[New post] Robert Murphy – Myths About Money and the Dangers of Fiat Currencies
User ID posted: " https://www.youtube.com/watch?v=9P14x14CQTw Robert Murphy - Myths About Money and the Dangers of Fiat Currencies SBTV spoke with Robert Murphy, an economist and Senior Fellow at the Mises Institute, about what money is and is the US dollar really ba"
SBTV spoke with Robert Murphy, an economist and Senior Fellow at the Mises Institute, about what money is and is the US dollar really backed by the might of the US military? How feasible is a bimetallism Gold & Silver Standard?
Discussed in this interview: 00:00 Introduction 02:02 The myths about money 06:46 What is money? 14:31 Gold Standard a check and balance on government 18:52 Bimetallism's link to Gresham's Law 23:51 US dollar is not a claim on the government 28:51 Consequences of the Nixon Shock 32:10 Mises' Gold Standard 42:13 Myth about money printing and prices
Stephen Thanabalan: hello again everyone and welcome to another edition of Silver Bullion Television SBTV I'm your host Stephen T. and today our guest is Dr. Robert murphy he is an economist broadcaster and senior fellow at the Mises Institute he's President of Consulting at by RPM and is the prolific author of many many books including contra-Krugman Chaos theory lessons for the young economist choice cooperation enterprise and human action and his latest work understanding money mechanics which is scheduled to be a game changer that will be seminal for use in schools and textbooks and the schedule for release later this year by the myself Institute and which will be the subject of our interview today he's also the host of the acclaimed Bob Murphy show and podcast if you're wondering where you managed to find time to do all that you're going to have to ask him but this show is essential viewing for many where he talks about everything ranging from his vast knowledge of finance and economics to even what undergirds him and his worldview in terms of his Christian faith he's also graduated from NYU with a PhD in Economics and is widely regarded as one of the brightest young well young-ish I should say economist working today welcome to SBTV for the first time Dr. Murphy how are you doing and as I said can we call you Bob
Robert Murphy: Well thanks Stephen for having me I'm doing great and yes you can certainly call me Bob I prefer it
Stephen Thanabalan: All right absolutely well we'll call you Bob then and well Bob given your depth and teaching and writing as an economies will renowned your books are used as textbooks by professors and in schools and we're thankful to god for that today we're going to focus on helping our audience learn from your ability to make things easy to understand for us demystifying highbrow academic stuff and bringing it to the common man if you like let's start with molly creation Bob because you wrote Adam as always a fantastic piece titled and is the title right here Four Myths About Money that Ought to Die Forever wow and in it I'm just going to quote you here the first myth is that money is a claim on goods and services the way a bond is a legal claim to future cash payments or the way a stock or a share is a claim on the assets of a company you write on the contrary money is a good unto itself and later on in the piece you add if we truly wish to understand money we must distinguish between credit liabilities on the one hand and a universally accepted medium of exchange now Bob where do you see this myth most commonly perpetuated
Robert Murphy: Well I see it in casual conversation you know like on the internet I mean people type it out but where I saw and that's what made me put it into this article that you're quoting from is people would say things like if someone was complaining or warning that oh the US dollar is in trouble a lot of times the defenders would say things like oh well you know the dollar just reflects the strength of the US economy and really the dollar is just you know it's a claim ticket like when you work you get claim tickets or credits giving you know entitling you to some portion of the total that's produced and that's really what it is they're viewing it like you go to a factory you work and then you get like a claim ticket and then you go to the store and you turn it in and say oh see this ticket's showing how I put in the work and so I owed some of these goods and even though I understand why people might think like that I think it fundamentally misconstrues where money gets its purchasing power from and that that's I mean so it's not correct number one but even beyond that it's I think it's not merely a harmless fiction I think it it leads people to misunderstand how money gets its value and so as an Austrian economist I want to make sure that people you know don't go awry at step one right
Stephen Thanabalan: Because given what you've mentioned about the Austrian school there there's Menger's view of the origins of money which says it's actually a good or commodity unto itself would you say in that sense that gold and silver they can be directly exchange these commodities even though they can be really bulky in that sense but I mean is that why fundamentally because gold is a good or a commodity unto itself Bob is that what you're saying is that why gold and silver in that sense is they're regarded as universal money
