Bitcoin and How Money Arises

Hi, you're listening to the Stefan Livera podcast, a show about Bitcoin and Austrian economics. Today, for episode one hundred and eighty-six, I've got a very special guest, Dr. Joseph Salerno, the academic vice president of the Mises Institute. He has a PhD in economics from Rutgers University, and he is world renowned as one of the foremost monetary scholars, so he's definitely very, special. Guest for the show, we talk about his thoughts on Bitcoin, Saillableness, which qualities are most important, we contrast some of the different views on how money arises, we discuss critiques of this concept of monetary velocity, and we also talk about deflation. This show is brought to you by Swan Bitcoin, the best place to auto-stack Bitcoin in the US with incredibly easy setup and low fees. Swan is also making a splash on the Bitcoin content scene with Swan Signal. Swan Signal pairs up great Bitcoiners for unique and compelling discussions, broadcasting Live every week on Twitter and YouTube, and then available for download at swansignalpodcast dot com. Swan has also launched the Swan Force. With Swan Force, you get paid to recruit Bitcoiners. You'll earn zero point two five percent of every Swan plan purchase your referrals make for up to three years, and they'll get ten dollars of sweet sats dropped into their account. Everybody wins. Join the Swan Force at swanbitcoin dot com slash enlist. Next, have you looked into Unchained Capital, a Bitcoin financial services company building pro- Products and services on the foundation of multisig, they build a collaborative custody approach allowing you to hold two of three keys. You can have one trezor, one ledger, and Unchained will be the third key in that scenario, and that's a good way for you to help secure your Bitcoin for the longer term. And if you ever need to access liquidity, if you need US dollars but you don't wanna sell your Bitcoin, Unchained offer collateralized loans. You put up some Bitcoin and you get USD. That Bitcoin is stored on chain, it's never rehypothecated, and Check out Unchained's blog, they've got some awesome articles there, so you can find them there at unchained dash capital dot com. Lastly, for Australian listeners, did you know you can buy Bitcoin with your superannuation? With a Bitcoin friendly, self managed super fund, you can. New Brighton Capital are giving you step by step written and video instructions and live ongoing support. They've streamlined the process to make it fast, affordable, easier than you think, and no one has control over your super but you, you hold your own keys. As long as you are comfortable making the investment decisions New Brighton Capital looks after the accounting and reporting for the fund. They're offering a free twenty-minute consultation. Go to newbrightoncapital dot com and use the coupon code LIVERA for credit off the monthly fees. That's newbrightoncapital dot com. Here's my interview with Dr. Salerno. Welcome. I'm happy to be here. So, Dr. Salerno, I, I guess, this is a, a Bitcoin-focused podcast, although obviously I've got a big, I'm a big fan of Austrian economics. I'd love to, yeah, just start talking a little bit about Bitcoin and understand a little bit of your thoughts around what it takes to, you know, for something to emerge as a money. so perhaps, we could just start by chatting a little bit about, I, I, I know you've read, my friend, Saftey N During, what were your thoughts on, on that book? I

thought it was a very good book. he, he, he, he b-explains the emergence of Bitcoin, In accordance with the way Karl Menger, the, Austrian school economist who founded Austrian economics, the way he explained the origination of money. So, I'm, I'm quite fond of the book. there's probably nothing I really disagree with i-in it.

Wow, that's very impressive. And I would love to chat with you a little bit. Obviously, I'm, I'm a student of Austrian economics myself, and I think there are different ways people might conceive of how money starts, right? And so the Mengerian story is, you know, the most saleable, commodity. if you look at someone like, say, David Graeber, he might say, "Oh, it, money first emerges as debt," right? And, and then there are others like, say, someone like, say Have a slight twist on the, Menghurian story where he might see it like, it, it, it doesn't have to necessarily be like transactional day, back and forward use, but it could be things like, it could start as something like a medium of wealth transfer that people would, you know, for, like transferring a dowry or an inheritance, and people might have used gold in those kinds of scenarios before using it in like a day-to-day transactional use. So, I'm- I'm curious, Dr. Salerno, what's your view there on this idea that it could start in a more, let's call it high-value transfer before moving to kind of buying bread and coffee and so on?

Like, I can see how it could be used, you know, in dowries or other high-- as you said, high-value transfers, initially, but that doesn't explain how it gets into circulation because people don't know what its purchasing power is. I mean, the price of money- Are the alternative amounts of goods and services that can be purchased with that. So it, it can't just go from being an occasional transfer for ritualistic or, you know, matrimonial purposes. there has to be some kind of a initial u-origination in, in, in trading that particular good, whatever it may be, for, for other goods, for direct use value.

Fantastic, and I think this comes into, the Mises' regression, theorem as well of saying it has to first start with a certain use, and then, beyond that, then people can start using it more as a, as a way to transact. I, I'm curious as well, when people talk about, say, with gold, they say, "Okay, there's like an industrial use to gold, but then there's maybe arguably also a monetary use to gold." Would you- Would you agree with that sort of framing that it, that it might initially start with an industrial use and then later become more like a monetary use?

Yeah, sure. I mean, gold was used for, ritualistic purposes, for religious purposes, to, for as conspicuous consumption, people, the, the rich, the, nobles, embroidered their clothing with gold as a symbol of status. but, but in doing that, it- Gained a value to these people, and they could compare it to the value of other things that they could get in exchange for gold. And so money, money, or at least gold as a, a, a good that could be trans- exchanged, began in that way. And it was only after a while that, that people began to see certain qualities in gold, permitted it or to be, to be, used to purchase other goods. So if you, if you produce something very specialized, Bob Murphy He uses the example of a telescope or something that very few people would want. One of the things you would do is, is the first exchange it for something like gold or wheat or something that isn't-- that's generally accepted.

