Transcript for:
Money Creation and Banking Theories

This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Jonathan, welcome back to the Human Action podcast. Hey, Bob. Thanks for having me. Sure thing. Well, we are coming off of a great Misesu. You and I had another joint presentation on MMT that the kids liked and uh we're back now talking about our favorite topic, money creation. The guest Tucker Carlson recently had was Richard Werner. And I truthfully can say folks, I have never had so many people requesting that, hey Bob, you got to take on this this interview. like I want or you know not just like oh take this guy down but also people just genuinely saying I'm really curious to hear you Murphy what what your response is to this and I was telling people well we're going to be doing a response and people were anxiously awaiting for it so Jonathan that's where we are now so just to give context folks Tucker Carlson had Richard Werner on who is a Germanborn economist who did a lot of work in Japan and you know if you go watch the Tucker interview he can give more of his background and they take three hours and go through and really, you know, tells the guy's career and everything. There's a lot there. So, why don't we be, we have plenty of clips, folks, and we're going to focus on what's pertinent, I think, to Austrian economics specifically. But before we dive into some of those details, Jonathan, I'm curious, do you want to give your just general reaction to the interview? Yeah, my my general reaction was that I mean it was fun, it was entertaining. Uh Verer was saying lots of you know interesting things, some of them pro provocative. Some some things where I was just sort of like you know uh face palming because like some of the things that he was saying is like are like these amazing insights that only he has and that he's discovered these things are things that Austrian economists have been saying for over a hundred years. Um, but another uh like general reaction that I had is that he's sort of an ink blot. Um, a lot of people depending on the school of thought or the sort of ideology that you're coming from, uh, you you you're able to see some some certain things that he was saying and identify with it. Uh, but other things that he would say would like totally contradict or go against what uh what you would think. And so he he doesn't fit squarely into a a school of thought as far as I'm concerned, at least based on the limited exposure that I've had just from his Tucker Carlson interview. I' I've read some little pieces of of his papers and uh and his book, The Princes of the Yen. But like when he's talking about uh how evil central banking is and how fractional reserve banking originated based on fraud, I was thinking all the Rothbardians are cheering. Uh but then he would he would turn around. He would talk about how uh fractional reserve banks ought to you know limit their uh their loaning their lending activity to businesses so that they can engage in profitable production and employ people. And I was thinking oh somebody like George Seljen a fraction was their free banker is going to be totally on board with that. But then also like there's some things in there that MMTers would you know latch on to or postcanesians. Uh many of the empirical like modern mainstream economists like the fact that he's he's doing these tests you know actually going to the inside of a bank and seeing how things operate. So really uh one other thing I saw I just saw some like standard Keynesian stuff in his uh at least in the beginning parts of his book the princes of the yen where he's talking about the problem with Japan is that it had insufficient aggate demand but then also it sort of sounds like you know monetary disequilibrium theory because he says there wasn't enough money and and the central bank and the banking system always had this opportunity to increase the money supply. So, I I know I'm like throwing a bunch of stuff out there, but my point is that everybody was able to see something that they liked and something that they disliked about this interview. And I think that that helps explain why it made such a splash because there was, you know, so much meat on the table for for everyone. Yeah, I think that's exactly right that you're right that some people were sharing it out of love and some were sharing it out of annoyance uh or incredility. Um, my quick just overall reaction to it is, yeah, there is a lot in here. Well, let me put it to you this way, Jonathan. I was concerned that my initial gut reaction because right out of the shoot, Tucker introduces him as at first I thought he said the most famous economist in the world and then I relisted to it and he said something like one of the world's most famous economist, something like that. I hope this doesn't rub you the wrong way, John. I checked. you have more Twitter followers than this guy does. And so, no, he cannot be one of the world's most famous economists if that's true statement. So, I'm curious, have you heard of like when when you heard like, oh, Richard Werner is on Tucker, were you like, oh, I want to go see what he's or did you say who did like because my honest reaction I I didn't know I didn't know his name. It didn't ring a bell when I first heard it. No, I did I didn't know his name. That doesn't mean a lot. I'm not trying to like put him down or anything, but but yeah, I I hadn't heard of him before. I have I think I've heard people refer to Princes of the Yin before. Yeah. So, right. That's exactly it's it's kind of like you know someone says some name of a famous singer and you're like what? Who's that? And then it's like oh you know he and then like you know they hum some song that was like big in the 80s and you're like oh that guy okay I just didn't know his name. Similar thing here that yeah when I first heard that and Tucker's introducing him as the most famous economist or one of the most I was like what the heck and then the more he talked Yeah. Prince of Yen I'd heard and then the thing too about he's got a paper for or like this documentary thing that they did where he went into a bank and worked with them to see what actually literally happens mechanically when the bank gives me a loan and that was like a big splash and so I've heard plenty of people who don't like the Austrians and say you guys you know rely on this textbook fractional reserve model and that's been discredited and so I was like oh it's that that's the guy because they always point to you know so and so empirically demonstrated you fools. So anyway, I'm I realized, you know, as it went along that, oh, this is why he's such a big deal because this is, you know, his his thing. And so I I had I remembered a lot of people had pointed to him over the years, but again, it's just to say he's the most famous economist in the world. I literally didn't his name didn't ring a bell. And you know, I'm people could say that proves how ignorant I am, but you know, I think I'm fairly wellversed in in economics. So So anyway, the point of that besides my dumb joke about your Twitter following, Jonathan, by the way, I wasn't kidding. He you really do have more Twitter followers than he does. So, well, I I I saw I think he has two accounts. So, I don't know if you were I checked all the ones I could find and one of them was a blue check mark. It it wasn't like some Stan account. It looked like it was really his account, you know, as far as I could tell. It was blue check mark and it wasn't, you know, the this is a fan account of blah blah blah. So, um, anyway, where I was go with this though is to say because there's so much in there and and the title is very provocative, you know, like the connection between the central banking and the CIA and war. So, it's all stuff that's red meat, especially since I've been loving Tucker lately for having people like Daryl Cooper on. And so, I realized, Jonathan, my initial emotional reaction and then, as you say, when he's going through and claiming originality on stuff that Mises wrote his dissertation on in 1912, I was like, give me a break. But um I realized, oh, hang on. I can't just be like the conventional historians who bristle at Tucker introducing Daryl Cooper as America's most honest historian. And when you know, if if Daryl Cooper's main narrative is stuff that the public has never heard before and it's very important what his claims are and yeah, if you quibble about some nuance he gives to something that happened in 1943, like that's not enough to just throw out the episode, oh, this guy's a sh, you know, Charlotte's. So, I'm trying not to do that here, too. That yes, there's a lot of stuff he says. It was clear Tucker's mind was getting blown by stuff that to you and me, Jonathan's like, "Well, how do you not know that? This is, you know, didn't Tucker go read Mis's theory of money and credit in the original German?" And apparently not. So, anyway, the that's the point being that yes, I I'm glad that this interview happened. I'm glad Tucker's mind was blown. But one of the main things that happened in this discussion, folks, is that Wernern is claiming originality or at least in modern times saying that, oh yes, this notion that banks just create money exilo when they make loans. This is something that you know they don't want you to know and we're going to spend a lot of time going through. And in particular, he dismisses what he called the fractional reserve theory of banks which everybody would associate with the Austrian school. And so that's what Jonathan and I are gonna spend most of our time on here. So, so a lot of it's going to be us nitpicking and coming off as being very critical, but overall, by all means, go watch the interview. And again, I'm glad it happened. I'm glad Tucker had him on, but a lot of what is going to follow from this, I'm guessing, also, you know, hearing your initial reaction, Jonathan, were going to be fairly critical. Is there anything you want to add before we dive into the clips? No, I I'll just echo God bless Tucker Carlson. He's been on a role recently, you know, having Scott Horton on, Daryl Cooper, all these all these great. He had Ron Paul on a while ago. I I would love to see somebody who's like, you know, explicitly representing the Mises Institute there, like somebody like you or Tom Woods or G Hollesman, Joe Serno, Tom Dorenzo. That that would be fantastic. Newman, he wants to get a fresh face, someone who's got a higher Twitter follower than one of the most famous economists in the world