So, the first thing is done, and this is all done by Gibbs, NVT, that means energy is the first thing, but because it is all natural, that's a system will exchange energy with the surroundings. So, that goes to give you, so then Gibbs did this amazing, he must have a very clear idea of what was going on. It must have been very, very interesting, because if you think of it, there is a man alone, sitting in Stalin's laboratory in Yale, he once went to Europe, came back, then rest of his life he never left. Many people gave him offer, but he never left, he didn't marry, and in the morning they used to go like Immanuel Kant of the great philosopher in Germany. He used to in the morning used to go to his laboratory, and in the evening used to come back to his home. All his entire life he lived with his sister, took care of him, and that's it, but those were very common those days, you know this kind of people like kind of aesthetic, highly aesthetic and dedicated life. So, they are sitting there, he must have this huge clarity of vision that how to go. So, the first clarity and brilliant idea was to go to the ensemble, because I give you my again and again the example of the 10 water glasses, you know they are all in different microscopic states, but their properties are the same. So, that would give you the idea of creating an ensemble, because in one stroke you went from solving Newton's equation to a distribution function, that was whole idea one sample, that you go to distribution. As soon as you go to distribution you can define averages, as soon as you can define averages you can start doing calculations, analytical calculation, otherwise you are stuck, you cannot solve in three body problems. So, that was the brilliant beginning of a whole of statistical mechanics, this ensemble. Then he made those two hypotheses and there was time average equal to ensemble average is I have explained many times, follows from the concept of space space which I think I did in second class or first class. Now, then he had to make equal upper high probability, because there is all in all in microscopic states of the same energy and there is nothing that we know about them other than that, that the same energy. So, there are no other option than to assume they are equal probability. So, there comes the equal probability, but then he landed in trouble, because his ensemble is now taken care of. But who guarantees that the time average equal to ensemble average is the first postulate, because for doing that my system, one system that has to go through all the microscopic states. So, then all the microscopic states must be visited. So, the concept of dynamics or time dependent came into Argodic hypothesis. That is why there is a huge school of mathematics even today who are working on Argodic hypothesis. And in the A.R.S.S. system who are shown to be Argodic first time by great Bovinovic and Sinai, only 1982. They said that a billion ball model or rather two dimensional disks are Argodic. That the first time by showing the diffusion exist and the main thing is that two trajectories starting together, go over all the space. You might have heard the beautiful things like chaos and the open of exponent. All these things come from these are the part of these Argodic hypothesis and chaos and that is why so much interesting chaos. Now coming back, so when you go from relax the constant of energy, then again I do not have any next step to do. That is why he must have a huge clarity of vision, because only thing that we have is this thing. So, what does he do? I put my picture here on the board. I put all these members of my ensemble, all the members of my canonical ensemble, very carefully listen. All the systems in my canonical ensemble who are exchanging energy with the surroundings. I put them against each other and then put them in a bath. Let them attain this is my super system. My super system now equilibrates at a constant temperature, but they are exchanging energy. So, all of them are at different energy states. So, these now becomes my one super system. Now I make an ensemble of the super system. So, this super system is now isolated completely after initial bath. So, this has a total energy. I hope you get the picture now. So, now I do a super ensemble of my super system, but the super system is now characterized by constant number of particles. So, total number of systems in my canonical ensemble which part a super system multiplied by the number n each. Similarly, volume. Similarly, the total number of particles. So, there are constraints. Now, I now want to write down. So, this is the distribution I discussed last time that how this was the one we considered in micro canonical ensemble. In micro canonical ensemble, I have only a system has a micro canonical ensemble where a system is characterized by four energy levels and energy. So, n equal to 4, v does not come here. Though v enters through, v enters through given these energy levels. I hope you understand like in particle in a box. Remember, n square h square by 8 mL square, L is the length. So, energy spacing comes through. So, these are the and I have four systems. So, this is my micro chronical ensemble and micro chronical ensemble. This will my omega equal to 4. All right. Now, I allow it to have different energies. As soon as I do that these different states become available to it. So, micro canonical ensemble has many more states available to it. Now, immediately realize not all of them will have equal probability. So, now I need to find out how to talk which energy is more probable. And that is now done by saying n is the number of particles in system. J and add over that you get the total number, total energy in my super ensemble. So, n remember n is the number of again, n is the number of particles in energy state Ej in my super. There is a two layers that we are doing here. These are number of systems. n is the number of system in energy state Ej. And then this is the bare combinatorics. But that has to be this combinatorics has to be maximized with this constraint. So, this is the constraint. And I can define now the probability. So, what I was asking the question, what is the probability? Now that all the energy levels are allowed, what is the probability? Now, what will be the condition that will determine what energy state is most probable in the system? So, I have removed all the barriers. The system can be in different energy states. I have still the constraint of number and volume. And in a super system, super ensemble I have constructed. What is the condition that will tell me what energy level? What is the probability of a given energy level? Now, energy levels are allowed. Energy levels are allowed. So, what is the condition that will dictate? No, no, that will come up. There is an outcome. But without doing Benjamin, you will take a guess. Very simple. It will be the arrangement which will maximize the, which will maximize this. This is an amazing thing that, really amazing. And even now it never fails to surprise me that this holds with enormous accuracy. 1 in 10 to the power 23 or probably whatever that kind of number. This law of maximum entropy, law of the maximum number holds such accuracy. It is just amazing that because these are called laws of large numbers that come into play. So, by the time you have some hundred particles or thousand particles, amazingly this distribution kind of, there is a force constant of course. We will discuss that kind of zoom scene. And it is essentially connected with a very deep level, the stability of the system. And that is why statistical mechanics gives you a real insight into natural systems. That how things work. And it is really mind-boggling if you think of it. So, now I can define the probability of my system, my system in an energy level and that is probability is Pj. That is where I ask the question. Because I am going to go for Pj. And only principle I have is maximize entropy. The maxima is omega. So, this Nj is the number of systems in energy level Ej. And now that particular energy level, my system can be, my ensemble, super ensemble can be distributed in the omega ways. And so then this is the normalization. This defines the probability Pj. Take a look into that. It is not difficult. But we are, I am saying that we are looking at a higher level. And when I go to grand chemical ensemble, even another higher level will come. But this is resting on micro-canonical ensemble. Grand canonical ensemble is rest on canonical ensemble. Let us say what we are trying to say. Omega is the number of ways I can, like here, omega is the total number. They might be the same. Don't let me work it out. So, this is the, in this case, I says it should be 440. So, given an energy Ej, I have a number of ways to define omegaj. All right. Now, so I now come there. I said it has to be weighted by omega, which is the, so the omega Nj given the weight of the, so in probability, how do we go about? We go about, we define a probability by, I did discuss little bit in lecture 2, probability of statistics, which is given in my book in, I think chapter, second chapter itself. You have the concept of the phase space. Sorry, sample space. What is the sample space? Samples place the total number of space that is available to you. Like, if I cross a coin, then the sample space is 2, 8 and 10.  