow. We can have expanded production of goods and services, increases in population. All of all of those sorts of things can happen with a fixed supply of money. Now uh gold uh was was not fixed because you know we had gold rushes throughout uh human history where we discovered new veins of gold and and that sort of thing. Uh is so it wasn't fixed but even in that case with gold the new production of gold would only happen when it was profitable to do so. So we would only get an increase in the supply of of of money in a gold standard if the if it was um if it wasn't cost prohibitive to do so. And sort of a weird thing about uh gold production in a in a gold standard is that unlike uh other other businesses that you know produce shoes or or whatever uh they in order for them to u earn a profit they have to sell the output. they have to sell the shoes to to consumers and they get that revenue and then if it's profitable then the revenues exceed the cost. So there's this last step of having to sell the thing. But the interesting thing about gold production in a gold standard is you actually produce the thing that is your revenue. So if you can make more gold than it costs you to produce that gold by paying workers, paying for land, paying for factors of production that go into gold mining and minting then it's profitable. Okay. So I know there's sort of a lot of technical details there, but what the implication of that is we only get more gold production when market conditions dictate that it's it's an economizing use of those resources, that it's not wasteful to to make more gold. I mean, this is something that Christopher Hansen and I uh talked about in a paper is is that we we can't call gold production in a gold standard inflation because here it's it's responding to market. people are actually getting the thing that they want. They've they've indicated through the the value of gold and the value of the factors of production in gold production uh that it's this is a good use of our resources. We want we want the those factors of production to be used for making more gold as opposed to something else. Now to get back to your question about u do we have enough gold like suppose you know tomorrow the uh US government says we're going back to a gold standard so some people might wonder do we have enough gold and the answer is yes so if if we were to go back to a gold standard it just means that prices would have to uh change they have to be different than than what they were before we might have they might be like tiny little gold coins you know that that that actually might impose some difficulties in in in using actual physical gold for transactions. Uh but the thing is uh if we have a banking system that uh can put some gold in a vault and then issue notes that represent the weights of gold in the vault, you can you can trade tiny little fractions of an ounce of gold uh with either pieces of paper. And there's also this uh new phenomenon um like there's one company called the gold pack that's uh creating these uh gold foil bills. The it looks like it looks like currency. It looks like you know cash. Uh but it actually has a layer of gold on the back of this. Why it's called a a gold back. Um I I can't remember the exact weights that they put but they have different denominations but it's perfectly feasible. It's it's technologically easy to transact with even tiny amounts of gold. Now, in a worst case scenario where we can't get, you know, small enough sizes of the of the money in the in the case that we're talking about now, gold, uh then often times what you see is people uh switch to two two um goods being used as money. So like we've seen throughout history, it wasn't just gold that was used as money, but gold and silver and sometimes even u less scarce metals like copper for example. And so so what does what does this mean? It means that we can we can make do with any amount of money that we have since since it's an exchange commodity since we trade with it and make prices in it. All all that needs to change is just prices themselves. we don't need to change the supply of money in order to facilitate more growth or to facilitate a growing population or something like that. >> This is a point that Serno has often made, Joe Solerno, our academic VP, um which I don't think gets emphasized enough, which is that in a well functioning economy, in a truly private economy, the natural tendency in prices would be to go down, >> not even to be flat, right? We often talk about how oh even 1% you know the 2% inflation goal that the Fed uses is bad should be 0%. But even really it could be negative right we don't even know that 0% is the proper target for price inflation. And if you just think about how the prices of many electronics and things have gone down usually those things that are not super government regulated the prices go down. It's the stuff that is more government regulated like education, healthcare, and stuff where the prices go up constantly, but it's also just being bid up. The prices are being bid up constantly over time because there's more money being created all the time. And I just remember this question is, you know, it's way older than me, but just even like in undergraduate economic classes, I think I was at Misesu or some Mises event back in the 90s when I was a kid. And uh the one of the other students asked, "Well, I mean what a loaf of bread then if we just had like this stable amount of gold, a loaf of bread would be like, you know, a fraction of a cent to buy given the current price of gold and all that stuff." And right the the