0:33 Intro. [Recording date: February 25, 2015.] Russ: Our topic today is whether we should have a monetary constitution, a set of rules governing government's role in supplying money, along with what those rules might be. We're recording this episode in front of a live audience at the Cato Institute and in honor of a new book that Larry has co-edited with Viktor J. Vanberg, Ekkehard A. Köhler, Renewing the Search for a Monetary Constitution. Larry, welcome back to EconTalk. Guest: Thanks, Russ. Good to be here. Russ: Now, this book is the result of a symposium organized by Liberty Fund in honor of a book written 50 years ago, In Search of a Monetary Constitution, which was edited by Leland Yeager. So a lot of what we are going to be talking about today is what we've learned in the last 50 years about money and government's role in money. But I want to start with the basics. What do you mean by a 'monetary constitution'? Guest: Well, that's one of the issues we debate in the volume. But you can think of a monetary constitution as a set of rules that govern the creation of money. In particular by the government. So, you can either think of it as a set of prescriptions that say what the government may not do to interfere with the monetary system. Or you can think of it as empowering the government. And then of course you can combine the two: the government is empowered to do such and such but not go beyond that. So, there are provisions about money in the U.S. Constitution. So, that's one of the topics we discuss in the book. But there continues to be debate about what they mean. And most of our discussion in the volume is about whether they are adequate: whether we've ended up with the kind of monetary system that the Framers wanted or that we should want. And we're not limited to the United States. Many of the contributors are from Europe, so we discuss the Constitution of the European Central Bank as well. Russ: Well, you mention that the Constitution deals with money. It deals with other things, too, by the way. Most of which we banish and neglect. So it wouldn't be unusual that there'd be something similar with money. But let me start with a basic question which a lot of economists in seeing such a volume would ask--not me, but others would: What would we want a monetary constitution for? The Fed's doing a great job. Saved us from the Great Recession. We had the Great Moderation, this wonderful period of success that was stewarded by these geniuses as the great steering wheel of the ship of the economy. Guest: Well, I think we found out in the financial crisis that the Great Moderation was hollower than we realized at the time. In a way, the timing of this volume is similar to the timing of the 1962 volume in that, it's true it's being published in a period of low inflation. Inflation has been between 1 and 2% in the last few years; and in the early 1960s it was between 1 and 2%. But as we've seen in the intervening 50 years, it didn't stay there. And we had all kinds of monetary troubles in the last 50 years. And the idea that the Fed had finally figured it out and we don't need to tell them what to do any more because they've got it completely figured out, I think was revealed to be much too optimistic. Russ: I'm sympathetic to that view but let's--I want to push back a little bit. So, clearly the period from 1962-1982 was not so good, toward the last part, very high inflation-- Guest: Double-digit inflation. Russ: Double-digit nominal interest rates as a result. Then there came this alleged golden era where they "figured it out". And couldn't you argue that, okay, things went bad in 2007-2008, but that wasn't the Fed's fault. That was the fault of an aggressive housing policy, exuberant animal spirits. And the Fed actually intervened and did a great job once they were called on to save things? Unlike the Great Depression, say, where Milton Friedman, Anna Schwartz, others have said that they failed their mission at that time. But now, Ben Bernanke, being a student of Milton, he knew what to do and look how well it turned out. Broad brush enough for you? Guest: Yeah, well, where do I begin? Russ: We've got an hour. Guest: Okay. Well, I think the Fed did a little better than it did in the early 1930s, in the sense that we didn't have so drastic a collapse in the economy. Of course, a lot of things have changed that make the economy better diversified. But, we did have the sort of careening from 4.5% inflation down to -2% inflation and then back up. And then of course we had all the financial troubles. It's true that housing policy had a lot to do--has a lot to do--with explaining why it was a housing bubble and not some other kind of bubble. But if you see people behaving exuberantly, and not just a few people but you see that it's widespread, you have to ask yourself: What's the common signal to which they are referring? To which they are reacting? If you see everybody at the party beginning to act a little crazy, you have to ask: Who spiked the punch bowl? And my view is that the Fed had a lot to do with it. They made the funds available that went into the housing investment, well, the housing purchases, driving up the prices of houses, making mortgages cheaper than they otherwise would have been, making mortgages available in greater quantity to people who were less creditworthy than in previous experience. So, I think it's the interaction of the bad housing policy and the bad monetary policy that spiked the punch bowl, that made this overinvestment boom in housing possible. If you just look at the price level, you wouldn't have seen anything going on. But I think that's part of the problem with the way that the Fed has been running policy. They take moderate inflation as a license to do whatever they like with interest rates and with financial policy. Russ: So I also add to the mix the bailing out of creditors in the preceding decades to this, which I think emboldened the drinkers at the punch bowl to spend a lot of other people's money and in irresponsible and imprudent ways. But let's put that to the side for the moment. Let's just look at the last 5 years. So, let's be agnostic on whether the Fed is the cause of the drop in output, the high unemployment rate that we dealt with. What kind of marks do you give the Fed for its behavior in the last 6 years when the economy slowly recovered, and many would say--again, I'm not one of them, but many economists would give them very high marks for averting a crisis, injecting liquidity into the system and making sure that the economy recovered? Do you agree with that? Guest: I actually have more complaints about the Fed's credit policies than I do about its monetary policies in the last few years. So, they've kept monetary policy on a kind of even keel. I think interest rates probably should be higher. I think they are continuing to keep us in this ultra-low interest-rate regime much longer than is justified. And that may come back to bite us. Russ: I think that's an excellent point. I think one view is, it's too early to tell. Guest: Yeah. Russ: It's like when they said we'd get a lot of our money back from the bailout of the TARP (Troubled Asset Relief Program) and I'm thinking, 'Yeah, what about the long-run cost that you've ignored?' But, go ahead. Guest: Yeah. So, the real problem in the last few years, and during the financial crisis and thereafter has been the sort of lack of constraint, a lack of limitation on the Fed to the rule of law. I mean, they've sort of been making stuff up as they go along, bailing people out, continuing that kind of policy. And creating a very uncertain environment as to who is going to be saved and who isn't. And whether we can count on the market--we can no longer count on the market to discipline banks that pursue imprudent policies. Especially the systematically important banks. Russ: Yeah. I think that's a disastrous thing for democracy. And capitalism.