for what that's worth. Okay, so let's dive in. So, we're going to play this first clip now for you folks. It'll be fairly self-explanatory. I don't think we need to set this one up and then we'll Jonathan and I will we'll unpack it. So, the solution to all this and why economics has made no progress is bank credit. Now, bank credit and actually you should say fully bank credit creation. This is a concept that's been a a taboo or a secret uh in economics. Banking has been frozen out of economics for a long time. uh there's no banks in economic models and theories and that's of course also why they don't work because in reality if you ask some ordinary people in in the business district of a of any town they will tell you you know what's important in the economy they will mention banks yes but ask an economist an academic research economist and they will not mention banks well ask any person who do you owe money to the bank some version of a bank exactly well the reason is that the the economists follow this theory that banks are just financial intermediaries. They just, you know, gather deposits here, do their analysis, credit uh you know an analysis analysis, you know, risk assessment and and all that and then they allocate the funds and invest. Okay. Right. They just take a percentage. They're passive. So, so they're intermediaries. Yes. But that's wrong. That's not what they are. That's it's one theory of banking and it's still the one that's still dominant. All the textbooks and the leading journals, they still use that. But actually if you look into it you realize there's three theories of banking. A second theory slightly older that was dominant until the 1960s so-called fractional reserve theory and you you may have heard this fractional reserve uh banking. What is that? Well this theory says this part is similar. Each bank is a financial intermediary. It just collects deposits and then does the analysis lends out the money. But in aggregate as banks interact there's money creation. Oh, that's where students years should have pricked up money creation. They even talk about a money multiplier. What? That's the second theory. Now, there's a third theory and that one had been made out to be a wacky conspiracy theory. Oh, but it is the one that was more or less quite widely known until about a century ago. And that's the credit creation theory of banking. And this one says banks are not financial intermediaries. Banks are special. They have a unique power that no other player in the economy has. And that is the power to create money. And actually that theory had been called all sorts of names like oh this is cookie people and you know cranks. Kane said in his general theory or was the treaties on money. You know these are the cranks who talk about this banks creating money. I think the average person believes the right the ability to create money is reserved for governments alone. That's absolutely correct. In fact I did a survey with my students in Frankfurt in 2011. My my uh audience was getting larger when I was teaching at good university Frankfurt. It was only sort of for a few years substitute professor uh optional courses. So first one was only 50 students but next one was already 150 in the end was 450. Everyone was there also from politics and law. And so I thought oh this is a great audience. Listen guys let's let's use these numbers. Let's do a survey. So I sent them out you know because you've got so many people then if if everyone does 10 questionnaires you know you're talking big numbers. So we did a survey of central Frankfurt and the one of the questions asked was just this question. Who do you think creates and allocates the majority of the money supply in the economy? And to make it easier, here's multiple choice answers. Uh the government, the central bank, um the financial markets, uh the banks, um and so on, you know, give a few options or or savings, you know, um people through their savings, which is another economic theory. And the answer was just as you said and you know you spoke the facts. 84% responded either the government or the central bank are the ones that create and allocate the majority of the money supply because that's common sense. You know it's something very important that clearly affects everything and everyone. It should be in the hands of the government. It's what people feel. But it's not true. That's not how it works. And so what is the answer? Well, of these three theories of banking, which one is correct? Well, what's the scientific thing to do is to do an empirical test? That's what a scientist would do. Well, it turns out I was the first to do an empirical test of the three theories of banking. Okay. So, I'm curious to get your reaction. Let me just remind you, Jonathan, I know you've looked at the clips. Later, we're going to get into his view of like why, you know, the the right way to corral these credit creating banks into doing socially useful things. So, if this is the point where you're going to bring up Mis's, like let's not explain what Mis's overall theory of the business cycle is, but just if you don't you want to comment on him explaining that ah yes, I was the first person to actually really nail down the fact that banks create money. Can you believe it? Yeah. So, just to to recap, I'll play a role that you usually play just to make sure everybody got that. Make sure we're not losing anybody. Yeah. Yeah. That's right. uh he so he's outlined three different uh views or uh theories of of how fractional reserve banks work or how how money is created through the banking system if it is at all. And so the first theory he calls the financial intermediation theory. And so this this theory as he sets it up is that banks are taking in deposits uh I guess it doesn't have to be uh demand deposits. could be, you know, time deposits, savings deposits, and they they so they take in that money from their customers, their depositors, and then other people come into the bank and they're asking for a loan, and the bank evaluates these uh different uh people or business projects or mortgages that they could make and and so but ultimately what they're using to finance those loans are other people's deposits. So, the the the bank is an intermediary. They're between the savers and the borrowers, right? Yeah. the public is is saving, giving their funds to the banks, and the banks are just evaluating the creditworthiness because the banks, you know, that's their job to figure out, oh, this guy might default. Let's not give him the money. We'll go or we'll charge a higher interest rate. But yeah, they're just passing through the savings that are coming from somewhere else. The banks aren't generating that themselves. Right. Right. So, if that's as far as you take it, then there's no money supply growth. It's it's literally just a transfer of money from one person through the intermediary to the borrower. Now the second theory that he talks about is he calls it the fractional reserve theory and this is where he brings up the money multiplier. So it once you start with that financial uh intermediation theory and then you think about what do the borrowers do with the money a after they uh receive it as a loan. And so they'll they'll spend it, they'll use it to build a house. And so the contractor, the builder of the house receives the money. And then you think, okay, well, they're going to deposit it in some other bank. And then if they deposit it in some other bank, then now that bank has has funds that it can use to uh it'll keep a fraction of those deposits in reserve. And then they'll make their own loans. And so that's the the stepby-step uh process. He he refers to the money multiplier where you get these overlapping claims on the same base money. the same money that was originally deposited in in the banking system and through the through the multiplication of claims on the same money then you get this increase in in the money supply broadly conceived including the bank deposits. So that that's another theory that that he's rejecting and and the one that he claims that he has verified through this empirical test is the credit creation theory which is that uh no it's it's not deposit first and then a loan. It's actually the the bank decides they just issue these they issue uh demand deposits as a loan to to a a borrower. So there's there's no draw down of reserves. Uh they're not taking money from one account and putting it into another account. they they have a borrower come in saying, "Hey, I'd like to borrow to to buy a house," for example, and then the bank just credits their checking account with with the with with new money. So, it didn't come from anywhere else. And so, that's why he calls it the credit creation theory. Uh, now, interestingly, like I I actually I know you've you've uh you've discussed this in your understanding money mechanics. I don't really I don't really think it matters if you if you change the order from deposit to loan to from lo as as opposed to uh loan to deposit because I think you still get the money multiplier aspect that you still get people taking the money and then as they spend it other people receive the money they deposit into other banks. Now what's interesting is that what once you think about those consequences of people spending the money that they've borrowed from the bank even even though under the credit creation theory then you see that the original bank h has to have expected or at least they will see a draw down of their reserves as as people spend it and then the other banks are saying hey we've got these claims on your assets and so the banks have to settle with one another. So yes, I if you if you you know put on the blinders like what horses wear when they're drawing carriages down streets. If you just look at this original loan contract, it certainly looks like credit creation. But then you have to think about what happens later. Like the the money does not just sit in that person's account that was credited with the money in the first place. They're going to spend it. Other banks are going to receive it. There's interbank settlement. So there's going to be a draw down of reserves. So once you see that draw down of reserves, then it starts to look like hey there's financial intermediation going on because there it is reversed this loan did um necessitate a draw down of reserves. So there was a transfer and then when you talk about other banks receiving the money uh and so they have an increase in the amount of reserves suppose that's