Robert Murphy: So I think there's two different claims so it's true that I do think commodity money historically gold and silver you know were the markets choice and that people left to their own free choices you know gravitated towards gold and silver as the world's monies and had governments not interfered with that deliberately you know people would have continued to use them you know past the 1930s and past the 1970s so I do agree with that and you're right that is intimately tied to Carl Menger's explanation the Origin of Money but even the point I was making about you know like the US dollar is not a claim on goods and services that's true even in our current fiat environment so right now when people hold a hundred dollar you know they have a hundred dollar bill a Federal Reserve note my point is simply to say that the reason you can go exchange that for a certain quantity of real goods is not because it's in any sense a claim on them it's just that the recipient considers you know his expectations of the future and so on and is willing to make that trade just like if you go if two students at school one has a bologna sandwich one has a peanut butter sandwich if they make a voluntary trade you wouldn't say oh it's because the bologna sandwich was really a claim on the peanut butter sandwich you would just say no they considered what they had and they each walked away with more utility subjectively conceived because they had different preferences and so likewise when you spend a hundred dollars at the store the merchant values the hundred dollar bill more than the goods and you value those goods more than the hundred dollar bill it's not that the money was somehow a claim so that was the simple distinction I was making
Stephen Thanabalan: No, thank you for that thank you for that it's because it's like money emerges out of voluntary acts actions and out of the direct exchange of commodities and that's what you're saying
Robert Murphy: Right yeah so fundamentally yes the same way you would understand or explain people making a barter transaction that's the same framework that the Austrian economist used to explain where does money get its value from the so in other words money is not some totally separate object that you need a different value system or you that you need a different theoretical mechanism to explain its value you use the same tools that you use to explain barter but then once you understand that you can understand you know why money is special so money is very crucial to an economy but the way economists and the you know the public should think about it is not that it's this qualitatively different good
Stephen Thanabalan: Bob just going to another of your articles here gold and silver fast emerged as the money of choice because they satisfied all of the criteria of what makes the medium of exchange durability you listed divisibility, homogeneity, easy to transport but at the same time you were saying it would not be practical for shopkeepers back then to do metallurgical tests on precious metals for each and every transaction obviously that was not possible so goldsmiths started acting as the ones who kept the metals and issued IOUs and then basically the government stepped in at that stage to come up with a uniform coinage system legally backed by the state and government of course like a sort of government-backed token system and then held in the banks that would replace the goldsmiths so the people didn't need to carry the actual gold and silver around and people could simply carry the IOUs or the receipt or eventually the notes to function as a medium of exchange instead and Bob can we say that need to be practical in the past so all the way in the past the need to be practical is still applicable even now today in that sense marrying commodity money to a paper claim is sort of in that sense unavoidable or even inevitable
Robert Murphy: Well I don't know that it's inevitable but yeah just to elaborate on some of the discussion there so what I was saying in the article is that you know what is money by definition it's a medium of exchange that's universally accepted in a certain you know among a certain community that's what money is but then to understand okay what sort of commodities make a good money or a convenient one and yes the attributes you listed so it's easier to look at the other way like why cattle even though in some communities historically may have served as a money function or at least as a valuable asset beyond just the direct use it's you know you got to you got to feed them they make a mess if if you want to spend half of a cow on some on a transaction that's hard to get the change right for biological reasons so that's why cattle did not become the world's money but then also too things like diamonds, one might have supposed well how come diamonds didn't become precious you know commodities that served as money well because they're heterogeneous like to have a pound of you know a one pound diamond is far more valuable than 10 or 110 pound diamonds or kilograms whatever you know unit of weight you want to use whereas with gold and silver you can just melt it down and it's pretty homogeneous you know it doesn't it's the size of the chunk doesn't really matter that much whereas with diamonds or emeralds or rubies it does and so that's why yes those items those precious gemstones are valuable but they wouldn't wouldn't make a good money the way gold and silver and copper do so that was that point but then as you mentioned even so it's inconvenient if if the silver is money in a community and you go into the store to take out an actual you know hunk of silver and then have the shopkeeper have to evaluate it to see is this really silver, how much is it, oh if it's too much you know how do I make change like to only take a portion of so that's the reason for coinage you know to take the gold and silver and stamp them into hard to duplicate objects you know metal disks that have you know shape or around the circumference you know they have the ridges and so forth to make it hard for people to shave off some of it which you know historically happened and tests like that so that that's the reason for coinage so it's not that minting it into a coin transformed it right it really was it was just signifying this is a certain weight of gold or silver that was the function of coinage for full-bodied coins and then as you say even that be you know there were certain instances where that wouldn't be convenient for large purchases or for security reasons and so that's why oh some people wealthy people would deposit their precious metals even in the form of coins with a with a banker for example