So essentially, people are looking for that thing that's more easy, more salable, right, to use the, the Mengerian framing. And so I, I'm curious as well to get your thoughts on what components make up the most important, what's the most important thing inside that salableness kind of category, if you will. And I think tying this back to, say, Safteens book, The Bitcoin Standard, and some people even in the gold world, they would blog and talk about this concept of stock to flow, right? And so I guess that is getting at this idea of scarcity. So i-in your mind, how important is the scarcity factor versus, say, some other factors like, say, divisibility or ease of use, things like that?

Well, I think the scarcity factor is extremely important, i-i-in the following sense. I mean, take iron, which is very durable, it's homogeneous, and but yet, it-it-it-it lost out as, as one of the, the media of exchange. It probably was used, it was used in Africa for a while, but It, it's the, the basically the portability, the, the weight, the, the value to weight ratio, that has to be very high. And for-- so in order for that to be high, then we get into the scarcity issue. Gold has to be very scarce, or, or any, medium of exchange ne- needs to be very scarce, which then in itself im- implies that the, the flow to stock ratio is tends to be very low. And we, we know, with, with experiences in the- nineteenth century, for example, that a, a great gold inflation would be one in which, you know, prices rose one percent per year. But between eighteen ninety-six and nineteen thirteen, there was, I think, a thirteen percent increase in prices over those years, less than one percent, but people considered that a great inflation. And that goes back to this, import-important, characteristic of, of, of a very high stock to flow ratio, or to reverse it, low, low flow to stock ratio.

Right. And I, I think another really interesting point that you were touching on there is around when it comes to the production of money, and, we could call this the, the market's So the response to the social demand for money, and I guess historically, if there was a lot more demand for money, then that would have triggered off a lot more people to go and become gold miners and then go and actually mine more supply, but it just so happened to be that gold was, I guess, the hardest thing, from a stock to flow ratio point of view. would you agree with that kind of idea?

Well, well, well, yes, in fact, you're exactly right. when, when the demand for, for, for money went People wanted to hold more or there was more goods to be exchanged, so they want-- they needed more money. What happened would be that prices would fall and in-f-the price of everything, inc-including the, the prices of the inputs into the, i-into gold. So that made it more profitable to mine gold. So even though in a year or two you didn't get back to the old price level, it took a number of years. After a while, prices returned to the, to, for example, from, you know, e-- early eighteen eighties to eighteen ninety-six, prices returned to, what they were, i-i-in, in eighteen ninety-six, they were the same as they were in the eighteen eighties because of, of, of the spur to gold mining. And so with

the way people, interacted under a gold standard. Now, obviously, we've had different types of Historically, I think, from, from, what I've read, it seems like the, the classical gold standard was kind of a, a less government intervention version, but then later we had Greater government intervention into the market for money, and that's where the government puts in, you know, controls or tries to set the price and so on, under that environment where it's less Government influenced. Would we say essentially that the market has less, because there's less, you know, credit expansion and that therefore that we would say there's less distortion by the government because essentially the supply is really being driven by what the market demands as opposed to You know, what happens when the government expands, or, permits credit expansion?

Yeah. So up until nineteen fourteen, which was really the death of the classical gold standard, that is World War Two. most countries within two, two weeks of the outbreak of the war went off the gold standard. And the reason they went off the gold standard was because the gov-- because the gold standard did restrain the government's ability to increase the money supply and, and pay for the war rather than paying for the war through, through- Through, raising taxes. So, once that happened, you no longer had the market completely in control. so once, then the Fed, in the United States, we didn't have a, a central, a formal central bank, until nineteen fourteen, when the Federal Reserve system came into existence. After the Fed came into existence, it was able to centralize all the gold reserves at the Fed by nineteen seventeen, and it had, the ability- Ability to manipulate the discount rate, which was lowering the rate, increased the, the borrowing from the banks, and then in the nineteen twenties, it discovered that, hey, I can create paper dollars out of thin air and buy up government bonds and increase the money supply further. So gold was still there at the base of the system, but, but the, the inverted triangle, which, which, which had layered bank paper money from the Fed on it, and then the checking accounts of the, of the banks themselves, that pyramid expanded and that So, so that was enough to drive, the inflation of the nineteen twenties. So even though prices didn't-- prices were pretty stable in the twenties, we had a tremendous, boom in real output in, in technology and, and, and saving. we had refrigeration coming in, the radio, mass production of cars. Prices should have fallen, but because of the, the massive credit expansion, prices pretty much stayed the same, which meant that the money supply was increasing if you look at By six percent or seven percent per year. And, so we didn't-- certainly we didn't get price inflation, but we, we did get asset bubbles in real estate in the United States and in, in the stock market. No, so I, so I was gonna say, we had a very watered down gold standard by that time. It was known as a gold exchange standard.

I'm curious, as in your, you know, studies and research of that time prior the gov- like more government intervention into it. Would it be fair to say loans were harder to come by at that time and that, it, it might have been like interest rates were higher? D-during w-w-what, what period of time? So in-- during the classical gold standard era, before kind of the massive expansion of credit, would it be fair to say that, or would you say kind of interest rates could still be, low even in that prior era?

Yeah, yeah, to the extent that interest rates were low in that era, they were low because people trusted the value of the money and were willing to save, and with the increased savings, there was increased lending, and, and, and so you, you had naturally low interest rates. That is, interest rates were such that they equilibra-- equilibrated, or balanced the amount of saving with, with the amount of investment that, that business firms wanted to do. that link Was broken. Once the government began manipulating interest rates, we then got this credit expansion, which went-- the lo-- the loans, as you said, were less restricted because they went beyond the voluntary saving that people were doing.