Then it is the total number of the sample space that is, so here the sample space is defined by total number of microscopic states that is available, not the total number of systems. So, you remember the Venn diagram we draw. So, that is the reason this should be omega. Okay, is it clear? It's a good question. Now, we have to go, what we did now? We have to do starlings approximation, you know omega ln n prime ln, and if you do that you get this quantity here. This is the thing that we have to maximize, but we have to maximize with this constraint. And then we do starlings approximation, and we have the very important thing which I would love, but it would take one class, is the method of, this is called method of constraint variation, method of Lagrangian multiplier, it was done by Lagrangian where we found out that, so it is essentially say that you are maximizing something, but you put a constraint to it. And for example, you want to have a certain distribution, but you put certain conservation condition of the distribution. And these are the conservation condition. Now, the way that Lagrangian multiplier goes is to put the constraint in the following form, so that you can see very easily that this is, this condition if I take dNi with respect to that, then that variation since this is constant, this will go to 0. This is constant because of total amount of energy, because that is my super system, super system is a microchemical system, that has a constant energy, so that will again be 0. So the way the Lagrangian multiplier works, that you put the constraint in the following form, that the whole thing is, so this is the one you want to maximize, but with respect to this constraint. All right, in the book in the appendix, I have described little better. So when you do that, we get this equation, you can go over, because this quantity is this quantity, and you can take the derivatives. And then you get this is the condition, taking the derivative, this equation 17, then you get the 18 comes out. This is actually easier of the things that you have done here. And then you can easily see that I can take some, this is the distribution that comes out, because just I have to take ln of that, and this that comes out, I sum over this. So star is there to denote, that this is the most probable distribution, and at least what I was telling that it works, though it is the most probable, it works with amazing accuracy. By sum over that, I get the total n, and then the e to the power alpha is e to the power minus beta en. There should be actually n in front of it. I do not know where the n disappeared. And then pj probability is this by n, and then this is, so sum over n, the sum over this is capital N. So then e to the power, so probability is, so this is the probability that, this what the probability that you are telling that nj by total number of states, and total number of systems in my microclinical ensemble is this thing. So you get now, this is the probability of getting my system in a jth energy state. So pj, j is the index of the energy state. So pj is the probability, and this is what you recognize. Two things, a, this is the, our Boltzmann, but we have not yet proved that beta equal to 1 over kBt. Beta is just in a constant parameter here. That's why it is called method of undetermined parameters. At that level, they are not determined. They are introduced at constant, and we have to determine them with the time. So, and this is the quantity that comes here. As the normalization is the partition function. This is one of the most important quantity in equilibrium statistical mechanics. But this is just, Boltzmann factor, but sum over all the energy levels. So total weight is the, this is equivalent to omega, exactly equivalent to omega, but this is canonical ensemble, where the difference between this micro canonical ensemble is that here I have all these different things, and in micro canonical ensemble I just have omega, total number of states, but in canonical ensemble each of these states are weighted by beta. So they are weighted by beta, and that is, this is the weight. So I just don't have the states, and now I can also have a degeneracy here, but that we will discuss later. So this I am not going to do. So then, now the most important thing which I think we will just do a little, then probably stop, because I think these are, how long this kind of heavy class can go on. So what the next thing is that, so we have the following, this is micro canonical, so then the way we write is N, V, this is a common way of writing the micro canonical ensemble, all the energy levels, you can have one or zero doesn't matter, this is determined by V, and so very interesting, so temperature will show that beta is one over KBT, the temperature comes through that, and total number of particles, energy levels is determined by the volume, and total number of, this quantity is a lot of interest, and a lot of insight can go into that, but I will discuss that a little later. So what do we need to do now, to show two things we need to do, A, that we have to establish the thermodynamic, how thermodynamic, like we have done, how thermodynamics follows from entropy, that was easy, because we knew these things, we, once this entropy, of course we have to establish the entropy by corresponding with Euler equation, and the relation omega, but once we know how to get temperature, by DSD is the temperature, that is well known relation, then we know the expression of pressure from entropy, expression of chemical potential from entropy, it is not the way you usually think about it, but micro chronical ensemble gives you those relations, now we have to define similar relations, from the similar relations for the, in the chronical ensemble, so that is the idea now, so we start with the average, defining an average energy, so this is the average energy that comes out of my partition function, of my distribution, and distribution is pj, pj is the probability of the system in energy level j, so this is the energy of the jth energy level, and this is pj, and then this is the standard definition, if this is the probability, if this is the probability, this is the probability, then I have the partition function again, so partition function q is actually measure of the sample space, so all the averages will be determined with respect to this, is the total weight of the sample space, so just like entropy omega is the weight of the phase space of the system, and all our averages are calculated with respect to this quantity, in canonical ensemble this is the weight of the system, so a system characterized by nve has a weight, that weight is given by entropy, or rather given by omega, and then log omega is the, similarly in canonical ensemble, this is the weight of the system, so that is the weight to talk of partition function, it gives a weight of the system, that is why we maximize the weight, or minimize the weight, so now we then again play the, it is a very interesting trick here, that I will probably not get to do fully, but de trivially from here to here, now as I said there one and now uses a very nice trick, nice trick is that we use definition of pj, and then pj is defined by e to the power ej by qj, so dpj is then written as I can take d of the left hand side pj, then I get these two terms, so ln pj, so ej on the other side is in the numerator, in the exponent, so this is in the exponent, so I can take d of that, differential here, then this comes out, and then I take log first, then I took the differential, I take the log, so ln p where e comes out, beta e and become, so beta e ln q, so I have a expression for e, that I put it here, ln pj by ln q, then dpj comes dpj, the differential will come later, then I have this term, dpj as dvdvj, and then we know the condition that sum over pj is one, because it has to be somewhere, because there is probability of being in the energy state, I add over everything that is normalized, that is also come from this definition earlier, tell me if you have any problem, and if that is so, the sum over dpj is zero, I take dpj is zero, this is the thing we use constantly, then we go back and we use the relation between entropy, which same as this relation, kb ln pj ln pj, you know this, do I have to explain this or not, yes or no, this is okay, but tell me if there is, actually what happens, this same as this, because if all microkernical ensemble all are same, then you put, this is what some information entropy and all the things, but they are all the same in this kind of setup, so if pj is one over omega, then one over omega, then sum, then all of them come out, but sum remains that gives omega, so these one over omega cancels that omega, and then these, when one over omega is minus, I think I did that last class little bit, they is equal to kb ln omega, okay, so is it kind of a, same generalized of these things to the energy levels, and then I can use this, do the ds, this quantity, and I get this equation, it is, one can work it out, that you get how these things work, ln pj, it becomes pj, which I don't know why I did that dpj, ln pj dpj, these equations can be, these equations I will link d as this, can become mined to, you can get this, okay, okay, entropy is now written as ds equal dE plus pdV, okay, so this is now, pj get cancelled, I have sum over dpj, and sum over dpj I just showed is equal to 0, so this term goes to 0, so I have left with this thing, right, and ds equal dE plus pdV, okay, so now I found this, we compare, and we, so till now I have these things, 1 over beta equal to dLn pj dh, and that is now, so from here these terms, from here this term comes, and that pd, we compare with tds into pdV plus pdV, then the first relation with thermodynamics is tds is 1 over beta dLn pj pj, yeah, 1 over beta so this, so Ln pj, this is pj Ln pj, so this term is okay, ds equal dE plus pdV is okay, so here we have dpj Ln pj, this quantity, and this quantity become Ln pj, this goes to 0, then let us stop now, we will continue from here, I have a little confusion what has happened here, so we will start at 4 o'clock from this equation, just no, at the end of the day you are, at the end of the day you are defining so what is this here let me describe this little bit so as I was telling I forgot his name, so I have a phase space okay, and what is the phase space as I explained that the total number of states in the system is a phase space always, that phase space is now partitioned into the the total space now constitutes say I for example bias my coin, if I bias my coin then I can make head and tail becomes different and then there are two ways now look into it that the biasing that I do that probability has to add to something that is my sample space okay that is the question he was asking that that is also equal to total end in this case it will be two so the but by biased probability that add up to one also total number of space so here this quantity is the giving that total number of so I have this is I have partitioned my system which is given to me that all the different energy levels I have partitioned my whole system in my configuration space all different energy levels are there okay this is my sample space and each of them given my micro grammatical because all of them is constant energy exactly so this is now these are my micro grammatical so I finding for each of them omega each of them are finding omega but now say 10 this is 12 this is 14 all this so I say now go okay I give you energy level tail in my diagram how many ways I can do it that is this this omega this this omega look at this so this partitioning so now I have to add up all the counts that I get here and that my total I have to get the total sample space like in