above their desired reserve ratio as soon as you take that into account then you can get the money multiplier. So, like my my response to all of this is that the these these three theories uh aren't mutually exclusive. They're really just describing different aspects of the same story. Some of them are more narrowly looking at one particular aspect. Uh, and I think the one that explains uh explains it most fully is the one that he's calling the fractional reserve theory because that talks about all of the knock-on all of the later effects that or consequences that happen after the loan is made. Yeah, I love all that. I know at some point we got to work in We were going to flash a screenshot because you you tweeted out in response to this. Yeah. Yeah. Yeah. Is this a good place to do it? Yeah. Yeah, we can do that. So he actually sort of acknowledges this in his in his paper. Um he says uh see if I just to be clear could be because you didn't just watch the Tucker interview. You actually went and read his paper or one of his papers. Okay. Yeah. Um give me one second. One Mississippi for you're in academia so for you time dilates. Oh, there we go. Okay. So he's he's talking about how uh he says the evidence is not as easily interpreted as may have been desired since in practice it is not possible to stop all other bank transactions that may be initiated by bank customers in parenthesis who are nowadays able to implement transactions via internet banking even on holidays. Uh so he's he's saying that we didn't get all of like the evidence wasn't as good as we had hoped because there were all of these other transactions going on at the same time while we were observing this bank when when the loan happened. This is his empirical test. This is the write up of his empirical that everyone's pointing to like oh my gosh for the first time in history an economist actually tried to test something and see how the world works. Wow. And so he went to a bank and said I'm going to take a loan from you and I want us to just document everything going on. And he and he's saying in that paper, ideally the bank would have done nothing else except process my loan and then we could see exactly what the before and after were. But in practice, no, the bank, even though they're working with me and being very nice, they weren't going to stop everything else they were doing. So money's coming and going, all these other transactions are happening overlaid on top of mine. And so it wasn't as clean of a test as one would have hoped for. Yes. And my point the the the the quick point that I made on Twitter is that those follow-up transactions are actually critical for understanding how how money is created whether or not you can uh reject the fractional reserve theory or the financial intermediation theory. Like if you're obviously if you're just looking at the creation of a brand new loan, of course it's going to look like credit creation. But the other theories are talking about well what are the what are the other effects of this loan creation? do does it does the money end up in other banks and then they use it to pyramid and and create new loans and then you get the overlapping claims and once you take all into all of that into account then you can start to see the aspects that are are described by the financial intermediation theory and the fractional reserve theory right um great stuff so let me try so folks we we'll probably be snappier in response to the subsequent clips here but like this is the the meat and potatoes of what we're trying to accomplish in this episode so I don't want to breeze through this too quickly. I agree exactly with what you said, Jonathan. Here's how I'll describe it. So, so, so we're not losing folks. Definitely the Mises Rothbard people of the three buckets that Verer just described would be the fraction reserve camp. And that Verer and his disciples or fans would say, "You Austrians are living in the past. You know, don't you understand that old textbook way of explaining stuff is is obsolete at this point." All right. So, here's how I would explain it. those like how I would comment on the three categories he listed the first one to say banks act purely as intermediaries where the public saves funds hands them over to the bank and the bank just lends it out and you could say in principle you don't wouldn't need banks right that if if somebody wanted to just you know uh some couple wants to borrow $300,000 to go buy a house they don't have it they want to borrow it from somebody and then 10 separate couples who have $30,000 to they want to save each over a 30-year stretch all chipped in and gave it to that one borrow, you know, a couple to borrow. That could all work and you could have, you know, 30 separate contracts explaining we're lending you $30,000 at this percent and you're going to make payments over the next 30 and you could go ahead and do that, but of course that would be hard in terms of just the transaction cost for them all to find each other and it would be extremely risky, right? If you're the the saver, one of those that geez, my uh you know, my money is if this one couple defaults, then there goes my savings, right? And so instead of doing that, of course, what happens in practice is oh, there's this thing called banks and all the savers deposit their funds with the bank or lend their money to the bank, I should say, more accurately in this model, and then the bank pools it and lends it out, and everyone kind of just participates in the diversification and pooling. And if some couple defaults on their mortgage, that loss gets spread among everybody. Blah blah blah. Okay. So, if you had what Rothbart in his writings refers to as loan banking, that would be fine. And banks would be pure financial intermediaries where it would just, you know, the only function they would serve is what I just said in terms of like assessing risk better and a lot and facilitating the the diversification and pooling of the risks and so on. But the banks wouldn't be creating credit beyond what the original savers did, you know, and the households would be restricting their consumption. That's how they come up with $30,000 or whatever I said because they're consuming less. That frees up resources and so the economy shifts away from making consumption goods and shifts into other things like building houses and long-term, you know, projects. Okay. the the oh and by the way in that model if you wanted to have a checking account in Rothbird's view if the banks are operating correctly and non fraudulently then if you go put $10,000 in your checking account the bank can't lend any of that out to anybody if somebody wants to buy a house and say we need a mortgage they can't tap into that 10,000 no that's a checking account that guy still thinks he has that money so that's if banks obeyed those rules and like it was only CDs or long-term savings accounts and things that they could lend out then there's no money creation. The banks are pure intermediaries. Okay. All the Austrians would say that is not true empirically. That's not how banks operate whether you think it's a good or a bad thing. And so that's why they would fall into the second category, the fraction reserve model, which as the name suggests means, yes, there's reserves in there that are backing up the checking accounts, but the banks don't keep them all in there. So somebody deposits $1,000, the teller puts the thousand dollars, you know, into the vault at the night at the end of the day and that money doesn't all sit in the bank vault. They end up lending some of that out. And so that's the fraction reserve idea. And then to elaborate where Verer was talking about when he says yes, there is money creation in this model, but it's like the aggregate outcome of the system. So here's what he means. And I'm just again elaborating on what you said there, Jonathan. The way you would teach this in a standard thing, the way textbooks used to treat it, the way I probably taught it in undergrad was, oh yeah, somebody deposits $1,000, let's just say to have concrete numbers to work with, the banks keep 10% in reserve. We're just making that number up. There were some regulations in place, but just to keep the math simple, right? So, of the $1,000 that's in there, that guy still thinks he has $1,000 in his checking account. He's he doesn't think he's loaning money to the bank. He's like, "No, I'm the bank is just storing my money for safekeeping and convenience." As as far as this guy is concerned, the bank only keeps a hundred of that in the vault, takes 900, lends it out to some other guy who wants to borrow $900 for something. Then the story is that guy goes and spends it ultimately you know the store where he spends it. Then what does that merchant do with it? They don't just keep it on the premises. They go deposit it in their bank. So from that other bank's point of view, it's like the store just walked up the employee from the store with $900 in cash and said, "Hey, we're depositing this into our business checking account." And so the process repeats, right? Because that store doesn't care about the history of where that 900 come from. They say, "Oh, here's 900 new cash in your checking." Well, we're only going to keep 10% of it, right? So they only keep 90 of that there. And then what is it? 810 gets lent out to some other guy. And then so with each stage 90% of that original amount gets lent out again in the form of cash the way the story was conventionally taught in the textbooks and on blackboards you know in the 50s through the 80s let's say okay and so notice when all is said and where does that process end I mean it's technically an infinite sequence but you know in the limit that original $1,000 now is spread among all the bank vaults in the country or the world economy serving as the 10% base. And so you say, well, how much in total new check checkable deposits could be supported by the thousand dollar in currency that is the base? Well, if it's a 10% reserve, then you just times 10, right? So that means ultimately there's $10,000 worth of checking account balances reser, you know, backed up by the 10, you know, the thousands in currency sitting in vaults spread around the world. Okay. And so the sense, oh, so if you started with $1,000 in physical cash, currency, green pieces of paper, and when the dust settles with all those loans and loans and loans and loans and redeposits, blah blah blah, $10,000 now people are walking around thinking they have that in the