Yeah, right. And so I guess for listeners, it-- you might think of it like you can have a natural market-driven rate for interest, and then it's almost like the government's interventions might artificially suppress that rate of interest. Interest, and so it might-- to the entrepreneurs out there in the economy, it might look like, "Oh, look, there's lots of resources available, go and borrow and do your investment projects." but the reality is that's kind of a, almost like a mirage, would you say?

Yeah, it's absolute, absolutely a mirage, because when that new money, that isn't genuine savings, gets paid out to the workers, the workers don't save that money, they go back to the, to, to consuming as they were before, so they have more money to spend on consumption, they, they, they spend the same proportion, but now they have more, and that drives up the, the, the prices of consumer goods and d- withdraws those resources, makes them more expensive, drives up wages, and, and a lot of these projects that were started under the illusion that interest rates are really lower, they, they become unprofitable.

I would also like to chat a little bit around this idea of people being able to hold their own money, because I think that's something special with Bitcoin that Okay, so in the Bitcoin world, when you hold the, the private key, so think of that like the password for your bitcoins, if you will, that allows you to really, it's treat it like a bearer asset, like I'm the one holding this, and I think potentially that is something special about Bitcoin that is not available in any other sense, because I guess with gold, you can physically hold the gold, but then the challenge is if you want to send that internationally or, you know, at long distances, that's kind of one difficulty. And I think as well, this comes through as a theme in your book as well, is this idea of sound money, it being free of government interference. So I guess, i-in your mind, when you're thinking about what makes a good money, does I guess resistance to centralization or resistance to being stored in, let's say, the vault of, you know, Fort Knox and so on, does that play into your mind in terms of what would make a better money?

Yeah, sure. What, what m-a sound money is the money which politicians can't tamper with. So what that means is that the supply of money is market based. The, the, the mining, the minting, the coining, a-and, The, the, the,

holding and warehousing and storing of money are all private. I mean, that, that's the ideal of sound money, in which politicians are completely, barred from interfering w-w-with the supply of money. And so go-- that's true of gold, it's also true of an asset like Bitcoin. I don't think it's quite a money now, but, but it's certainly a payment system and certainly a valuable asset, and it's purely market-produced. So it's- An asset that the government hasn't yet gotten, found a way to control.

Right. And, I, I think the other question that for people who are maybe they're a little bit newer to this whole world, and they might see alternative cryptocurrencies, and they might think, "Oh, but see, that means Bitcoin isn't scarce because someone can go make some other cryptocurrency." Now, I guess the typical response that we, kind of Bitcoin people would say is, "Well, hold on, they, the..." If you were to try and make some other money, it wouldn't necessarily have the same network effect, right? There wouldn't be the same kind of exchanges, merchants who wanna take it, the miners, and so on, and, and there's a kind of network effect around one. So even though from the outside it might look like, "Oh, you can just make your own," there's a real difference there in terms of who you could trade with, so in your mind, does that- Does network effect also play into that idea of what makes a better money?

Yeah, sure. I mean, the, given the larger the network, all other things equal, the sounder the money will be, right? There'll be a mo-more stable demand for that money. if, if someone comes in with a, with a new cryptocurrency and a-attempts to, get people to use it, I mean, the, the people the in-the initial users or people who are thinking about using it are gonna find that there aren't that many, many people, other people People that accept it. So there, there's gonna be real disadvantages in establishing an, an initial network, so you ha- you have to come in with something that's better than Bitcoin, that, that, that, that is, is- better enough that people will, will abandon Bitcoin despite the, disadvantages of not having a, a, an established network initially for this other currency.

Yeah. Yeah. and also when we're talking about people having the ability to- Self custody Bitcoin, or just whatever, whatever it is that you want. I think also part of it is about being able to easily know the full supply. So with things like Bitcoin, if you run the software, you can sort of see, okay, this is the total supply and that there's been no, inflation beyond the twenty-one million that everyone is, set on as the limit. but I suppose getting into more questions around things like, you know, if you're coming from a full reserve banking view or you're in the fractional reserve banking camp of the, now personally I'm in the, I'm in the full reserve banking camp, but I guess is it possible that people use, let's say, IOUs, and then those IOUs start to become treated as though they really were, Bitcoin, and then that becomes a way of, supply expansion?

So the IOUs you're talking about are IOUs to, to specific amounts of Bitcoin? J- Oh, right. Yes. I think that can, that can happen. But I think the fact-- and this was brilliant-- that the, the founders of Bitcoin established right out of the gate credibility in the limit of supply is something that If you begin to issue IOUs, pe- that credibility will be shaken, and, there'll begin to be a, a shrinkage of the network in some sense, and there'll be scope for other entrepreneurs to step in with other types of cryptocurrencies.

I see. And I suppose, now again, I'm in the full reserve camp, but let's say, imagine someone was in the, fractional reserve camp here, and they might think of it like, "Oh, but see..." You, you know, we need this kind of banking network to use it, to make it easy for people to do transactional stuff, because maybe Bitcoin isn't suited for day-to-day commerce. if, if, if it were significantly adopted, they, they might sort of argue and say, "Well, no, we need some kind of fractional reserve system to, per-permit, or at least it, it may be a vector by which it gets introduced is people using, say, a retail banking service or application and then- And actually, you're-- what, what's be-- getting traded around here is IOUs. So, but, but,

yeah, yeah. No, I was gonna ask, but how, but, but what problems w-would Bitcoin be facing that would be solved by the IOUs? I mean, Bitcoin is extremely divisible, and, and, and, and easily transferable. What? What, what, what, what problems are there? Maybe that there's no interest on it. So that is of course the lure to getting people to accept IOUs. You put the, y- You promise the, the people that are holding the, the, the Bitcoin that they'll, if they make Bitcoin deposits, they'll, they'll earn interest. So then it becomes an unstable fractional reserve banking system

I see.