professor, whoever it was, he's like, "So you're overcoming scarcity. Like what's the problem? So now you can buy a loaf of bread for like a quarter of a cent." It's not like that is beyond our logistic abilities to handle that problem. But people present that like it's a big problem. And I it's it's it's odd to see why that's a problem. But people become accustomed to just thinking in these terms, right? Well, we obviously we need more money. And I think that takes us to the next question then is right. So we've covered kind of this basic issue of it doesn't matter how much money is in the economy and Mises covers that, right? Like he basically just addresses this issue, right? Any amount of money is the correct amount of money. >> Correct. Yeah. And that's emphasized by both Mises and Rothbar. to say whatever the total amount of money is that's perfectly feasible. It's perfectly acceptable. We we don't need changes in the supply of money uh for for any reason. >> And just on a practical level, right, uh gold is very divisible, right? As you were saying, we could have tiny fractions of it and use them through a variety of innovations. Um but we constantly encounter this every time we hear from the central bank and we hear from just right important people talking about banking and the money supply. We get hit with this whole philosophy about how there has to be monetary inflation in order to maximize economic growth or in order to have a sufficient amount of economic growth. Like what how old is this idea? this this idea that gee the the economy will stagnate if the money supply isn't growing. What's give us a little bit more about what ar what the argument there is. >> Well, yeah. So, I think uh so I mentioned in the article that it was mentioned in the Federal Reserve Act uh that the goal of the Fed was to furnish an elastic currency. That was like on the I think it was the first sentence of of the act. It's like just describing what is this thing that we're creating. It's something that will furnish an elastic currency. And I think uh part of the reason that that was put in there is because people had this recent experience of banking panics. So pe people uh saw that uh banks were were going under and they were losing their deposits. Uh and so they the they came to the wrong solution basically. of of course you know people in the Misesian and Rothbartian tradition would say well no the solution is to have banks keep 100% reserves or at least higher reserves uh so that they so that you don't have these banking panics where banks are are collapsing because depositors are running to the bank trying to withdraw their uh checking accounts. So, so instead of coming to that solution, uh, of course the the banking interests uh, at the time they they of course they really wanted to maintain this very profitable endeavor that they had going on with fractional reserve banking. Uh, but they also they also knew that banking panics were unpopular. Uh, and banks themselves don't like to fail. So the people who own banks, they don't want their banks to fail. And so instead of coming to the sort of the more difficult solution of okay there has to be some limits on how much bank credit is expanding uh we we have to impose higher reserve requirements or or at least clear up the contracts associated with banking. um they came to the opposite sort of uh conclusion, the wrong solution, which is oh we just we need uh we need a central bank that can coordinate bank credit expansion and also they can bail out as a lender of last resort. they can bail out these um failing institutions. And that way and that way we can uh pro protect the banking system from from collapsing um as as sort of this you know periodic cycle throughout the the 20th centur excuse me the uh 19th century where we had banking panic after banking panic and so people were sort of sick of that and the solution that they arrived at was this was this wrong one. In terms of the the history, you know, that's a good question. Um, I'm sure you can like go back into the history of economic thought and you can find uh even even before Adam Smith, before Richard Canton, people talking about how uh talking about changes in the supply of money and and what the consequences would be. But I do know that in the in the progressive era there were these very strong powerful uh banking interests that were they were very much interested in a central bank that would furnish an elastic currency and the goal was to protect the banking system. So another point that I make in my article is that but by by going with that solution instead of going to a full reserve banking system by going with a solution where we have the central bank that's a lender of last resort and that's coordinating bank credit expansion what they're doing in effect is they're just offloading the the risks and the costs of bad banking practices to the public. So now in instead of a a bank failing because it it uh had lent too much, it had expanded fiduciary media too much, instead of a bank failing and then uh better banks take its place, now we just have this uh this case where everybody is having to bail out. So all taxpayers and all money users because a lot of it is financed through inflation are are the ones who are paying the costs of of bailing out these these bad banks. So it's like we're now in this situation where everybody is now bearing the costs of the bad banking practices in the in the banking system. >> And it sounds like the banks knew what they were doing right when when they were calling for this elasticity right in Rothbart's work. He doesn't