{ "episodeId": "SLP600", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "philipp_bagus": { "name": "Philipp Bagus", "role": "guest", "tag": "PHILIPP" } }, "segments": [ { "speaker": "stephan", "time": "00:11", "start": 11.19, "text": "Hi everyone and welcome back to Stephan Livera podcast. This show is brought to you by Bold, the best place to buy, sell and save Bitcoin. For US listeners, you can find it over at getbold.io. Now today, rejoining me after a few years on the show, is Dr. Philipp Bagus and he is, a professor at University of Saddad Rayuan Carlos. He's a fellow of the Mises Institute. He's the author of various books, but today we're gonna be talking about, Philip's latest book, which is Full Reserve Banking versus the Real Bills Doctrine. So, Philip, welcome back to the show." }, { "speaker": "philipp_bagus", "time": "00:45", "start": 44.89, "text": "thank you, Stephan. It's great to be back." }, { "speaker": "stephan", "time": "00:47", "start": 46.97, "text": "Great. So yeah, I, I really enjoyed reading the book. I, you know, just, finished reading it, and, I thought there were some really great insights in terms of the whole full reserve banking debate and understanding monetary theory and capital goods and these various aspects. So we're gonna get into all these things today. But let's start with-- I'd like to start with why. So from your perspective, Why, why care about all this full reserve banking stuff? Why is it so interesting to you?" }, { "speaker": "philipp_bagus", "time": "01:14", "start": 73.73, "text": "Well, because fractional reserve banking, which is the, the opposite, opinion That is, the idea that banks don't have to hold or shouldn't hold one hundred percent reserves, but can, create, new money out of thin air is, one of the main problems that That we have, not only the monetary system, but its ramifications, yeah? You know the importance of money if you have a bad monetary system, its ramifica- its ramifications go Through all society, yeah. It allows the state to grow, it allows, for, unstable situations which also have, redistributional effects and psychological effects. So, And cultural effects also. So, fraction-- the, the issue of fractional reserve banking versus full reserve banking is, in my opinion, vital for For civilization." }, { "speaker": "stephan", "time": "02:18", "start": 137.95, "text": "Yeah, and look, I, I have to say, I fully agree with you, but, let's just, let's kind of talk it out and talk about some of these different issues. As probably many listeners know, this is a long-standing debate, arg-arguably hundreds of years old debate, in some ways, but, in let's say recent decades, a lot of Austrian economists, such as yourself, Hans Simon Hopper, Joseph Salerno, Bob Murphy, Bagus, yourself, How There's been a lot of people writing about this from the full reserve perspective, and then there are those arguing for a-- They would call themselves more of a free banking perspective, but I guess we would see that as a pro fractional reserve perspective. And in this particular book, you're going a-- after, Rallos' book and discussion around real bills. so maybe to sort of set some of the context and maybe some of the historical reason for-- here for us, can you Could you just spell out a little bit about, just the basics of the currency school and the banking school and where they differ?" }, { "speaker": "philipp_bagus", "time": "03:23", "start": 202.66, "text": "Yeah, the discussion as you, say allude to, goes back to the nineteenth century, to the debate, in, England. the UK between the currency school and the banking school, the banking school wanted, defended a banking system with fractional reserves without a central bank So they, they thought that banks should be free to produce new money if there would be more demand for money. Yeah? So they argued in favor of a flexi-flexible money supply, yeah, that could adjust to the demand for money. While the currency school argued in favor of one hundred percent reserves, and they thought that, well, fractional reserves, this currency school argued, are Is, is the origin of business cycles, yeah, and financial instability. And in fact, on a political level, the currency school prevailed with the, Peel's Bank Act of 1844, which established one-- established one hundred percent reserves for banknotes. So then banks could only issue notes if they had one hundred percent reserves for them. However, they forgot to include in the bill demand deposits. So, the banks could issue demand deposits without one hundred percent reserves. Yeah. So from then on, banks shifted their business from issuing unbacked notes To unbanked, unbacked banked, bank deposits, demand deposits. So, in, in, in practical terms, the currency school forgot to include demand deposits in the money supply that had to be backed, by one hundred percent reserves. The other flaw the currency school had that they wanted to have a Central bank, yeah, that would control the banks that they would fulfill these, these legal, requirements, yeah? But, and here we come back to the, the question how to call it, free banking or fractional reserve banking. In fact, you don't need, you don't need a central bank, yeah? It's very dangerous to have a central bank in place. You just need- Banks that fulfill the legal obligations, that is, and standard and traditional legal obligations to hold one hundred percent reserves for, for deposits, yeah, for demand dep-deposits. Why? Because the depositor thinks that he has the money always available. And if he thinks so, the bank, bank, is not allowed to use the money deposited and lend it out to someone else. Yeah, this is just legal principles, where you, you don't need a central bank. for that. Yeah. And therefore, I would call, this one hundred percent, banking system a free banking system, yeah, because it's according to the general legal principles. and you know, don't need a central bank, yeah? And the other system, which depends, depends the banking school is the fractional reserve, school, which they call free, free banking because they like, of course, the word free, and they refer to free banking as without a central bank, and that is true. They think that, this system can regulate the amount of money, the supply of money to the demand of money without a cent-central bank, yeah? Our tonnage. So this is the old debate, and then this debate has, actually there was a debate before in the School of Salamanca, yeah, where Soto in his book, Money, Bank Credit, and Economic Cycles, explains the forebears of the de-debate that goes back to the Spanish school of Salamanca. And this debate now, has repeated itself, let's say, within the Austrian school of economics, where as you have- Huh, as you have said, they are proponents or defenders of one hundred percent, banking, which