9:45 Russ: Let's put the Fed aside now and let's look at some alternatives that are discussed in the book. Let's start with a broad question: What's special about money? And you raised this question in your introduction to the book, a very nice essay that explores many of the issues we're talking about today. And I recommend it to our readers, as well as the rest of the volume. But you start off with a very basic question, which is: What's the government--I mean, the government's really involved with money. Guest: Has been for a long time. Russ: Has been for a long time. We understand why sovereigns like sovereigns. They're into that. So, what's the theoretical case, if any, for why government should be involved in the supply of money? Guest: It's actually hard to pin down what is the case, because most economists who even see this as a question--why does government provide money?--tend to sort of zip by it in a couple of paragraphs. Russ: Like, why is the sky blue? It's just a reality; we move on. Guest: Well, so it's obviously: everybody uses the same money, therefore it's something the government has to provide. But if you sort of dig down into the technical question of whether money has the characteristics of a public good--the characteristics of being my consumption of it doesn't diminish your consumption of it, like when I tune in the radio it doesn't diminish the amount of radio you can tune it--that doesn't apply to money. The money in my pocket is not in your pocket. Russ: You're using the 'public good' here as a technical term that economists use for special--it doesn't mean just 'a good thing.' Guest: No. It doesn't mean 'a good thing for the public.' It means a good that the market has trouble providing because you can't sort out who is getting the benefits in what degree, and you can't exclude people from enjoying it even if they don't pay. So, the market does well with goods where you can make the user pay, otherwise you don't get it. And then you have an incentive to supply it because you get paid for supplying it. So the claim is that money is different from that. But it's hard to see it. I mean, as I said, the money in my pocket is not in yours. So banking has been private for a long time. Russ: It could be, though. Guest: Well. Before that, coins. Same story. The coins in my pocket are not in your pocket. If you ask, Why did government get onto this track of monopolizing the production of money, you have to go back to the early monarchs and kings who monopolized the mints. But it wasn't always so. As far as we know, the earliest mints were private merchants who were sort of certifying the weight and the purity of the pieces of metal they were trading with. And if you ask, why would government take that business over--and we've got lots of historical examples of private mints, even in the 19th century before they were outlawed. In the California Gold Rush there were a dozen private mints. Why would government take that over? It's like asking why does government run buses? There are sort of two possible explanations. One is there is a market failure to produce efficiently the good in question. And the other is that it's somehow in the government's interest, most likely there's a fiscal motive. And if you look into the question of whether governments have improved the quality of coins when they've been in charge of issuing silver and gold coins, the answer is, 'No.' They've notoriously debased the coins. Whereas the private mints actually had a pretty good track record. Because their business depended on the coins being regarded as reliable. Whereas if you have a monopoly and you have a law that says people have to bring their silver to you for coinage and are not allowed to take it anywhere else, you can debase it without losing all your customers. So, just on the evidence it seems like the fiscal motive was at work, and-- Russ: 'Fiscal motive' makes it sound pretty high falutin'. Guest: Phrasing relatively[?]. Yeah. Russ: It means exploiting the opportunity to control the currency to make more profit than they otherwise would. Guest: Make a profit. That's right. And in the Middle Ages and during the wartimes sometimes two-thirds of the sovereign's revenue came from the Mint. So, if you want to be less high-falutin', they asked Willie Sutton why he robbed banks, and he said, 'That's where the money is.' Russ: Yeah. Guest: Why do you control the Mint? Because that's where you can make a lot of money doing that. You can call in the old coins, take half the silver out, issue new coins, and now you've got half the money supply; replace everybody's coin with half as much silver. Now you've got half the silver to spend. If you move on to more modern money, it was banks that introduced checking accounts, that introduced paper money in the form of bank notes that were redeemable for gold or silver. And governments eventually monopolized the issue of paper currency. They haven't monopolized, at least in the United States, the issue of checking accounts. In some developing countries the only checking account you can get is in a government-owned bank. So--and they use that as a source of revenue. Russ: I have to mention a couple of things. I find it amusing when people say, 'Well, there is private issuing of money--they just exploited and make a profit.' Of course, the government has done that for centuries. Guest: Yeah. Russ: You might like to think it was confined to monarchs. But of course in democracies, that tendency has apparently been a problem as well.

15:24 Russ: We've done better recently relative to the historical record. And we'll come back to that. I just want to make one other point about public goods, though, because I think it's so important: this temptation to say, 'Well, we know from theory that x can't exist.' Famous example is: Lighthouses can't be provided because it's a public good. And Ronald Coase pointed out that communities of sailors got together and found a way to provide a lighthouse anyway. And I remember, oh, maybe 20 years ago, papers being written that said we had to have government control of taxis because it would be inefficient; too many cabs would come in; all the cab drivers would be driven out of the market; they wouldn't make enough to stay in business. Yet somehow Uber, Lyft, and others are thriving. Not in the way that the theorists imagined, of course. But in a different way. That we weren't as economists clever enough to imagine. So, I think we should always be careful when we say, 'Government has to do x'. Having said that, James Buchanan argues that it's efficient for government to provide money. So, what is his argument and what are your thoughts on that? Guest: I want to react to something you said a minute ago, which is, when private people produce money they also exploit the profit opportunity. Well, but as long as they are under competition, it's not that they earn monopoly profits. It's that the public gets a better product. So, Buchanan--I don't know if this is going to be one of his last publications. Of course, he died shortly after our conference. Well, 9 months after our conference. This may be one of his last papers. Buchanan makes the case the monetary constitution should empower the government to produce money, and direct it to stabilize the purchasing power of money. So when he says 'inefficient' what he seems to mean is, you're not going to get the kind of money you want unless you write down the set of rules saying this is the kind of money we want, and direct the Central Bank to produce money that has that characteristic. So, he draws a distinction between money and other goods--which we were talking about a minute ago--and says, money is different in that, with other goods we just provide a legal framework and let the market sort out what the qualities of goods are going to be and who produces them and what the prices are. But in the case of money, we want to specify the characteristics in terms of the behavior, the purchasing power of money, because the most important thing is predictability. And predictability means either 0 inflation or an easily predictable rate of inflation. I think he's kind of jumping the gun, here. There are theoretical arguments that the public may prefer money that actually pays a positive rate of return. Milton Friedman's famous Optimum Quantity of Money argument is that if you had the government acting and issuing un-backed paper money, if you had it acting like a competitive firm, they would have to pay a competitive rate or return on this IOU they are issuing. So, it should appreciate. Or, in terms of the price level, the price level should be gradually falling. That's sort of looking at it from the point of view of a monetary consumer. So, it depends on what kind of money consumers want. And I think Buchanan's preference makes sense but it may not be everybody's preference. And we shouldn't short-circuit the market process of discovering exactly what kind of features people want in their money. Given a choice between paper money that's manipulated in a certain way or that is supposed to be manipulated in a certain way, and a commodity money, people may prefer a commodity money even though gold does not have a perfectly constant purchasing power. Under the classical gold standard, there were years of +2% inflation and years of -2% inflation. Although on average it had pretty close to a 0% rate of inflation.