and then get you know some conservative claim so there's a reason for all this evolution of these things and private coin or coinage I should say historically private mints did a better job of that than the government so that's not something that intrinsically is that you need government to perform private mints historically you know made beautiful coinage and they had the right incentives to avoid counterfeiting and so on so that's all stuff that could happen in the voluntary sector so now finally to circle back to what you were asking me yeah nowadays those things would all evolve too but it's important I think to understand the fundamentals each step of the way like why what is it that makes something a good money commodity and then why would you want to be in coins why would you want to have paper or nowadays electronic claims on it to facilitate large-scale transactions and so on so that's I think the evolution of the of the reasoning and so yes any whatever is going to be the money in the today's global economy people are going to have paper or electronic claims on it but it's still many people believe that underlying base money itself should be a physical commodity item you know there's still a lot to be said for that
Stephen Thanabalan: Right so it's not so much the fact that it's both government backed and tied to the metals as much as it is tied to the metals that's your anchor point isn't it that's what you're saying isn't it because even today some people might even argue and say hey government backed doesn't mean or I haven't count for much anymore
Robert Murphy: Oh yeah certainly I'm most familiar with the US situation but here people put their money in the bank and they think it's safe because oh we have what's called FDIC the Federal Deposit Insurance Corporation and not after the 2008 crisis it was increased to 250,000 in your checking account but if you go and look at the the actual web government website and look at their reserves it's they I don't know the exact number but it's something like they have 1% or something like that you know in other words if the banking system really did take a hit they really only have about one they could only satisfy 1% so it's yes they and there's moral hazard as I'm sure you and your your viewers understand that by the government telling people telling Americans don't worry if you put money in a checking account it's safe we guarantee it then nobody does any research the average person when he opens a checking account with Citibank or Bank of America or Wells Fargo they don't go and look at their loan portfolio to see is this a safe bank they don't care and so then that gives the bank reason to be riskier with their loans
Stephen Thanabalan: Bob you had written that the gold standard worked pretty much like a track and balance on the government where the government on one hand backs the gold standard by making the standard offer to redeem their own paper currency this is in the past of course with the gold standard and then redeemed their own papers currency with a specified weight of gold and this actually you were saying that this actually discourages them from printing all this money because people would even back then people would you know they would it would affect the flow of gold in and out of the country through arbitrage as people would just trade the gold through arbitrage can you explain how this mechanism really works
Robert Murphy: Sure, and I want to stress that originally historically it's not merely that like the central bank like the Bank of England, the Bank of France, you know the German central bank, the Federal Reserve it's not that they had their own sovereign currency that was a paper notes and they and they had like a peg right so nowadays we could imagine if various central banks wanted to sort of link their currency back to gold or a basket of commodities of which gold was a prominent component that would just be sort of like a peg or a pledge or a target and that would be better than doing nothing but you know you could but what I want to stress for your viewers historically that's not what it meant for example you know I know the most about the united states context originally like in 1792 there was a coinage act and it defined the dollar as a certain amount of grains of gold or silver right so it wasn't that they said oh the dollar will redeem at these ratios it was saying that's what a dollar is the Federal government up through 1861 did not issue paper notes that were dollars instead it just said if you want legal currency if you want dollars bring a certain weight of gold or silver to a US mint and we will stamp it into coins that label with the appropriate number of dollars and that's like a 20 gold piece has a certain weight of gold in it and the general public can bring that amount of gold and we'll stamp it into a coin that says 20 US dollars and that's the official money so the number of dollars in a sense was endogenously determined based on the definitions right so it was more like saying one foot is defined as 12 inches or one meter is defined as 100 centimeters that was what it meant to say the dollar is this amount of gold or this amount of silver historically so in terms of the what's called the classical gold standard which prevailed before World War I you're right that because the dollar was defined as a certain weight of gold and because the British pound for example was defined as a certain weight of gold it implied an exchange rate between the us dollar and the British pound it was about $4.86 per British pound and so if the US government printed too many dollars well then that would push up the dollar price of the pound in the foreign exchange markets and that would set up an arbitrage opportunity where people would turn in their paper dollars for gold ship the gold across the Atlantic Ocean over to London turn that in for pounds and then use the pounds to buy dollars in the forex market and they would end up with more dollars than they started out