we could, call misses, even though there's deba- the debate the fractional ba-reserve banks, they, they claim it's not so clear. However, I think at least from 1953 with the, American edition of, the Theory of Money and Credit, he defends a system where all, all new money substitutes must be backed by one hundred percent reserves, yeah? But what is clear is that Rothbard is a one hundred percent or full reserve theoretician, yeah, Salerno, Hoppe, Hülsmann, Walter Block, yeah, yeah, Jesus Vázquez Soto, David Howden and myself. And we have engaged in a debate with, with the other side, well, Lawrence Wright is of course on the other side of the Freshman Reserve Bankers and, George Selgin And in, in Spain, it's, it's Juan Ramon Rayo. So Ra-Rayo wrote actually a book criticizing Mises' monetary theory, yeah? And, I'm criticizing Rayu's book and the theory behind the book because he's criticizing Misses using his," }, { "speaker": "philipp_bagus", "time": "08:58", "start": 538.1, "text": "real bill fractional reserve, banking theory, which is very similar to, Antal Fekete's theory actually. So this is basically here the, the debate." }, { "speaker": "stephan", "time": "09:10", "start": 550.24, "text": "Yeah. Okay. And so I guess one other, I guess zooming out kind of question, I, I guess the, the way the full reserve camp is seeing it is sort of like the government is giving a special privilege to some of these people, and that's what's enabling this fractional system, right? This- Idea that they can suspend redemption of specie, that they can have, you know, legal tender laws to treat the IOUs the same, and these, these kinds of things actually act almost like this kind of artificial government subsidy. And now on the banking side, there are people who want that privilege because obviously- Being able to just issue more, you know, money to-- monetary tickets than actual money proper that you have in your vault is obviously highly, highly profitable. So there's a lot of bankers who want that, but then, you know, it seems that there's this justification that, \"Oh, see, it's because of the needs of trade or because of this, that, and the other.\" That, is that one way to view that, or how, how would you kind of sort of view the differing participants there?" }, { "speaker": "philipp_bagus", "time": "10:12", "start": 611.55, "text": "Yeah, that's H-how I, I see it, yeah. So if I say free banking, I see it that it's a banking system where there are no privileges, yeah? There are no legal privileges against, the standard, legal rules legal principles, yeah. So, in such a system, banks can't appropriate money deposited, yeah. Money, people, depositors that, give the money to the bank to use it at every moment they please to, they think they have it available when they make their buying decisions, purchases, they think, \"Well, how much do I have on the bank?\" So they think they have it available, they want to- Have it available. So then, in this case, the bank, legally, yeah, in a free legal system, can't use the money, yeah, because then there would be a double availability, though two people at the same time would use it, yeah, the people, the person who makes his purchase is thinking that he has the money and And the bank who lends it out to someone else, yeah? So this is then a free banking system. However, the fractional reserve bankers they like, of course, to call it there, they see it differently. They, they think there's no, there are no legal problems with this, With this," }, { "speaker": "stephan", "time": "11:38", "start": 698.33, "text": "yeah, I see. And I, I think that double availability you're touching on is really, a really, very important point to understand because the way, the way I'm reading it, the way, you know, when I read Huerta de Soto's, you know, Money, Bank, Credit, and Economic Cycles, it really comes down to this idea of if you have an expansion of credit not backed by voluntary saving up front That's where you cause this business cycle and, and so there's kind of a complicated sort of reasoning of why this-- you get this artificial lengthening of the capital structure of production and so on. But it comes, like, I think at the very base of it, as you said, this double availability seems to be the crux of the issue. It, it seems to be that either you have-- you need to understand which side of the, the thing you're on. Like, if you have put this money into, let's say, a vault and it's safe, you, you You know, it's, it's, you are, I guess, there's one side of it where you are saying, you know, I've put this money into a time deposit and I no longer have access to that? Or I've put money into this vault and I retain access to that. I guess that's the-- like, that's the crucial distinction, isn't it?" }, { "speaker": "philipp_bagus", "time": "12:46", "start": 765.87, "text": "Yeah, that's the distinction between loans and deposits. So in a loan, I give up the availability for a certain period of time of, of the funds, of the purchasing power, and I transfer it to someone else who uses it, yeah? So there's no double availability. and in a deposit, the idea of the deposit is that I want to retain the availability at all time, yeah? Why do I do the deposit? Well, to- To, to use the, transfer system to make transfers via us or because I think it's safer than at my house, and I want to, for, for, for comfortability, yeah, it's more comfortable to use it this way, so therefore I make the deposit, but I want to retain the ability, the availability at all times. If not, I could, I could lend it out, yeah, then I would lose it and earn interest, yeah, but I want to retain it, yeah. So and, and this is the second case of the deposit It then of course, the bank can't use it or the, the person who gets the money can't use it, you may call it a bank or not, because I can deposit money with you and say, hey Stephan, can you, take care of this money and, I want to be able to use it whenever I, I want, ask it for you, and, I pay you for that also for the service to, to, to look after my money? Then you shouldn't be allowed to use it to, to use it to, to loan it out to someone else, because then we have the double availability, and this legal problem of the double availability then leads to the Economic problem that you pointed out, that then new money is created, yeah, new perfect monetary substitutes are created, l-loaned out, introduced into the loan market So there's an additional supply which isn't backed by real savings, but just because, there has been new money created due to this double availability problem and this new money injected into the loan market increases the supply of loans and therefore reduces the price of these loans, that is the interest rate, artificially, and it's artificially because this, this reduction of the interest rate isn't