bank. Well, that's creation of $9,000 that the banks have in a sense created and pyramided on top of that. And the multip multiplier is 10 in that example, right? It's like one over the uh the reserve ratio, you know, one one divided by 0.1. Okay. So there I again I just want to point out it's a little bit misleading when he's saying ah my theory of the banks creating money versus because even right there even his own explanation and when I spelled it out for you exactly what he has in mind the banks created $9,000. The Fed didn't create that $9,000. It was clearly the commercial banks did. Okay. Then the last one is Verer is saying that the the tweak he's making the re way he's saying no what we're saying is not the story that number two door number two was is he's saying it's not that the the first person gives the $1,000 in currency into his checking account. it goes into the vault and then the bankers take out 900 in cash and give it to the next borrower and then that guy has to go spend it and eventually they has to get he's saying no the moment that you know but what happens is when the bank grants the loan to that second borrower or the second guy who is a borrower the act of granting the loan in terms of the accounting and the legality and the mechanics of the banking system at that moment of decision $900 has been created x neol in the economy. Whether or not that guy even takes physical possession of the 900 in currency, right? The the original thousand still sitting in the vault, it was the bank's decision to grant credit that created $900. And so my point is right and I I admit some of the people teaching the standard fraction reserve theory whatever they probably didn't realize that but that is implicit you know and that's something that when I started teaching this like I realized and it's like yeah that's really you know when you're just trying to isolate where is the you know rabbit getting into the hat for this magic trick like how do banks create money that's what it is right because even if the guy takes the money out and you know the other guy he's walking around town now with the 900 in currency the money supply has already been increased by 900, right? He doesn't have to go spend it and redep deposit it. It's the fact that the first guy put the,000 in. He still thinks he has $1,000. So M1 is still a th000 from there. People know those monetary goods. And then the bank gives the 900 to the second guy. He now thinks he has 900 in cash balances. He has an IIO. He has a debt to the bank, don't get me wrong, but a debt doesn't, you know, subtract from the money supply. It's just a separate thing on the side. So that guy thinks he has 900 in cash. Whether he keeps it in the bank on deposit and and when you say you have 900, what do you mean? Whether he like, you know, takes his ATM card and puts it in and says see 900 or if he flashes nine Benjamin Franklin's. Either way, it's in M1. So I'm just I'm just saying even if you just stopped and you were a total card carrying fractional reserve banking theorist I could show you just you know thinking through introspection and think that clearly it's the bank's decision to grant the credit that created the 900 there regardless of whether the guy you know took the money out physically or left it with the bank. And then last thing I'll say here John is I liked how you put it in your tweet that so if it seems like well what's the different aren't we saying the same thing? Well, no. I still think the res the fraction reserve story is more accurate and better to teach people because the banks, if all you knew were, oh, banks can just create money. You know what I mean? Like you think that you think it's the central bank or the government. No, banks just create money by the mere act of granting loan. Then it's wonder like how come the banks aren't all trillionaires, the bankers. And the reason is like you're saying because they have to be careful. They can't just grant, you know, loans to themselves and then go buy yachts and things because there's the reserves that the way the interbank clearing system works is if if one bank expands too rapidly and grants too much credit and its customers are going around spending money, then the other banks get up piling up claims on that first expansionary bank and it loses its reserves just in the interbank clearing process. So when you understand how all that works and why there's limits on what the banks can do and Verer in the Tucker interview alludes to that. And he said stuff like, "No, you know, they got to be careful and blah blah blah." But when you spell out, well, why do they have to be careful? It's because, oh, the fractional reserve people, you got to go read their writings to understand. And like somebody like a George Seljer, Larry White in their free banking model, they go ahead and model it. They they think it's cool. Rothbard would say it's it's not cool, but we all agree just because banks legally can engage in fractional reserves doesn't mean they can just make loans to each other and go buy yachts and say, "Hey, we can just create money." Haha. You you know what I mean? So anyway, that I know that took a while, folks, and I promise we'll be snappier going forward in this episode, but I really wanted to just nail down. I think this is critical that when people are like, "Oh, you fractional reserve theorists have been disproven." It's Yeah, because if you're if you're just ignoring what happens after the bank grants the loan, then yeah, you can forget about reserve. But no, reserves are important whether or not they're legally required. Okay. I know I went on a long tangent there, Jonathan. Any anything you want to say before we move on? Yeah, very I'll do it very quickly. I don't want people to think that we're just like, you know, sitting in our armchair. Uh like we've been presented with this empirical evidence from Verer and it's like, well, no, if you think about it, it must be it must be like this. I know. I know it sort of looks like that cuz we're sitting in chairs and we're just like thinking through, but I'm kneeling chair that matters. I I just want to point out that if if you look at Verer's paper, he says the evidence is not as easily interpreted as may have been desired. And the the point that he's making there is there were all of these other transactions that were conflating. They were muddling. And what we're saying is that yes, those other transactions are an important part of the story. So like you have you have to think through or look be be an empiricist look at what happens after this initial act of credit creation and then once you do that you see that the fraction what he's calling the fractional reserve theory actually does a better job of of explaining the story in a full way. Oh I I thought of another way to put it. Um, Carlos Lara actually uh a guy I've co-authored some books with um and done some projects with in the past, but when I first encountered him, he was actually working he was using Rothbard's uh I don't know if it was Manom. He's using something from Rothbard. It must have been Many sake because he was Carlos was using my study guide and that's how he reached out to me because we both lived in Nashville at the time. So anyway, he was doing a PowerPoint presentation ex around circa 2008 right when stuff was blown up explaining to conventional bankers around Nashville. He was giving these PowerPoint presentations explaining how fractional reserve banking worked and it was blowing their minds. They would come up to him afterwards saying we had no idea we were doing that. And so and the way Carlos put it was was great. We it ended up being in this book that we wrote called How Privatized Banking Really Works. But he said like so back at that time this was be well the the the Fed still imposed uh reserve ratio requirements on the banks and so we just rounded it to 10%. that was more subtle and nuanced, but he was just saying for the sake of argument, say it's a 10% reserve ratio. And so he was saying, I'm just going to adapt the numbers we've been using here, Jonathan, strictly speaking, yeah, some, you know, Jim Smith walks into his bank and gives 10 Benjamin Franklin's over to the, you know, the teller, says I'm depositing $1,000 in cash into my checking account and walks out. the 10% reserve requirement, if that's what we assume, you know, is legally imposed, the bank would have the legal ability to go make a loan um of $9,000 to somebody else. So long as they thought that person would just leave it sitting in his checking account and never spend a penny of it, right? Because then that guy's 9,000 in checking plus Jim Smith's,000 would be 10,000 in checking accounts. And they say, "What's in the vault right now?" Oh, $1,000 in currency. 10% satisfied. But Carlos went on to say, "But that would be ludicrous for them to give that much at that stage because if that other guy spends any of that 9,000 they just granted to him." Well, then in the inner bank clearing process, you know, they're going to get hit on the thousand, they're going to have to transfer that to another bank. You know, in terms of the it'll go the money will go out of their vault over to the other bank's vault or on deposit with the Fed. You know, they'll they'll debit their reserve account with the Fed and credit the other bank's reserve account with the Fed. And so then you know when the dust settles they will no longer be in compliance with the legal reserve requirement. So that's where it comes in in these FRB you know examples that you had to learn when you took econ 2011 or something with and then it l you know lends out 90% and then they do this and lends out 90% is that that's how the bank can be sure even if this guy goes and spends it all right away we don't get caught with our pants down. Like that's why it had to be the step by-step thing. But yeah, Carlos recognized in terms of just the principles and the reserve requirement. Yeah. right out of the shoot. You could lend the full amount if you wanted to, but it would just be reckless to do it because like you're saying, Jonathan, once the other transactions start kicking in. So again, it's and Carlos was, you know, full-blooded card carrying fractional reserve banking in the Roth, you know, theorist in the Rothbartian tradition there. He was just excess to Verer though, he did say at the start of that clip that, oh, economists don't have banks in their model. What the heck? He is right that a lot of macroeconomists in the mainstream don't. So Scott Sumner, who's