19:42 Russ: So, let me bring it back to his constitutional idea. You could argue--it would be foolish, but you could argue--wouldn't it be better if Americans only had one religion? We could all be together, in one big community. And yet we've decided, Constitutionally, that that's a bad thing for the government to try to create. And so, in that case it's very clear that there's a bunch of people who want no religion. There's a bunch of people who want a religion other than what the central religion would be. So, going back to your version of Buchanan's argument: Okay, maybe Buchanan's wrong; maybe people want lots of money--different kinds of money. But I want to think about the constitutional issue in a slightly different way. Which is, we basically say to the government with respect to religion, 'Hands off. Don't get involved.' What's the argument for that in the monetary constitution? What's the monetary analogy? We see its virtues with respect to the press, with religion. One of the challenges I think you have of convincing people I think who are skeptical about the virtues of a hands-off policy, is that, 'Well, we've never had that, and that scares me. So I think I'll stick with the devil I'm used to.' But make the case for why that particular proscribed role for a constitution would be a good idea. Guest: So, I don't want to make the argument that, if we left it to the market everybody could have their own kind of money. Well, they could, but everybody would have their own kind of money and you'd have, you know, hundreds of different competing monetary standards in the same economy. I don't expect that. All the historical evidence says there are reasons of convenience to converge on a common monetary standard. But the question is: Which monetary standard should it be? What that would mean for a monetary constitution, a sort of hands-off policy, would be, have the usual rule-of-law, property rights, contract enforcement--have those kind of things apply to monetary contracts; have the ordinary rules of business law apply to banks; but don't have special discriminatory laws that hamper banks or that favor certain banks. You know, for a long time we weakened the U.S. banking system by restricting banks, say, from branching across state lines. In recent years we've switched-- Russ: We've fixed that. [?] of them, really. Guest: We've switched to weakening the banking system by giving them privileges. Russ: Yeah. Guest: So that they have less incentive to behave prudently. So, if the government had never interfered--and I have evidence on this in the chapter where I contributed to the volume because my chapter is on the history of free banking and the theory of free banking--we can look at systems that had the most minimal government intervention. There's no case of zero. But the systems where the intervention was the least were the most stable. And had the most success. Had the most innovation in banking. Had the most competition, of course, in banking. Provided the best services at the best prices to their customers. Russ: Why did they end, if they were so good? Guest: I think largely for fiscal reasons. So, the system I've written the most about is in Scotland, roughly from 1720-1845. But in 1845, the British government, because Scotland was part of the United Kingdom now, decided to sort of amalgamate all the banking rules between the rest of the United Kingdom and Scotland, which up till then had had a sort of separate set of banking rules. Basically for the benefit of the Bank of England, which was the monopolist in London, that was lending money to the British government. So, the wider the circulation of Bank of England Notes, the more it can lend to the government. And there seems to have been some concern about Scotland being a kind of embarrassing example of how the government doesn't need to intervene in the banking system. But anyway, if you look at that case, if you look at other cases, I think the pattern is pretty clear that the least restricted systems are the ones that performed best from the point of view of the average user of money. And those were systems that were on gold or silver standards. And there doesn't seem to have been any great dissatisfaction with that. There were proposals by some economists to try to have a system that was even more stable in purchasing power. But in retrospect, the variations in the purchasing power of the dollar under the classical gold standard were trivial compared to what it's been under the post-gold-standard period, the fiat dollar standard. And Buchanan talks about predictability as an important feature of money; and I agree more predictability is desirable. But if you look at the--one practical fall-out from the shift to a fiat dollar is that the predictability of the purchasing power of the dollar has gone down. It's true that in the last few years, inflation has been fairly low and steady. But nobody can count on that continuing. And so nobody's willing to buy 50-year bonds under today's monetary standard, the way they were under the gold standard, because they can't predict what the dollar is going to be worth 20, 30, 50 years from now. Russ: Explain what 'fiat money' is. Guest: So, fiat money is money that is not backed by gold or silver or any commodity. It's just issued by the decree--'fiat' is a technical term meaning a decree--by the decree of the government. So the government says, 'This is money.' And if you read the fine print on your dollar bill, it says, 'This is legal tender for all debts, public and private.' Which means, this will pay any debt denominated in dollars. If you've been paid with these pieces of paper, you can't go to court and say, 'I haven't been paid because when I made the contract I was expecting to get gold.' Too bad. Russ: If I make a contract that says I want gold, I can enforce that, right? Or no? Guest: That remains-- Russ: Or bitcoin? Guest: That remains to be determined. It's actually a little bit up in the air. Availability of gold for ownership by U.S. citizens, which was illegal for several decades, has been restored. So you can own gold. You can write contracts denominated in gold. The question is if the other party wants to pay them off in dollars, what the court will decide. I don't think we've had a clear ruling on that.