Venn diagram that total sample space is this quantity I have to go back and say this energy 10 has a number with it which is number of ways I can do 10 in micro grammatical ensemble that quantity is this quantity okay this is very neat and clean where the stat mac part is very clean where one tends to get confused sometimes when the interface with thermodynamics comes because I always think that stat mac interface is still a little rugged there is always a little approximation that is made there so that is where little bit ambiguity sometimes crops in so we will meet again at and we will start from the thermodynamics part and g plus pdv at we will finish canonical ensemble and start canonical today tomorrow I will do hopefully tomorrow we will start doing the fluctuations atleast half towards the end of tomorrow morning that is the most interesting thing in my book in initial title I have realization of promises that statistical mechanics has see difference from quantum is stat mac is the following in quantum I do Schrodinger equation no derivation is required then I say this side you go to 0 h equal to hc 2m plus vx then that is a differential equation now I put it in a vx equal to harmonic oscillator I solve I immediately get experimental observed quantities which is the vibrational spectroscopy the lines if I make a little distortion because of rotation I get what is q or branch which is exactly experimental similarly you do particular box you know you go to conjugate polymer so at it almost trivial level you get results which are connected to experiment and spectroscopy that is why spectroscopy came first quantum calculated statistical mechanics on the other hand you have to do a lot of work go through the whole postulates which is suddenly far more non trivial than writing down Schrodinger equation of course if you go out Schrodinger did it is original paper if you read it will be lot of fun that how we argued which was written in the first edition of Barry Rice and Ross I used to have all these original papers at one time that is what I knew that he did everything he did it from debaugly wavelength debaugly hypothesis he does not do that operator equal that was done by didap history is very interesting so there was a formidable thing that went on for the electric effect black body radiation, planks that led to quantum mechanics here the Maxwell then Boljman but Boljman is so difficult we cannot work out Boljman's equations in a class so we start with Maxwell then ok Boljman tried and did s equal to k b l n omega then comes the Gibbs this formidable wall of the postulates micro-granical, canonical, grand canonical then you come to applications but the first applications are actually the fluctuations which just the and the linear response that is one of the most fundamental thing of natural science is the response function that we will be able to do tomorrow


welcome all back to the channel y'all. It is time to do some elk hunting. I'm going to start this video off with a bottle. Elk hunting tradition, hunting tradition.  Last year if you guys watched my elk series that I went to the woods with the born and raised guys and the hushed guys. Ended up tragically. Ended up uh not opening this bottle ever. So I got a message on here it says be calm settle in one two squeeze enjoy the ride lfg 2020 even signed it for myself like like i'm a big shot or something uh so if you guys have followed my channel and hunting um three years ago i went to the elk woods for the first time did not know what i was doing at all and i got on some elk never got close enough just had no idea um second year went with born and raised hush and guys uh they watched my videos basically saw that i didn't know what the heck i was doing helped me out a bunch and i learned a lot it was great hunt but just hunting public land um seven days in the woods finally got on our bull and uh ended up shooting it forward and the mistake i made and the reason i wrote that message on the bottle is when i stopped called the elk the elk was still moving i never even practiced that shot of following and then stopping and i never settled into my shot and so that was one of the things that the guys taught me was make sure to settle in when you stop an animal you're usually going to have a lot longer than what you think you know at least a few seconds maybe even five seconds to to settle in and get that shot off and make a good placement so that is the goal for this year but this is different this time uh because we've got a private land tag so this this was something i wanted to do to get experience and i'm hunting with my boys um outlaw mullet man uh guys i've hunted with before many times but we've never elk hunted together i'm not gonna lie to you it was pricey to to book this hunt but i wanted to do it to get the experience of bow hunting in the elk woods and get a lot of a lot of bugles get a lot of setups the more setups you do i mean you just learn so much out of each one and we are just getting set up right now getting the bows dialed in i'm about to shoot my broadheads uh at the target uh for the first time been been shooting field tips so let's see how they do what are we at 38 well all right here been in the woods for how many years together every year since like i don't know six seven years ago 2015 2016 okay something like that 38 i'm just gonna cut my 40 pin just to hear it well shoot one more just to be safe you can definitely hear that muzzy whizzing here we go well y'all it's started to rain so we got the rain gear um this is gonna be a little different than the public land hunts that i've done in the past where i'm basically packing in long ways camping in a tent uh at night just carrying everything in my backpack we're gonna ride out in buggies and i'm carrying a mid-sized pack hopefully gonna be packing out an elk on this trip uh with the packs and then once we come off the ridges using uh using buggies from there you have to have a guide uh to go out to go out with you they just don't let you go out on uh on private land and and go off by yourself i love doing that but i'm gonna be asking a ton of questions try and learn as much as i can we're gonna throw on the the boots and uh and do some tramping hopefully not get too wet and hopefully be able to fill in this entire thing for you guys without uh without the water getting in the way you know i'm ready to see one up close and redeem myself it's all about it's all about redemption having a good time and enjoying the ride so let's uh let's get out in the woods y'all start tramping around and looking for some help coming close just made it out here the rain is uh continuing it's like real foggy misty just want to show you guys just right off the bat getting out of the mule we're getting ready to walk in immediately see a huge wreck it's about my height it's awesome so me jared and mike all really spread out on this place so uh it's just gonna be me and the outfitter going together doing the walk and do a little stalking may not get it down the day but but we're gonna we're gonna see some activity out here and y'all day two of the hunt last night that last hour was the most incredible hour of elk hunting that i've ever had it was just bugle mania this cold front that came in has got these bulls charged up we just gotta we just got to get in a position where we can uh have a good wind and sneak around on some of these flatter areas where they were uh where they were herding up and uh just get on the right bull hopefully we'll get the right shot today and get one down all right y'all we are back at the buggy right now and uh we did hear a shot today so someone got one down and uh i think some of my boys are doing some bed stalking we just we came across some bulls that were bedded kept bumping them and i just couldn't get them to come in to to my calling they would kind of look and they get curious but they wouldn't come all the way in and i think at this point we're just kind of just making mud here trying them up you know getting educated so we're gonna take a break uh ride back get a quick bite to eat and then hopefully they're gonna be charged up going this afternoon get off their beds get in the mood you know what i'm saying


Hi to the weekly update on the digital edition of Intergeo 2020. My name is Denise from Team Intergeo Communication. So first of all, I would like to say in the name of the whole team, the organizer, hello to our new subscriber and fans here at the Geospatial Community Number 1. Your reactions in the social media channels of Intergeo are simply fantastic. Whether on Instagram, LinkedIn or YouTube or with the registrations for the newsletter, we are really happy about your likes, your subscriptions and want to say thank you for your support. We keep you up to date post-regularly updates, who is present, who has registered and keep you informed about all developments around the digital event in October. So the first companies, our Intergeo Digital pioneers, have recognized the benefits of Intergeo's digital event format and we are happy that every day there are more and more companies registering for the expo to showcase their products and solutions. Over 40 brands from the industry have already confirmed their participation, together with their partners and co-exhibitors. You would like to mention Regal and Autodesk in particular. They are participating as premium partners of Intergeo Digital Expo and I look forward to reporting more about their innovations and products here in the coming weeks. And the Intergeo conference will focus on topics such as climate and geodesy, smart cities, FIM and digital trends in public surveying. Please find an update of the official program of the conference on the Intergeo website. And the president of the DVW organizer of Intergeo Hans-Jörg Kutterer was here and he speaks in the new video with IntergeoTV about the developments of the digital edition. And the ticket shop is now available. You can get tickets for the expo and for the conference. Until September 15th you'll get the full conference ticket for the early bird rate and the expo tickets are for free. But only until the 15th of September. So anyone who registers for the expo online in the ticket shop can take a look at Intergeo Digital 2020 and join the event. So that's it for now. If you have any questions or suggestions about Intergeo Digital, please feel free to send us a direct message via Twitter to add inside Intergeo or via the Facebook messenger or linked in on the Intergeo official pages. See you soon. Bye!