So I, I don't see besides offering interest, I, I, I don't see what, what problems are solved by, by going to a system where you have fractionally backed Bitcoin IOU circulating.

Gotcha. And I suppose the other argument around fractional reserve banking is people might say something like, "Oh, but without the credit, we wouldn't be able to go and, invest into this business, and, oh, no, that, that will, you know, we're gonna have, Significantly reduced business investment and so on, but I suppose that's ignoring that you really can still have loans in a full reserve banking environment, it just takes place in a different way, correct?

Yes, it absolutely does. It takes place through other financial intermediaries. Excuse me. like money market mutual funds, like s-s-certificates of deposit that are denominated in Bitcoin, but where you forswear taking the, the deposit out for thirty days, sixty days, or two years. that there are-- you don't need fractional, fra- fractional reserve banking to get genuine savings into the economy and invested in new and better capital goods and, and providing economic growth.

Understood. And I suppose just one other angle. So obviously, I, I, I, I'm with you there. I guess one other angle people could, it could happen in a way where it's unknown to people. So let's say they think they are transacting with, you know, let's say I'm using some Bitcoin bank A and you're using Bitcoin bank B, and, you know, in my app, I, it's, oh, send, you know, Dr. Salerno, you know, whatever, a hundred thousand satoshis or whatever Think we're transacting with real bitcoins, but actually we're just transacting in IOUs on this layer that has been built up by retail banks. Do you see that as a kind of, as a, is there, are there any historical parallels there with people in kind of, you know, thinking back to gold and, you know, passing around tickets that represent gold? Are there any parallels there in

your mind? Well, there, I mean, there was with the Bank of Amsterdam, right? Like, they, they claimed to be a full reserve, Bank that, you know, fully backed up their, their, all their, their, their notes with, with, with gold, and all their deposit accounts with gold. But, but, but when the French invaded and, and, and, and, and took, took a look at the books of the bank, it turned out that the bank hadn't, honored that, that promise, that solemn contractual promise to, to, to maintain a hundred percent reserves. So I guess given, the, the, the fact that, you know, these currencies are digital, something Develop, but that would undermine, I think, once it was found out, it would undermine current, conf- confidence in not just the, the, the currency that was doing it, but if there were competing cryptocurrencies, it, it may undermine confidence in them.

I see, yeah. So I guess we could say it depends on what the, the community of users and people want. And so let's say the users were using some service and this service is purportedly full reserve, but then later it came out that, no, really, they weren't. weren't, and only those people who were storing Bitcoin using, holding their own keys, running their own, you know, Bitcoin software, they were the ones who didn't lose out in that scenario. We're the ones who are trusting that service in this hypervertical case, they're the ones who lose out,

right? Yeah, the ones that, that, that trust a ser- a service that, I mean, I mean, that, you know, surreptitiously lends out, in effect, lends out the, their Bitcoin. Or issues more claims than, to their Bitcoin, to people who are, are paying interest to, to, to that particular bank.

Yeah. I think for some of my listeners, I think I'm probably familiar, but just for some of my listeners, could you explain a little bit around how loans might work in a full reserve, scenario and, and the difference there between, let's say, okay, I guess the example might be something like, you've got, you know, a hundred pieces of gold and a hundred- Tickets, you know, that represent, you know, those gold. And what I guess the point you're getting to there is that if some financial institution issued more tickets than the amount of gold pieces they had, that is credit expansion, right?

Yes. That's bank credit expansion. and so that means that the, the bank can't simultaneously fulfill all of its contractual obligations to pay out the, the full amount of the, deposits and, and, and- And, and notes, or IOUs that it's, that it has issued. In, in fact, of course, when you make a deposit a-and you get a ticket, that ticket isn't really to the depositor, that isn't an IOU, that, that is a bailment. That, if you stored your furniture, because you were going on a business trip for two years, you're gonna be in a way, and they, and they rented that furniture out. I, I mean, that's violating the, the, the, the,

contractual agreement to store the furniture. I mean, it's called a bailment. It's not-- you're not loaning the warehouse company the, furniture. Y-y-you're turning it over to them to, for a specific purpose, to store.

Yeah. And then in terms of a loan, so let's say there's, you know, full reserve bank offering, operating in Bitcoin world, and then I guess the key point to understand is that if you are a customer of this bank and you want a loan, that bank is only giving you the loan from funds where somebody else has willingly is foregoing their use of that money, as opposed to today's world where it's kind of like you're sort of playing both sides of it because You've got it, it's there in your account that you can spend today, but it's also being loaned out, if that makes sense.

Yeah, no, no, absolutely. so there are w-ways to, to, to make loans, so, so people who, who want to earn interest and don't need the, immediate availability of, of that, of, of the, that deposited bitcoins, can deposit it in a time, a true time account, an account, you know, which, has a- Maturity date, that is, they can't withdraw it until it matures, sixty days from now, a year from now, I mean, that's what a bond is, if, you know, five years from now. so the banks can issue those sorts of, of, accounts to their customers, and, and that wouldn't be credit expansion, because the, the, the, the borrowers are s- can have access to the money for that, the term of, of the certificate. But you'd- You don't do not as, as a depositor.