26:57 Russ: So, your example was, if we started from scratch, with, say, free banking, we have some evidence that it might turn out okay. We're not at scratch. We're in the middle. Guest: That's right. Russ: So, give me a possible route by which we could either reduce or eliminate the government's role in the issuing of currency. One, right now, if I want to issue currency that competes with the government, I guess it's iffy. Bitcoin is out there. Guest: Yes. I did a paper for the Cato Monetary Conference a few years ago, which is in The Cato Journal, on two cases of people who tried to compete with the Federal Reserve in issuing money and were shut down by the Federal Government. The case of the Liberty Dollar, which was a silver coin and silver-backed bank note. They didn't shut down the bank notes but they came and raided the operation and confiscated all the coins they could find. This was a project by an entrepreneur--well, it was a non-profit project--but an entrepreneur named Bernard von NotHaus. He was convicted of-- Russ: What was the crime? Guest: The crime was, there is a provision in the Federal Law dating back to the Civil War that makes it a crime to issue pieces of metal, well, or anything, that are intended to circulate as currency. He was also convicted of counterfeiting, as though his coins were identical to the U.S. coins--which was ridiculous. He was recently sentenced, after many years of delay. And his sentence is limited to probation and monitoring. So that was a relief. Russ: You've got to keep an eye on a guy in case he starts printing up coins. Guest: But his business was shut down, and people who are owed money from that business-- Russ: [?]-- Guest: have yet to be resolved. Russ: So the-- [?] Guest: So, the [?]. And the other business was EGold. So, EGold was-- Russ: E-dash-gold? Guest: E-Gold. E-dash-gold. Well, actually there wasn't a dash in the trademarked name of it. Russ: Sorry. Guest: So it was an online system for transferring ownership of gold, where your account balances were in gold ounces, and you could transfer them to other people in the system, just like you can, you know, go online and transfer dollars in our current system. And that was shut down for violating money laundering laws. So, one way to come back to, to re-open the possibility of owning sound money for people is to illuminate these kind of legal barriers that prevent private entrepreneurs from trying to introduce some other kind of money. Now I, a minute ago, talked about the convenience of being on the same monetary standard with everybody else. So I don't expect these kind of projects, or Bitcoin, to take off in a big way, until the dollar starts to show much greater instability than it has at the moment. Because you see that--you've seen that in Latin American countries: high inflation, people dollarize themselves. So, they use an external money. And in the extreme cases, the government tosses in the towel. So, in Ecuador, they said, 'Okay, nobody wants our currency any more. Let's just stop issuing it and just have the dollar be our official money.' Russ: The U.S. dollar. Guest: The U.S. dollar. So, that's one way to get a sounder money, but we don't really want to go through that. 3035 Russ: So we should be rooting for inflation. Guest: No. Russ: To encourage-- Guest: we don't want to do that. Russ: Okay. But my question is, for example, I'm trying to think of analogies that would give people comfort. So, FedEx came along. And FedEx found a little loophole--the U.S. government has a monopoly on the delivery of letters and first-class mail. Whatever that means. Of course it's open to interpretation, I assume. But FedEx created a product that was considered legal. Which, I'm sure took some creativity. Guest: It was express delivery. Russ: Express delivery. Overnight, quick. Which certainly was in contrast to its government competitor. Russ: And it turned out pretty well. The government could have shut them down. They could have changed the law. Legislators could have responded, changed the legislation to have prevented it. Guest: The Courts could have ruled in favor of the Post Office. Russ: Correct. In which case there would be no competitor. Or, the government also could have said, 'Hey, this is great! We need to get out of this business. We'll do something else.' They didn't. They've moved along in parallel; other places have come along, DHL, UPS, etc. And UPS was already delivering packages, but express delivery became more diverse. What would be your ideal for how we would allow a thousand flowers to bloom--would you like to see the government just say, 'Anything goes? We're open to competition?' Or would you prefer to have the government out of the business entirely? Guest: Well, the first step would be to say it's open to anybody who wants to come along with a new idea. And so, we repeal the law that makes it a crime to produce pieces of metal of whatever shape and design that are intended to circulate as money. We revise the money-laundering laws and the know-your-customer restrictions so that there's a level playing field. Russ: What are 'know your customer' restrictions? Guest: So, 'know your customer' is, nobody is allowed to open an account or transfer money, basically, without revealing their identity to the institution that's doing the money transferring. Russ: Can't have Swiss banks in the United States. Guest: You can't have numbered accounts. You can't have anonymity. That's right. Russ: That's to prevent criminals from--? Guest: So, if we were serious about that, we would want to withdraw $100-dollar bills, because that's actually the preferred medium of payment for criminals. Russ: And there's been some serious talk about that, actually. Because that would raise the cost, presumably, of transacting--you'd have to give out 5 $20s. Exhausting. Guest: But getting the government out of the business is actually a thorny question. Because as I said, there's actually a great convenience in being on the same monetary standard. So it seems to me we can't just advocate for liberty of competition in money, but we also need to do something to write a constitution that constrains the existing monetary system. Or provides a path for winding it down. One way to wind it down would be to go back to a commodity standard. We used to have a monetary system in the United States without a Central Bank. We could go back to that. Russ: It's pre-1913. Guest: Pre-1913. Russ: How is that possible, [?] happened didn't it? Guest: Well, we'd have to put a different monetary standard in the place of Federal Reserve dollar. So, a commodity standard is one option. People in the volume talk about other options. Instead of a single commodity like gold or silver, a multi-commodity basket is one possibility. Just freezing the supply of Federal Reserve liabilities so the Fed no longer has discretion to run a monetary policy is another possibility. But then there are sort of more status-quo oriented or more moderate ideas discussed in the volume, like Scott Sumner's idea to give the Fed a set of instructions about monetary policy that eliminates its discretion. And that of course is an idea that goes back to Milton Friedman and before, that we would want the monetary rules rather than the discretion of monetary authorities.

35:13 Russ: I want to come back to that, but I want to--since you brought up a commodity standard such as gold or silver or a basket of commodities, I want to talk about that. And I want again to bring it back to what modern macroeconomics, the way I was taught--I don't know if you were taught that way, too. But there's a certain mythology. Perhaps some of it's true, perhaps none of it. You tell me. But there's a certain idea that, well, before 1913, before there was a Central Bank to conduct monetary policy, the economy was struck now and then by the whims and winds of gold supply, animal spirits, etc., and there was no way to counter those with monetary policy because there was no Central Bank. And the virtue of the Central Bank in this story is that it's a steering wheel that allows us to offset the swerves and spills that would otherwise take place if no one were in charge. So, if we had--and help me out here. What's the difference between, say, the free issuance of currency, private, and, say, a gold standard? Or a better way to say it, pre-1913? What world were we in, pre-Federal Reserve? It wasn't free banking. Guest: No. Russ: So, what was it? Guest: It was a system in which-- Russ: And what was good and bad about it? Guest: We had a gold standard-- Russ: And why might we want to go back there? Or stay away? Guest: We had a gold standard. Paper currency was issued by private commercial banks--in the United States, the national banks. So, banks had Federal charters, had the authority. Now, they were restricted in various ways. In particular, they had to buy Federal government bonds to back their currency, to serve as a kind of liquidation fund in the event a bank failed. And there you see the fiscal motive pretty clearly at work. This was a Civil War measure: 'How do we get someone to lend us money?' the Union Government said. 'We'll have the banks have to buy our bonds if they want to issue bank notes. So that was the arrangement. A sort of better model would be a freer banking system, like Canada at the same period. So you've got nationwide branching of banks, banks issuing their own bank notes. But they are interchangeable. They all circulate at par value in terms of the gold that they are redeemable for. So, that's a system in which the quantity of money in the economy as a whole is ultimately governed by the international gold standard. The famous price-specie-flow mechanism, which says that if your price level gets higher than the world price level, your citizens will start buying imports; that will make money flow out; that will make your money supply shrink; that will make your price level come back down to the world level. And then it will stop. You'll reach an equilibrium. So, it was a kind of self-regulating system. Russ: So, in that world-- Guest: Now, recreating that in a world without an international gold standard, that's a real problem. Russ: But in that world--there were a lot of recessions. Just like now: there are recessions. The government just kind of twiddled its thumbs. I guess. Right? Guest: Right. Russ: Which would be disturbing to a lot of people. Not just economists. There would be a political clamor for doing something. Guest: There is this widespread view, or myth, I should say, that business cycles were much more terrible in that period. Russ: Bank runs, crises, panics. Guest: There were those things every so often, because the United States had a weak banking system. But even given that weak banking system, if you look at aggregate data on recessions; if you look at variation in the real output of the economy, if you look at the length of recessions and the frequency of recessions, that system was no worse than a system under the Fed. And George Selgin and Bill Lastrapes and I have an article setting forth that evidence, mostly drawn from the work of other people who are not, you know, talking about free banking, like-- Russ: Not crazy people-- Guest: Christina Romer. That's right. Guest: Exactly. I mean, that's what the system looks like. So the Fed has not in fact delivered on the promise of stabilizing the business cycle. Now maybe it could. But it hasn't. Russ: Yeah. We need to look more. Learn more. You could argue that the world as we know it is more complicated. More prone to business cycles. Globalization. Who knows? There could be other arguments beside just the monetary framework that we are talking about. Guest: Being more diversified actually works against business cycles. Russ: I understand. You'd think. Guest: I mean, we had agricultural shocks in the 19th century. Locusts could cause a recession. Russ: Yeah. I guess that's true.