Chapter 3. Government Meddling with Money 1. The Revenue of Government Governments in contrast to all other organizations do not obtain their revenue as payment for their services. Consequently, governments face an economic problem different from that of everyone else. Private individuals who want to acquire more goods and services from others produce and sell more of what others want. Governments need only find some method of expropriating more goods without the owner's consent. In a barter economy, government officials can only expropriate resources in one way by seizing goods in kind. In a monetary economy, they will find it easier to seize monetary assets and then use the money to acquire goods and services for government or else pay the money as subsidies to favored groups. Such seizure is called taxation. Direct seizure of goods is therefore not now as extensive as monetary expropriation. Instances of the former still occurring are due process seizure of land under eminent domain, quartering of troops in an occupied country, and especially compulsory confiscation of labor service, for example military conscription, compulsory jury duty, and forcing business to keep tax records and collect withholding taxes. Taxation, however, is often unpopular and in less temperate days frequently precipitated revolutions. The emergence of money, while a boon to the human race, also opened a more subtle route for governmental expropriation of resources. On the free market, money can be acquired by producing and selling goods and services that people want, or by mining, a business no more profitable in the long run than any other. But if government can find ways to engage in counter-fitting, the creation of new money out of thin air, it can quickly produce its own money without taking the trouble to sell services or mine gold. It can then appropriate resources slyly and almost unnoticed without rousing the hostility touched off by taxation. In fact, counter-fitting can create in its very victims the blissful illusion of unparalleled prosperity. Counter-fitting is evidently but another name for inflation, both creating new money that is not standard gold or silver and both functioning similarly. And now we see why governments are inherently inflationary, because inflation is a powerful and subtle means for government acquisition of the public's resources, a painless and all the more dangerous form of taxation. Two, the economic effects of inflation. To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2,000 ounces more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly created money and use it to buy goods and services. In the words of the famous New Yorker cartoon showing a group of counterfeiters in sober contemplation of their handiwork, retail spending is about to get a needed shot in the arm. Precisely. Local spending indeed does get a shot in the arm. The new money works its way step by step throughout the economic system. As the new money spreads, it bids prices up. As we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven. In the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But on the other hand, people in remote areas of the economy who have not yet received the new money find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most and at the expense of the latest receivers. Inflation then confers no general social benefit. Instead, it redistributes the wealth in favor of the first comers and at the expense of the laggards in the race. And inflation is, in effect, a race to see who can get the new money earliest. The late comers, the ones stuck with the loss, are often called the fixed income groups. Ministers, teachers, people on salaries lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts, contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long-term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are taxed. It has become fashionable to scoff at the concern displayed by conservatives for the widows and orphans hurt by inflation. And yet this is precisely one of the chief problems that must be faced. Is it really progressive to rob widows and orphans and to use the proceeds to subsidize farmers and armament workers? Inflation has other disastrous effects. It distorts that keystone of our economy, business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the cost of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation and may even consume capital while presumably increasing their investments. This error will be greatest in those firms with the oldest equipment and in the most heavily capitalized industries. An undue number of firms therefore will pour into these industries during an inflation. Similarly, stockholders and real estate holders will acquire capital gains during an inflation that are not really gains at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital. By creating illusory profits and distorting economic calculation, inflation will suspend the free markets penalizing of inefficient and rewarding of efficient firms. Almost all firms will seemingly prosper. The general atmosphere of a seller's market will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. In these days of rapt attention to cost of living indexes, for example, escalator wage contracts, there is strong incentive to increase prices in such a way that the change will not be revealed in the index. The quality of work will decline in an inflation for a more subtle reason. People become enamored of get rich quick schemes, seemingly within their grasp in an era of ever rising prices and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive then is to borrow and repay later rather than save and lend. Inflation therefore lowers the general standard of living in the very course of creating a tinsel atmosphere of prosperity. Fortunately, inflation cannot go on forever, for eventually people wake up to this form of taxation. They wake up to the continual shrinkage in the purchasing power of their dollar. At first, when prices rise, people say, well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down. This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself and conceals the inflation further, since the demand for money is thereby increased. But as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say, I will buy now, though prices are high, because if I wait, prices will go up still further. As a result, the demand for money now falls and prices go up more proportionately than the increase in the money supply. At this point, the government is often called upon to relieve the money shortage caused by the accelerated price rise, and it inflates even faster. Soon the country reaches the stage of the crack-up boom, when people say, I must buy anything now, anything to get rid of money which depreciates on my hands. The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply as people spend more and more of their time finding ways to get rid of their money. The monetary system has in effect broken down completely, and the economy reverts to other monies if they are attainable. Other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation. This condition of hyperinflation is familiar historically in the Asiniats of the French Revolution, the Continentals of the American Revolution, and especially the German Crisis of 1923, and the Chinese and other currencies after World War II. A final indictment of inflation is that whenever the newly issued money is first used as loans to business, inflation causes the dread business cycle. This silent but deadly process, undetected for generations, works as follows. New money is issued by the banking system under the aegis of government and loan to business. To businessmen, the new funds seem to be genuine investments, but these funds do not, like free market investments, arise from voluntary savings. The new money is invested by businessmen in various projects and paid out to workers and other factors as higher wages and prices. As the new money filters down to the whole economy, the people tend to re-establish their old voluntary consumption-saving proportions. In short, if people wish to save and invest about 20% of their incomes and consume the rest, new bank money loaned to business at first makes the saving proportion look higher. When the new money seeps down to the public, it re-establishes its old 2080 proportion, and many investments are now revealed to be wasteful. Liquidation of the wasteful investments of the inflationary boom constitutes the depression phase of the business cycle. 3. Compulsory Monopoly of the Mint For government to use counterfeiting to add to its revenue, many lengthy steps must be traveled down the road away from the free market. Government could not simply invade a functioning free market and print its own paper tickets. Done so abruptly, few people would accept the government's money. Even in modern times, many people in backward countries have simply refused to accept paper money and insist on trading only in gold. Governmental incursion, therefore, must be far more subtle and gradual. Until a few centuries ago, there were no banks, and therefore the government could not use the banking engine for massive inflation as it can today. What could it do when only gold and silver circulated? The first step, taken firmly by every sizeable government, was to seize an absolute monopoly of the minting business. That was the indispensable means of getting control of the coinage supply. The King's or the Lord's picture was stamped upon coins, and the myth was propagated that coinage is an essential prerogative of royal or baronial sovereignty. The mintage monopoly allowed government to supply whatever denominations of coin it and not the public wanted. As a result, the variety of coins on the market was forcibly reduced. Furthermore, the mint could now charge a high price, greater than costs, seniorage, a price just covering costs, brassage, or supply coins free of charge. Seniorage was a monopoly price, and it imposed a special burden on the conversion of bullion to coin. Gratuitous coinage, on the other hand, overstimulated the manufacture of coins from bullion and forced the general taxpayer to pay for minting services utilized by others. Having acquired the mintage monopoly, governments fostered the use of the name of the monetary