he's he's not naive enough to think oh these these bankers who wanted this new central bank that would be mostly answerable to the big banks JP Morgan and such that oh it was a mis they didn't realize what they were doing right they didn't know that they were socializing losses privatizing gains basically right like so much of corporate welfare works and but Rothbart has a you include a paragraph of his from a history money bank in the United States and he says the complaints Points of the big banks were summed up in one word, inelasticity. The national banking system they charged did not provide for the proper elasticity of the money supply. That is, the banks were not able to expand money and credit as much as they wished, particularly in times of recession. In short, the national banking system did not provide sufficient room for inflationary expansions of credit by the nation's bank. What's interesting here is that the he keeps mentioning, right, he's not mentioning the central bank here. He keeps mentioning the private bank's ability to expand the money supply. And I is there an issue here where really the issue at hand was this would allow the banks to take more and more risks and without that coming back to destroy the bank because then they would have the lender of last resort, the central bank, right? What what was the private I just want to get a little bit more of an explanation about how did the big banks benefit privately in terms of maybe stock prices in terms of the owners benefiting from this ability to expand the money supply? What kind of what was the mechanism there that brings them great ability or great benefits from expanding money? >> Well, one thing that occurs in a in a free banking setup. So suppose we have fractional reserve banking. So that's that's allowed and it's and it's going on but we have free banking. So there's no central bank. What that means is that uh you have uh bank competition and so if one bank uh happens upon a lot of the liabilities of another bank. So you know people take their loans from one bank and deposit it in another bank either through a series of transactions or just directly. It means that those other banks now have an incentive to go redeem those those banknotes. in this case, bank notes at the issuing bank. And that that means a draw down of reserves for the issuing bank. And if it's severe enough, if they don't have enough reserves to cover all of those, all of the clearing that needs to happen, that bank that issued all of that fiduciary media would then go out of business. So there was so that was actually a a good check on on bad banking practices. That was a good check on you know overissuance of fiduciary media because there was this threat that other banks would would come and and and redeem our our notes and we would have this big loss of reserves. So so that that was that was a constant threat for the banks in in a in a free banking sort of system. But what what the banking system got with a central bank is now there's a coordinator of that whole system. So now everybody can increase fiduciary media in the same proportions which means that if they're all doing it then when it comes time to clear with one another then there's not as severe of a threat uh that one particular bank would go under. Of course there's always the threat that depositors will run on the bank but there's less of a threat that other banks that you're competing with will will be able to put you out of business because everybody is issuing fiduciary media. So, so when it comes to clearing time, uh, if both banks have issued a lot of fiduciary media, they clear with one another and they settle and there's not there's not a big, you know, net loss of reserves for for any one individual bank. So, that that was one of the main things that the banking system by grouping together and Rothbart you uh so you read that one uh paragraph from um from his history of of money and banking in the US. uh but Rothbart points out that e even though these banking interests had uh like different concerns, they had different interests, you know, one was more heavily invested in railroads and so they want a certain set of things from the US government, another one was more invested in steel production and so on. Uh however, they all coincided. They they were all in favor of of a central bank. And so it just shows how the the all of these individual banks they had an incentive to group together to to cartilize and cartilize under a central bank that would be this coordinator and also serve as a lender of last resort. Rothbart says although these financial blocks usually clashed with each other, they were as one on the need for a central bank. Even though the eventual major role in forming and dominating the Federal Reserve system was taken by the Morgans, the Rockefeller and the lobe forces were equally enthusiastic in pushing and collaborating on what they all considered to be an essential monetary reform. So this is I mean this is a classic case of of of businesses who are in competition with one another realizing that there are particular benefits to be had if they group together cartilize and actually become regulated by the by the federal government in this case under a central bank. >> Yeah. That's remarkable that somehow they've managed to flip the switch or the script on that. And we're often told that um that monetary expansion is bad for big corporations and bad for rich people and it's good for poor people because it's based it's based on this myth that poor people are deeply in debt and and take out all the debt and therefore benefit