Let's talk through that example. So then the customer, it, the important part is the customer is going there and saying, okay, Mr. Banker, I'm giving you, you know, this, you know, two bitcoins and I, I, it's in a term deposit for, you know, a year and I can't access it, access it in that time. And then that banker then can turn around and, offer that out as a loan so long as he's not expanding beyond the amount of actual bitcoins he Overall vault, right?

Right. Basically, there, there'd be a separation, there'd be a separation between deposit banking, which is, is not a loan, which is what we call a bailment in legal terms, w-uh, where the bank is only storing or warehousing your money and, and shifting it among accounts when you write out a check, write an order to the bank to shift that to someone else's account. so that and, and loan banking, so, so there would be a strict divide between the two. and any mixing of, of, of, of deposits, any using of, of, of the, deposits on, on the deposit side for, for loans on the, loan side would, would be considered embezzlement.

One interesting thing that I find about Bitcoin is that in some ways it, it is-- well, it's extremely subversive that people can actually save their money in a way that's outside of the, of the government, and that may also drive- certain changes in the way governments can, inflate, because now they can't inflate, even if they know how much you have, that would still drive Or arguably, it might drive a reduction in the size of the state, which I guess we, we would like that. Yeah, I don't, yeah.

No, you're, you're absolutely right. I mean, should something like Bitcoin, which, which has a, a supply that is beyond the reach Of, of government manipulation. Should that become the general money or the, the general medium of exchange, which is money, then, then the state would have to raise taxes in order to fund its various programs, and it would no longer be the Santa Claus state, which just bestows, you know, gifts on, on everyone wh-uh, while, seemingly not increasing anyone's taxes, at least in the short run. So yeah, that would be, that's wonderful.

And I, I think it's also fair to point- point out that the government has set up, well, around the world, governments around the world, set up this kind of environment where there's inflation occurring, and then there's also a capital gains tax. So then it, it basically, they're trying to tax the accumulated wealth of the population, because over time, the nominal value of your property, of your house or, or different, assets are rising, and then as people turn over and sell them, that's where the government is coming at you for their capital gains tax Pound of flesh, right?

No, that's absolutely true. And, and a progressive income tax, of course, takes a, a, a greater proportion of the same amount of wealth because inflation will push people, if it's not indexed, it will push people into higher and higher tax brackets where they have to pay a greater proportion, even though the real value of that wealth isn't increased. And that's, you know, that's monstrous.

Right, right. And that's, oh, I don't know, maybe this is an Australia specific term or it's a global term, but

Rising, but your tax, which pushes you up into higher tax brackets, therefore you're, you're paying even more to the government. So in terms of, oh, we've just got a question from the chat here. with, so, so let's say we had separated loan and deposit banking, how would a bank make money from deposit accounts? I, I presume this would just be more like they might charge a fee for service for offering this kind of thing.

Yeah, I mean, they would charge a fee for service. That, that has been done in the past It's done currently when you, when you store anything with a warehouse. When we have to start to think of banks, deposit banks, as simply warehouses that are giving us, certain conveniences, that is relieving us of, of, of the risk and, of, of storing, an inconvenience of storing the money, of, The, of, doing the accounting ourselves, the, in other words, if we have a checking account at the bank, they'll do the accounting for us and so on. So that's, yeah, there's, we're paying for conveniences.

Yeah. And, and sort of like paying for access to the ATM network or of that bank or, I mean, I guess that's, yeah, although nowadays it's, it's very digital, so it might kind of operate in a more digital way rather than physically getting cash out of the ATM, but it's a similar Infrastructure and then you pay for that service, I guess. now, Dr. Salerno, I'd also love to talk about your critiques on monetary velocity. I think those were, excellent, and I think it-- this is a common confusion that I see amongst people in the-- maybe not so much in the Bitcoin world, but out in the kind of quote-unquote crypto world, they, they st-- they talk a little bit about monetary velocity and thinking, you know, talking about like high velocity and low velocity, but I think the- The concept is quite bunk. but perhaps we should just make sure for the listeners that they can follow along. Could you just outline a little bit around what is this whole MV equals PQ?

Yeah. So what, what, what, what- You can think of the following example. L-let's say, that there's, you know, a thousand dollars in the economy, and during the year, so you take some arbitrary period of time, there's been ten thousand dollars worth of goods produced and sold. Well, there's, there, there's a mystery there. I mean, we all-- there's only a thousand dollars in the economy, how can we have ten thousand dollars worth of goods sold? Well, you know, the economists step in and they say, "Well, of course, you know, mo-- money, can, can circulate at different rates. so, s-- some dollars could turn over at tw- twenty times during that year, other dollars may turn over only two or three times, but the average is ten, right? We have ten thousand In existence, so that must mean that we have a velocity of ten for the dollar. But that's, that's absurd. velocity is a meaningless term. it doesn't have, any effect on value because people often say, "Well, when velocity of money goes up..." prices will go up, right? So, you know, just like, so velocity operates like an increase in the money supply, so an increase in velocity or an increase in the money supply, for either reason, if people spend money more quickly, then they can drive prices up. but, but think of it this way, right now, as we sit here at this moment, everybody has certain amount of cash in their bank accounts and, and, and in their purses and wallets. tomorrow we'll all go into the market and we'll, we'll And we'll keep the rest for ourselves and for future purchases. Where there's-- Where is there any velocity there? There is no velocity. Money, money is simply exchanged like any other good. So one economist, Nassau Senior, who was a classical economist during the eighteenth century, mid-eighteenth century, he was brilliant on this. He pointed out, he said, "Look, he says, houses change hands, but we never talk, and, and houses have a certain velocity." and, and, and so does, and, and another econ- French economist Anonymous point that sort of art, for example, is held and then exchanged, that has velocity. Does the velocity of, of, of, of houses or art affect its value? Of course not. It's actually the other way around. we, we decide on the price for certain things, and if, if the price looks good, then we, then we exchange it. So velo-velocity is an empty concept. It's something that we should avoid using, and especially not use in, in, in, in our, our theory of, of how the value of money is determined.