unit, doing their best to separate the name from its true base in the underlying weight of the coin. This too was a highly important step, for it liberated each government from the necessity of abiding by the common money of the world market. Instead of using grains or grams of gold or silver, each state fostered its own national name in the supposed interests of monetary patriotism, dollars, marks, francs, and the like. The shift made possible the preeminent means of governmental counterfeiting of coin. Debasement was the state's method of counterfeiting the very coins it had banned private firms from making in the name of vigorous protection of the monetary standard. Sometimes the government committed simple fraud, secretly diluting gold with a base alloy, making short-weight coins. More characteristically, the mint melted and re-coined all the coins of the realm, giving the subjects back the same number of pounds or marks, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the king and used to pay his expenses. In that way, government continually juggled and redefined the very standard it was pledged to protect. The profits of debasement were haughtily claimed as seniorage by the rulers. Rapid and severe debasement was a hallmark of the Middle Ages in almost every country in Europe. Thus in 1200 A.D., the French Leveret-Tournois was defined at 98 grams of fine silver. By 1600 A.D., it signified only 11 grams. A striking case is the dinar, a coin of the Saracens in Spain. The dinar originally consisted of 65 gold grains when first coined at the end of the 7th century. The Saracens were notably sound in monetary matters, and by the middle of the 12th century the dinar was still 60 grains. At that point, the Christian kings conquered Spain, and by the early 13th century the dinar, now called Maravedi, was reduced to 14 grains. Soon the gold coin was too light to circulate, and it was converted into a silver coin weighing 26 grains of silver. This too was debased, and by the mid-15th century the Maravedi was only 1.5 silver grains, and again too small to circulate. 5. Gresham's Law and Coinage. A. Bi-Metallism. Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. As we have seen, Gresham's law that an artificially overvalued money tends to drive an artificially undervalued money out of circulation is an example of the general consequences of price control. Government places in effect a maximum price on one type of money in terms of the other. Maximum price causes a shortage, disappearance into hordes or exports of the currency suffering the maximum price, artificially undervalued, and leads it to be replaced in circulation by the overpriced money. We have seen how this works in the case of new versus worn coins, one of the earliest examples of Gresham's law. Changing the meaning of money from weight to mere tally, and standardizing denominations for their own rather than for the public's convenience, the governments called new and worn coins by the same name, even though they were of different weight. As a result, people hoarded or exported the full-weight new coins and passed the worn coins in circulation, with governments hurling maledictions at speculators, foreigners, or the free market in general for a condition brought about by the government itself. A particularly important case of Gresham's law was the perennial problem of the standard. We saw that the free market established parallel standards of gold and silver, each freely fluctuating in relation to the other in accordance with market supplies and demands. But governments decided they would help out the market by stepping in to simplify matters. How much clearer things would be, they felt, if gold and silver were fixed at a definite ratio, say 20 ounces of silver to 1 ounce of gold? Then both monies could always circulate at a fixed ratio, and far more importantly, the government could finally rid itself of the burden of treating money by weight instead of by tally. Let us imagine a unit, the Rur, defined by Ruritanians as one-twentieth of an ounce of gold. We have seen how vital it is for the government to induce the public to regard the Rur as an abstract unit of its own right, only loosely connected to gold. What better way of doing this than to fix the gold-silver ratio? Then Rur becomes not only one-twentieth of an ounce of gold, but also one ounce of silver. The precise meaning of the word Rur, a name for gold weight, is now lost and people begin to think of the Rur as something tangible in its own right, somehow set by the government for good and efficient purposes as equal to certain weights of both gold and silver. Now we see the importance of abstaining from patriotic or national names for gold ounces or grains. Once such a label replaces the recognized world units of weight, it becomes much easier for governments to manipulate the money unit and give it an apparent life of its own. The fixed gold-silver ration, known as bimetalism, accomplished this task very neatly. It did not, however, fulfill its other job of simplifying the nation's currency. For once again, Gresham's law came into prominence. The government usually set the bimetallic ration originally, say twenty to one, at the going rate on the free market. But the market ratio, like all market prices, inevitably changes over time as supply and demand conditions change. As changes occur, the fixed bimetallic ratio inevitably becomes obsolete. Change makes either gold or silver overvalued. Gold then disappears into cash balance, black market, or exports, when silver flows in from abroad and comes out of cash balances to become the only circulating currency in Ruritania. For centuries, all countries struggled with calamitous effects of suddenly alternating metallic currencies. First, silver would flow in and gold disappear. Then, as the relative market ratios changed, gold would pour in and silver disappear. Many debasements in fact occurred covertly, with governments claiming that they were merely bringing the official gold-silver ratio into closer alignment with the market. Finally, after weary centuries of bimetallic disruption, governments picked one metal as the standard, generally gold. Silver was relegated to token coin status for small denominations but not at full weight. The minting of token coins was also monopolized by government, and since not backed one hundred percent by gold was a means of expanding the money supply. The eradication of silver as money certainly injured many people who preferred to use silver for various transactions. There was truth in the war cry of the bimetallists that a crime against silver had been committed. But the crime was really the original imposition of bimetallism in lieu of parallel standards. Bimetallism created an impossibly difficult situation, which the government could either meet by going back to full monetary freedom, parallel standards, or by picking one of the two metals as money, gold or silver standard. Full monetary freedom after all this time was considered absurd and quixotic, and so the gold standard was generally adopted. How was the government able to enforce its price controls on monetary exchange rates? By a device known as legal tender laws. Money is used for payment of past debts as well as for present cash transactions. With the name of the country's currency now prominent in accounting instead of its actual weight, contracts began to pledge payment in certain amounts of money. Legal tender laws dictated what that money could be. When only the original gold or silver was designated legal tender, people considered it harmless. But they should have realized that a dangerous precedent had been set for government control of money. If the government sticks to the original money, its legal tender law is superfluous and unnecessary. On the other hand, the government may declare as legal tender a lower quality currency side by side with the original. Thus, the government may decree worn coins as good as new ones in paying off debt, or silver and gold equivalent to each other in the fixed ratio. The legal tender laws then bring Gresham's law into being. When legal tender laws enshrine an overvalued money, they have another effect. They favor debtors at the expense of creditors. For then, debtors are permitted to pay back their debts in a much poorer money than they had borrowed, and creditors are swindled out of the money rightfully theirs. This confiscation of creditors property, however, only benefits outstanding debtors. Future debtors will be burdened by the scarcity of credit generated by the memory of government's spoliation of creditors. The compulsory minting monopoly and legal tender legislation were the capstones in government's drive to gain control of their nation's money. Bolstering these measures, each government moved to abolish the circulation of all coins minted by rival governments. The use of foreign coins was prevalent in the Middle Ages and in the United States down to the middle of the 19th century. Within each country, only the coin of its own sovereign could now be used. Between countries, unstamped gold and silver bullion was used in exchange. This further severed the ties between the various parts of the world market, further sundering one country from another and disrupting the international division of labor. Yet purely hard money did not leave too much scope for governmental inflation. There were limits to the debasing that governments could engineer, and the fact that all countries used gold and silver placed definite checks on the control of each government over its own territory. The rulers were still held in check by the discipline of an international metallic money. Governmental control of money could only become absolute and its counter-fitting unchallenged, as money substitutes came into prominence in recent centuries. The advent of paper money and bank deposits, an economic boon when backed fully by gold or silver, provided the open sesame for government's road to power over money, and thereby over the entire economic system. The modern economy, with its widespread use of banks and money substitutes, provides the golden opportunity for government to fasten its control over the money supply and permit inflation at its discretion. We have seen that there are three great checks on the power of any bank to inflate