like the Mercadus Institute's uh go-to guy on, you know, money and banking and the Great Depression and what caused the Great Recession and everything. He famously, he proudly says, "I don't have banks in my model." Because he says, "You don't need it." Right? Like, in other words, I'm above the frey. I'm the the person who's really isolated. It's NGDP growth, period. And you know, you don't need banks. So, um, Verer's not attacking a straw man there, but I know maybe now Jonathan is where we can flash it. It is not true that the Austrian school doesn't have banks in their model, is it? That's correct. So, yeah, that was another thing probably the first thing that I responded to publicly after this interview is I I just showed that uh so I paraphrased Verer saying economists ignore banking and then I showed the table of contents from Mises's 1912 book, The Theory of Money and Credit. um originally published in German uh and actually in uh in Verer's history of thought paper he cites the theory of money and credit and he also cites Hapa Hollesman and block uh their 2000 excuse me 1998 paper against fiduciary media. So, so Verer has been exposed to the Austrian school and has read at least parts of Mises because he quotes Mises in that paper, but I I just showed that uh table of contents just so yeah, Mises was on this uh as far back as 1912 and he he showed you know how fiduciary media works, what what fractional reserve banking does and means and what are the consequences. I'm sure we'll we'll get to Austrian business cycle theory at some point in this episode, but yeah, so I was I was just showing and it wasn't just like back then. It's not like Austrians have forgotten about what Nis wrote about. Like this has been a part of our tradition for over a hundred years. So yeah. Well, yeah, that that critique applies to the mainstream, but definitely not to the Austrians. Okay. Well, that's good. So, I need to go read his thing. I thought I looked at I probably looked at it years ago when somebody first, you know, threw Verer in my face and said, "Haha." Okay. So, that's what I was going to say. I was going to give him an escape hatch cuz he does say even in that Tucker clip that we played. He's not claiming he invented credit creation theory circa 1989. He's saying this used to be known and then was buried by the CIA or whoever and then now has come back because he resurrected it. So I guess I you could say in fairness maybe he would say, "Oh yeah, yeah, Mises knew about it." I'm just saying nowadays it's been completely lost and you could just say, "Well, don't you know about the Mises Institute?" But okay, fair enough. So maybe maybe I'm bristling too much at the guy. Okay, I have been burning too much time here. Let's go, folks. Let's get clip number two ready. Go ahead and let's let's play clip number two. Basically, the Bank of England was alchemy at work. You're creating money out of nothing but not through the actual, you know, physical alchemy process. It is the credit creation alchemy because banks create money out of nothing. But it's it's a trick. So, what happened is this. when gold is money and people think we need gold for transactions. One thing was the governments investing in you know creating gold but you know that was of limited success. Now the reality is though that people don't want for that transaction to carry gold around because it's dangerous. I mean even today if you go around New York City, Manhattan, you don't really want to walk around with too much visible gold hanging around you. You know, it's kind of in London, you wouldn't want to do it. And that's 21st century. So imagine, you know, 15th, 16th century, 17th century, you don't really want to do that. Bandits on the roads. No, not a good idea. So what do you do? Well, you put your money, your gold where it's safe. Turns out there's some professions that were working with gold. And therefore, they had safe places. They had their own little private security team, private army to to watch their safe with the gold. And these are the goldsmiths. you know, they make gold jewelry for the the king and the aristocrats and the rich people. And so people started to deposit their gold with the goldsmith. Obviously, you need evidence like what if something happens to the goldsmith and his son taking over the business denies that that's your goal. So clearly you need some receipt. Okay, so that was the convention. They got a little fee for safeguarding the gold. Fine. Everyone's happy. But the next step is this. Let's say I'm, you know, in the province, um, somewhere in Hampshire in England, and we're neighbors, and we agree I'm I'm buying this plot of land from you, and we agree on the price, and okay, how much gold? Fine. So, what are we going to do next? Well, I've got the gold with a goldsmith in London, you know. Okay, I I will go and get the gold. By the way, what are you going to do with the gold? Because if you're not going to keep it here, then it's kind of dangerous. like I'm risking my life going to get the gold, bring it here, and then you bring it back to the goldsmith. We might as well leave it in the goldsmith and I give you my deposit receipt. And that's what happened. So the the receipts of deposited gold of deposited money became the first paper money in Europe. Gold certificates. Yes. Exactly. That's how it works. Now, so the goldsmiths of course realize what's happening. Oh, nobody's coming to pick up the gold. That's kind of convenient. And because and this this already explains the secrecy that suddenly then engulf the whole thing because people also realize well the goldsmiths have the money they have the gold and if you suddenly you get into trouble or you lose your job you you need money where do you go well the goldsmiths have money so people came there begging for money and asking for loans here's where the secrecy comes in until around 350 years ago in almost all European countries It was illegal to lend it interest. Of course, that's Christianity, Christian rules. You know, the Bible was against interest and interest was everywhere forbidden. So, the goldsmiths would say, "Oh, well, yeah, maybe I can lend you some money, but we have to keep this very secret because, you know, of course, I'm going to charge you interest." Yeah, I'll pay interest. Yeah. Yeah, we'll keep it secret. And this is what happened. The goldsmiths then realized next, well, hang on, maybe we we don't even need to lend the gold. And of course, like every guild, any trade association that we're meeting regularly, they're talking shop. And you know, how do we deal this with this issue? Of course, we don't want to lend out too much gold. We might get into trouble. Also, we need to collaborate. If some goldsmith suddenly needs more gold, we have to help each other. Otherwise, everything will come up and we'll all get arrested for lending at interest, you know. So they were sworn to secrecy and one goldsmith probably the first one to have this idea. Said, "Hang on, guys. I've got an idea. We don't need to lend out gold. I'll show you." So the next there's always this guy coming every Monday morning. Okay. So let's wait. He's coming probably in 20 minutes. They always want to borrow money. I've turned him down. I'll lend him money to show you. So he comes around. Oh, please. Oh, you know, dear goldsmith, I need to borrow this money. All right. Today I'm I've decided I'll lend lend it to you. Here's the standard contract. You know, all the small print, the interest. Uh your daughters will be sold in slavery if you can't repay. You know, it's a standard practice and all that small print. Don't worry about it. Yeah, I know. Okay, it's fine. Just one more thing before I give you the gold. Okay, we said 300 gram of gold. Here it is. I will, you know, you sign there. I sign and I I lend it to you, but I want you to deposit the gold immediately with me. Well, I need the gold. I need the money. Yeah, but you get the deposit receipt and Oh, yes, of course. Yeah, that's all I need. I need the receipt. Get it? So, what happened was the goldsmith loan contract signed and the goldsmith buying that loan contract, that's an asset on the balance sheet, hands out the 300 g of gold. Now you see it, now you don't. You've deposited it. Here's your deposit receipt. It's all very transparent. And with double entry accounting which was created for banking to hide the truth of banking it looks all very transparent because you can't see the money creation at first sight in double entry accounting. So why is all it's all correct? He the borrower deposited the money. Didn't you see it just deposited it? Ah but it is still fraudulent. It's fraud. And you can prove this because did this person, the borrower, when they walk to the goldsmith, did they have gold with them? No. But they're leaving the goldsmith with a document that confirms they've deposited gold. Well, how did that happen? And also, secondly, if you measure the amount of gold at the goldsmith, did that increase? No. So, that's fraud. Okay, Jonathan, I have some stuff to say, but do you want to go first? No, I went first last time. I'll let you take the lead on this one. Okay. So, here uh so I you know obviously people Rothbartian's watching. Yeah. Yeah. But let me again push back on this notion that this is guys come here. This is a secret that they don't want you to know about. The CIA buried this. Okay. Watch this folks. I'm going to show you some screenshots here. Okay. This is from a book called Modern Money Mechanics. Not to be confused with Modern Monetary Theory. This is Modern Money Mechanics, a workbook on bank reserves and deposit expansion put out by the Federal Reserve Bank of Chicago. Now, when I end up showing you what they're going to talk about, you might think, "Oh, was well, the Fed was formed in 1913. This must be from like 1916 or something because Verer, you know, in this Tucker interview explained how this was all quashed and nobody knew about this. This was forgotten 100 years ago, ancient wisdom that he resurrected in like 1991." But no, this book that I'm, you know, about to quote from originally came out in 1961, right? And then it had subsequent, you know, updates and whatever in in '92 and so forth, right? So this is something that originally the Federal Reserve Bank of Chicago plugged into, you know, the new world order, whatever, published in 1961 and there were multiple updates. Okay. And now let me just show you with all that buildup. You said, "Wow, this better be good." Oh, it will be. Okay. So