Inflation: Wet Streets Don't Cause Rain, and Prices Don't Cause Inflation | Lawrence Reed

[00:00:00] Affordability, the cost of everything from food to gas to houses, everything is bothering Americans today. We are going to talk about in this third lesson about economics, about money and inflation, and how that's affecting affordability. Welcome to The Jenny Beth Show. I'm Jenny Beth Martin.

[00:00:34] Welcome to The Jenny Beth Show. On this third episode of economics, we're going to be talking about money and inflation. And joining me again today is Lawrence Reed, who is an economist and the President Emeritus of the Foundation for Economic Education. Larry, thanks so much for joining me again today. Larry, my pleasure. Thank you, Jenny Beth.

[00:00:55] So, affordability. Everyone is talking about affordability today. And I think that affordability ties to inflation, which caused prices to go up, which ties to money and the government spends way too much money, but also it's printing a lot of money. So I'm really looking forward to this conversation. Oh, it's one of the most interesting aspects of economics. I get more questions about money and inflation than I do just about anything else. So what is money?

[00:01:25] Well, the simplest definition that most economists will use is it's a medium of exchange, which is another way of saying it's a middleman. Think of it this way. You trade, say your labor, you trade for money, not because you tend to eat the money or consume it in any way yourself, but rather you intend to use it as a means of acquiring something else.

[00:01:51] It's a middleman that makes trade. It's a middleman that makes trade seem to be more complicated, but it actually makes far more trade possible than you would have with a simple barter system, which is like exchanging a pen for a pencil. So with money, you all of a sudden have access to just about anything that can be purchased anywhere in the world. So why is it so important in a modern economy?

[00:02:19] Think of it this way. Money is at least one part of almost every transaction in the economy. If you take barter out of the picture for a moment, we still do some of that, but it's kind of primitive and rather few and far between in terms of examples of our trading. Money is the most important commodity in a market economy because it's at least one side of every non-barter transaction.

[00:02:49] And so therefore, whatever affects money is going to affect everything else. Sometimes money, by the way, is two sides, both sides of a transaction. If you use euros to buy dollars, you've got money on both sides of the transaction. But usually it's one side.

[00:03:08] So either way, it's so important, so central to the way economies function, so ever-present in our transactions that if you mess money up, you could mess up an awful lot of other things at the same time. And, well, what other things can you mess up if you mess up money? Well, let's say you're overprinting, as our government is. That'll affect everything.

[00:03:36] It means that prices across the board likely will be higher than they would otherwise be. That has implications. If people get used to or expect that prices are going to keep rising, things happen like they may save less. They may feel like, well, I know it's going to cost more tomorrow, so I better spend today in order to get it.

[00:03:58] If they don't save as much, we don't have as much capital formation, which any prosperous economy very much needs. And you can also create societal or social upheavals with the destruction of money. There have been many examples in history of where governments have created a runaway inflation, and one of the results of it is turmoil in society.

[00:04:26] People rising up against the powers that be, and their lives are so disrupted by the inflation that they go out into the streets. There's many examples of that. And what makes money different from other economic goods? Two reasons. One is it's only useful for what it gets you in exchange. Think about that. Money is only useful for what it gets you in exchange.

[00:04:53] If you can't get anything with it for any number of reasons, maybe it's become worthless. If you have a piece of money of whatever form, but you can't buy anything with it, then it ceases to have value because that's what it's all about. Money is a means to acquire what you're after. And the second reason it's different from everything else is its supply must remain scarce in order to perform its function.

[00:05:23] When it comes to other economic goods, like consumer goods, capital goods, if we could double their quantity overnight, we would be roughly twice as rich. We'd have problems with where to put some of the stuff, but in any event, more goods, more services, that's what makes a nation wealthier. But if you double the quantity of money overnight, all you've done is double the claims to goods and services.

[00:05:50] It would be as if, let's say you go to a play or the theater and, you know, there's a guy who handles coats. You go in and you check your coat in and he gives you a ticket. You know that there's one ticket for every coat on deposit. And you go in and watch the play. If in the meantime, he decides, hey, I can manufacture a whole lot more tickets and maybe even sell them, make a little money.

[00:06:19] All these claims for the coats I have in deposit. Let's say he does that. And then you go back later to claim your coat and he says, oh, somebody claimed it because I issued a whole lot of tickets. You would cry fraud, right? He didn't increase the wealth of society. He just increased the claims to the wealth that there was. So limiting the supply of money is essential to money retaining its value.

[00:06:47] And when governments don't understand that and they start overdoing it, as many have throughout history, they just reduce the value of every unit of money in circulation. And if they do enough of it, they can completely destroy it and the economy with it. Explain that a little bit more. They can reduce the value of every dollar in circulation. Yep. Well, this is a supply and demand explanation that applies really to everything.

[00:07:14] The more you tend to produce of anything, all other things being equal, such as demand, well, then the less valuable any one unit of that substance will be. So it's especially true with money. The more money that is circulating, the less value any one unit of it will have. And how does money differ from bartering? Barter is a simple direct exchange, like a pen for a pencil.