under a free banking system. One, the extent of the clientele of each bank. Two, the extent of the clientele of the whole banking system, that is, the extent to which people use money substitutes. And three, the confidence of the clients in their banks. The narrower the clientele of each bank, of the banking system as a whole, or the shakier the state of confidence, the stricter will be the limits on inflation in the economy. Government's privileging and controlling of the banking system has operated to suspend these limits. All these limits, of course, rest on one fundamental obligation, the duty of the banks to redeem their sworn liabilities on demand. We have seen that no fractional reserve bank can redeem all of its liabilities, and we have also seen that this is the gamble that every bank takes. But it is, of course, essential to any system of private property that contract obligations be fulfilled. The bluntest way for government to foster inflation then is to grant the banks the special privilege of refusing to pay their obligations, while yet continuing in their operation. While everyone else must pay their debts or go bankrupt, the banks are permitted to refuse redemption of their receipts at the same time forcing their own debtors to pay when their loans fall due. The usual name for this is a suspension of species payments. A more accurate name would be license for theft. For what else can we call a governmental permission to continue in business without fulfilling one's contract? In the United States, mass suspension of species payment in times of bank troubles became almost a tradition. It started in the War of 1812. Most of the country's banks were located in New England, a section unsympathetic to America's entry into the war. These banks refused to lend for war purposes, and so the government borrowed from new banks in other states. These banks issued new paper money to make the loans. The inflation was so great that calls for redemption flooded into the new banks, especially from the conservative, non-expanding banks of New England, where the government spent most of its money on war goods. As a result, there was a mass suspension in 1814, lasting for over two years, well beyond the end of the war. During that time, banks sprouted up, issuing notes with no need to redeem in gold or silver. This suspension set a precedent for succeeding economic crises, 1819, 1837, 1857, and so forth. As a result of this tradition, the banks realized that they need have no fear of bankruptcy after an inflation. And this, of course, stimulated inflation and wildcat banking. Those writers who point to 19th century America as a horrid example of free banking failed to realize the importance of this clear dereliction of duty by the states in every financial crisis. The governments and the banks persuaded the public of the justice of their acts. In fact, anyone trying to get his money back during a crisis was considered unpatriotic and a dispoiler of his fellow men, while banks were often commended for patriotically bailing out the community in a time of trouble. Many people, however, were bitter at the entire proceeding, and from this sentiment grew the famous Hard Money Jacksonian movement that flourished before the Civil War. Despite its use in the United States, such periodic privilege to banks did not catch hold as a general policy in the modern world. It was a crude instrument, too sporadic. It could not be permanent, since few people would patronize banks that never paid their obligations. And what's more, it provided no means of government control over the banking system. What governments want, after all, is not simply inflation, but inflation completely controlled and directed by themselves. There must be no danger of the banks running the show. And so, a far subtler, smoother, more permanent method was devised and sold to the public as a hallmark of civilization itself. Central Banking 8. Central Banking Removing the Checks on Inflation Central banking is now put in the same class with modern plumbing and good roads. Any economy that doesn't have it is called backward, primitive, hopelessly out of the swim. America's adoption of the Federal Reserve System, our central bank, in 1913, was greeted as finally putting us in the ranks of the advanced nations. Central banks are often nominally owned by private individuals, or as in the United States, jointly by private banks. But they are always directed by government-appointed officials and serve as arms of the government. Where they are privately owned, as in the original Bank of England or the second bank of the United States, their prospective profits add to the usual governmental desire for inflation. A central bank attains its commanding position from its governmentally granted monopoly of the note issue. This is often the unsung key to its power. Invariably, private banks are prohibited from issuing notes, and the privilege is reserved to the central bank. The private banks can only grant deposits. If their customers ever wish to shift from deposits to notes, therefore, the banks must go to the central bank to get them. Hence, the central bank's lofty perch as a bankers' bank. It is a bankers' bank because the bankers are forced to do business with it. As a result, bank deposits become redeemable not only in gold, but also in central bank notes. And these new notes were not just plain bank notes. They were liabilities of the central bank, an institution invested with all the majestic aura of the government itself. Government, after all, appoints the bank officials and coordinates its policy with other state policy. It receives the notes in taxes and declares them to be legal tender. As a result of these measures, all the banks in the country became clients of the central bank. In the United States, the banks were forced by law to join the Federal Reserve System and to keep their accounts with the Federal Reserve banks. Those state banks that are not members of the Federal Reserve System keep their reserves with member banks. Gold poured into the central bank from the private banks. And in exchange, the public got central bank notes and the disuse of gold coins. Gold coins were scoffed at by official opinion as cumbersome, old-fashioned, inefficient, and ancient fetish, perhaps useful in children's socks at Christmas, but that's about all. How much safer, more convenient, more efficient is the gold when resting as bullion in the mighty vaults of the central bank. Bathed by this propaganda and influenced by the convenience and governmental backing of the notes, the public more and more stopped using gold coins in its daily life. Inexorably, the gold flowed into the central bank, where, more centralized, it permitted a far greater degree of inflation of money substitutes. In the United States, the Federal Reserve Act compels the banks to keep the minimum ratio of reserves to deposits. And since 1917, these reserves could only consist of deposits at the Federal Reserve Bank. Gold could no longer be part of a bank's legal reserves. It had to be deposited in the Federal Reserve Bank. The entire process took the public off the gold habit and placed the people's gold in the none too tender care of the state, where it could be confiscated almost painlessly. International traders still used gold bullion in their large-scale transactions, but they were an insignificant proportion of the voting population. One of the reasons the public could be lured from gold to banknotes was the great confidence everyone had in the central bank. Surely the central bank, possessed of almost all the gold in the realm, backed by the might and prestige of government, could not fail and go bankrupt. And it is certainly true that no central bank in recorded history has ever failed. But why not? Because of the sometimes unwritten but very clear rule that it could not be permitted to fail. If governments sometimes allowed private banks to suspend payment, how much more readily would it permit the central bank its own organ to suspend when in trouble? The precedent was set in central banking history when England permitted the Bank of England to suspend in the late 18th century and allowed this suspension for over 20 years. The central bank thus became armed with the almost unlimited confidence of the public. By this time the public could not see that the central bank was being allowed to counterfeit at will and yet remain immune from any liability if its bona fides should be questioned. It came to see the central bank as simply a great national bank performing a public service and protected from failure by being a virtual arm of the government. The central bank proceeded to invest the private banks with the public's confidence. This was a more difficult task. The central bank let it be known that it would always act as a lender of last resort to the banks, that is, that the bank would stand ready to lend money to any bank in trouble, especially when many banks are called upon to pay their obligations. Governments also continued to prop up banks by discouraging bank runs, that is, cases where many clients suspect chicanery and ask to get back their property. Sometimes they permitted banks to suspend payment as in the compulsory bank holidays of 1933. Laws were passed prohibiting public encouragement of bank runs and as in the 1929 depression in America, government campaigned against selfish and unpatriotic gold hoarders. America finally solved its pesky problem of bank failures when it adopted federal deposit insurance in 1933. The Federal Deposit Insurance Corporation has only a negligible proportion of backing for the bank deposits it insures. But the public has been given the impression, and one that may well be accurate, that the federal government would stand ready to print enough new money to redeem all of the insured deposits. As a result, the government has managed to transfer its own command of vast public confidence to the entire banking system, as well as to the central bank. We have seen that by setting up a central bank, governments have greatly widened, if not removed, two of the three main checks on bank credit inflation. What of the third check, the problem of the narrowness of each bank's clientele? Removal of this check is one of the main reasons for the central bank's existence. In a