with and so that just shows the mechanism if the US government printed too many dollars ultimately gold would flow out of its coffers over to for example the Bank of England's vaults and so that was the ultimate check so that was true for all the countries that participated in the international classical gold standard again which dominated right before up to the eve of world war one and so all the governments of the world had this check if they printed too aggressively they would lose their gold to the other companies that were more or countries that were more conservative and so that limited inflation that's why historically prices did not just keep going up and up and up in the in the heyday of the classical gold standard there might be periods where there was an inflationary boom but then when there was a bust prices would come back down so that you know the price of a well-made suit in the United States from 1800 to 1900 was roughly the same measured in dollars because you know the dollar was tied to gold
Stephen Thanabalan: Quick question about Gresham's law here because you've talked about bimetallism Bob which was a dual standard for both silver and gold and which ended in 1874 as you write and you were saying that the torque that is that excuse me unless the implied value ratio of the two metals is close to the actual market exchange rate one of the metals will necessarily be overvalued so it started back then in the US for all of you at 15 to 1 which was the ratio set by the market but then inevitably over time one metal would be overvalued Bob you've written that when people talk about bimetallism they often talk about Gresham's law summarized in the aphorism bad money drives out good, were people holding on to the undervalued money and getting rid of the overvalued money is that how Gresham's laws linked to bimetallism back then are we writing an understanding there
Robert Murphy: Yes, so great questions and yeah everything you said is right so I'll just elaborate on that for your viewers so yeah in the US context it was the coin jacks of 1792 that established like I said it defined what is just for people's history so the US you know there was the revolution in 1776 when the 13 colonies broke away from great Britain and then they had a period of the Articles of Confederation and then the US Constitution and so 1792 was very early in the modern version of the US Federal government that was established under the union what we call the Constitution so at that point again they defined the US dollar and the reason they used the dollar was because this different currencies had been circulating in the colonies and the Spanish dollar was one of the most popular so a lot of Americans just thought of prices in terms of dollars so that's why, that's what you know those people chose is the US unit of currency so it was defined as a certain weight of gold or silver and the ratio of the two was exactly 15 to one in 1792 and the reason they did that in terms of the statute was because as you say the global world market at that point it was you know gold was about 15 times the value of silver in terms of kilograms the market value and so they were they wanted to be a bi-metallic standard because they wanted to facilitate coinage of both metals because for large purchases oh you have a 20 gold coin that's you know that's very convenient for a large purchase but then for smaller purchases gold was too expensive like the coin would have to have so little gold in it it would be cumbersome so instead you'd have silver coins for for transactions of smaller market value and they wanted to have both so that's why they said oh 15 to one because that's the right ratio but then the world price moved to about 15 and a half to one and so at that ratio given that the US authorities had pegged it at 15 to one now silver is overvalued and gold is undervalued and so it becomes a silver standard then that's where Gresham's law comes in so you get to answer your question yes people when you go to make a purchase you're going to spend the metal the coins that the law is sort of overvaluing and you're going to hoard the ones that are undervalued so in in our modern times just to give people an understanding if I have a US quarter that was minted in 1950 there's actual silver in there so it's worth in its silver content is worth much more than 25 cents so it would be foolish of me to spend that quarter today in a transaction where I'm just getting 25 cents for it I would instead spend the quarters that don't have any silver in it so that's to show the coins that are being spent in circulation are the ones that have the lower you know metallic content and so historically that's what would happen that government it wasn't just the United States governments that had bi-metallic standards depending on the market ratio either the silver or the gold coins would sort of be overvalued and that's the one people would spend because you're getting more on the face value of the coin than the actual metal content would fetch you if you melted them down and sold it as bullion and so that's it would alternate based on how the exchange or the you know yeah the exchange rate between gold and silver moved in terms of commerce so that so yeah Gresham's law is summarizing bad money drives out good what that's getting at is the idea that the money that's being overvalued that's actually not as good as the law says it is that's what everyone wants to get rid of when they spend and people hold or hoard the money that's better than what the official law recognizes and so that's why they what they mean by saying bad money drives out good you only see in commerce the money that's actually not as valuable in terms of its content