[00:07:43] There's no medium. There's no middleman. There's nobody trading a pen for something that they then turn and use to exchange for something else. Money enters the picture when you get this middleman, when somebody, let's suppose a corn farmer, he raises corn and he's got a little extra corn and he decides, I want wheat.

[00:08:10] He goes to the wheat farmer and says, hey, you want to make a trade? If they do make a trade, that would be barter because it'd be corn for wheat. Let's say the wheat farmer says, well, I don't mind trading some of my wheat, but I don't need any corn. Have you got any oats? And you as the corn farmer say, well, hold on, I'll be right back. You go down to the oats farmer and he would like some corn. So you trade your corn for his oats. You bring the oats back to the wheat farmer and say, okay, now I got the oats.

[00:08:40] Let me have some wheat. In that example, what served as money effectively were the oats. As the corn farmer, you traded for the oats not because you intended to eat them, but because you intended to use them to acquire what you were really after. That's why money is different. It's that middleman that makes all kinds of trades possible that otherwise would not happen. That is a good way of thinking of it.

[00:09:08] I don't think I've thought of money as a middleman before, but it's a really good analogy. Yeah, yeah. You work for money or use this example, for instance, somebody who starts a restaurant. It used to be the custom that they would take the first dollar that they earn and frame it, right? You've seen that in mom and pop restaurants. Have you ever noticed? So that's the only one they frame. That's right. Because it was the first. All the other dollars they earn, they get rid of.

[00:09:38] They use as a means to acquire what they were really after. Has money always been around or was there a time and place when it was invented? As far as we know, money goes way back in history. But there probably was a period in very primitive times when all trade was barter. So we think that money as a middleman was invented somewhere along the way.

[00:10:03] Maybe in the corn farmer example, maybe it was that kind of invention where a corn farmer decided he could trade his corn for the oats that then the wheat farmer would sell it. So it was invented at some point because it just seemed to make sense. I think when you realize you can – if you have to rely on barter, well, you're out of luck. You're spending a lot of time trying to figure out all the deals to get what you owe to. That's right. Well, who's got what I want?

[00:10:33] And maybe they don't want what I want or what I've got rather. So barter is rather primitive. We still engage in it when it makes sense. But a modern, industrialized, globalized economy has to make use of money in order to prosper. And what are some of the forms of money that have taken place? Historically, the range is incredible. Seashells have been used as money.

[00:11:01] Indians in North America used what they called wampum, which were beads. In colonial Virginia, tobacco was used as money. And by the way, there was a tobacco hyperinflation in Virginia that prompted them to look for something else to serve as money. Because at first, with tobacco supplies limited, tobacco kind of kept its value. But then they found ways to cultivate it better and grow a lot more.

[00:11:31] And then it started taking ever more tobacco to get to buy anything. And that's when they said, let's move on to something else. In Homer's time, the ancient Greek who wrote the Iliad and the Odyssey, he talks about cattle being used as money. And you can see why in a fairly primitive economy, everybody knew what a cow was. And so you could look at a cow and say, well, I don't really need one, but I know lots of people who do.

[00:12:00] So I'll trade for that cow because I know I can then trade it for what I'm really after. So it tends to have to be some kind of familiar commodity for something to emerge as a medium of exchange. People have to know what it is and feel that if they can't use it, they can use it to get what they really want. Rats were used as money on Easter Island, believe it or not. Mahogany logs in British Honduras.

[00:12:31] Oh, cigarettes in prisoner of war camps during World War II became money. People were trading for them, not to smoke them, but to use them to get what they were really after. So there's some really odd things over time that have been used as money. When did silver and gold become used as money? That was certainly centuries before Christ.

[00:12:57] We don't know exactly when, but it seems that in almost every part of the world, gold and silver emerged at one point or another as the chosen monies of trading peoples. There's good reason for that. When you think of it, gold and silver tend to retain their value. They're very divisible into smaller quantities. You know, if your money is cattle, you know, how are you going to make change?

[00:13:24] But gold and silver can be divided up into whatever size you want. That is very convenient. They have high value in very small quantities. So let's say you are persecuted people and you want to get out of the country. You can convert your wealth into gold and silver and, you know, one wagon load will carry an awful lot of wealth, but in the form of gold and silver because of its high value in small quantities.

[00:13:55] So gold and silver emerged as money, but at first it was not, or they were not used separately. They were used together often as they're found in the earth, a mixture of gold and silver, and they were not standardized. It was around 650 B.C. in western Turkey when traders standardized those lumps of gold and silver into what we now call coins.

[00:14:21] I mean, if you think of it, if your money is just a lump of gold and silver, then every time there's a trade, you have to weigh it. Right. To see what it is. Does it meet the price? But if you standardize it, you can look at it and know exactly what it is and what it's worth. That was a huge achievement. Within 100 years, gold and silver coinage became the chosen monies of the entire Mediterranean region. It became the foundation of the prosperity of ancient Greece and later Rome.