because savings have increased, but just because new money has been Produced, so it's an artificial decrease of the interest rate, caused by credit expansion, and this, as you know, the interest rate is very important as coordination. For, savers and investors, so, and for entrepreneurs. So if the interest rate decreases, yeah? It's, in a free market, it's a sign that, more savings are available for new projects. So then with the lower interest rate, more, more investment projects, look or seem to be profitable, yeah, and are profitable with the lower interest rate, and, and, and then there's an artificial boom. There are more, investment projects started, however, they can't be finished because it's all an illusion, yeah? There aren't more real savings available, yeah? There was just an artificial reduction of the interest rate due to the credit expansion of the fractional reserve banking system. So It was very nice in the, nicely explained in the book of Where to Resorto that it's actually a legal or ethical problem of double availability, then if you make something legal which is, shouldn't be, yeah, because it's against the general legal principles, then you will have social problems, then you will have also economic, problems, and this isn't the form of the business cycle, yeah?" }, { "speaker": "stephan", "time": "16:33", "start": 993.49, "text": "Yeah, I see, yeah. And so the point that is maybe difficult for people to understand if they haven't sort of read some of the books is maybe this concept of the capital structure and understanding that you need enough to sustain the people who are undertaking that new project. And so that's probably the point where there's not enough savings to justify this many people who are, let's say consuming, because they aren't able to put all the resources they need to, to make their project come to fruition, and that's kind of where this, this artificial lo-- artificial lowering of the interest rates, are coming into it. so I guess we should bring it to the real bills doctrine and sort of explain in, in, you know, in the modern context of this debate, what's happening here, because it sounds like, the real bills doctrine or that kind of idea is Being used as a justification for fractional reserve banking, as we would call it, and so, so it sort of seems to be this idea that, oh, see, it's, it's, it's among commercial terms and terms of trade, and these banks are kind of issuing commercial paper, and therefore it's a real bill. I, as I'm understanding it, that's, that would be their argument, or can, can you maybe characterize the real bills doctrine before we then go and critique that?" }, { "speaker": "philipp_bagus", "time": "17:56", "start": 1076.4, "text": "Yeah, for instance, there's a difference between Rayo and the real bills, fractional reserve banking theory and the one of George Selgin and Larry White, because Rayo says, \"Well, fractional reserve banking, credit expansion is bad, problematic," }, { "speaker": "stephan", "time": "18:14", "start": 1094.37, "text": "if," }, { "speaker": "philipp_bagus", "time": "18:15", "start": 1095.15, "text": "yeah, the, the banks use the money deposited.\" To issue a mortgage, that is a very long term loan, because then he says the, the real problem here is the maturity mismatching, yeah? That, the bank gets basic, he sees the dep-deposit as a loan, as a very short-term loan, and this is lent out for a long term, yeah? So he sees there's a problem, but he says fractional-reserve banking is Not a problem if the bank uses the money deposited to buy or to purchase, or how it's also called, discount real bills. That is commercial papers, that is very short-term loans up to thirty days, which are backed by Buy goods, so in, in, in the process of production or which are very close to production, that is a very safe loans, or at least they say that it's, it's very safe because they are backed. So if, if, if, if, if the debtor cannot pay back the commercial Commercial, bill, commercial paper, then you get the goods, yeah. And he says, \"Then it's not a problem because, it's very short term.\" And it's in a response to an increase in, in the de-demand for money, the needs of trade, yeah? So this goes back then to the needs of trade argument by the banking school The, the idea is, well, there's a company that is producing goods and then it needs money to transport it to the final consumer, for instance. So basically the goods are already produced, maybe, bottles of water, they are produced" }, { "speaker": "philipp_bagus", "time": "20:08", "start": 1208.09, "text": "there's, more demand for these bottles of water, and therefore more has been produced, but now the company needs money to tran-transport it to the final, Consumer and then, it issues a commercial paper, yeah, and the bank buys it using the money deposited there by cre-creating new money, and, there, then it's transported to the consumer, and the consumer pays for it, and then, the, the company pays back the, in thirty days the commercial Paper, and then the new money that has been produced is just destroyed again, yeah? Because, it's paid back, yeah? With all credit expansion, yeah? If, if the loans are paid back, the money supply, the same way it is, as it increased before, now shrinks back. So And then the idea is, of course, if there's more production of, of, bottles of water, then there will be more demand for these loans. the, the needs of trade increase, so the banks increase, the money supply, and then when they don't need it any, anymore, if it's paid back, then the money supply decreases again. This is the law of reflux, yeah, it's called the law of reflux that the bills are pay, paid back. It, it flows back, so to speak, and it's according to the needs, needs of trade, the more is produced, the more bottles of water is to produce, if there's e-co-economic growth, for instance, then the more money is produced, and this allows-- and this has advantages. So Ryo says it's not, or actually the real bills, people all they say It not only has no problems with real bill fraction of the banking, it's also beneficial. Why? Because if There is this new production of, of, bottles of water, yeah, which leads to a higher demand for money, yeah, if the banks wouldn't increase the supply of money Yeah? Yeah, you see that the idea is that the fractional reserve banking reserve system, adjusts the money supply to the demand of money. Yeah. So it's a flexible money supply that increases according to the needs of, needs of trade. If they wouldn't do it, what would happen if the demand for money increases? Well, prices would fall. And this would be bad, yeah. And here comes, and as you know, we talked in the last time we talked about deflation, right? Because I, wrote the book in defense of deflation, so there comes Comes in, a, a subject which is very, near to me, yeah, because I wrote a lot of it. So why do they, think or I think that this would be bad? for several reasons, he says, \"Well, if then there would be such a price deflation caused by an increase in the demand of money, yeah, in a full reserve banking system where the banks couldn't increase the money supply.