40:07 Russ: So, let's talk about, then--it would be hard to recreate that world, because we don't have an international gold standard. We're in America. I assume that's--or any individual country. What constitutional constraints can we put on the current system that might improve matters? So, let's not be crazy. We're stuck with the Fed. We're stuck with monetary policy. What should the Fed do--not what should the Fed do: What restraints should be on the Fed to keep it from getting us into trouble? What are some of the choices? Guest: I should say that the volume, the book we're talking about has a variety of proposals in it, so it's not all free banking by any means. Russ: You only get a chapter, right? Guest: I only get a chapter. Russ: Yeah, that's an oversight, there. Guest: There are a couple of other people who are favorable. Well, it's a good question. My view is that any constraint is better than no constraint--well, that's a little strange. Russ: I know what you meant. Guest: Many constraints are better than no constraint. And so, a popular constraint which a lot of central banks have adopted in the last 30 years is an inflation target. And it seems to me that that's better than no constraint. And the Fed has adopted an inflation target now, explicitly; except that the Fed adopted it, rather than Congress imposing it on the Fed. So the Fed could abandon it at any time. It's not a constraint in the same way as a legislatively- or Constitutionally even better-imposed constraint. But I'm persuaded by arguments in the volume and elsewhere that as far as fastening a rule on the Fed, a nominal income rule would be better, one that says-- Russ: Explain how that would work. Guest: Yeah. So, what the Fed should be concerned about is the total amount of spending in the economy, not just the stock of money and not just the price level. Guest: And not the interest rate or the overnight Federal Funds rate. Guest: Certainly not interest rates, that's right. But what that would mean is if there isn't any additional hoarding going on, or any dishoarding going on, then the Fed just pursues even money growth. But if people want to, for whatever reason, want to hold money--they want to hold more money balances relative to their spending, then the Fed should supply the additional money that people want to hold, because the alternative is that spending drops off; and that has real repercussions that we're better off avoiding. It's true that if the price level adjusted instantly, the market would clear-- Russ: It would be irrelevant-- Guest: and we'd be fine. But prices are sticky, I think is a fact about the world we are living in. Russ: Well, and information is imperfect. A bunch of people show up at your store; you don't know if they are there because they have more money in their pocket or less desire to hoard money, keep money, or whether your product is really great. So you could make a lot of real mistakes in the short run-- Guest: That's right-- Russ: trying to figure out what's going on. You can't ever figure out what's going on. So you will inevitably make mistakes. So, the argument I think is it would be better if what I saw coming into my store was real rather than nominal--that would be one way to put it, right? Guest: That's right. And actually stabilizing nominal income is a better way of reducing that signaling problem that people have, that sellers of goods have, than stabilizing the price level. So, some people who want to stabilize the price level acknowledge this in the case of an adverse supply shock. So, there's an oil price rise, let's say, and the United States is an oil-importing country. The price of oil goes up; the price of gasoline goes up; the price of things made with oil go up. If you want to stabilize the price level, you have to push other prices down so that the average level of prices doesn't rise. But the rise in the price of things made with oil is providing information. It's not clear why you want to cloud that information by pushing other prices down, because that means a tight monetary policy, tighter than people expected. Russ: At least in the short run. Guest: So you're hitting the economy with a double whammy. It's got a real shock and now it's got a monetary shock on top of that. Both of them negative. And some people who favor a stable price level will say, 'Okay, yeah, we grant it in that case.' But then they should also grant it in the other case. If you have an increase in the productivity of the economy, either a positive supply shock or improvements in technology, improvements in labor productivity or total factor productivity, you should let the prices of those particular goods that are now being produced more cheaply, let those prices fall. Don't try to offset that by raising other prices. Russ: Is that going to happen naturally? An oil price shock doesn't cause inflation; the Fed wouldn't have to do anything. Or are you talking about in the short run, when the signals are confused, right? Guest: Yeah. Russ: Those prices are going to have to fall--the Fed doesn't have to drive down the other prices. They are going to go down anyway, on their own, right? Guest: Oh. Eventually they'll go down on their own if people are spending more on oil. Russ: Yeah. Guest: Depends on the elasticity of demand for oil. But if they are spending more on oil, right--they'll be spending less on other things. Russ: So the Fed wouldn't intervene there. To me, the issue is just measuring price indices accurately in a time where we are blessed to live, where quality is changing every day. Every day, almost, the world is getting better and the products are getting better. And so assessing what's actually happening, the overall price level, seems to be much more difficult than it was 25, 50 years ago, when the economy was much more static. So to me the question is, given that uncertainty, that measurement uncertainty, is nominal GDP (Gross Domestic Product) targeting--are they going to be better? I'm not sure. I'm not sure it makes any difference. I'm not sure that really gets around that. Guest: Yeah, it actually is easier on that score, because you don't need to know the right price index to do it. Russ: You don't need to, but the question is are you still--are you doing the right thing? Guest: Yeah. I think for the reasons we talked about earlier. It is a problem if you want to stabilize the price level that you have to take account of quality changes, and that's difficult. There are all kinds of, as you've been saying, quality changes that goods experience. So, if it's a simple thing like your tire lasts 60,000 miles instead of 40,000 miles, you can make an adjustment. But what if it gives you a better ride? How do you adjust for that? Russ: What if it has a microwave oven in it? While you're driving along? How do you weight that? Guest: So, some people are under the misapprehension that it's harder to stabilize or to target nominal income because it's the product of real income and the price level. But that's actually not how it works. First the statistical authorities gather information on nominal income and then they derive real income by dividing by a price level. Russ: Which they also have to derive. Guest: Which they have to construct by going out with clipboards and writing down prices and then trying to make adjustments for quality changes. So you save yourself that trouble if you are just looking at total spending.