[00:14:51] It made trade so much easier to have reliable gold and silver serve as monies as long as the governments didn't debauch the coinage, which sooner or later they all seem to do. When governments get involved with money and how do they start ruining it? Yeah. Well, they have a – every government has an insatiable appetite for revenue. Right. They never have enough. There's always another war to fight, another program to fund, another election to win.

[00:15:21] There's always reason for them to spend more. And you can't imagine that if you've got this thing private – say privately issued money circulating in the economy, you can't imagine a greedy king watching that happen and not wanting to take charge of it. And so governments sooner or later in history have decided, I want to be in charge of money. I want to be – I want to have a monopoly of the mint.

[00:15:46] So I'm the only guy who gets to mint the gold and silver coins and I get to put my face on it. But then if they want to spend more, they then discovered I can just take a little bit of the gold and silver out, put in some junk metal. And a lot of runaway inflations in the past when monies were gold and silver happened that way. They took out the precious metal of the coinage and put in cheaper junk metals. That's how Rome's inflation took place.

[00:16:14] And they did that until ultimately there was almost no precious metal in the coinage. The rest was all junk, junk metals. And it was important for it to be real? And why? For reasons of trust. Every free economy rests heavily on trust.

[00:16:35] If you couldn't trust a person you just made a contract with, if you couldn't trust what he just passed on to you as a reliable money, if you found out later that it really wasn't, it breaks down trade. It is a step backwards in our economic progress. So you really need a reliable money that's honest. And throughout history, you find battles between contending groups over the question of honest money.

[00:17:03] One of the Henrys of England, when he came to power, I think it was Henry I, I believe, he was so interested, so impassioned that money had to be sound. Didn't want it debauched. That he had all of the various ministers of the mints around England come together at Christmas time one year for a conference.

[00:17:31] And he had already fingered which ones were debauching their coinage, taking gold out and putting in cheaper metal, pocketing the difference. And he cut the arm off every one of the ones that were cheating. Henry VIII, quite a few generations and centuries later, did just the opposite. He was a great inflationist. He printed and debauched the currency like crazy.

[00:17:57] When did the gold standard or how did the gold standard work? In America, every country, of course, has a little different story. But it is a remarkable development that almost every country sooner or later got around to preferring gold and silver coins or even paper money. But paper money that was backed and redeemed into gold and silver coin.

[00:18:22] In America, we had, of course, a runaway inflation, paper inflation during the war for independence because Congress didn't have the power to tax. And it fired up the printing press and printed continental dollars until they became worthless. But then when the Constitution was written, it anticipated sound money.

[00:18:47] In fact, there's even a provision in the Constitution that says no state can issue a medium of exchange that isn't gold and silver. Even the federal government from the earliest days of George Washington said we're going to use gold and silver as our money here in America because that's what the world prefers. That's sound money. You can't hyperinflate it.

[00:19:13] But the problem was that they tried to have both gold and silver circulate at the same time. But they fixed the price of one in terms of the other. That's a complicated thing. But so America actually had a silver standard for the first 40 years of our history. Then when Congress changed the price again, it caused the economy to flip from a silver to a gold standard.

[00:19:39] And then finally, after going off of it during the Civil War, America in the year 1900 formalized a gold standard. It defined the dollar as one twentieth of an ounce of gold. And that's what we had until Franklin Roosevelt in 1933 seized our gold and put us on an unbacked fiat patron standard.

[00:20:04] And when and where – that's where paper money came from in America? We've always had paper money, but it was historically a substitute for the real thing. It was a receipt. It was an indication that, you know, you could take this to the bank and get a certain amount of gold if you wanted to. As long as you knew you could do that, most people would prefer to use the paper because it's just more – Easier to carry around. Yeah, easier to carry around. Rather than a twentieth of an ounce of gold. That's right.

[00:20:34] But once government breaks that connection, then you can have things like a run on the bank where people rush to get the gold now with their paper because they don't expect the paper to keep its value. Is that – well, what is fiat money? Fiat money is a term that comes from the Latin. It essentially means whatever the emperor declares. In a monetary sense, it means unbacked. It's not convertible into precious metal.

[00:21:04] It's paper money that's not redeemable. And therefore, its value is whatever it happens to fetch in the marketplace at any given time in goods. But government can print as much fiat money as it wants. And that's why governments like fiat money because they're completely in charge then. Their control over money is complete.

[00:21:24] They can print whatever quantity they want except, of course, for the discipline of popular disaffection with inflation. You know, they can't typically just print and make it worthless tomorrow because people will object. But they can do a slow motion depreciation. So a minute ago you were talking about the debauching of money. Is that what's happening in America right now?

[00:21:53] Yeah, and it's an age-old problem. In ancient Rome, when monies were gold and silver, paper money hadn't been invented yet. You still had governments debauching the monetary standard by cheapening the coins, taking the precious metal content out. We're doing the same thing. In America, our dimes and quarters and half dollars up until 1964 were 90% silver. Now they have no silver. Now they have no silver in them.

[00:22:21] And the paper money had some backing with gold really all the way up until the 1970s, even after FDR seized our private gold holdings. And we weren't completely off of the gold standard because we still had to honor foreign claims for gold for our paper money. But Nixon ended that altogether.