\" Then this would be bad because, for example, in a gold standard, then more resources would be dedicated to Mining, yeah? Then otherwise, yeah? Because the price of gold increases, yeah? It's a price deflation, which means that the purchasing power of money increases if it's gold, then The price of gold increases, that it means that mining gets more, profitable, that means that more resources are used for mining and less for producing other goods and services, which are, yeah. So, so you have this loss in the production of the other goods and goods and services, yeah." }, { "speaker": "stephan", "time": "23:56", "start": 1435.86, "text": "Yeah. So I guess that's probably one main one. I guess there's a few different things to tease out here because depending on where, what position you're coming from, there are some who come from this idea that, you know, the government should manage or the- The central bank or the state should manage the money supply, and then others who are maybe they're not saying the government should do it, but they're saying maybe the commercial banking system should do this management of the money supply using this real bills, kind of doctrine or idea, right?" }, { "speaker": "philipp_bagus", "time": "24:23", "start": 1463.06, "text": "Right. Yes, exactly. So they, they think that the government would be, due to several reasons, the government would be bad in doing this due to incentives, and so on, but the fractional reserve banking system Would do it automatically and would, would, would do it, would do it well, and they call it also to establish monetary equilibrium. Yeah. So this is a Let's say a macroeconomic idea that there should be monetary equilibrium, that the demand for money should be equal to the supply of money. So if the demand for money increases, the supply of money should also increase, yeah? no, the adjustment shouldn't be, due to prices because there are these problems of, of what we, what we talked about that the resource, the resource costs of the monetary standard also that prices could be rigid, downward." }, { "speaker": "stephan", "time": "25:26", "start": 1525.89, "text": "Yeah. And then in terms of the answer, it's, it's essentially that the supply of money doesn't actually have to increase, merely because the demand for money increases, right? Because, you know, just because I feel more uncertain about the future or I have more need for money to facilitate exchange doesn't necessarily mean there needs to be more actual units of money, right?" }, { "speaker": "philipp_bagus", "time": "25:48", "start": 1547.59, "text": "Right. Yeah. This ties back to the idea, what is the optimal amount, of money? Yeah. And this, Mrs. and Rosper say once something, has been established as money, that is, it's a generally accepted medium of exchange, The social function of money that is facilitate-- facilitating exchanges cannot be increased or improved or deteriorated by changing the, this quantity. Yeah? Let, let's say we have the dollars as a, as a commonly accepted medium of exchange as money And then producing more dollars doesn't make it a better money or destroying dollars doesn't make it a better money in the sense that it facilitates better exchange, yeah? Once it's established You, you see most clo-closely if we, if we say, let's add in zero, a zero to all dollar notes and deposits. Yeah. I, it doesn't make it better money, just prices multiplied by ten and, and, and that's it, or if we subtract a zero from all notes. So once We have," }, { "speaker": "philipp_bagus", "time": "27:04", "start": 1623.52, "text": "something established as money. This quantity is optimal to fulfill the function as money. And in, if this, in this context, then the demand for money increases, yeah, or the supply of goods increases, that means that, the purchasing power of this money will increase, yeah? As you say, if we have, a lump of money supply that can't be increased anymore, you know, that is fixed, and then there is some uncertain Uncertainty increases because people think that there may, a war may, may break out or there may be a natural catastrophe, and they want to have a higher cash balance. Yeah? They can do that No, it's not necessary that new money is produced. They just, what they will do is they will," }, { "speaker": "philipp_bagus", "time": "27:58", "start": 1677.6, "text": "reduce the purchases And s-try to sell more of what they produce, and what is the consequence if, if all people try to sell more and buy less, then prices fall. Yeah? Until the point where they, start to buy, a-again, yeah? So prices adjust, people then have a higher real cash balance because with the, with the same amount of money now they can buy more, and exactly, the-- it has been established what they, what they wanted. And there's also a social function. Which is, normally then in these, circumstances, for example, if uncertainty increases because of natural catastrophe, people reduce their spending and they reduce their consumption spending. That is, they free up consumer goods that then can be used in those regions where the catastrophe strikes and destroys stuff, yeah? So it makes actually sense to save, yeah? And this Yeah, for, for example, not to go, to on vacation to the area that is affected by the catastrophe or not investing in this area makes totally sense. Of course, it changes relative prices, yeah, but this is all part and parcel of the market process and it's an important information that is transmitted then through this, these prices. So, so I think it's, it's, it's a big error to think that, the money supply must be increased if the demand for money increases, and, and through the, resource costs of the monetary standard, yeah? This argument that I mentioned before, that, if, gold is money and then, the purchasing power of gold increases, then more mines will be built. Yeah, that is true. In fact, Milton Friedman said, \"Well,\" The gold standard has very high resource costs. It doesn't make sense to, to dig the gold out of the ground and then put it behind the walls of Fort Knox. We can't, we can all save these costs. By, doing fiat money, paper money, yeah? Yeah, yeah, th-that's, that's true. But all monetary standards have their own costs, yeah? Gold standard has her own costs. A Bitcoin standard would have, costs mostly energy. and fiat money has also cost, which is, which is actually huge, yeah. There are the, the salaries of the central bankers, the time of the people who analyze the Fed