free banking system, inflation by any one bank would soon lead to demands for redemption by the other banks, since the clientele of any one bank is severely limited. But the central bank, by pumping reserves into all the banks, can make sure that they can all expand together and at a uniform rate. If all banks are expanding, then there is no redemption problem of one bank upon another, and each bank finds that its clientele is really the whole country. In short, the limits on bank expansion are immeasurably widened, from the clientele of each bank to that of the whole banking system. In addition to removing the checks on inflation, the act of establishing a central bank has a direct inflationary impact. Before the central bank began, banks kept their reserves in gold. Now, gold flows into the central bank in exchange for deposits with the bank, which are now reserves for the commercial banks. But the bank itself keeps only a fractional reserve of gold to its own liabilities. Therefore, the act of establishing a central bank greatly multiplies the inflationary potential of the country. The establishment of the Federal Reserve in this way increased three-fold the expansive power of the banking system of the United States. The Federal Reserve system also reduced the average legal reserve requirements of all banks from approximately 21% in 1913 to 10% by 1917, thus further doubling the inflationary potential, a combined potential inflation of six-fold. 9. Central Banking, Directing the Inflation Precisely how does the central bank go about its task of regulating the private banks? By controlling the bank's reserves, their deposit accounts at the central bank. Banks tend to keep a certain ratio of reserves to their total deposit liabilities, and in the United States, government control is made easier by imposing a legal minimum ratio on the bank. The central bank can stimulate inflation then by pouring reserves into the banking system, and also by lowering the reserve ratio, thus permitting a nationwide bank credit expansion. If the banks keep a reserve deposit ratio of 1 to 10, then excess reserves above the required ratio of $10 million will permit and encourage a nationwide bank inflation of $100 million. Since banks profit by credit expansion, and since government has made it almost impossible for them to fail, they will usually try to keep loaned up to their allowable maximum. The central bank adds to the quantity of bank reserves by buying assets on the market. What happens, for example, if the bank buys an asset, any asset, from Mr. Jones, valued at $1,000. The central bank writes out a check to Mr. Jones for $1,000 to pay for the asset. The central bank does not keep individual accounts, so Mr. Jones takes the check and deposits it in his bank. Jones Bank credits him with a $1,000 deposit and presents the check to the central bank, which has to credit the bank with an added $1,000 in reserves. This $1,000 in reserves permits a multiple bank credit expansion, particularly if added reserves are in this way poured into many banks across the country. If the central bank buys an asset from a bank directly, then the result is even clearer. The bank adds to its reserves and a base for multiple credit expansion is established. Undoubtedly, the favorite asset for central bank purchase has been government securities. In that way, the government assures a market for its own securities. Government can easily inflate the money supply by issuing new bonds and then order its central bank to purchase them. Often the central bank undertakes to support the market price of government securities at a certain level, thereby causing a flow of securities into the bank and a consequent perpetual inflation. Besides buying assets, the central bank can create new bank reserves in another way by lending them. The rate which the central bank charges the banks for this service is the re-discount rate. Clearly, borrowed reserves are not as satisfactory to the banks as reserves that are wholly theirs since there is now pressure for repayment. Changes in the re-discount rate receive a great deal of publicity, but they are clearly of minor importance compared to the movements in the quantity of bank reserves and the reserve ratio. When the central bank sells assets to the banks or the public, it lowers bank reserves and causes pressure for credit contraction and deflation, lowering of the money supply. We have seen, however, that governments are inherently inflationary. Historically, deflationary action by the government has been negligible and fleeting. One thing is often forgotten. Deflation can only take place after a previous inflation. Only pseudo receipts, not gold coins, can be retired and liquidated. 10. Going off the gold standard The establishment of central banking removes the checks of bank credit expansion and puts the inflationary engine into operation. It does not remove all restraints, however. There is still the problem of the central bank itself. The citizens can conceivably make a run on the central bank, but this is most improbable. A more formidable threat is the loss of gold to foreign nations. For just as the expansion of one bank loses gold to the clients of other, non-expanding banks, so does monetary expansion in one country cause a loss of gold to the citizens of other countries. Countries that expand faster are in danger of gold losses and cause upon their banking system for gold redemption. This was the classic cyclical pattern of the 19th century. A country's central bank would generate bank credit expansion, prices would rise, and as the new money spread from domestic to foreign clientele, foreigners would more and more try to redeem the currency in gold. Finally, the central bank would have to call a halt and enforce a credit contraction in order to save the monetary standard. There is one way that foreign redemption can be avoided. Enter central bank cooperation. If all central banks agree to inflate at about the same rate, then no country would lose gold to any other, and all the world together could inflate almost without limit. With every government jealous of its own power and responsive to different pressures, however, such goose-step cooperation has so far proved almost impossible. One of the closest approaches was the American Federal Reserve Agreement to promote domestic inflation in the 1920s in order to help Great Britain and prevent it from losing gold to the United States. In the 20th century, governments, rather than deflate or limit their own inflation, have simply gone off the gold standard when confronted with heavy demands for gold. This, of course, ensures that the central bank cannot fail since its notes now become the standard money. In short, government has finally refused to pay its debts and has virtually absolved the banking system from that onerous duty. Pseudo-receipts to gold were first issued without backing, and then, when the day of reckoning drew near, the bankruptcy was shamelessly completed by simply eliminating gold redemption. The severance of the various national currency names, dollar, pound, mark, from gold and silver, is now complete. At first, governments refused to admit that this was a permanent measure. They referred to the suspension of species payments, and it was always understood that eventually, after the war or other emergency had ended, the government would again redeem its obligations. When the Bank of England went off gold at the end of the 18th century, it continued in this state for twenty years, but always with the understanding that gold payment would be resumed after the French wars were ended. Temporary suspensions, however, are primrose paths to outright repudiation. The gold standard, after all, is no spigot that can be turned on or off as government whim decrees. Either a gold receipt is redeemable or it is not. Once redemption is suspended, the gold standard is itself a mockery. Another step in the slow extinction of gold money was the establishment of the gold bullion standard. Under this system, the currency is no longer redeemable in coins. It can only be redeemed in large, highly valuable gold bars. This, in effect, limits gold redemption to a handful of specialists in foreign trade. There is no longer a true gold standard, but governments can still proclaim their adherence to gold. The European gold standards of the 1920s were pseudo standards of this type. Finally, governments went off gold officially and completely in a thunder of abuse against foreigners and unpatriotic gold hoarders. Government paper now becomes the fiat standard money. Sometimes, treasury rather than central bank paper has been the fiat money, especially before the development of a central banking system. The American Continentals, the Greenbacks and Confederate Notes of the Civil War period, the French Assignate, were all fiat currencies issued by the treasuries. But whether treasury or central bank, the effect of fiat issue is the same. The monetary standard is now at the mercy of the government and bank deposits are redeemable simply in government paper. 