early on, this is like page I I might be this is like page four or five or something in this workbook and the section is called who creates money and it starts out changes in the quantity of money may originate with the actions of the Federal Reserve system. You know, people are falling asleep. Yeah, that's what we think the the the government and the central bank of control. But then you skip down four paragraphs. It started with goldsmiths as early bankers. They initially provided safekeeping services making a profit from vault storage fees for gold and coins deposited with them. People would redeem their deposit receipts whenever they needed gold or coins to purchase something and physically take the gold or coins to the seller, who in turn would would deposit them for safekeeping, often with the same banker. Everyone soon found it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money. And then what I've highlighted then bankers discovered that they could make loans merely by giving the promises to pay or banknotes to borrowers. In this way, banks began to create money. Okay folks, so that is from the Federal Reserve Bank of Chicago in 1961 in a workbook for the public. As far as I know, I mean, the thing I'm just reading for is a PDF that's online. you know, I don't think this was just an internal thing that they're saying, let's not, you know, let's make sure the the rubes don't get a hold of this. This is what we've been doing. Right? So, this is again, so I'm trying to convey, I mean, I'm trying to be cheeky about it, too. But what I'm trying to convey, folks, is a lot of what Verer was saying in there is, you know, good stuff and I'm glad that the word's getting out. But his constant refrain of I mean he even went so far folks in one part we don't have in the clips here is to say someone from the CI or someone from the US government told him the CIA is watching you. Okay. I don't know whether that person was claiming to be from the CIA himself in terms of you got to stop telling everybody about how banks work and how they create money through credit creation and stuff by the mere act of granting loans. Right? So, I'm saying right there, it's not just saying banks create money, but they even went through the whole story of the gold smiths and what happened step by step. The thing he just told Tucker and Tucker's mind is getting blown. The Federal Reserve Bank of Chicago published that in 1961. Okay, Jonathan, go ahead. Oh, no. No. Yeah, I I completely agree. I mean, this this sort of uh story you can see in Rothbard's u writings when he's talking about the history of money and banking. Um and and so like this is this is not something that's like some brand new, you know, shock and awe sort of discovery on the part of Verer. This this like this this idea that banks can can create money through through their fractional reserve, you know, deposit and lending operations. There's an increase in the money supply. I know we were just talking about the three different theories and there's some quibbles about which one is the most accurate description of what's going on, but like the idea that banks are creating money and that this originated with the actions of the Goldsmith bankers, it's like this is this is I don't I I guess I can't say it's common knowledge, but among economists, especially the economists that I work with and talk with, uh it's it's common knowledge. So, this is this is not some sort of like earthshattering thing. And I I also think that it's doubtful that the CIA is, you know, coming after him because he's revealing this because as you as you mentioned, there are Federal Reserve documents that are explaining this same history. So like if the CIA is against Verer, then the CIA is also against the Federal Reserve. Now, that would be that would be a movie that I would like to see is like fighting between the CIA against a sitting president in the 1960s. I think not. Um and also just to clarify, you're right, John. I I don't mean folks to say, "Oh, yeah, you would have to go to this 1960." This is just chalk, you know, Rothbart and Mis's writings are replete with this stuff, but given that we we earlier gave a nod to maybe what Verer has in mind is, oh yes, these obscure marginalized Austrians who, you know, don't have any prominent academic posts anymore, you know, they're just a chapter of the history of Yeah, they still talk about this stuff. But I'm talking to to show that he can't merely be saying that is I'm saying Federal Reserve Bank itself explained all of this and gave that same Goldsmith history back in 1961 and has published multiple updates of that document throughout the decades. Okay. So again I I'm just the reason I pick them and not you know something from Rothbart's uh what has government done to our money or something is to show this this is not some heterodox obscure thing that only you know postcanesians and Austrians know about. Okay, here's we're going to get ready to to play clip three here, folks. Um, let me just set this up a little bit. So, Jonathan, this is the one that's going to be a surprise for you. I I was intrigued by what Verer just said there when he's telling the goldsmith story and how the bookkeeping worked. And so, it is kind of neat, right, when you're really trying to understand he was trying to isolate the fraud involved and how something screwy's going on. And again, just folks to to explain, you know, to paraphrase what his story to Tucker there was, some original people deposit actual physical gold, you know, back in the days when gold coins were the the money and the bankers give them notes, you know, saying, "We acknowledge you deposited this amount of weight, you know, of gold into our vaults and at any time this note allows you to redeem it." And so that person can now go around town spending those notes as being the same thing as money because the merchants realize, "Oh, yeah, if I wanted the the gold coin, I would just go down to the to the goldsmith and hand this note." Okay. But then now that they the the goldsmith has a ton of or not ton, you know, a lot of metal, yellow metals sitting in his vault. Somebody need needs to borrow money and he goes ahead and does the transaction and says here technically let me take the gold out, give you a bag of coins. You're signing the IOU blah blah blah or you're I'm going to charge you, you know, 16% interest peranom. And now you know what is part of the deal. Give me that bag of coins back. I'm gonna go put it back in the vault and close the door. And here's the note, right? And so he's saying in terms of the double entry bookkeeping, it all looks, you know, above board and everything, but it's, you know, obviously something's crazy going. That guy's walking around back into town now with notes saying, I just deposited these gold coins when he didn't start out with them. So something's fishy, right? So I actually done I went and dug up uh I found an old video on YouTube from more than 10 years ago of I think it's a verer. Not sure. But there in the example he goes through was talking about gold coins and deposit and he goes through step by step with the bookkeeping involved in terms of the double entry bookkeeping but how this you know thing works and and one of the examples it's like it starts out original guy deposits I think it's 100 ounces of gold and then this guy GTO shows up and borrows 90. So I'm assuming because you know Gito is kind of a weird name that this this must be Verer. That's the only explanation I can find. He looks a little different but again this is this video that I found was from a while ago. So folks just to pace yourself mentally. This is a 4-minute clip. Let's go ahead and play clip three of of how what Verer just said there, you know, sort of intuitively to Tucker was unpacked in terms of the actual accounting and bookkeeping. So, what I'm saying to in this in this slide here, look at this carefully. There's still 100 ounces of gold in the vault and the bankers are still counting that as assets. And now on top of that, the bankers are counting the 90 ounce IOU from GTO as an asset too because G in their mind they're saying no, this is a legally binding contract he just signed with us and he's a he's a smart guy. He's going to come up with the money even if that weird book he's writing doesn't pan out. He's probably going to just go shake somebody down for it. So we're going to get paid. So this is clearly an asset and we still have the 100 ounces in the vault. And the way these fractional reserve bankers work, they think money in the vault is our money. we can, you know, that's our asset. So they, so the asset side is 190. So we know because of the double entry bookkeeping, it's got to be the case that the that the liabilities and shareholder equity have to equal 190. And and so where where does that come in? Well, right now there's still no equity. Okay? Because nothing is, you know, all the bank has done is made a loan. That per se doesn't earn them income. They earn income over time through interest acrruel. So right now at the at the moment of giving that loan to to Gito, they haven't earned anything. So where that 190 comes from on the right hand side is the fact that Billy still thinks the bank that he has a claim on the bank of 100 ounces of gold that anytime he wants to, he can either write checks or he can show up and withdraw his money. So when the bank legally speaking wants to say, "What are our liabilities?" Well, Billy has the right to withdraw 100 ounces of gold. But so does Gito. Okay, so it's true GTO didn't walk out of the bank. He didn't want to walk out with 90 ounces in metal, but he could have if he wanted to. And now with his checking account, if he wants to, he can go to a bank and write it write it out to cash. You know, if you've ever done that, if you write a check out to cash and give it to the bank, they give you cash for it. Okay? So So he can do that if he wants. It's just he doesn't want to do that right now. And in any event, if he writes checks to merchants in the community, then this bank is going to be obligated if the people who get those checks want to hand over physical gold. Okay? So, so now the assets and liabilities are 190 ounces. So, when we talk about, you know, so, so notice what happened here is the bank's balance sheet expanded or grew because of granting the loan to Guido. And, and that's why I did it this way. I didn't want, you know, cuz probably most of you when you hear examples like this, you're thinking, okay, first there's 100 