policy, the, all the analysts that otherwise could do, pro-productive stuff, yeah. the printing, the printing, but most impor-- also the finance of the government, that, that this allows the government to grow to, to a huge size, and most importantly of course, the business cycle, yeah, that we have financial crisis Prices. I mean, this is a, this is a huge cost. Yeah? And on a free market, we don't have a free market in money, but if we would have a free market in money, people would of course take into account in their decisions when they choose their money What they want to use, the costs, yeah? They would compare, it would be subjectively look at what are the advantages of this money, it okay comes with this costs, but the com- the in a process of competition, then they would use, one or the other. Yeah. So, to say the argument that a full reserve system would have too high reserve resources costs is, Against the idea of subjective economics, that people subjec-subjectively choose freely, the money that they think is best for" }, { "speaker": "stephan", "time": "31:50", "start": 1909.99, "text": "them. Back to the show in a moment. This show brought to you by CoinKite dot com, the creators of the best Bitcoin hardware security devices, such as the Coldcard Mark IV and the new Coldcard Q. Now, we use Bitcoin hardware security devices to keep our keys offline, our private keys offline. Now, the way these work is you can do that setup Up, write down your twelve or twenty-four words on those, the seed word cards and keep that secure. Now you can use this device to interact with the Bitcoin network using software such as Sparrow Wallet, Electrum, or Bep20 or Nunchuk as a few examples. Now, you have a range of security features that you can use with these devices such as passphrases, you can use seed x or, or my favorite is multi-signature. Now, if you're starting in a basic way, just start with the device and And the USB-C cable, plug it directly to the computer and use it that way, and then later improve your setup. But I believe these devices are great at helping secure your coins, especially as you start to migrate up into multi-signature security. But don't be disheartened or don't be, scared away, they are accessible, and I think you actually do learn about Bitcoin in the process. So to get yours, go to coinkite dot com, use code Livera to get a discount on your cold card. The lead sponsor of this show is Bold, the best place to buy Buy, sell, and save Bitcoin. For listeners in the US, Bold lets you secure your financial future with complete peace of mind by integrating a low fee Bitcoin only brokerage with next gen multisig vaults. With Bold, you can smash buy Bitcoin or set a DCA plan for only zero point nine nine percent fees and seamlessly deposit the Bitcoin direct to your Bold Vault. The Bold Vault is a two or three collaborative multisig where you hold two keys and Bold holds one as a redundant backup, protecting against loss or theft. You can use Trezor, Ledger or cold card hardware wallets to spin up a Bold Vault in just a few minutes, and the Bold Vault is the only collaborative custody vault available with zero monthly fees. They're also offering zero fees on your first ten thousand dollars of Bitcoin buys and twenty five dollars of free Bitcoin when you buy a hundred dollars of Bitcoin or more. Try Bold today and upgrade your stacking experience over at getbold dot io. Yeah, I think that's a really well put, and, so it's really a counter to-- so basically it's this idea of a cash building deflation, right? As you were, as you were spelling out, it's this idea that for various reasons, whether that's uncertainty, people in the economy might decide that they want to hold more cash, and, you know, so be it, like that's their subjective choice, and it is always, an entrepreneurial task. I think one interesting area, and you, you touch on this in the book as well, is that there There's gonna be this ongoing desire for a stable money, right? Like there's this kind of, people just want stability in the money, and we see this not just in economists, but even kind of macro kind of commentator people, people, someone like a Jeff Snider or someone like that, they, they, they, they, they might sort of have this idea in their head that, oh, the money should just be stable, and, you know, I think that just ignores a lot of the other realities of just the world today. I, I'm curious how, if you had- I have to critique this idea of, you know, stable money. Why is that, why is that a problem? Why is there a problem with that desire?" }, { "speaker": "philipp_bagus", "time": "35:10", "start": 2109.94, "text": "Well, money can never be neutral, it can never be stable. Money is a is a factor of change, yeah, of human action. So, m-- the money will always change in value because people change their subjective valuations, the price of money, yeah, the purchasing power is a price, just a price as other prices like the price of milk. So should the price of make be stable? No, because the per preferences change. Should the price of money be stable? No, and it cannot be. Yeah, it, it, it just cannot be, in a free market. Yeah. So, it's, it's an element of change. Money is an element of change, and a money that has an increasing purchasing power, yeah, has, is Citrus Payrus, of course, preferred by people, yeah, because if I hold money, I prefer money that increases in purchasing power to one that is, that is stable. Yeah. So, moreover, the, sometimes it's argued, \"Well, we need stable money because of, information costs and, and so on.\" However For economic calculation, yeah, Mrs. As well as, we need a money that has not too high fluctuations in its purchasing power for economic calculation, obviously, yeah, but there will always be," }, { "speaker": "philipp_bagus", "time": "36:43", "start": 2202.9, "text": "Variations in the purchasing power, otherwise it wouldn't be money, yeah? It would be something else, yeah. So, so, yes, if we have very hyperinflation and so on, economic calculations get distorted, but on a free market the money, that is chosen will be some that, w- where the fluctuations aren't so wild, and to make it totally stable isn't only impossible, it's only-- would only be possible with, with the state, yeah? The state could impose Or the state can impose, for example, a price control for the price of milk, it can do so. but there of course there are problems for that, yeah? There are shortages or surpluses, yeah? Which come along with this. Now, for that, of course, if the price of milk is, is fixed by the government, then information costs For some actions are reduced. Yeah? Let's say I'm an ice cream producer, and the government has fixed the price of my most, most important input, of milk. Of course, this makes my planning easier. However, in other parts of the