from a depreciating currency because they pay it back in depreciating dollars. The reality of course is that rich people take out way more in debt and benefit many times more proportionally than poor people from a depreciating currency. And then we see that at work right now over the last 20 years. It's the top end of the economic scale that's gotten richer and richer beyond belief. >> Yes. >> While normal people don't see that much of appreciation in their few assets. Uh and so yeah, of course, if you have a little loan and you're like a low-inccome person, you're paying it back in depreciating dollars, but you're also paying all the inflation on the other side. So it doesn't end up in any sort of net uh increase to your standard of living. But when you own as huge amounts of assets and prices on that is constantly inflating through monetary inflation, plus the fact that you're running all your businesses based on debt. >> You always see this from rich guys. they're they're always like running their newspapers, right, were famous for this. They were all like way massively overleveraged uh during the great recession and a lot of them had to sell out and go out of business. Uh but before that happened, all the all the rich guys were telling us what brilliant investors they were because they kept earning all these huge returns on all of their debt. And then that on the one on the few occasions that interest rates actually went up and stuff, it turned out they weren't actually that brilliant after all. But they were benefiting hugely from this ultra low interest rate and high monetary inflation environment. And yet we're just told that no, if if you want solid money, if you want low inflation, you want higher interest rates, you must be against poor people. So it's amazing just how they've managed to seize control of that that whole narrative and this takes us then I think to the flip side of things which is and this is the last question too right and you it's the issue of this deadly fear of deflation >> right that that we're constantly told that you have to have a constantly inflating money supply in order to have economic growth and so the worst thing that could possibly happen is deflation and why is that like if there actually was deflation. Would there be good things to go along with that? What would economic cycles look like if deflation were actually allowed to happen? Because central banks never allow the actual deflation to persist for any significant period of time. What if if the the central bank just like sat back and said, "Oh, prices are going down. We're going to just let it play out for a little while. See what happens." What what would that look like? >> Yeah, you're you're right. A lot of people have this uh deflation phobia and Mark Thornton, my colleague, he's in the office right next to me. He coined this term for deflation phobia. Let's see if I can pronounce it correctly. Apop liththerismosphobia. Apop liththerismosphobia, which is just a great term. It's the the fear of def uh fear of deflation, irrational fear of, you know, falling prices. So, I mean, people have this fear for a variety of reasons. I listed a couple. Uh, one one that's uh is so silly that I I didn't even bring it up in this article is this idea that if prices are falling, consumers will stop spending because they're always expecting prices to be lower next year or something like that. So, they're going to delay they're going to permanently delay their spending. But, I mean, this is just the silliest argument. So this came up recently uh on social media and uh I I posted this this uh now famous image that shows you know different industries and the price increases in those different industries and of course as you as you mentioned there's been tremendous inflation uh price inflation in particular industries like healthcare and obviously asset prices u education all of these sorts of things. So prices are increasing there. But then like you look at other industries like TVs and consumer electronics where prices have consistently fallen by a lot actually. Uh which is sort of surprising to see uh in this environment where we have you know consistent monetary inflation. And so my question I can't remember exactly how I phrase it but my question was uh I think it was uh did people stop buying TVs? Because you know prices of TVs have have fallen dramatically. So like now you can get you can get a massive uh TV like these 75 in TVs, 85 in TVs uh for the price of of a small relatively small TV, you know, 10 years ago or 20 years ago. Uh and of course the technology is completely different. The quality is is much better. They've got all these all these new things that they're doing with TVs. But of course people haven't stopped buying TVs. people people don't stop buying things even when they expect prices to fall. So I I didn't even address that in the article just because it seems silly. We like we have time preference. Like we need to eat like we we need to eat today. It's it's not like uh if I expect grocery prices to be, you know, 50% lowered next year, then I'm going to stop buying groceries today. It's like it's just sort of a silly argument. Okay. So what are the more serious uh arguments? uh one one argument uh from the people who have this apop liththerismosphobia is that depressions coincide with deflation. So there's this, you know, statistical correlation that when there's a depression, there's also a deflation. And and so one thing that I did in my articles, I I listed off a few uh bits of reading that people could do. U and one of them was from Pavo Risa where