47:50 Russ: Before we go on talking about this, I just want to make sure we get this question in, which is: The independence of the Fed is a popular conversational topic in Washington, D.C. these days. And I always find it moderately amusing--there's this fear that, oh my gosh, the Fed is going to have these kinds of constraints; it will be politicized, perhaps. It seems to me it's perhaps the most important political and politicized institutional in America. You want to say something about that. Guest: Yes. Well, I recall Ben Bernanke making joint press conference appearances with the Secretary of the Treasury, Hank Paulson, so I think that ship has kind of sailed, where the Fed says, 'Oh, no: we're pure and chaste on this political influence question.' Mark Calabria from the Cato Institutional wrote a piece recently saying, Look, independence of the Central Bank means independence from the executive branch. They are not supposed to take instructions from the President or the Secretary of the Treasury--which is what we've seen a gross violation of in recent years. It's impossible for the Fed to be independent of Congress. Congress wrote their statute. They can revise it. They revised it most recently in the Dodd-Frank Act. So, it's true we don't want Congress back-seat driving monetary policy on a week-by-week basis. But calling for the Fed to account for its actions to Congress is not a violation of the kind of independence that matters for monetary policy. Russ: Yeah. It seems one of the strangest things you could possibly imagine, this idea that--I mean, it's a nice fantasy for economists: We're so brilliant and have such high integrity that you can just put us over here in this black box and we'll work on the levers and turn all the dials to make sure the economy does great. And we never go to cocktail parties; we never get called down to Pennsylvania Average., etc., etc., etc. It's all just a bunch of devoted technocrats working on their craft. And that seems to me to be a-- Guest: And when we have a press conference to describe what we've done, we'll describe it in the most neutral, uncolored terms. Russ: Yes. Guest: We'll be completely frank and honest about our success record. Russ: That whole thing, to me, it strikes me that it would be better to be open and transparent about the political nature of the Fed, where accountability, usually even democracy is a good idea. Even if it's accountable to something as strange as Congress. But accountable to something would seem to be a good idea. Guest: Yes. So, the most shocking thing to me--we had a partial audit of the Fed coming out of the Dodd-Frank Act. But even then we didn't learn until there was a Freedom of Information Act suit against the Fed from Bloomberg News that we learned that during the financial crisis the Federal Reserve Bank of New York had a line of credit ready for Bank of America, and another one ready for Citibank, in the event they should need it. Right? Something that no other bank got. This should be public knowledge. I mean, this should not be the Fed's call. We're sort of beyond monetary policy here--this is a credit policy. When the Fed claims independence, it's ridiculous to claim it for things that aren't even monetary policy--that are credit-allocation policies. Russ: Well, they have a lot of responsibilities. They have a lot to take care of.

51:35 Russ: Let's talk about another possible way we might restrain the Fed that gets talked about, which is the Taylor Rule. So, the Taylor Rule evolved as a description of what the Fed did during a time when the economy was doing well. And since people believe that those two are related, they concluded that maybe this would be a good rule. What are your thoughts on the Taylor Rule as a possible constitutional constraint on the Fed? I don't know if you have anything in the volume on it, so we might be going off. Guest: People allude to it, but there isn't a very deep discussion of the Taylor Rule, it's true. Because it's hard to think of it in constitutional terms. Russ: Hard to think of an equation in the-- Guest: Yeah. And it has some variables in it that it's up to the Central Bank to construct. Like, the Taylor Rule says the Central Bank is supposed to minimize a loss function which has to do with the difference between the inflation rate and the desired inflation rate. That one's easy enough to measure. But the other is the difference between the output of the economy and the potential output of the economy. And potential output is completely-- Russ: It's a will-o'-the-wisp. Guest: It's an extrapolation--there are different ways of doing it. There isn't any one clear way of doing it. And since the financial crisis, real output has been consistently below its potential output; and you have to ask: how many years can that go on before they realize that the potential ain't what it used to be? And the potential output has started to droop a little bit toward the path we're actually on. Russ: But, I joked earlier about the fact that the political constitution, the U.S. Constitution itself--not the monetary part or the kind we're speculating about today--that the political Constitution is more of a suggestion. It's not exactly a commandment. We've been flexible. One of my favorite things here in Washington is the Jefferson Memorial. If you go in the Jefferson Memorial you'll see quotes from Jefferson. They've somehow managed--it was built during the Roosevelt Administration--they found a--I don't remember it verbatim; I'll look it up and put a link to it--they found a quote from Jefferson that talks about the importance of flexibility. And not being stuck with rules. At a time when of course Roosevelt was trying to push the envelope on what the U.S. Government was allowed to do. So, one view says this whole constitution idea, although it's an interesting intellectual exercise, it's not really the issue because the real issue is: what does the body politic really want from its monetary policy? And if the body politic wants inflation, or if a particular part of the body politic, the financial sector, has a lot of power and they get what they want, it's unlikely that a constitution will constrain what the Fed might do or what the world might do. So, I just want to propose an alternative. Which would be--and I hate to say it, because I'm against this--but I think it's worth thinking about, which is: we should pick the right person. George Stigler called this the 'Ralph Nader school of regulation', when I took his class. Ralph Nader says, 'We have the wrong people running the regulations. The ones we have now, they're bad. They are corrupt; they've been influenced by political pressure. And they're just the wrong ones. We need the right ones and then everything will turn out okay.' It's imaginable that if you put, say, John Taylor as head of the Fed--which is a possibility. It's not like suggesting that I would be the head of the Fed, Larry. 