economy, the planning may become more difficult, yeah? First of all, because we have now to take into account the doing of government, of government, yeah, interventionism. What will the government do? Will it lift the price control? Will it, maintain it? So their higher costs are are implied. And of course, there will be distortions. Yeah, there will be distortions due to the price control that will lead Yeah, to, ca-chaos that increases the information cost. So you, you sh- we should have free, free prices and also for the price of money, yeah, and not, artificially stabilized" }, { "speaker": "stephan", "time": "38:48", "start": 2327.78, "text": "Yeah. And there's a really great, section from, there's a quote here I recorded this, I wrote this down, on prices. It's an entrepreneur, I'm quoting here, it's an entrepreneurial task to anticipate prices. Part of the entrepreneurial task is to anticipate the purchasing power of money. Thus, entrepreneurs must, can, and do forecast changes in the demand for money. The, those who anticipate it better than others will gain, while others who are worse in their anticipation may lose. There's nothing arbitrary about this redistribution. It is entrepreneurial Right? It is an entrepreneurial choice here." }, { "speaker": "philipp_bagus", "time": "39:21", "start": 2360.66, "text": "Yes, exactly. Of course, this is the argument that, it would be somehow unjust or unfair if, the purchasing power of money changes and there's a redistribution. But no, we won't We all have to, all people acting people and entrepreneurs have to anticipate what will happen with the price of money, with the demand for money, and those those who, who make errors in this, of course, they, they, they will lose. They will, buy, for example, factors of productions at a too high price if they don't anticipate, a price deflation correctly, yeah, a cash building deflation correctly, yeah. Then they will have, losses, but others will have profits, yeah. So there's a just a redistribution from those who are worse in anticipate-anticipating these changes to those who are better in this." }, { "speaker": "stephan", "time": "40:16", "start": 2416.19, "text": "Yeah. And, one other thing, you just going back to another thing you were touching on as well, this idea that, again, quoting from the book, \"Sateris paribus, market participants prefer a money that constantly increases in purchasing power to money with a constant purchasing power.\" And so it's also, and the reason for that, as you spell out, is because of uncertainty, right? Because if your money is going up in purchasing power, that helps you against uncertainty. And so in that way, You know, it-- as, as we were saying, it's an entrepreneurial choice which, you know, which money that you are going to choose, and over time, right? You know, the, the one that's gonna preserve your purchasing power, and I think it's fair to say if, if you've been holding Bitcoin and using that over the longer term, you have seen this big increase in your purchasing power. So, you know, in a, in a simple way, you could sort of say, \"Yeah, in that sense, it, it, it has worked for people who've been" }, { "speaker": "stephan", "time": "41:13", "start": 2472.51, "text": "With the, I guess, now I think it would be good to just talk a little bit about some of these categorization issues. So you touch on this in the book as well about how from Rallo's perspective, everything is either a real asset or a financial asset. And so whereas, let's say, the Austrians are viewing it in a more like, you've got consumption goods, things that, you know, you consume now, you have production goods, things that you're using to create, you know, consumption goods or other production goods, and then you have money, and money is in its And so can you explain for us what some of the issues are that are being created here when you don't have the right framework for what these different asset types are and where that causes Ralos to run into issues here?" }, { "speaker": "philipp_bagus", "time": "41:59", "start": 2518.64, "text": "Yeah, he distinguishes between real assets and financial assets. And, the financial assets," }, { "speaker": "philipp_bagus", "time": "42:10", "start": 2529.52, "text": "money is a financial a-asset, but there are many types of these financial assets. So a stock, a bond is also a financial asset. Yeah. and, so what he, what Mrs. Kohl's fiduciary media that is unbacked monetary substitutes for him are just a financial asset where people invest in. Yeah, so," }, { "speaker": "philipp_bagus", "time": "42:42", "start": 2561.68, "text": "and this allows him or, yeah, this, let's say, put it this way, it, this leads to a confusion in the sense that if I buy- A financial asset, a bond or a sh-uh, a stock, then I'm saving, yeah? Let's assume that I reduce my consumption to do so, yeah, and not I'm selling another bond or using it for my cash balance. But let's say I reduce my consumption and buy a stock, then I'm saving, yeah? And, then of course, the seller of the bond can use the proceeds and make an investment project, and it's backed by real savings, yeah? If I do it with another financial, financial asset, a loan, it's the same, yeah? I give up purchasing power, I save, and the, the seller of the bond uses it for an investment project which is backed by re-savings, real savings. Now, if we say that, Fiduciary media is also a financial asset, s- and someone who gets this f- fiduciary media in Raius' view is then also saving Yeah. So the, the bank creates, this, new money, this demand deposit, as Mrs. would call it, fiduciary media, by buying, this real bill with, with new money. For IOUs, the receiver who gets, Who, who, who gets, the money in his bank account by the bank, he's actually saving, he's investing, yeah? And therefore it would It's for him the investments are backed by savings, and therefore he, he doesn't see that there's a problem, yeah? Because, as you said there's a, there's a categorically difference, yeah, not only between consumer goods, investment goods, capital goods and, and, and money, but also between money proper Perfect money substitutes and financial assets. It's, let's say, a perfect monetary substitute, yeah, which is, what you have on your bank account. Yeah? When you open your online bank, you see the money there. It's a perfect money substitute because, because you can use it as if it would be cash Yeah. So it's a perfect monetary substitute. For, for Ryo, it's, it's a financial asset that you have invested in. Yeah? And, And therefore, he doesn't see the problem of the credit expansion, which creates new perfect monetary substitutes, and actually he, he criticizes the concept. And we're coming back" }, { "speaker": "stephan", "time": "45:27", "start": 2726.53, "text": "to this double availability