That was a fantastic explanation. So, let me just replay some of that just for the listeners, make sure everyone can follow along. So I think, we could summarize this, one of Murray Rothbard's critiques, in fact, was that at all given times, money is resting in somebody's cash balance, and it's not circulating, so to speak, right? And now, I think one of your critiques, Dr. Salerno, and I, you know, I really enjoyed this, I, I can't remember which article it was from, but essentially, it

Antecedently established by the different parties, right? It's not that, yeah, yeah. Right. So, so, so, so,

so when we go into the market tomorrow, w- You know, to, to pur-purchase the various goods and services that, that, that we demand as, as, as consumers, and there's-- and we're, we are facing the sellers or vendors of those goods. there's a subjective interaction of the values of the sellers and the values of the, of the buyers, and that establishes prices. It's only at that point that the money changes hands. In other words, many people, and unfortunately some Austrian economists that are free-- free, call themselves free bankers look at it this way. Many people think That, well, there's a certain price level, and then money floods in and pushes this price up, or, or, or it drains out and, and, and lowers it. But that's not, but, but money doesn't push prices up or down, it's the other way around. Money exchanges hands only after people have valued money versus goods, and, and, and prices are determined on the market. So that's, a, a, a very important point, and, and, and many economists don't understand

Yeah, that was, fascinating. I, I think that's really great because I think there's a common confusion, right? So maybe not as much nowadays, but a couple of years ago, you would see people in the, again, quote-unquote, crypto space where they would talk about MV equals PQ, and then they would say, "Oh, well, look, see, if we slow down the velocity, then that might mean this token holds its value more." And it just, it just seems like fallacy on top of fallacy on top of fallacy, right? And I think People should think a little bit more clearly when they're thinking about what does it really mean to talk about monetary velocity? Yeah, does that even, does it even make sense, right? So that's there. look, another area I'd really love to chat about is your explanations on deflation, because, this is one of my favorite articles to tell people to go and read, because I think you were just way ahead of the typical person today who's, who's like saying, "Oh, no, deflation is bad." really, we have to understand what are the causes Up that deflation into components, and I think you do this in your article, an Austrian taxonomy of deflation. So I think, I guess if I were to just summarize it for people to make it easy for them, it's like we should think of it like there's growth deflation, that's the good kind, and then we've got the bank credit deflation, which is sort of- Superficially looks bad, but actually is also another part of the process.

Yeah, yeah. So, let's start with growth deflation. I mean, I oft-often ask my class, do you like low prices? And they all say, "Yeah, yeah," you know, I, I ask, "You know, would, would you prefer if an iPhone was only ten percent of, you know, if it was sixty dollars instead of six hundred dollars?" And they're, "Yeah, yeah," they all think that's great. And then I say, "Well, do you think that's good for business?" And everyone says, "No, no, it's terrible for business." But the point is this, what, when prices, when in, in, in a capitalist economy that is operating without the government intervening in the money supply and increasing the money supply, what occurs is that there's continual competition, continual competition for ways of, of making the pro-production costs lower, of lowering the price of different things. So when that occurs, through new technology and new investment in better and more capital goods Labor becomes more productive, each labor can produce more, and so therefore we have more goods in the economy. Now, how are they gonna sell these additional goods? People are buying all they want at the, the going prices, they have to lower their prices. So to make a long story short, growth deflation, the fallen prices, is a result of the, g-growth in, in productivity and, and, and the increase in, improvement in technology and so on. So the first HDTV, in Japan was sold for thirty-six thousand dollars back in the nineteen nineties, and today for an HDTV that's much larger, much more, much higher quality, better picture, more pixels per square inch and so on and so forth, is five hundred dollars the same thing has happened with LASIK eye surgery, for example, where it used to be seven thousand dollars per eye and, and today it's, it, it's, you know, three hundred for, four hundred dollars per eye. But the, the point is, are we better off? With its inflation, we are, what about the companies? Well, in fact, despite the fact that computer, price of computers of all types have fallen tremendously by ninety percent, you know, f-- since PCs were first introduced, for example, or if you go back to the mainframes, mainframes were about three, three million dollars, but now, a, a laptop has more memory and is faster. how do they stay in business when these prices plummeted? Because they had lowered the cost in advance through- Through competition and improvements in, in technology and, and lowering of costs of production due to more and better capital goods and ro-robots and, and so on. So that's growth deflation, that's very good. bank credit deflation, is an unfortunate consequence, but, but it's necessary of the fact that the, central banks have previously inflated Artificially lowered interest rates and lured entrepreneurs into making bad investments. And then when that has occurred, and, and, and, and, and, and the, the central banks have stopped increasing the money supply as quickly, then pri- the, the, prices begin to fall, and, and interest rates rise, and these things become unprofitable, and you, and you begin to get, you know, business bankruptcies and so on. The problem then is if you don't have a, a central bank bailing people, bailing out institutions bailing out banks, well then what happens is that th-these banks fail as they did in the 1930s, and you get a bank credit deflation, which is necessary because- The, the, the banks have made these, these very bad loans and, malinvestments have been made by bad investments by, by the entrepreneurs. So it's a way of correcting that whole process

Yeah, and I suppose with that it becomes-- because often the government will have, you know, occupational licensing and all these other things that make it difficult for people to readjust, right? So it's kind of like we've built up these, these malinvestments over time, and people then might find it difficult to now change and find some other job in some other industry when really that's where they should have been all along, right?