Stephen Thanabalan: Brilliant, thank you so much Dr. maybe now returning now to your article about the four myths of money you also added that one of the four myths is that quote under a gold standard the money is backed up by something real whereas under our present system dollar bills are backed up by faith in the government so on the surface reading of this statement it would seem rather okay but for you it's not that you disagree with this statement in theory and call it a myth am I right but you're saying it's the imposition of the wording that you are disagreeing with in terms of the myth
Robert Murphy: So there's a certain sense in which those words could be could mean a statement that I agree with but the way I see people in practice talk about that it's I i have concerns with and so that's I think that's what was driving that you know my discussion that you're quoting from so again specifically it sort of ties back to the earlier myth that I talked about where people think that the US dollar nowadays somehow reflects the strength or integrity of the Federal government and they'll look at things like oh here's the assets on the Federal Reserve's balance sheet and let's see if those are quality and that's what they're using and they're treating it almost as if Federal Reserve notes are bonds that the Federal government has issued or that the US treasury or the Federal Reserve has issued and I think that's fundamentally mistaken that the US dollar does not again it's not a claim on the US government they're not promising you anything and to understand why does it have purchasing power you say oh the reason I sell my car for 5,000 US dollars right now is because I forecast I have expectations that those 5,000 will have purchasing power next month and so really I'm doing a calculation the goods I can get next month with the five thousand dollars do I value those more than my car right now and that's why I would do that trade, it's not because oh these five thousand dollars are somehow a claim on the US government and I trust the integrity of the us government so the one sense in which that statement is correct is if what the person means is I trust that the Federal Reserve won't be too reckless so I trust that they're not going to print 10 trillion dollars next Thursday and so that's why I'm willing to accept dollars today is because I trust you know their sanity so in that sense okay but the way people often talk about oh the US dollar is no longer backed up by gold instead it's backed up by your faith in the US government again I'm concerned that some people might misunderstand what that means and think that the dollar is somehow a claim when no it's not really a claim on anything anymore
Stephen Thanabalan: Because some people even say you know oh it's fine if the dollar crashes the dollar is still backed by all the assets held like the military or the raw materials and natural resources in the ground so what do you say and what was your take on that
Robert Murphy: Right, so that's a great example and that's what I what I mean when I say I think that's a bad way to look at it because you could imagine you know if there were some small you know if Hong Kong or you know some small area of people declared their independence and their sovereignty and they issued a currency that was defined in terms of gold or silver for example then that could be very valuable that could appreciate year after year against the dollar against the euro, yuan, so forth and it wouldn't be because oh the GDP of that area is bigger than the US or the China you know what I mean it's that's the wrong way to look at it it's really not you know based on the economic fundamentals in the sense that I think a lot of people mean and so it's again it's not like looking at a bond that a corporation issues and trying to figure out are they good for this because if the US dollar is not a promise for the US government to do anything then it doesn't matter what its finances are like and so on right again all this though is just to indirectly say the reason you might be worried if they keep running huge deficits is that you're worried the Fed's gonna print more dollars or electronically or physically to cover the deficit and so that's why you might be worried about the future of the dollar based on the current profligacy but again it's not because they have to redeem it the dollar is just what it is and you're right like things like the US military where that's again that's not really an indication of why you should value the currency that that organization issues and in fact you know there's I'm sure you're familiar with there are people that wonder if US foreign policy sometimes is influenced by like Middle Eastern governments that are trying to get off the petrodollar so whether that's true or not but my point is if anything that would just show that they have to resort to violence to sort of try to prop up the dollar and that's hardly an indication of if it's strength and vibrancy
Stephen Thanabalan: Now I just want to shift off of that now to all the way up to the post-world war ii and the Bretton Woods era the Bretton Woods system because you know our time is rather short and it's a Bretton Wood system a global financial system resting on a refined gold exchange standard in which the US dollar was the reserve currency and Bob you wrote that by 1968 the Americans had capitulated and left the unofficial price of the dollar the market price of the dollar that is deviate from the official Bretton Woods value relying instead on diplomatic pressure to dissuade other governments from exploiting the discrepancy and inverted commerce running on the Feds in increasingly inadequate gold reserves and by 1971 president Nixon would remove this gold standard entirely and the world would operate on a purely fiat monetary system the Nixon shocks as they they're known a couple of days ago professor Jonathan Levy at the university of Chicago was speaking to the BBC and he was saying that in all of world economic history 1971 marks the fundamental turning point and we're still working out the consequences of that till today do you have any kind of a response to all of that