problem. And so I guess like the crux of the issue, and I think you spelled this out as well in the book, so listeners for more detail, obviously check out the book, but the, the, the point I guess you're, you're getting at here is that money isn't a financial asset. Money is a present good, facilitating exchange and reducing uncertainty. And I think that, once you've understood that concept, then it sort of becomes more clear that you've got money and financial assets and they're, they are separate things, but in, let's say, Rios' framework and the framework of many who are kind of in the fra- fractional reserve bankers, whether they are like a Larry White and George Selgin or a Rios or someone else who is a fractional reserve banker without really thinking about it That's what's going on, isn't it?" }, { "speaker": "philipp_bagus", "time": "46:10", "start": 2770.49, "text": "Exactly, yeah, yeah. therefore it's, sui generis, money, because it's a pre-- it's a present good that is used to facilitate exchange. It's not used for consumption, nor is it used as, as a capital good to incre- increase productivity, yeah, of, of your production process. It ju- it just facilitates exchange and reduces uncertainty. And therefore there's this categorically, categorically difference, yeah." }, { "speaker": "stephan", "time": "46:37", "start": 2796.78, "text": "Yeah. So I- I guess let me just pull on that thread a little bit more, just to have explain that. So in today's modern fiat standard, fiat world, people think of it like, \"Oh, if I have, let's say, ten US dollars, or I have, let's say for rich people who have US government bonds,\" For them, that's, you know, financial asset, in their-- well, that, that is a financial asset. But to them, they might also think of that as money, right? So, and I guess in the Austrian framework, maybe you're seeing it a slightly different way. Can you, can you explain that difference?" }, { "speaker": "philipp_bagus", "time": "47:15", "start": 2834.69, "text": "Yeah, when you-- This also ties back to a very important distinction that I would like to make, that you can use your income Yeah, Rothbard and Mises I was like that on three margins, yeah. Your income you can use to spend it on for investment purposes, that is buying a bond, for instance, financial asset. You can use it for consumption or you can use it to add to your cash balance. Yeah. These are the three different, yeah. purposes. So and if, so cash balance includes, of course, perfect monetary substitutes as well, yeah?" }, { "speaker": "philipp_bagus", "time": "48:00", "start": 2880.11, "text": "you're- That and this implies that if the demand for money increases, if people want to hold higher cash balances in the system of fractional reserve banking, it's interpreted as if there would be more real savings and more projects could be financed, because then the fractional reserve banking system, if the demand for money increases, creates new money which is then invested. However, if you look at it If people increase their cash balances, yeah, then demand for money increases. They can do it in two ways, or they can reduce From the income, they can reduce their investment spending. That is, maybe I have a savings plan and I invest two hundred dollars every month, I reduce it to one hundred and use the one hundred to increase my cash balance. In this case, there aren't re-more real savings available, yeah, yeah, but less, yeah. Actually, the time preference is determined by the relation between the consumption and investment spending. Yeah. So if I spend less of my income on investment and more to increase the cash balance and re-remain constant the, the consumption spending, my time preference has increased. Yeah. So at the same time, I increased my cash balance And I increase my, time preference. I'm saving less, yeah. And this, and this leads us to a very important distinction between the stock of savings and the flow. Yeah. What is important here is the flow. Yeah? That is, the flow is the consumer goods that aren't consumed and that are available to sustain the factors of production which are Producing the capital goods, yeah, in the, projects, yeah, that we talked in the beginning, that make the, production more, more productive, yeah, all the machines and so on, yeah, or these people, these factors of production that are producing machines, they need consume, no? They need consumer goods, and where do they get the-- where do they get them from? Well, from the savers who give up, yeah, the consumption of these goods, and then they are tr-transferred in the market process through the buy of bonds or stocks or so on to these, to these people So, you see that an increase in this, cash balances, which may be called a stock of savings, yeah? People say, \"Well, my savings are so much,\" well, this, this is a stock of savings, it's, it's not a flow, and you need the flow to have, more," }, { "speaker": "philipp_bagus", "time": "50:50", "start": 3050.15, "text": "goods available, yeah, for, for, for consumption, yeah. So," }, { "speaker": "stephan", "time": "50:58", "start": 3058.15, "text": "so, so I mean, I, I agree with you on that, but I'm just curious how you would view it, like, as an example in today's modern fiat world. Now, of course, you and I have our many disagreements with that, but let's say rich people today or companies, they do think, now maybe they're kind of blurring the line like moneyness or art, you know, but they might see it like, \"Oh, instead of...\" Of keeping a hundred thousand dollars or more because they're only guaranteed up to X amount, above that they might start holding government bonds because in their mind that's what they do to, you know, safe, safekeeping of their money because they trusted the US government or whatever won't, won't rug them later on, which, you know, fine, that might be an issue, but, you know, in their, in their mind Are they seeing it, you know, like, from an accounting perspective, they might look on their balance sheet and be like, \"Oh, I've got cash and cash equivalents,\" you know, let's say, cash in their bank account, in the business bank account, but also maybe some government bonds, you know, US government ten-year treasuries or something like this. So I'm curious how you would, you know, disaggregate that. Would you view that ten-year bond, the government bond, in this case, as part of their cash balance or would you see that as" }, { "speaker": "philipp_bagus", "time": "52:11", "start": 3130.88, "text": "Yeah, the, the, this is part of the, the investment, yeah?" }, { "speaker": "philipp_bagus", "time": "52:17", "start": 3136.9, "text": "because they, they have given up, money, even though it's, it's hi-highly liquid, yeah, and Mrs. talks about it as secondary media of exchange, yeah? And secondary media of