ounces in the vault and then they took out 90 and gave it to GO and he walked away. But what I want I'm trying to isolate and show you is no. The first thing that happens conceptually in terms of the accounting is the mere granting of a loan to Gido all of a sudden increases both sides of the balance sheet. And to the extent that Gito may not withdraw the money then at that point in time in that period the money supply or the money stock in this community is now bigger and and what do I mean? Well, I'm saying to the extent that we consider checking account balances or demand deposit balances part of the money supply or the money stock, um clearly it's gone up by 90 ounces. So if if if Billy is the only person in the community originally, it's gone up by 90%. Now, of course, there's a lot other money in the economy, so it hasn't gone up very much, but you get the idea. Okay? So this is the sense in which fractional reserve banking increases the money supply at least depending on how you define it. So obviously it hasn't increased the amount of physical gold which what we would call reserves but it has increased M1. All right. And later on in the course, we'll define what's the difference between monetary base reserves, M1, M2, that kind of thing. But I'm saying this is what Rothbart has in mind when he says fractional reserve banking can increase the money supply. Did you get a call from the CIA after that? No, I didn't. So, of course, folks, what that was is a uh an excerpt from I had done a course on how the Federal Reserve works for the Mises Institute, which Oh, shoot. I meant to verify. I think they rebooted those. I think that's actually still I think you can still get it. I'll I'll check. But by the time you're seeing this, folks, I'll we'll put a link in if if it's that if that's a thing, if you can go watch it. But any event, that is we gave like a sample, right? So that particular lecture they pulled and they posted on YouTube and that's got like 19,000 views or something and I just go through and so the conducts there is that was the the third one I originally went through the bookkeeping of um just standard loan banking like to show if they really were just financial interiors how does that work and also what I do folks is I show how does the banker you know earn income over time so they do increase their equity right so there's a way that the banks profit from this practice but the point is they can't just give loans to themselves because they you don't earn income from the granting of a loan. It's got to be over time. It's the interest income. Okay? So, obviously my point there, folks, was to say, you notice how there's a lot of similarity between what I just went through there and what Verer's telling Tucker, come here. Let me tell you what they don't want you to know. I'm the first person to really blow the lid open on this. I mean, so you can see maybe why some of us are like, come on, dude. All right. Anything else you want to say, Jonathan? besides noting the uh amount of sunlight that was or light overhead light that was bouncing off my head there. I I did notice that, but I wasn't going to call attention to it. Um but I mean another funny thing that's happened is that uh while I guess the CIA didn't call you after this video, what do you think there was any sort of like implicit message in the WF highlighting your book understanding money mechanics is like, "Hey, we're watching you." That that sort of thing. I don't think so. So folks, what he's talking about is my most recent what I'll put a show in a note in the show not page two for the institute I wrote this book called understanding money mechanics and of course we go through all this stuff in that book as well and the the World Economic Forum you know the Claus Schwab thing before he stepped down that was all the all the rage you know you will own nothing and be happy we'll make you eat the bugs and all that stuff. they when they were they were coming out and they had like a a quick video on their YouTube page explaining like oh new books to check out and they were going through it and one of them was mine highlighting it and so of course a ton of people were sending that to me either laughing and thinking that was hilarious or wondering like Bob what's your deal like how come the WF is pushing your book I I don't know what to tell I mean so I no one I don't have any inside story obviously if I were working for them I wouldn't tell you guys but um my my guess is Jonathan it was just some like low-level staffer that just thought oh no this guy does a good job explaining stuff and our people want to know how banks work and so there you go. So that's my innocuous explanation. Okay folks, you haven't seen like black Ford Explorers or black uh trucks and helicopters flying over. I guess what I could do is just exp every bad thing that has happened and why I'm not as popular and as you know I'm not yet the multi-millionaire that I think I really ought to be given my talents. It's because behind the scenes the CIA has just been you know blocking me and doing all sorts of stuff. Okay. Uh well, we got one more clip for you folks. Uh clip number four, please, Mr. Engineer, and we will then discuss and wrap this thing up. So, in principle, banks get their return from the the difference between the interest they pay on deposits and the interest they earn on their lending. But the key thing is that for the actual lending, they're not really giving up intrinsic resources because they're creating new money. So, it's actually easy for them to earn this fake. But but it is you know it's there's technicalities and you have to do it properly. It doesn't mean you know you can be careless and sometimes when they are careless it blows up and we have banking problems you know and banking crisis but the the the regular banking crisis are mainly when banks create credit for asset purchases and that's what creates these boom bust cycles in the UK bank credit I mean 85% of bank credit is for asset purchases and so you get these acid boom bust cycles banking crisis in regular intervals in some other countries uh I haven't mentioned the third scenario Uh so bank credit for asset purchases no good. It's not uh sustainable. It's not productive. Credit creation for consumption is it's for the real economy but it's for consumption. Therefore it's inflationary. It's also no good. It's not sustainable. The third possibility is the redeeming feature of banking. And that's why we can turn banking into a very positive very powerful positive force for creating prosperity and abundance. Namely, when banks create credit for productive business in uh investment for the investment in the production of goods and services, implementing new technologies, uh implementing new ideas, it's actually the driving factor for growth and prosperity. when banking supports entrepreneurs that implement new things and that's when you get very high economic growth without inflation without asset inflation and so really what we should do is bank credit creation should be mainly only for business investment but this this is not what regulators do regulators now have not just hundreds they have thousands of rules for banks and banking is the most regulated industry on the planet most of them are useless they don't achieve the goal of preventing ing banking crisis. For that, we we we can scrap all these rules. We just need one rule that banks should only be allowed to create credit if it contributes to um to national income through business investment. So, as long as the fraud is done in a socially approved way that that helps everybody, then it's fine. Yeah. So, this is where I was thinking, "Oh, I wish he had read more of Misesus' theory of money and credit, although I'm I'm not sure like how obvious it is." Like, if you just do like a first read, do you really get all the ins and outs of Austrian business cycle theory, but what he's describing there, but by the way, I I agree with him about, you know, uh, bank regulations. Sometimes they're ownorous. Sometimes that leads to like less productive lending. So, there's I mean, there's some there's a lot of agreement there. But then when he comes down to this prescription that we should restrict banks and say that they can only make loans for business investment, it's got to be this, you know, profitable, productive, you know, encouraging employment, um, stimulating national income, these sorts of things. Like he he has he's basically just described what Mises pointed out as what starts the business cycle. So, um I I guess um he's sort of thrown out this this interest rate um issue. U in fact, elsewhere in the interview, he he just sort of like disregards interest rates, but he sort of mocks it like, oh, that's another red herring that you know, a lot of the mainstream is going to tell you that interest rates have something to do with credit flows. No, they don't. But but the idea is that when when the bank is increasing the supply of loans to businesses. So so we'll take let's just like think through what happens if we adopt his prescription when when the bank increases the supply of money increases the supply of credit uh and offers it to banks that pushes down the interest rate that increases the supply of loanable funds. You know if you just think about the typical garrisonian graphs you know increases the supply interest rate comes down and now what does this do to entrepreneurs? like what do what do entrepreneurs see? What do they think? How do they respond to this? And the answer is they they see they take the um the funds because they're cheaper. There's there's more funds available. They take these funds and they they start new lines of production. They buy new capital goods. They make new capital goods. And what Mises pointed out is that when when they're doing this, they're not just increasing productivity. So yeah, I mean it sounds like yeah, new capital goods that increases productivity. Starting new lines of production. This is good for employment. This is good for national income. But what Misa's pointed out, they're making specific capital goods. And this and the sorts of of lines of production that they're starting are ones that are longer than we can actually finish. So there's a a certain amount of saved resources. There's a certain amount of of, you know, capital that we have available to us. Yes, we can move things around. We can start to make different capital goods. we can start these new longer lines of production, but ultimately the real resources