he showed that it's actually there was this big anomaly in the statistical correlation that all these deflation phobic people focus on and that is the great depression. In the great depression, of course, there was a depression u but we also had deflation. Uh and he shows how that that actually didn't occur broadly that it's not always the case that we have uh price deflation during a depression. And uh moreover uh there's no clear there's no clear like causal link. It's it's difficult to say that deflation causes depression. So these people who think that we should be afraid of of deflation, avoid deflation at all costs because they're associated with depression, they're it seems like they're uh confusing a symptom for a cause and also they're they're putting too much focus on one particular case where there was severe uh decreases in output and a decrease in prices. So so sort of put that one aside. And the the other one that the uh deflation phobic like to trot out is uh the debt deflation which you mentioned earlier. And so I also listed some reading about that. And of course you made a great point that it's it's not necessarily the the poor, the people on the outskirts who who are the ones who are hurt by uh price deflation because as you mentioned oftentimes it's the rich, the people who have lots and lots of assets uh who are very leveraged. They're the ones who have taken on a lot of debt to purchase those assets. And they're the ones who who benefit from unexpected uh uh inflation because not only did their asset prices rise, but also the real costs of their debt payments uh decrease. But of course, um like even if you sort of put that aside, uh there are plenty of ways to structure loan contracts such that uh it's the debt payments are actually tied to some price index statistic. And and there are there are certain you know investment vehicles like that where uh if if there is a big bout of deflation then there would be an alteration in your debt payments. And of course you know lenders are okay with that as well because they would rather get paid than not get paid. And so if if the extent of price deflation was such that somebody would not be able to make their debt payments of course they would be happy to renegotiate come to new terms so that they do get paid as opposed to not get paid. So, I I dealt with with th those are the I I dealt with two of those. But those are the sorts of things that the deflation phobic bring up and I just showed it's there's nothing there's nothing to worry about. We we should we should celebrate decreases in prices. We we we should that's a that's a wonderful thing because that means that we're producing more goods and services. It it means that uh we're we're able to accomplish more of our ends. We're able to have a higher standard of living. Uh the same amount of income can go further. This is something that should be very populist, should be something that like you know everybody uh is uh not just okay with but would want like we want cheaper goods and services. We want things to be uh more affordable. But for some reason, we've all been convinced that deflation is this big scary thing because of the real value of debts or because people would delay consumption spending uh or because like I said, there was this great depression that also had a big bout of price deflation. Those would make good bumper stickers like uh celebrate deflation, deflation now >> because yeah, we got our work cut out for us because right the propaganda the central bank propaganda has been so effective that people I think even if they know almost nothing about monetary economics they associate deflation in their minds with credit crunches with the great depression with all that stuff and I think the the uh mainstream e economics profession has been extremely effective at sending that message. >> Yeah. >> Yeah. >> It's uh for all the reasons you outline though, right? It's just it's something else entirely. And and this is something I guess that Rothbart has had to combat forever and Mark Thornton of course came up with that term that that unpronouncable word. Um so we just hear it all the time. What what about deflation? And then nobody then there'll be no one will be able to borrow anything. no one will be able to buy anything because it's a downward spiral. That's often what I hear about donations. Everything spirals downward. Everybody loses their job >> and then no one can buy anything. >> But man, that's that's just an incorrect narrative and we just got to keep coming back to it over and over again. But >> yeah, a lot of it goes back to you mentioned the downward spiral. A lot of it comes back to the Keynesian thinking that uh we need aggregate spending to to be maintained and and in in the case of a depression that requires you know monetary inflation or expansionary fiscal policy deficit spending to maintain the level of aggregate spending. uh but like if you understand what money is you know of course the Austrian school has a great handle on that like what is money what is the nature of money uh and also a great handle on how the banking system operates then you you come to this conclusion we don't need big increases or decreases in the supply of money to to balance with the so-called needs of trade that's that's exactly what prices do prices adjust since money is an exchange commodity >> all right well that'll be it for this episode of Radio Rothbart. Thank you, Jonathan Newman, Henry Hasslid, research fellow here at the Mises Institute for joining me today. We will be back next time with more, so we'll see you then. [Music]