[00:22:46] And ever since 1973, I guess it was, our paper money is not connected to the supply of any precious metal. And it's so not connected to it that a penny would cost more to produce than to make. And we aren't making those anymore. And now I've seen articles that we may start making nickels. And pretty soon, I think we're going to get away from the denomination is going to be a dollar of a $10 bill rather than a hundred of a dollar.

[00:23:16] That seems alarming to me. Well, and it should be. As long as we keep depreciating the value of our currency by issuing too much of it to accommodate federal spending, we're going to see more and more of that sort of thing. Someday the dime will not be worth producing. And a quarter will not be worth producing. In countries that suffered runaway inflation, one of them was Bolivia in 1985.

[00:23:43] I went there during their 50,000 percent inflation to see how people were coping. The smallest note in circulation was that for a time was like the 10,000 Bolivian peso note. They had nothing smaller than that. And it was almost worthless. And I think it's something that most Americans can't quite imagine. I don't want us to ever be in the point. I don't want us to ever be in the point where we can imagine it.

[00:24:11] That is, that's terrible. But we shouldn't think that we're exempt from the laws of economics. Well, we're not. Yeah. If we do what other countries that have suffered hyperinflation do, we will suffer the same consequences. And we have had runaway inflations. We've had two of them, three really, in American history. The continental dollar that we talked about.

[00:24:33] And then during the Civil War, both North and South went off of gold and adopted their own paper monies. Southern paper became completely worthless in part because of the outcome of the war. Because they lost. Yep. But even the North, they depreciated their greenbacks by 50 percent. And you said we had three times. Oh. Jimmy Carter? Three times. Hyperinflation?

[00:25:03] Well, we had double-digit price inflation. Okay. If I said three, I was thinking really two. Okay. Continental dollar. And then both North and South. Oh, I see. Yeah. Okay. And then with Jimmy Carter, it wasn't hyperinflation, but it was double-digit inflation? Yeah. On its way until a new administration came in and shut down the printing presses. Yeah. Yeah. We need that right now. Explain.

[00:25:30] What is the role of the Fed? What is the Fed? And what is the role of the Fed? The Fed or Federal Reserve is America's central bank. In economics, most economists have unfortunately sort of accepted the notion that government should have its own central bank. But for a long time, that was a very debatable issue.

[00:25:57] It ought to be debatable again today, given the track record of our central bank. But establishing a central bank, I think, is yet another step that governments have resorted to, to consolidate their control over money. If government wants to be completely in charge and be able, through its own discretion, to determine what the quantity of money is, well, it needs a national bank that will direct the rest of the banks in the country what to do.

[00:26:26] And so it's the orchestra conductor for the nation's banking system, you might say. And it has the extraordinary power of determining bank reserves, of determining what quantity of paper money will be printed. Early in its history, we still had a requirement that every dollar had to have at least a 40 percent gold cover. But they did away with that. How quaint. Yeah, really. They did away with that.

[00:26:55] And then in 1933, Roosevelt seized your gold. We had less than a month to turn it all in, except what might be in your teeth were jewelry. But gold coins, he said on the 5th of April, 1933, you had to turn them in by May 1st to the government under penalty of $10,000 in fines or 10 years in prison or both. And even when you buy gold today, the government wants to know, don't they?

[00:27:25] I don't know what the requirements are today, but I'm sure they'd like to know. They probably do in many cases. It's crazy that they were able to seize gold because that was private property, but they still were able to. Yeah, although I've seen estimates, and that's all they are because we don't know for sure, that for every dollar in gold that our forefathers turned in, they kept two or three. So, yeah, for sure. I can see that.

[00:27:54] Why would you give it all to the government? Yeah. It's just crazy. It's crazy that that happened in—was that—that was during the Great Depression? Yes, 1933. Roosevelt really was of the view that we had to pump up the money supply. And if they had just stabilized the money supply, we would have been okay.

[00:28:23] But he wanted to pump it up, accommodate big federal deficits, and he thought gold would be a drag on that. And, of course, it is. Gold is honest money, and Roosevelt wanted to be dishonest with our money. So he had to seize it. Okay. We're going to talk about inflation, and there is a connection between printing money and inflation, right? Yes. And we talked about overprinting money, and the governments have overprinted money.

[00:28:54] Yes. What is—before we explain the correlation between the two, what is inflation? What does it mean exactly? This is such an important question, because if you change the definition, you change the responsibility. Here's what I mean by that. If you define inflation as rising prices—and a lot of people do—well, then it's not far from there to conclude that, well, it's businesses that raise prices.

[00:29:22] I happen to see the clerk in the grocery store change the price. So he's at fault, or it's oil shakes, or it's—Jimmy Carter, for a time, thought it was your credit cards causing inflation.

[00:29:36] But if you—instead of thinking of inflation as rising prices, if you define it as an increase in the quantity of money, especially an increase in the quantity of money in excess of any increase in the demand for money, then you're led into very different directions. You have to ask, okay, who does that? If you and I tried it, we'd be arrested for counterfeiting. Right. The quantity of money is something the government has put itself in charge of.