aren't there to actually complete these projects. And so you get into the middle of them and uh you find that the capital is more scarce. And I mean like like physical capital goods like the capital goods that you need to finish these projects just doesn't exist. So their prices increase these uh new lines of production that appeared profitable now are they realize that they will not be profitable. So they abandon the projects they liquidate. they lay off their workers and we have this, you know, crisis, we have this bust or the recession period where we need to correct those mistakes. So, so the very thing that he's prescribing is what Mises cautioned against and said, "No, we can't do this." By the way, I I completely agree with him. Uh you can have, you know, bank credit expansion that turns into like this big asset bubble or it can cause, you know, like a simple inflation if it just goes to consumer loans and they run up, uh, you know, credit card debt as a response. But the specific channel that Mises uh explained is what results in a business cycle where we have these big macroeconomic swings is when that credit creation, the money creation is channeled through uh credit markets to business investment and they start these projects that can't be completed. So here he just needs to he needs to do his homework. He needs he needs to finish the theory of money and credit. I know he's read at least parts of it. Um and and think through all of the consequences of allowing banks to do this sort of thing. Yeah, great stuff. I'll I'll just be real quick here and we'll wrap up, folks. Um yeah, just to elaborate a bit on what you said there, Verer. One of the things he's known for is he has this idea of of disagregating the credit flows and to distinguish between are banks this new credit they're creating is it fueling asset purchases or is it like going to households and they're using it to buy gasoline and tuna fish and so to understand what type of credit inflation is going to cause what you know the public thinks of as inflation meaning like oh g I go to the grocery store and stuff's more expensive you need to know where's the new credit flowing And so I I think that's a good contribution that he made or a good distinction he's drawing. And it does help to explain, you know, you're you've told me before, Jonathan, I need to stop apologizing for it, but some of us worried about the rounds of QE and we're thinking, oh, that's going to, you know, geez, that's going to cause uh consumers to see higher price inflation at the store, and it didn't. And so yes, that looking more carefully at the flows and thing because in other words, QE did cause prices to go up, but it caused like the price of mortgage back securities and the price of treasuries and the price of, you know, stocks in the S&P 500 to go up. It didn't cause tuna fish to, you know, go up by five times. So there there's that element and I think, you know, he does a good job. We don't have the clips here, but when he's talking to Tucker about that and doing the MV equals PY stuff and that's where he gets into all that the failure of standard monitoriism and you know Milton Friedman was lamenting in the early 80s like oh gez you know V is is unpredictable and it kind of screws up my model as as a as a quantity monetary theorist or monitorist. Okay. So, that's all good stuff. But yeah, on this thing right here and elsewhere he talks about too like, oh yes, you want the public authorities to be control of the money. And that's what and again for all the reasons you don't want the the backroom bankers with their cigar filled rooms making deals and fraudulently creating money that doesn't exist and lending it out to the wrong people. For all those reasons, you also don't want them quote lending to the right people either. that in the standard in the in the Rothbartian sense, even though Roth understands the credit creation, money creation dynamics, he thinks that's fraudulent, just like it seemed 10 minutes ago, Verer agreed. And so if something is fraudulent, you should probably stop it, right? You don't need systematic fraud for a healthy economy. And so if banks merely acted as credit intermediaries where households genuinely saved, that would free up real resources that aren't being devoted to producing consumption goods and can shift then into investment goods. That's how it's all internally consistent and sustainable. So in Verer's framework, the last thing I'll point I'll make here folks is yeah, you've got all these local community banks or whatever spread around the country. This is, you know, I don't have in the clips, but that's what he's telling Tucker the right thing to do is when Deng Xiaoping went to Japan and they gave him the secret to sustainable high economic growth over the decades. It's, oh, you got to don't have all the power of credit creation vested in the one bank of China. You got to distribute it to the local banks and have, you know, them making loan cuz they got their feet on the ground and they, you know, can give to the local hardware store that nobody's heard of, but that's what you need for, you know, sustainable. But how is the local hardware store getting the lumber to build the building and getting all the tools and everything if households haven't genuinely cut back on their consumption, right? That there's there's physical processes involved. It's not merely bookkeeping operations. And so that's what is the genius of Mises and his theory of the the credit cycle is that he realized ah yes he you know back in 1912 he explained how banks create money through the act of granting loans over and above their reserves the way you know verer said was known and but then me has explained and that's what causes the business cycle per se there's no way to do it in a healthy manner that process per se causes the boom bust cycle and you know and that's that's what it seems like Verer did not quite get to that part of the lesson. Okay, I'm I'm done. Jonathan, do you have any parting words for the audience? Yeah, one last thing that I'll say about this. So, he talks about the asset price inflation if banks are lending and people are just using it to bid up, you know, real estate, stock prices and so on. And he talks about the consumption just causes inflation. But, you know, the the main the main uh you know, case study that he's looked at is the Japanese experience. And so like what if if the problem is bank lending that's being used to bid up asset prices or bank lending that's just being used for consumption then the correction to those problems is it's just a nominal problem. So for an asset price inflation suppose it's a bubble like a speculative bubble then the correction that needs to happen is just you know new prices people just discovered the new prices that you know reflect you know actual productivity or the actual value of the underlying assets. In the case of consumption, it's like, yeah, there's a new higher level of prices and people obviously that's unpopular. People don't like that. But it's just like this nominal increase in prices of of consumer goods. But if you see like in cases like the Great Depression or the Great Recession in the US or even the Japanese experience where they had this long recession, it means that there's some real problem. And I I mean that I mean real in the economic sense like there's as opposed to monetary. Yeah. Yeah. is it's not just a nominal problem. It's not something that could be fixed by just, you know, people uh changing prices. It's not something that's that just results in a in a in a price change, but like there's actual real resources that are misallocated. There's labor that had been used in an unproductive way and now people are unemployed and they're trying to find a productive and and profitable way for for them to be employed. So like you actually have to move real scarce real resources around. And if that's the case, then the problem is not that banks were lending just and that lending caused asset prices to increase or that banks were lending and people were just using it for consumption because those problems can be are fixed or the consequences of them is just change in prices just nominal fix. It means that the problem is actually a real one and the one that that like the the answer the solution to this is well you need uh an explanation for the real changes in production and capital employment and you know labor employment that happens when businesses take those loans and then they uh they come up with a new structure of production. So it seems to me like there's a big gaping hole in his uh framework and that gaping hole is he's missing Austrian business cycle theory. Right. Uh just one last comment on that to emphasize what you're saying. I forget who said this but I think it it really helped me when I was trying to understand and distill down the Austrian theory and compare it to the other schools of thought is someone said people often read Mises and Hayek and think it's a it's a theory of overinvestment causing the business cycle and they said no it's a theory of male investment mal investment and that's critical right so it's not just like oh they did people invested too much and well no because if it's just they invested too much then that just means oh we had less consumption than we would have wanted to in an optimal time path, blah blah blah. But okay, fine. We we end up next year with more tools and equipment than we would have planned on, but now that we have them, great. We're that much more product. No, it's like what if you made a bunch of hammers, but they didn't make any nails. And then next year, now we've got thousands and thousands of extra hammers, but no nails. And that, you know, so I'm exaggerating, but that's the Mecessian story. And you can see you don't fix that just by saying, "Oh, well, let's just change the price tags." No, there there's going to be real consequences if that's what's happened physically in the structure of production and and bank uh banks lending out more than they have in reserves is what fuels that in the messian story. Okay. Well, thanks Jonathan. I think uh we did the best we could be expected to in terms of unpacking the the good and the bad and the ugly from Richard Verer's recent appearance on the Tucker Carlson show. Uh, I want to thank you for for showing up and and giving your insights. Yeah, thanks for having me. It's been great. Thanks everybody for tuning in. We'll see you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org.