Robert Murphy: Okay so I didn't see professor Levy's remarks so I don't know whether I would agree with ways but from what you just said yeah I would agree with what that statement I don't know if it's in the same spirit of what he meant but it's interesting there's lots of statistics when people worry about wealth inequality or income inequality it's interesting if you look at the charts and they they'll show things I'm making up these numbers but this is the spirit of the kind of thing I mean they'll say oh look at from this period to this period wage earners only gained 10% whereas the upper one percent they gained 200% and things like that and so it looks like wages aren't keeping up with productivity and things like that and if you look at the charts of these things very often where this turnaround happened was not in the 1980s with Ronald Reagan it was in the mid-1970s it was like around 1973 without the recession you know that happened there and so my point has always been to say right that's exactly what you would expect because in the early 70s the Nixon administration formally severed the dollar's last remaining tied to gold and that gave the Federal Reserve permission or the ability to print dollars recklessly you know to fund the Vietnam and the war on poverty and so forth and that's what you would expect to see you know in terms of running the printing press which groups would benefit well the speculators the people who are tied to Wall Street who you know have very liquid funds and can and they earn their money through speculative investing those are the ones who would do well in an inflationary environment the people who work at a coal mine or who go to a factory to make cars and they have a fixed you know wage that's set in a contract that maybe they get to negotiate every year they're clearly going to be hurt by a sudden surge of unexpected inflation and so I'm saying these statistics aren't showing the dangers of capitalism they're showing the dangers of fiat money
Stephen Thanabalan: You had an interesting article from 2011 and I quote I'm just going to quote you here unfortunately even though the proponents of sound money can all agree that FDR's actions in 1933 and that's as you just talked about the Nixon shocks and Nixon's actions in 71 were despicable they can't all agree on the best way to reverse those catastrophes so for example suppose the government does indeed link the us dollar back to gold what price should it use the current market price deep Bretton Woods era price of 35 dollars per ounce the pre Roosevelt price of 20.67 an ounce end quote Bob do you still hold to this view all these years later
Robert Murphy: So yeah my thinking on the gold standard has evolved over time so when I was younger I was so fascinated by it and so enamored and you know it was just such a great mechanism and I thought it was being so unfairly denigrated by modern economists and the general public you know the general public is taught at least in the united states I can't speak to Singapore or Australia but the modern public in America is taught that oh yes we used to have the gold standard but it caused the great depression and so thank goodness we got off of it right that sort of as if it were a voluntary choice that Americans made to leave gold when no it wasn't Roosevelt threatened people with a 10-year prison sentence and a huge fine if they didn't turn in their gold so that wasn't that Americans decided to go off goal they were forced to at gunpoint in the early 30s right so that's what how partly how they weaned America off of gold but so yes but so and so because I thought that was such a better system than the fiat system it's true I had spent some time and I even wrote some proposals for here's how the US like the Federal Reserve could announce oh instead of targeting CPI or you know core CPI inflation at a certain two percent instead of announcing its targets like that or instead of announcing targets for the Federal funds rate what if instead the Federal Reserve just said we're targeting the price of gold at $1900 per ounce period and that's it for the rest of time and you know we promise we will intervene in markets and buy and sell gold on our balance sheet and I was toying with the idea but the eventually I've stopped doing that so I'll still argue and explain that the gold standard didn't cause the Great Depression the gold standard was a great check on inflation and so forth but I'm no longer in personally putting a lot of effort into trying to get US authorities to go back to it because they would just abandon it whenever a crisis came back and so I realized it would discredit commodity money if they were to do that and so instead what I advocate in terms of government policy is just give people freedom like change the tax code so that if you're working with gold and silver coins is the money you're not going to get hit with capital gains taxes you know as the as they appreciate while you're holding them things like that or just other regulatory constraints that make it difficult for people to transact using precious metals rather than fiat money
Stephen Thanabalan: Right because that was what JP Cortez also from the Mises Institute now he's with the SMDL he was saying similar things now our SBTV team were actually discussing your writing Bob and Vincent was saying hey would the government have a problem coming to a consensus on what gun price to use since the Bretton Woods era price clearly didn't already price the risks perceived by the market in and in that sense can it be argued that the fixed prices of the Bretton Woods and the pre-Roosevelt era they will not work in tandem with the money printing and some would add hey you remember the London gold pool failed because the market won and the fixed price lost