[00:30:05] And so it has an interest in you thinking that inflation is rising prices, because then they can point the finger of blame at business people. But ultimately, it's inflation, which shows up as rising prices, is the reduction in the value of the money. And that happens because they're issuing too much of it. So rising prices are the result of inflation. Yeah.

[00:30:32] Jack Kemp, former congressman, used to say, wet streets don't cause rain. And what he meant by that was that rain is the cause. Wet streets are the symptom or the outcome. But you don't look at wet streets and—or rain and say wet streets caused it. You're getting the cart before the horse. So first you have an increase in the quantity of money.

[00:30:59] Then you get, as one of its effects, rising prices. And that's something that we're seeing right now. On the left, they're talking about affordability. Yeah. And they're making affordability and the prices a bad guy because that's where it affects people the most personally. The microeconomic impact of it. But it isn't—the high prices themselves are—they're definitely an issue. So I'm not saying they're not an issue.

[00:31:26] The high prices themselves are the result of bad monetary policy and overspending by the government where it's affecting what should be free markets. Yeah. If those who are decrying affordability—which is a real concern. I don't diminish that. But if they were really serious about affordability, they'd be denouncing Congress for spending too much and denouncing the Fed for monetizing a lot of federal spending.

[00:31:56] But they're not interested in that. In fact, a lot of the same people who are making affordability a big issue are also pushing massive new government spending programs. So that would defeat the purpose. So they don't understand the cause and are not addressing it head on. Instead, they're advocating more of the very problem to solve the affordability crisis.

[00:32:20] So what is the first experience with hyper-hyperinflation? This was a very colorful time. Back in 1715 in France, Louis XIV, the famous Sun King, been on the throne for decades, fought a lot of wars with the rest of Europe, spent the French treasury into near bankruptcy. He died in 1715.

[00:32:47] And his successor, the new king, Louis XV, is in power. And he doesn't know what to do. The treasury is broke. He wants to spend a lot of money. What can he do? A man named John Law from Scotland got in to see him. And I'm just paraphrasing what I think the conversation must have gone like because we know what the outcome was. John Law probably said to the king, Hey, you need money?

[00:33:18] Well, you're the one with the police and the army and the navy. You got all the concentrated power and force you need. Just print it up. Just print it. Make the people use it. And the king might have said, Oh, wait a minute. But we can't print it because we don't have the gold to back it. And that's when John Law said, My idea is you just need to print it and tell people, Look, I'm the government. Money is whatever. If the dog eats it, it's dog food. In other words.

[00:33:46] And so print it and back it with the force of the police if you have to. And the king went along with it. And at first, things looked pretty good. They paid off a big chunk of the national debt just by printing paper money. But prices almost from the start began to rise ever faster. And by 1720, just five years into this, the French paper money became completely worthless. They had a runaway inflation.

[00:34:13] And John Law, who was celebrated as the economic savior of France, five years later, he becomes a hunted man running all over Europe with the French not far behind trying to catch up with him and do away with him. Well, he had to be the scapegoat. Yeah. Yeah, that's right. Someone had to be the one who, where the buck stopped. That's right. The king's not ever going to let it be the king. No, no.

[00:34:40] It was the stupid, gullible king who fell for the scheme and didn't want to hold himself accountable. And we talked about hyperinflationary periods in America. And you talked about the North and the South and the two hyperinflationary periods. And how did we handle money after that? After the Civil War? Yes. Well, there was a strong interest in the country to return to sound money, to gold and silver.

[00:35:08] And in 1875, Congress passed a law called the Specie Resumption Act, which declared that on the 1st of January, 1879, American money would once again be gold or paper redeemable into gold. They gave themselves, in other words, four years to make sure the Treasury had plenty of gold to back it up.

[00:35:35] And so that was a great piece of legislation. That was a time when Congress did the right thing. They said, you know, we've had paper inflation in both North and South. Now we've got to get off of that. Let's have sound money. Give ourselves four years to have the gold in the Treasury. And thereafter, we'll have a solid gold standard. And then that was formalized by the Gold Standard Act of 1900. And that lasted 33 years. Yeah.

[00:36:05] Not very long. The reason governments don't like gold is that they can't print it. It's as simple as that. Yeah. It's such a problem. I shake my head every day, too. Yeah, I do. Sometimes you don't know what else to do, but just shake your head.

[00:36:26] You talked a little bit about what the Constitution says in terms of money that seats had to, if they had money, if they were circulating, it had to be gold or silver. Yeah. What else does the Constitution say about money? And how did Alexander Hamilton influence our country's monetary policy? Maybe, unfortunately, the Constitution didn't go into much additional detail.

[00:36:53] And so it left the door open for things like a national or central bank. In fact, under the Washington administration, with Hamilton as the Treasury Secretary, America got its first central bank. It was called the First Bank of the United States. That was not specified in the Constitution, but it was regarded as a legitimate power of Congress to create a central bank.

[00:37:18] It would have been great if the Founding Fathers had included a provision in the Constitution forbidding a government bank, but it didn't. And that bank lasted 20 years. It was not renewed immediately, so we were without one from 1812 until 1816. And that's when the people who thought we ought to have a central bank, some of those were direct beneficiaries of that whole process.