11. Fiat Money and the Gold Problem When a country goes off the gold standard and onto the fiat standard, it adds to the number of monies in existence. In addition to the commodity monies, gold and silver, they are now flourish independent monies directed by each government imposing its fiat rule. And just as gold and silver will have an exchange rate on the free market, so the market will establish exchange rates for all the various monies. In a world of fiat monies, each currency, if permitted, will fluctuate freely in relation to all the others. We have seen that for any two monies, the exchange rate is set in accordance with the proportionate purchasing power parodies, and that these in turn are determined by the respective supplies and demands for the various currencies. When a currency changes its character from gold receipt to fiat paper, confidence in its stability and quality is shaken, and demand for it declines. Furthermore, now that it is cut off from gold, its far greater quantity relative to its former gold backing now becomes evident. With a supply greater than gold and a lower demand, its purchasing power and hence its exchange rate quickly depreciate in relation to gold. And since government is inherently inflationary, it will keep depreciating as time goes on. Such depreciation is highly embarrassing to the government and hurt citizens who try to import goods. The existence of gold in the economy is a constant reminder of the poor quality of the government paper, and it always poses a threat to replace the paper as the country's money. Even with the government giving all the backing of its prestige and its legal tender laws to its fiat paper, gold coins in the hands of the public will always be a permanent reproach and menace to the government's power over the country's money. In America's first depression, 1819 to 1821, four western states, Tennessee, Kentucky, Illinois, and Missouri, established state-owned banks issuing fiat paper. They were backed by legal tender provisions in the states and sometimes by legal prohibition against depreciating the notes. And yet all these experiments, born in high hopes, came quickly to grief as the new paper depreciated rapidly to negligible value. The projects had to be swiftly abandoned. Later, the greenbacks circulated as fiat paper in the north during and after the Civil War. Yet in California, the people refused to accept the greenbacks and continued to use gold as their money. As a prominent economist pointed out, in California, as in other states, the paper was legal tender and was receivable for public dues, nor was there any distrust or hostility toward the federal government. But there was a strong feeling in favor of gold and against paper. Every debtor had the legal right to pay off his debts in depreciated paper, but if he did so, he was a marked man. The creditor was likely to post him publicly in the newspapers, and he was virtually boycotted. Throughout this period, paper was not used in California. The people of the state conducted their transactions in gold, while all the rest of the United States used convertible paper. It became clear to governments that they could not afford to allow people to own and keep their gold. Government could never cement its power over a nation's currency if the people, when in need, could repudiate the fiat paper and turn to gold for their money. Accordingly, governments have outlawed gold holding by their citizens. Gold, except for a negligible amount permitted for industrial and ornamental purposes, has generally been nationalized. To ask for return of the public's confiscated property is now considered hopelessly backward and old-fashioned. 12. Fiat Money and Gresham's Law With fiat money established and gold outlawed, the way is clear for full-scale government-run inflation. Only one very broad check remains, the ultimate threat of hyperinflation, the crack-up of the currency. Hyperinflation occurs when the public realizes that the government is bent on inflation and decides to evade the inflationary tax on its resources by spending money as fast as possible while it still retains some value. Until hyperinflation sets in, however, government can now manage the currency and the inflation undisturbed. New difficulties arise, however. As always, government intervention to cure one problem raises a host of new, unexpected problems. In a world of fiat monies, each country has its own money. The international division of labor, based on an international currency, has been broken, and countries tend to divide into their own autarkic units. Lack of monetary certainty disrupts trade further. The standard of living in each country thereby declines. Each country has freely fluctuating exchange rates with all other currencies. A country inflating beyond the others no longer fears a loss of gold, but it faces other unpleasant consequences. The exchange rate of its currency falls in relation to foreign currencies. This is not only embarrassing, but even disturbing to citizens who fear further depreciation. It also greatly raises the costs of imported goods, and this means a great deal to those countries with a high proportion of international trade. In recent years, therefore, governments have moved to abolish freely fluctuating exchange rates. Instead, they fixed arbitrary exchange rates with other currencies. Gresham's law tells us precisely the result of any such arbitrary price control. Whatever rate is set will not be the free market one, since that can only be determined from day to day on the market. Therefore, one currency will always be artificially overvalued and the other undervalued. Generally, governments have deliberately overvalued their currencies for prestige reasons and also because of the consequences that follow. When a currency is overvalued by decree, people rush to exchange it for the undervalued currency at the bargain rates. This causes a surplus of overvalued and a shortage of the undervalued currency. The rate, in short, is prevented from moving to clear the exchange market. In the present world, foreign currencies have generally been overvalued relative to the dollar. The result has been the famous phenomenon of the dollar shortage, another testimony to the operation of Gresham's law. Foreign countries clamoring about a dollar shortage thus brought it about by their own policies. It is possible that these governments actually welcomed this state of affairs. For A, it gave them an excuse to clamor for American dollar aid to relieve the dollar shortage in the free world and B, it gave them an excuse to ration imports from America. Undervaluing dollars causes imports from America to be artificially cheap and exports to America artificially expensive. The result? A trade deficit and worry over the dollar drain. In the last few years, the dollar has been overvalued in relation to other currencies and hence the dollar drains from the United States. The foreign government then stepped in to tell its people, sadly, that it is unfortunately necessary for it to ration imports, to issue licenses to importers and determine what is imported according to need. To ration imports, many governments confiscate the foreign exchange holdings of their citizens, backing up an artificially high valuation on domestic currency by forcing these citizens to accept far less domestic money than they could have acquired on the free market. Thus, foreign exchange as well as gold has been nationalized and exporters penalized. In countries where foreign trade is vitally important, this government exchange control imposes virtual socialization on the economy. An artificial exchange rate thus gives countries an excuse for demanding foreign aid and for imposing socialist controls over trade. At present, the world is enmeshed in a chaotic welter of exchange controls, currency blocks, restrictions on convertibility and multiple systems of rates. In some countries, a black market in foreign exchange is legally encouraged to find out the true rate and multiple discriminatory rates are fixed for different types of transactions. Almost all nations are on a fiat standard, but they have not had the courage to admit this outright, and so they proclaim some such fiction as restricted gold bullion standard. Actually, gold is used not as a true definition for currencies, but as a convenience by governments. For A, fixing a currency's rate with respect to gold makes it easy to reckon any exchange in terms of any other currency. And B, gold is still used by the different governments. Since exchange rates are fixed, some item must move to balance every country's payments, and gold is the ideal candidate. In short, gold is no longer the world's money, it is now the government's money, used in payments to one another. Clearly, the inflationist's dream is some sort of world paper money manipulated by a world government and central bank, inflating everywhere at a common rate. This dream still lies in the dim future, however. We are still far from world government, and national currency problems have so far been too diverse and conflicting to permit meshing into a single unit. Yet the world has moved steadily in this direction. The International Monetary Fund, for example, is basically an institution designed to bolster national exchange control in general, and for an undervaluation of the dollar in particular. The fund requires each member country to fix its exchange rate and then to pool gold and dollars to lend to governments that find themselves short of hard currency. 13. Government and Money Many people believe that the free market, despite some admitted advantages, is a picture of disorder and chaos. Nothing is planned, everything is haphazard. Government dictation, on the other hand, seems simple and orderly. Decrees are handed down and they are obeyed. In no area of the economy is this myth more prevalent than in the field of money. Seemingly, money, at least, must come under stringent government control. But money is the lifeblood of the economy. It is the medium for all transactions. If government dictates over money, it has already captured a vital command post for control over the economy and has secured a stepping stone for full socialism. We have seen that a free market in money, contrary to common assumption, would not be chaotic. That, in fact, it would be a model of order and efficiency. What, then, have we learned about government and money? We have seen that over the centuries, government has step-by-step invaded the free market and seized complete control over the monetary system. We have seen that each new control, sometimes seemingly innocuous, has begotten new and further controls. We have seen that governments are inherently inflationary, since inflation is attempting means of acquiring revenue for the state and its favored groups. The slow but certain seizure of the monetary reins has thus been used to, a, inflate the economy at a pace decided by government, and, b, bring about socialistic direction of the entire economy. Furthermore, government meddling with money has not only brought untold tyranny into the world, it has also brought chaos and not order. It has fragmented the peaceful productive world market and shattered it into a thousand pieces, with trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates, currency breakdowns, etc. It has helped bring about wars by transforming a world of peaceful intercourse into a jungle of warring currency blocks. In short, we find that coercion in money as in other matters brings not order, but conflict and chaos.