Well, that's a great point actually, because what-- the, the way to, to- Mitigate the recession and make it, and more quickly, and make its effects less devastating is to get rid of things like minimum wage laws, special privileges that unions have that allow them to keep wages above, especially during a depression, a, a, a, above the market levels, occupational licensure, as you pointed out, which keep people out of certain professions. You could, you, you could all, really make a, a depression much less severe if you could, while it was going on, begin to make these reforms. So that was a very good point that you bring up.

Great. and also, I think the other question people have in their minds is We've, well, basically in living memory, we've all been living in an inflationary environment, so we're used to this idea of prices rising over time, and I guess for some people they might- Now flipping it back the other way, like imagine we lived under a gold standard or potentially under a Bitcoin standard, we would be living in a world of beneficial, you know, growth deflation. Now, some people might- Come back and say, "Well, hold on. How, how, if I'm a business owner, how am I gonna make it work if my-- the prices for the things I sell are com- are coming down over time?" Or if I'm a-- if I'm an employee, how would I be comfortable with having my salary, the nominal, salary might be actually dropping over time, right?

Yeah, well, f- let's deal with the business owner first. the business owner wouldn't, isn't interested in the absolute level of his prices. He's Between his prices and the prices he pays for the inputs that he uses, which are his costs of production. So in, in a dynamic capitalist economy, the costs of production are falling tremendously, and in fact, we, we know that there are, there, the computer industry has grown tremendously despite this plummeting in prices by ninety percent, for, you know, chips and so on. as far as the workers are concerned, their nominal wages won't change much Much, unless there's an increase in the population and the labor force. So what will happen is that prices will fall, the nominal wages won't increase, but they won't fall. they'll just become more productive. So, so, you know, if prices fall by ten percent and their wages stay unchanged, then they'll have, an ten percent increase in their real, their real, income.

Yeah. one other question I, I had on my list and I, just thought of it recently as well. So Murray Rothbard, in, I believe it's Man, Economy, and State, he talks about this idea of Medium of exchange being the most kind of the-- it's like the quintessential or the defining, characteristic of money. Yeah. is it possible though that, kind of coming back to that idea of, you know, large wealth transfers, is it possible that- A money could arise even though it's not being used for like coffee and bread and kind of day-to-day transactions, but it just, it just takes time. Even though medium of exchange is still the defining characteristic of money, it's just that it kind of, it might move through these stages. And I think potentially that also, comes up in Jevons and other writers where they're saying, okay, it starts collectible, then store of value, then medium of exchange, then unit of account. What's your view on that? And do, do you have any thoughts on how to, if you will, square that circle?

Well, I-- to the extent that it becomes, is used as a store of value or it's used, you know, in, in religious rituals, if that-- if it becomes more and more generally acceptable, at some point It will then become, people will realize that, and then they'll trade their less saleable goods for that thing, and it will then assume the role of a medium of exchange. I mean, we can go through different thought exper-experiments. You can think of how that, that could happen. and that, and with gold and silver, they were used, you know, for, as I said, conspicuous consumption, for, you know, showing off one's wealth, for, r-r-religious rites and so on. And, and through- So they were very, very w- a-and also for aesthetic purposes, people thought they were beautiful. So there were these other uses initially, and, and people may have very well kept their wealth in that form. In fact, they kept it in the form of plates, gold plates, and ornaments and so on. And then when people realized how generally acceptable it was, they realized this is one of-- this good will be very, very salable because everyone accepts it. So yeah, I don't see any contradiction there with, with the Mengerian story.

Yeah, yeah. and I guess I'm also reminded here of the point that, one of my favorite, kind of quick essays I can offer to people, I, I, because people ask me what, what should I read, and one of my favorites nowadays to recommend for people in the Austrian tradition is, Dr. Hans Simon Hopenhay's essay, "How Is Fiat Money Possible?" And in that essay, he makes this point about how You know, people might have superficially thought, "Oh, you need like a different money for different trading areas," but then the point that, Hopper makes there is that really, think of it more like, imagine if you had one global trading area, that would be far bigger from a, you know, a network point of view than each individual country having their own fiat money, right? And I think that is a good, interesting thought experiment for people to imagine, well, wouldn't that be better if you could just trade globally across this whole network? Network.

Yes, because you would save the cost of inter-network trading, right? This, of, of exchanging currencies, there would have to be, resources devoted to, to, to that, providing that service of exchanging the currencies. So that's absolutely true. I mean, Hans, Hans, you know, saw, saw deeply into that problem. I think he put it in a very good way, his explanation.

Fantastic. And so I think I'd love to also chat a little bit about monetary reform. Now, we know the government isn't necessarily gonna listen to people who are saying, you know, take yourself, you know, get out of the way, let the market decide what money is, but- Hypothetically, what are some of the ideas that could be posed as improvements on monetary reform?