Robert Murphy: I'm not sure if this is answering your questions so Ludwig von Mises had the best proposal I have seen for how could given that governments abandon the old either the classical ratio or the Bretton Woods era ratios that you like you say it used to be 20 and 67 and that should give your viewers some idea of how much dollar inflation there has been that before you know in the early 1930s an ounce of gold was only 20 and 67 cents that just shows how many dollars have been created since then and then the 35 announced you know was the for several decades up until 71', it's so Mises had a proposal I think he wrote it in the 50s I believe to say what they should do is just look at what the market price is and just say okay going forward if anyone wants more US dollars they have to bring that many ounces of gold you know to the proper authorities and then be issued what will be legal tender so in other words the US authorities will not print more green pieces of paper that say 20 or 100 on it unless people bring to the government the right amount of gold and then they put it in the vault and that's in a sense backing up the new money so it would it wouldn't instantly switch to fully 100 gold backed money but over time it would you know it would asymptotically approach that because from that point forward any new dollars created would be backed up 100 by gold in the in the US vaults so that was his proposal again he was leaving it to the market to decide he was saying when you announce this new policy just look at like a month period and what's the average price of gold in terms of dollars you know once people know this is coming so they can adjust and maybe the price of gold changes based on this new information but go ahead and make the announcement saying you know starting next year this is what we're doing see what happens to the dollar price of gold and then just lock that in and then that's the thing going forward so so that was the way Mises proposed if the US government were serious about tying the dollar back to gold that's what he recommended so if they were going to do it that's the way to do it I'm just saying I personally I don't trust them even if they were to do that there could be a new administration in 10 years and if there's a big financial calamity they would just abandon that and it would further discredit people say obviously gold doesn't work
Stephen Thanabalan: Because back in 2011 you suggested that ben Bernanke the then Fed chair and other Fed policy makers that they could go back on gold immediately by switching from targeting the Federal funds rate the interest rate between the banks to targeting the price of gold and you recommended that the Fed's holdings of treasury debt and other assets that as they matured that you should replace them with physical gold do you still think that this is a valid proposal today
Robert Murphy: Right so yeah they're what you're describing you're exactly correct that is what I said and that's what I meant when I said I used to you know I even had proposals I'm saying yes that like when I was when I was explaining to people you know this is how the classical gold standard worked what a great system it had checks on government in 71' there was an awful decision look at how much you know it's not a coincidence that we had double digits CPI inflation the US in the 70s right soon after they got rid of the link to goal that's not a coincidence it's not that inflation was OPEC's fault it was you know the printing press so that was, so you're right so then people want a solution and so I say okay yes rather than ben Bernanke you know the Fed chair at the time when I was giving these talks rather than him buying mortgage-backed securities and treasuries which just sort of rewards bad actors instead they should be let those assets that you know as the mortgage-backed securities and the treasury's mature roll those proceeds over into acquiring physical gold and so that's to give credibility that if the Fed's going to target a price of gold to show world investors that it's serious and credible they would have large stockpiles of gold with which to maintain that pledge right just like the Chinese authorities if they want to say that oh we're going to have a dollar-yuan ratio they need to have a bunch of treasuries to back that up to show the world if we need to intervene in the currency markets to support our currency our peg we can likewise if the US government is announcing to the world where the Fed is announcing the world the dollar is going to be 1900 an ounce or whatever the number is period they need to have stockpiles of gold to support it in case the dollar's getting hit and then you know the price goes up to 2000 they got to be able to sell gold for dollars to push the price back down to whatever the target is so yeah if the Fed wanted to do that I would be happy and I'd much prefer that system to what they're doing now or that regime to what they're doing now I'm just saying I personally have stopped pushing that because I don't trust the Fed to stick to it and so I'm not going to waste my time getting public support for the Federal reserve to do something where I don't trust those people
Stephen Thanabalan: Hypothetically speaking I mean how would such a move impact the gold price for that matter
Robert Murphy: Yeah exactly so that's why I think I told you a minute ago Mises proposal I think that's why he said you gotta first announce this is what you're gonna do in the future and then let people react because you're right if the Fed were to say next week hey we're going to let half of our balance sheet roll off and replace it with gold well that's a lot of gold they would be accumulating so that's clearly going to push up the price of gold immediately as speculators realize oh wow the demand to hold gold you know from Institutional investors all of a sudden is going to go up a lot so and that would affect also when the Fed promises a certain dollar price of gold if they were to do that regime they would have to take that into consideration to realize if we make this move that's going to push up the dollar price of gold other things equal and so let's not set the target too low otherwise you know our move is going to be contradictory