[00:37:45] They got Congress to create another one called the Second Bank of the United States, and it opened its doors in 1816. Its charter was due for renewal in 1836. And that set up a big battle, famous battle between President Andrew Jackson and Nicholas Biddle, who headed up the Second Bank of the United States. Biddle wanted the bank to be rechartered for another 20 years.

[00:38:15] And Jackson, to his credit, said, we don't want a central bank. Like, it's a tool of the elite and the wealthy. It accommodates government deficits. Let's get rid of it. And he vetoed the charter of the Second Bank, and so we killed it. And we didn't get a central bank again until the Fed in 1913. And by the way, Andrew Jackson is notable for another economic reason.

[00:38:43] It was under his presidency for the first time in American history that we had zero national debt. No national debt with him. For one year anyway. And he was more of a populist, wasn't he? He was, and he was a hard money man. But yeah, he didn't like central banks. He thought money should be gold and silver. And he put us on a sounder financial basis by killing the central bank.

[00:39:11] And then we got some of the most prosperous decades in American economic history in the absence of a central bank. What would happen if we did not have a central bank right now? You know, I do believe there is some role for government in money. But it should be limited, as it is in other realms, to maybe a definition, an enforcement of the definition.

[00:39:37] Let's say, you know, we have this kind of arrangement with weights and measures. We say that formerly a foot is 12 inches. A yard is 36. A pound is 16 ounces. But the government doesn't go further and say only the government gets to produce yardsticks and tape measures and, you know, things by which we leave that to the private sector. And anybody can create those things as long as they're honest.

[00:40:07] You don't sell a yardstick that's only 35 inches without somebody saying, hey, I can take you to court. So a government can set up the rules, don't commit fraud or deception, but otherwise leave money, as we do with anything else, to the production of the marketplace. In this case, it would be banks in many cases. Who could have anticipated Bitcoin? Right.

[00:40:35] And, you know, regardless of what you may think of Bitcoin, it did not require a government to establish. I think that's why governments don't like it. Yeah, that's why they don't, because they want to be in charge of everything. And it is a way around some of what we're seeing with money today. In the first episode, we talked about booms and busts.

[00:41:03] What is the connection with monetary policy and booms and busts? And what are booms and busts? Yeah. A boom, of course, is a period of rapid economic growth. It can become what some people might refer to as a kind of frenzy in its late stages with booming stock markets and so forth. The bust is when everything falls apart, when the stock market collapses and so forth.

[00:41:32] And that cycle is often ascribed to capitalism. You have critics of capitalism who say, well, one reason we're against it is it causes booms and busts. Those of us who believe in capitalism are the first to say, no, you're wrong. Booms and busts come from erratic monetary policy. When the government takes over money, it has a lot of reasons to expand it.

[00:42:01] But when it gets out of hand, it then contracts the money supply or stops expanding it, which then causes the house of cards to fall. We've seen that many times in American history. The Great Depression was brought on by a period of Federal Reserve expansion of money, producing the roaring 20s. And then they slammed on the brakes and contracted the money supply and jacked up interest rates.

[00:42:25] So the booms and busts we've become accustomed to are not a natural marketplace phenomenon. I mean, you see it, say, in some commodities, you know, say tomatoes. You know, there's a time in the spring where there's great activity in that industry. Everybody's planting tomatoes. Then we just sit around and watch them grow. And then all of a sudden there's another boom in activity in the fall when the tomatoes need to be harvested or late summer.

[00:42:50] But that's a natural cycle that doesn't afflict, at the same time, everything that we produce. But an economy-wide boom and bust has the common feature of what's happening to the money, the money and credit. You can cause a boom by printing money, artificially lowering interest rates.

[00:43:13] And you can cause a bust by refraining from stopping the printing of money and jacking up interest rates. All right. I understand that. Now, I want to go back to something with the overprinting and how it affects prices and how it affects supply and demand. So we talked about in a previous lesson that the more supply, usually prices go down, the higher the demand, usually prices go up. Yes.

[00:43:41] But those are the only things that wind up affecting prices. The amount of money in circulation winds up affecting it as well. Yes. So how does it interfere with supply and demand? The manufacturing of money by government? Well, it sends false signals.

[00:44:01] Normally, in a free banking system, free market capitalist system, for interest rates to fall, you would typically have more savings. As people saved more, those savings showing up as bank deposits. The banks then have more to lend out. And through competition, the interest rate falls.

[00:44:24] But if the government injects into the banking system its own bookkeeping entries, its own money, it can look as though people have saved more. They really haven't. The government's just injected into the banking system new money. But in the short run, it has the same effect. It reduces interest rates. And that's what fosters the boom.

[00:44:47] Lots of people who would not have expanded a business if interest rates were 6% will rush to borrow the money if it's only 4%. And so off we go with an artificial boom. At some point, the market adjusts. Interest rates start to rise. And if the government actually slams on the printing press brakes, it can cause interest rates to rise even faster and further, which really put a crimp on the economy.