Yes. So, just to your first point, the point you just made, though, we, we really don't want government to get involved in monetary reform. I think Rothbard thought that, you know, at some point we could have had, the government take us back to a gold standard. I even thought that way, but I don't, I don't think, you know, w-w-with what we know about governments, especially today, with the way they're printing The, the, that'll never happen, and we can't trust them to, to, to carry it through. So what I think should be done is that we should push for the, the, the right to hold foreign currencies, to, to, to, to take, to, to have, gold and silver, detaxed. That is take, take all excise taxes, sales taxes, capital gains taxes off of gold and silver, and allow contracts To be enforced that are made in gold and silver and foreign currencies or Bitcoin or anything else. so w-what we need is currency, w-we need is, is, is, is, you know, currency competition, competition in currencies, which was Hayek's idea in a very, a good pamphlet that he wrote back in 1975 that I, that I highly recommend, on currency competition, before his denationalization of money, which I'm not, where he advocates private fiat currencies, I'm not so crazy about that, but, but, just allowing People to, to, to use any kind of, of, of money that they, that they desire and have it enforceable and don't try to tax it out of existence.

Right. And I think it's, it's worthwhile thinking about what would make most sense. And I think, as you're saying, this is kind of the, the less you're asking for less, right? You're just saying let people decide, right? Let people decide what they wanna use as their money and, you know, let the market decide, right? And now obviously we know the government isn't gonna do that anytime soon, but it's, it's-- I think it's, it's educational for people nevertheless to think about the implications, what would happen if we were to remove capital gains tax, let's say.

Yeah, no, I mean, pe-people could, I mean, gold and silver would look better as a medium of exchange or as We got rid of these taxes on them.

Right, yeah, and I think because right now it's, because of things like capital gains tax, it just, it becomes too onerous and you'd now have to do accounting, you have to now think about, okay, well, what did I buy? What was my cost basis on this? It just, it's like this incredible administrative and onerous burden that basically nobody does, and so now it's almost like, and I guess this is, I guess a little bit going to that idea of Bitcoin as potentially- It kind of like an Uber strategy, right? Like Uber just kind of got out there and it got used enough that there were enough people who kind of demanded that, hey, we want this now. So yeah, I wonder if pot- potentially Bitcoin is kind of like an Uber strategy in that way of getting people to kind of just use this alternative money that is hard to inflate and hard to stop.

Yeah, I mean, that may very well be, be what, what happens. I think there has to be something that, some event, not necessarily catastrophic, but an event that shakes people's confidence in, in the government and its, and, and, and, and the dollar and the way it's being issued. And I think this pan-- the, the way they're throwing money at everything, certainly in the United States, is go-- may very well cause a, a rapid consumer inflation. I mean, asset bubbles, people don't understand asset bubbles. But they do understand a, a huge, you know, increase, rise in the price level that, that, significantly reduces or dilutes their purchasing power. So that, that may push people towards, Bitcoin.

Yeah. And, and actually, just while you were mentioning this idea of, inflation and, in, under this current scenario as well, because I think this is another area where people talk about velocity, and they say, "Oh, well, see, now the velocity might be really high, and that's gonna drive the inflation." But I think- I think that's not really what drives it, right? It's more about, probably, it's more about inflationary expectations going forward, would you say? Yeah,

no,

it's,

it's inflationary expectations. Now, people make more frequent transactions because money's beginning to lose its role as a store of value. It's still a medium of exchange, people will accept it, but with the idea that they're gonna get rid of it in the next, you know, day or two. I mean, that's what happened in, in, in, in Germany during the hyperinflation. Literally towards the end, workers were demanding to get paid two and three times a day, and their families would be at the factory gates, and they would give their, their, their pay envelopes to their families, who would rush out and, and spend it on different goods and services. But that's, all that means is that the value, people's subjective value of money is going down in relation to goods, so they're trying to purchase the goods.

Yeah. And so I guess that's sort of like a, I guess the quick way to say it is like monetary hot potatoes, right? Nobody wants long, because they're, they're worried that the v-- the value is going to drop. And I guess that is potentially a difficult question because people, people want an answer, right? They just want to see, "Oh, well, look, see, the, the, the central bank did all this liquidity and all this, you know, base money creation, but really what's driving it is, is that kind of gradually then suddenly, conception in everyone's minds of, "Oh, I, I'm expecting more inflation," and eventually you just sort of hit a tipping point, would

you Right. Oh yeah, right. That's where money begins to lose its value at hourly, where there's a significant drop, and, and at that point, you know, then you get everyone rushing trying to purchase different goods and services, and eventually then the price level rises to infinity, which means you could give them the whole money supply of the country, and a farmer won't sell you a, a dozen eggs, which is what happened in Germany.

Right. And so I guess for a long period of time, it looks like everything is fine, but then it just sort of, sort of flips. And I guess if you're in the government at that time, you have this temptation because you're worried about, "I've got this big hole in my budget. I need to-- " From the government's point of view, they want to inflate more and more, and they, at the, I guess at the start, they might inflate a little bit and say, "Oh, it didn't, it didn't cause too much inflation, so I

can That's how it happens.

Yes.

You're right. Yeah. So I think, listeners, if you're interested, check out, I think that, I think that point, Murray Rothbard makes that point in The Mystery of Banking, so definitely go and check that out. Dr. Salerno, look, I, I've, I've really enjoyed chatting with you. I'd love to chat more, but I think this is all we've got the time for today. but, listeners, make sure you follow Dr. Salerno, go and read his

Yeah, is there anywhere else you would like people to follow you online?

No, no, that's it, that's it.

Thank you. Excellent. Well, look, I've really enjoyed chatting with you. Thank you for joining me. Thanks for having me on. I hope you enjoyed the show. Go and find my website at stephanlivera dot com, follow me at stephanlivera on Twitter and on YouTube. Also, just a quick note, I'm thinking of trying something a little different with the podcast over the coming months, so I might experiment a little bit with doing more episodes but shorter episodes. So keep an eye out for those, make sure you're subscribed in a podcast app, and I'll see you guys in the Citadel.