Stephen Thanabalan: Well Dr. Murphy I have taken up a lot of your time I don't want to hold you up any further but because you've taught us a lot about money today and we do really appreciate that so thank you so much I just want to however end by coming back to your article about the Four Myths of Money to look at how you deal with the final myth and this is the myth just to quote you the purchasing power of money equals the supply of real output divided by the supply of money so that's the myth that you've quoted now you were also saying that prices are not a mechanical function of physical stocks of goods and dollar bills on the contrary people's subjective valuations are also critical that's what you were saying my question is when we talk about the purchasing power and devaluation of the US dollar a lot of people will say hey you know the purchasing power is going down as the devaluation of the currency the US dollar is underway and by expanding the monetary supply by printing more money it sort of functions like a hidden tax the expansion of the money supply functions like a hidden tax through inflation of the money supply it's a form of theft in that sense from people who do not know how to protect and hedge against the erosion of their purchasing power and through money printing excuse me there and for example by buying silver and gold to hedge against that so how do you dovetail this conventional understanding of the purchasing power being lost with the response that you gave in debunking the myth earlier
Robert Murphy: Okay, yeah so great question so it's certainly true you know as a first pass if you're just talking to someone who you know doesn't have any knowledge of how money works and inflation and oh you know gee what why doesn't the government just print a million dollars per person and make everyone a millionaire right so someone who's at that level of understanding yeah I think it's perfectly fine to say things like well just think about it if they double the amount of dollars that wouldn't make more cars that wouldn't make more factories right so it can't be that we have that more people have cars because the same the same number of cars to go around all it would tend to do is make the price of a car double right and so you get people thinking like that so I agree like at a very elementary level to just think in terms of how many dollars are there and how many real goods and it's a division problem that's that's a good way just to warm people up so they understand printing money doesn't make society richer the same way you as an individual if you get twice as many units of money you're a lot wealthier that's not true for society as a whole but what I was getting at though is that's really you know it is just a pretty basic point and then fundamentally it's not true that if for example they double the supply of dollars prices might not double or some prices might more than double and other prices might not go up nearly 100% so it's not it's not a mechanical thing it's not like an engineering problem prices always work through you know subjective expectations to give you a different example even if the Fed didn't create any new dollar if the Fed just said starting in two months we're going to create 30 trillion new dollars and drop them from helicopters that would make prices and dollars right now go up immediately even before those that new money hit the system because people subjectively would get you know value dollars less and try to get out of dollars because they know this future policy is going to happen and so you would see dollar prices going up right now even though no new dollars were created so I'm showing that you know in reality prices involuntary transactions always go through the subjective evaluations of the two individuals in their minds and so money prices are not merely an arithmetic issue it's not merely an engineering or a technical issue it's ultimately going through subjective valuations
Stephen Thanabalan: Well I'm afraid that's our time because you've got to run obviously but we hope to do this again and thank you so much for all the books you put out there because it's educational and this book coming up it's coming up at the end of the year isn't it Understanding Money Mechanics
Robert Murphy: Right so the online version we were releasing them serially that's all done so the chapters are up there people want to go and look at the online version right now yes we're just compiling those together and I'm you know proofreading to make sure there's no typos and things but yes to have a physical book and yes certainly this calendar year will be available I don't know exact date
Stephen Thanabalan: And Bob before we wrap up could you let our listeners know more about how they can find your work because we understand you're a prolific writer and you have a blog as well am I right
Robert Murphy: Sure thank you so my personal website is consulting by rpm.com but also if it's easy to remember people can just go to bobmurphyshow.com that's where my podcast is and that has links to everything else
Stephen Thanabalan: Yeah the Bob murphy show essential viewing and no shameless plug involved here well thank you so much Dr. Robert murphy Bob as we call you for coming on the show and giving us your time today it has been an absolute pleasure speaking with you
Robert Murphy: Well thank you Stephen for the interesting questions and I hope your viewers got something out of this thank you for having me thank you
Stephen Thanabalan: Now that was Dr. Robert Murphy senior fellow at the Mises Institute for more information about his work and his views on the economy you can read his articles at http://www.mises.org you can also check out his own website at consulting by rpm.com blog and Bob can also be reached on social media on twitter at the handle Bob murphy econ now if you like this video please hit the like button and subscribe to the SBTV channel to be updated on new content to also check out the SBTV podcast on iTunes and Spotify as well
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