'If we had John Taylor as head of the Fed, then we'd be pretty comfortable. It's true there'd be some slippage in the Taylor Rule and definitions.' But it's imaginable that he would be constrained by his past statements and personal philosophy to stick with it. Similarly, earlier, if we'd picked Milton Friedman to be the head of the Fed, that he might have followed an optimal quantity of money rule, or the equivalent of computer generated constant increase in M2, say. What do you think of that as a possible solution? Like you? You'd be a good one. Guest: Hmmm. Russ: The enthusiasm's boundless. Guest: It's unfortunately true that under our current system it does matter who is in charge. When G. William Miller was head of the Fed--that was under the Carter Administration--it didn't go so well. They eventually kicked him upstairs and brought in Paul Volker to replace him. So, it does matter, who is in charge. But the cautionary tale here is when Arthur Burns was appointed to head the Fed, Milton Friedman in his Newsweek column said, 'This is great; this is somebody who understands monetary economics; he'll do the right thing; he'll keep monetary growth moderate.' And not a couple of months in office had gone by when Burns started talking about how, 'Well, the economy is not behaving the way it's supposed to because inflation and unemployment are not staying on the Phillips Curve.' And Friedman had to write to him and say, 'Stop talking nonsense, Arthur.' And eventually they stopped being friends, eventually, because Friedman was determined to speak the truth even if the hurt burns his feelings. So, Burns did not live up to his advance billing. Yeah, I think I would feel more comfortable with John Taylor than with Janet Yellen. But even then, it's the wrong kind of system, if the outcome depends really crucially on who gets appointed. That's too much risk. And the whole logic of a monetary constitution is like the rest of the logic of the Constitution of the United States, that you want to tie your own hands as to what sort of wacky adventures the government can go off on. And the sort of classical analogy, of course, is Ulysses tied to the mast so that he doesn't steer the boat over to the island of the Sirens and smash it on the rocks. Russ: That's an important point. Guest: So, maybe what the public wants in its far-sighted self is to tie its own hands. They want the monetary system which can't be manipulated by the experts who are currently in charge. Russ: In a recent EconTalk episode with Mike Munger we talked about how when we choose in groups we sometimes are willing to tie our hands, willing to give up some of our freedom. Voluntarily, we give up our freedom. And it's under certain situations. The obvious one being if I don't comply with the contract, you put me in jail. You can take my money, against my will. But that, I signed the contract willingly, and if I didn't comply with the terms, I face the consequences. Because I understand that's a better world to live in. It's very hard for people to accept hand-tying arguments, because the temptation is always to say, 'Well, it would be better to have freedom to choose.' Guest: I go to meetings where I agree I'm not going to talk unless I raise my hand and I'm called on. And everybody else agrees to it, too. And the meeting goes more smoothly because of that. Russ: Absolutely. You mention getting the right person--I always wonder if you or I were Secretary of the Treasury in 2008 or 2009, would we have had the courage to say No. There have been. Guest: Well, we could have stayed in office if we had had that courage? Russ: That would be a different, that would be another question, right? Obviously there's tremendous political pressure, regardless of one's principles, to bail folks out. And I think, again, that's the virtue of the constraints. And there are constraints other than legal constraints, other than legislative constraints, other than constitution, etc. I just wanted to put that in, because I think it's important.

59:41 Russ: I want to make sure we mention this: If we did have some rules for the monetary system, there is an issue of an emergency--which I can't say with a straight face. But you do talk about it. So, how would we deal with emergencies, where we might want to break the constitution? Which we do, by the way, in wartime, with respect to the political Constitution. We say, it's an emergency. And we lock people up, in ways that we would never do in non-wartime. Guest: So, it would be better if we assume that there's going to be emergency actions taken to constrain them. You might say, in an emergency as defined by the following characteristics, so that 'emergency' can't just be declared at any time. The following exceptions can be made but only the following exceptions. So, the Dodd-Frank Act actually has a section that deals with that. Russ: Have you read the Dodd-Frank Act? Guest: This section of it. Russ: Just checking. Guest: Not the other 2000 pages. But I always like to point out: the margins of the Dodd-Frank Act and other government bills--they are very large, the margins. So when you say, 2000 pages, it's not really 2000. Guest: Well, it's still being written as we speak. Russ: Of course! Well, it's a living document! That's the kind of quote that if I remember correctly FDR (Franklin Delano Roosevelt) used of Jefferson, about 'living documents.' Yeah, go ahead. Guest: So, a lot of people were understandably upset that special bailout arrangements were made for a few identifiable firms--Bear Stearns, AIG. So the Dodd-Frank Act says that there can't be that can't be that kind of bailout for a single firm. There can only be a broad-based lending program to which general criteria for inclusion apply. Now, it remains to be seen whether when push comes to shove that will be honored. We also had--one reason to be pessimistic is that in 1991 Congress wrote the Financial Institutions Reform Act-- Russ: I was just thinking about that. Guest: Which said that there's supposed to be structured early intervention for banks with low capital; they are supposed to be wound up and-- Russ: and management should be taken out of office and replaced. Guest: Completely ignored. When the time came, it was completely ignored. Russ: Ignored. Literally. Right? So, welp, there was a crisis. Was it an emergency? It's a dangerous word. Just want to mention that.

1:02:19 Russ: You write--this is a quote: Central bank histories around the world are equally or even more regrettable than the Fed's, with the exception of the Swiss national banks. What is special about the Swiss? One argument would be--this is the argument I always like, where people say, 'Well, our school systems are awful and Finland's are good.' Although lately they haven't been doing so well in the international tests. But put that to the side. Guest: Yeah. Russ: Ours are awful; Finland's are good. We'll just use Finland's. Hey, they've got a track record. So, whatever Switzerland is doing, let's have more of that. Guest: So, it's just an observation that the Swiss franc has had lower inflation than any other currency in the post-War period-- Russ: Is that true? Guest: Yeah. As for explaining it, I'm not sure. Of course, Switzerland has an interesting constitutional setup, a very decentralized government. Russ: We need cantons instead of states. Whatever those are. Guest: With the exception of the Swiss National Bank, which is a national institution. But exactly why they've been more responsible? I suspect it's the good luck of having a history of monetary economists who were concerned about avoiding inflation. And of course a banking system which does banking for many more people than Swiss citizens. And bankers don't like their currency to be debauched. It's not a good way to attract customers. So I suspect that has something to do with it. Russ: Or it could be just that when you have--how many Central Banks are there in the world? 150? 120? 80? Do you know? Guest: Fewer than there are nations. Russ: There's about 200 countries, right? Guest: Yeah. Russ: So, let's say there are 100 Central Banks. You expect one of them to get righteous by chance. I guess. I don't know. Maybe that's a little pessimistic. Too cruel.