[00:45:15] So if we just got government out of the business of deciding what interest rates should be out of the money and credit supply business, the economy would be a lot more stable than it has been just since the Fed was created. What, 113 years? It was advised that one of its jobs was to iron out the business cycle. But thanks to the Fed in all of its years, we've had a Great Depression and eight or nine recessions.

[00:45:44] So it hasn't fulfilled that mandate at all. And in fact, has exacerbated booms and busts through its own money printing. You said when we did not have the central bank, during that time, we had a period where we had no debt? Well, for one year under Jackson, we had zero national debt. But, you know, there are reasons why issuing debt or bonds is not a bad thing. If you're funding long-term capital projects.

[00:46:13] We're talking about roads. Yeah, or even airplanes for defense. Right. Some of that can be justified. But we've gone way beyond that. We go into debt these days just to finance our current consumption. And it seems like it's much easier to go into debt when you've got a central bank that can just print more money. That's right. It is the last resort for buying federal bonds.

[00:46:40] When the Congress spends more than it takes in, it then goes to the Treasury, which then prints up the bonds and the notes and the bills, debt instruments, to finance that deficit. And as long as there are buyers for those bonds, government gets revenue. And if the buyers stop appearing, the Fed itself can buy them. In fact, it has a significant portfolio of billions of dollars of U.S. debt in its possession.

[00:47:10] I don't know how I can buy my own debt to buy stuff. I don't think that would work very well. No. But I guess when you're the government, you can do a lot of things that don't naturally happen. For sure. Okay. Is there anything else that people should be thinking of when they're thinking about money and inflation, affordability, prices?

[00:47:33] I think people should understand that the generally rising prices, that is to say not just a price here and there, but across the board, all prices rising, is a monetary phenomenon. First, you get the increase in the money supply, and then you get rising prices as a result.

[00:47:55] So people should be aware that if prices are rising pretty much across the board, that it's not greedy business people who suddenly decided to be even more greedy. It's rather the underlying value of the money, largely determined by how much of it the government creates. And if they really want goods to be affordable and affordable for the long term, they should be working towards forcing Washington to balance its budget, cut its spending, and curtail the Fed.

[00:48:25] When we look at the last six years, we had the bailout during COVID, and then we had the Biden administration with their Increased Reduction Act. I mean, Increased Inflation Act. They tried to see a reduction, but it wasn't. In both of those, the government was just spending more and more and more money. So it was going further into debt, and it was affecting everything.

[00:48:55] When the lockdowns first happened and the government decided it was going to give everybody money for not working, that was completely artificial. Because in the normal working economy, you've got supply and demand at play. You earn your money from the work that you produce. But when all of a sudden money is there for no work being produced at all, that messed everything up. It did.

[00:49:21] And then on top of that, we had the inflation bill from Joe Biden or the inflation law from Joe Biden. And that further messed it up because then it was going in and saying, here, we'll give you money, states, to go create things that weren't really being demanded. They weren't in demand. And then you wound up with some of the things that Nick Shirley has uncovered because someone was going to take – that money was going to fall somewhere.

[00:49:49] And people were grabbing it and taking it. All of that has changed the dynamics of what we're dealing with. And to be able to unwind all of that, it takes leadership and courage and determination. And it also takes time. It's not something that we can completely – we can't completely unwind it at the drop of a hat. Yeah.

[00:50:17] And one other thing it takes is a patient people. I mean, we can't even wait five seconds to get a reply on a text message. Yeah, yeah, that's right.

[00:50:26] And if Congress were to do the right thing, that is to cut its spending and instruct the Fed to stop its monetary debasement, that would cause some real problems in the short run for the same reason that the drunk who quits drinking, that's a good thing that he quit drinking. But he still has to go through the hangover phase.

[00:50:50] And if politicians during this downturn hear from people who say, save me, do something more, then they, you know, they may get frightened and start going back to the bottle again, you might say. Well, I think that that's where leadership really comes into play. Yeah. President Trump, I think, is a very rare leader.

[00:51:13] And I see that – the thing that I always come back to when I think about his leadership ability is that he goes down that escalator when he first announces that he's running for president. And he talked about the problem of the border. And he talked about the immigration problem in the country. And at the time, I knew there was an immigration problem. I'd done a documentary on the problems at the border. And we had stopped the Gang of Eight – we had stopped the Gang of Eight bill.

[00:51:42] And in the 90s, there was another effort that stopped an amnesty bill that George H – that George W. Bush was trying to push through. So there were people who were aware of the immigration problem. I'm not saying that nobody was aware of it. You had to be, I think, hyperactive in politics to be aware of the issue. And he comes down and he starts talking about it. And he talks about it. And he talks about it. And he talks about it.

[00:52:12] We're going to build a wall. We are going to secure the border. And in the first administration, he started working to do all of that. In the second administration, he knew much more what to do. And he's completely sealed the border without even finishing the wall because he's enforcing the laws that are on the books. And he's much better prepared.

[00:52:31] Well, in that we went from people not understanding what the problem was at the border to now the majority of Americans want the people who've entered this country illegally deported. You may ask it in a slightly different manner. They don't want the people who entered here legally to continue to be here.

[00:52:55] He's completely changed the entire focus of the country and not just the majority, not like 50, 51 percent, but we're talking 65, 70 percent of Americans and even more than that agree that illegal immigration is wrong. And he's stuck to his guns on that. I'm thinking of people like Ronald Reagan and Margaret Thatcher.

[00:53:18] They, too, when it comes to inflation, faced, when they took office, rampant inflation, double digit in both Britain and the U.S. And they could have, you know, threw in the towel after a few months as things turned into a recession. But they stuck to their guns until the problem was fixed and inflation came down. That's the essence of true leadership.

[00:53:42] You do what you know to be is right and you don't blow with the wind and change just because of political pressure. And you let the arrows come at you, but you deflect them. Yeah. And boy boy, President Trump had a lot of errors about that particular issue, being called a xenophobe, being called a racist, being called all sorts of horrible names. And what he was trying to do is protect the country. Yeah. You that's what we need when it comes to all of this.

[00:54:09] We need someone who is going to be honest about the problems and campaign honestly about the problems and say, here's how we're going, going to fix it and and to stick stick to it. And I'm not in any way saying that President Trump isn't trying to fix the problems with the economy. He certainly is. It is better than it was under Biden.

[00:54:35] And in his first administration, up until the lockdowns happened, we had the best economy I'd ever seen in my lifetime or at least in my adult lifetime. And I was just a child with Ronald Reagan. So I know he had a booming economy, but I didn't. I wasn't an adult during that time.

[00:54:56] And I think it can happen again, but it means that people, the voters have to trust that what he's doing is going to work. And the Congress has to be able to go home and say, here's what we're doing and why. Yeah. And constantly go back to it. Our attention span is like that of a gnat. Yeah. So you have to keep reinforcing it. Absolutely.

[00:55:21] And we, the people, have to put the heat on our representatives that, hey, we're not looking for more from government. Stop spending. Cut back. And we have to reward the politicians who will cut spending. But instead, when we find one, we tend to throw them out. Yeah. We throw them. Well, I don't. But there are people who do.

[00:55:42] What I found, what I find troubling is that we, at this point, while we're recording this, and I hope that this series lasts a bit longer than what I'm about to say. But while we're recording it, the Save America Act still has not been passed into law. It is a simple bill that would require proof of citizenship to register to vote and voter ID. It doesn't really cost anything. Yeah.

[00:56:07] There's some money involved, but in the grand scheme of how much the federal government spends, it's a teeny, tiny, tiny amount. In order to pass it, what they're looking at now is adding it to a budget reconciliation process. And they have to figure out a way to make it spend more money, which is crazy to me.

[00:56:28] And so the Congress itself is set up to reward the people who are asking for money and not the people who are asking you to just leave us alone, let us do our life and do the things you're supposed to do. And one time I went and I spoke to a member of the House Appropriations Committee. And he said to me, he was very honest, and he said, we don't know what to do with you.

[00:56:54] You are the only person who's ever come in here and the people associated, like the local people who lived in his district associated with the Tea Party movement. You're the only ones who've come in and told us you don't want any more money. Yeah. Everyone else asks for more money and we know how to take care of that. We don't know how to do what you're asking. Mm-hmm. Yeah, isn't that a sad commentary? It's a pretty good explanation for the mess that we've gotten ourselves into. Yeah, it is.

[00:57:24] And it's going to take leadership. And what I always think of is if we can't get the leadership that we need from Washington, D.C., we have to just be the leaders we're looking for, which is why we're doing this training and trying to educate people so we can go and talk about why we need to limit the amount of printing of money. And why we need to look at ways for the government to spend less money so we don't have inflation so it doesn't artificially mess up prices. Yeah, exactly. I agree.

[00:57:53] Well, Larry Reed, thank you very much for this conversation today. My pleasure. Thank you, Jenny Beth. We have one more episode on economics with Lawrence Reed, and I hope that you stay tuned for that one and tune back in for it. We'll be talking about myths and misconceptions in economics and economic history. If you missed the first few sessions, be sure to go back and watch those. And also, he's written a book, and we have an interview about the book that he wrote as well.

[00:58:21] So there are three previous episodes I hope you'll go and check out if you haven't already. And if you're enjoying this conversation and want to have more like it, make sure you're hitting like and subscribe and that you share this with your friends. It's a way for us to reach more people and really help us teach more people about money and economics and inflation so that we can continue to educate and activate people just like you. Thanks for joining. I'm Jenny Beth Martin, and this is The Jenny Beth Show.

[00:58:51] If you enjoyed today's conversation, go ahead and hit like and subscribe. It really helps us reach more people who care about liberty and the Constitution. You can find this and other episodes at JennyBethShow.com, as well as Facebook, YouTube, Rumble, Instagram, X, and your favorite podcast platform. The Jenny Beth Show is hosted by Jenny Beth Martin. The Jenny Beth Show is a production of Tea Party Patriots Action.

[00:59:17] For more information, visit TeaPartyPatriots.org.