1:04:16 Russ: Let's talk about Bitcoin for a minute. We mentioned it earlier in passing. Explain to folks what Bitcoin is and what it's potential. Those who remember the interview I did with Marc Andreessen will remember that--which was extremely eye-opening for me, which was bitcoin's real potential as a competing currency: it's as a reliable payment system that would evolve, would remove some of the transactions costs of transacting now in small amounts. And the uncertainty about whether, when I make a transaction, I've actually transferred the money. That's really fascinating. But other people are excited about it as a potential currency or a monetary solution. So, talk about it. Guest: When I spoke on this stage in November at the Cato Monetary Conference, my paper was on the "Market for Cryptocurrencies." And somebody in the audience asked that question: Can somebody tell me what is a bitcoin? Russ: It's a bit tricky. Guest: Yeah. A bit tricky. So, I thought about it afterward and this is the best I could come up with-- Russ: You can't bite it. You can't check it for reliability[?] Guest: So, gold was the original bitcoin, because you used [?]. So, we had commodity money, gold and silver coins. Then we had bank notes that were claims to gold and silver. It was an IOU (I Owe You)--you could go to the bank and they would give you coins that you had coming. Then we introduced paper money that you couldn't redeem. So that's an IOU-nothing. Russ: Right. Guest: That can serve as money if people accept it. Bitcoin is an electronic IOU-nothing. But it's not issued by the government. It's produced by a computer program. And there's a system of people whose computers are involved in the payment processing network. But that's a kind of metaphysical definition of what a bitcoin is. Russ: Well, what's special about it--there are a few things that are special about it. One of them is, how many exist and how many come into existence. Guest: Right. So the really interesting thing about it from the point of view of a monetary constitution is that there is literally a program written down that governs the quantity of bitcoins, the quantity of bitcoins. The path is pre-determined. And there is nobody in a position to change that. There isn't any Central Bitcoin Authority that has the power to introduce more bitcoins. The whole system of production is according to this program. So that has, sort of, interesting implications or sort of makes us think about other ways we might write a program to produce a money that instead of having a predetermined quantity path, might have a predetermined or stable purchasing power. Or might be defined to have stable nominal spending in terms of that currency. So that's it's interest from the point of view of a constitution. But you are right: the value of bitcoin is it's part of this payment system. Russ: Well that's its value now. Guest: Right. Russ: Potentially. Guest: Right. The blockchain could be used for other purposes, too. Russ: And I guess, to me the fascinating thing is, when you tell noneconomists about it, who are not cyber-sophisticated, they say, 'Well, why would anybody take it?' And the answer of course is because they can spend it somewhere. 'But then why would that person take it?' And the answer is, I think fundamentally: There are people in the world who would like there to be an alternative to the dollar, or a government-run currency, and they are willing to take the risk. They are not taking a risk of inflation, because of if this program is correct. What they are taking a risk of is that they may accumulate the equivalent of the Russian ruble after 1917, when the Czarist ruble was--we have friends who said, 'Well, we used them as wallpaper.' Because they were not legal tender any more. So there's a risk if you-- Guest: You know, if you hung onto your Confederate currency after 1860, it's actually performed better in purchasing power than the Federal Reserve Note. Russ: Is that true? Guest: Yes. Russ: As a collector's item now, you are saying? Guest: Yes. Because the quantity is-- Russ: Not too many people use them as wallpaper. That's the problem. Those people who have held them got lucky. So, I think there is, among renegade folks, there is a desire to have an alternative. And they are therefore willing to take a chance. They might not put their life savings into it. But eventually if enough people started to feel that way, we could get to a world of an alternative currency. Is there any chance of that? Guest: I was going to agree with you, that I think the bedrock of the demand for bitcoins is from people who are enthusiastic about the project of a non-government currency. It does have a problem, which is in getting more widely accepted as a medium of exchange, for people to want to hold their checking account balances in bitcoin. Which is that the value is, right now, rather unstable. Russ: Yes, it is. Despite the claim that there's this smooth path of expansion. Guest: That's the quantity. That's not the purchasing power. So, if demand goes down there's no place for it to be felt other than the price. Because it's not going to be felt in the quantity. So that's a problem. Maybe if somebody introduces a cryptocurrency that has a more stable purchasing power, they can get that more widely accepted. As long as bitcoin's purchasing power was appreciating, it wasn't a problem that it was bouncing around the path. But now that it's down, I think that it's been a blow to trying to get it more widely accepted. Because there are a lot of entrepreneurs who are trying to introduce payment systems or consumer front ends to make it easy for merchants to take payments by bitcoin. Russ: So you write, Bitcoin is something else again, a transferable private unit with a positive value, unbacked by redeemability. Unlike Hayek's proposed unbacked private currencies, bitcoin is guaranteed by private programming to expand in nominal quantity only gradually along a known path. It is produced by decentralized mining rather than by any central issuer who could issue more at will --and here's the key part I want you to talk about because its volume cannot be unexpectedly expanded. I want to read that again, because I butchered it. ... because its volume cannot be unexpectedly expanded. Bitcoin is free of the time-consistency problem that haunts Hayek's proposal--the temptation of a profit-maximizing issuer, when nominal expansion has no cost, to take the one shot seignorage profit from hyperinflationary overissue. Explain that briefly. Guest: So, one of the most interesting proposals in monetary regimes over the last 50 years was Friedrich Hayek's "Denationalization of Money," where Hayek started by saying, well, we shouldn't put any legal barriers in the way of people using a currency from another country. Or gold or silver if they want to. So, don't try to stop people from fleeing a bad currency into a good currency, and maybe that will discipline the issuers of bad currency to stop being so bad. And then he revised it to say, Why not let private firms enter this competition? And if we think about it, maybe the reason we've never seen private firms issuing an unbacked money is that it's been illegal. Now, I'm a little skeptical of that part. I think there's a reason why people would prefer a commodity money to an unbacked private money. And that's what I referred to in that last sentence. Which is, if you can, as a private issuer, get people to accept the money which you have no obligation to buy back, in terms of any underlying commodity or bundle of goods, you have no contractual commitment to keep its purchasing power stable. You are just promising that that is what you are going to do. Once people start to accept that, you make a profit with every additional unit you can issue, whether it's in note form or bank balance form. And so there's a temptation to hyperinflate. Russ: Your brand name-- Guest: Yeah, it's true, it's a one-shot profit. Russ: Right. Guest: And you destroy your brand name. But if that profit is big enough-- Russ: Right-- Guest: and if you write down a model of it, it looks like the profit is basically infinite. Until people react and stop accepting it. So I think maybe that's why we've never seen unbacked private money. Not the absence of legal restrictions against it. I'm all in favor of letting people issue an unbacked private money. But there is this problem of how the users of it are going to trust you not to hyperinflate it. That's the problem that Bitcoin has solved by making the quantity written down into a program that's publicly observable. Russ: At least we think that's true. It's hard to-- Guest: That's true. Russ: I trust that. Right. It seems true. But we don't 100% know.