exchange, allow you maybe to reduce the cash balance a little bit because you-- they are so highly li-liquid. Yeah. But the, the main difference here is that it's, it's a credit trans-transaction. Yeah. You're giving up money to, to ge-get it back in the future, while with cash, you're not giving up, you have it available, and with deposits as well. Yeah. it's a perfect monetary substitute, you can use it at any time. Yeah, so, so there's a categorically, economic distinction between money, and the perfect money substitutes and of course, investment vehicles, even though they are highly liquid, and they can be highly liquid, and you, you, you may be actually, try to make an exchange with them." }, { "speaker": "stephan", "time": "53:23", "start": 3203.37, "text": "Yeah, interesting. Yeah, because to me it's sort of like that's the economic treatment of money, and then maybe there's a difference in accounting treatment or legal treatment or at least, let's say, common practice today in the modern business world, and maybe what's happened is just there's been this blurring of the lines of like what is a perfect money substitute versus where maybe there's like a looser, like you said, a secondary, monetary, medium of exchange. Yeah, medium of exchange, and, people- Sort of, kind of blurring the lines and saying, \"Oh, well, it's, it's close enough to money, and because of various legal protections in the system, you know, the bank guarantee only up to a certain amount. Above that, they tend, you know, in practice, in commerce or rich people or high net worth people, they might do that.\" And so I guess, but, but economically and categorically speaking, to understand the issue, it comes back to understanding where, where are they creating a double availability problem, right? Like that's kind of the fundamental- Kind of, if you get down to the bedrock, that's what's causing the issue. No matter what you call it from an accounting perspective or a legal perspective or an economic perspective, that's what's causing the, this artificial, expansion, lengthening of the capital structure, right?" }, { "speaker": "philipp_bagus", "time": "54:40", "start": 3280.03, "text": "Right, with, with the ten-year government bond, people who buy them, they have given up the availability of the cash, of the- Money substitute, yeah. And, the, the difference is the, the money proper and the money substitutes you can use directly to buy stuff." }, { "speaker": "stephan", "time": "55:02", "start": 3301.78, "text": "Right. Yeah, I can't go to the supermarket and pay with a government bond, right?" }, { "speaker": "philipp_bagus", "time": "55:06", "start": 3305.64, "text": "Yeah, you have to first sell it It's highly liquid, of course, but you have to first sell it to buy, to buy groceries, right? So, so this is the difference between a highly liquid secondary medium of exchange and," }, { "speaker": "stephan", "time": "55:20", "start": 3320.43, "text": "and money. This show brought to you by Mempool.space, the world's leading Bitcoin visualizer, and now they've got an accelerator program. So if you have a transaction that you sent at a fee that was too low to get confirmed, now you can fix this at, with the Mempool accelerator. The way it works, you can go and search your transaction, scroll Scroll down, click Accelerator, and you don't need an account. You can pay with Lightning, and then it'll show you it's now in the process of being accelerated, and then after a few minutes, it's confirmed. And so this is a great way to help you out if you are stuck, and this can happen where maybe your wallet doesn't have RBF or CPFP, or it might help you in situations where it's impractical to go and re-sign, so for example, multisig with keys in different locations. And thirdly, even in some Lightning scenarios, perhaps a forced close Use RBF. And so in this case, the Mempool Accelerator can help you out. So keep it in mind, and you can find out more over at mempool dot space slash accelerator. And now, back to the show. Yeah, I think that's a really good clarification there. and then, so yeah, as you were touching on this idea of cash holdings as a stock and then savings, the flow variable, like it's an ongoing, savings that is used to finance the consumption of the people working on those longer-term projects, right? Because those people working on the- Long-term projects, you know, they aren't, let's say, sustaining themselves, they're working on this other project, so there needs to be enough saving somewhere else, and I guess that's where this kind of concept of real savings, so maybe that would be a good question to kind of go to next. So can you explain why is it that- Holding, you know, fiduciary media doesn't count as real savings." }, { "speaker": "philipp_bagus", "time": "57:00", "start": 3420.16, "text": "Yeah, because the real savings are, I'm abstaining from consuming a consumer good. Yeah, so I have my income And I spend less on consumption than, than the months before, so I'm freeing up consumer goods that come to the market. And I, And then purchasing power is transferred in some way or another. Yeah, it can be transferred in the way that I, spend less on consumer goods? And spend less on, spend more, I, I buy a, a bond, and the purchaser of the bond then can buy the consumer goods and give it to his workers, yeah, to produce. The other way is that, and this is interesting, is that, that I increase my cash balance, yeah? I consume less, and I don't buy the bond by increase my cash balance. What is the consequence? It's that consumer good prices will fall. That is, the entrepreneur can, with the same money, now he can buy more consumer goods, yeah, and, sustain more workers. Yeah. So, so it-- and actually it has the same effect, yeah. The importance you see is the relation between my consumer spending And my investment spending. This is the relation that determines the time preference and how much real savings are actually available. Now, if fiduciary media increased, yeah? That is a fractional reserve bank, buys or discounts a real bill. what happens on the balance sheet of the bank, on the asset side, there appears the real bill, and on the liability side, it puts, yeah, in the bank account of the seller of the, real bill. Money that is literally created out of thin air, that didn't exis-exist before. This is the nature of fiduciary media, yeah? They are unbacked, perfect money substitutes. Now The s-the seller of the real bill, the company, the entrepreneur who sells it, now has more money on his bank account, but no one has saved, no one has reduced his consumption, no one Yeah, but he has more purchasing power. So this isn't the problem. This is exactly the problem that there's a disconnection between the real savings, no one has saved more, but There's more investment spending available. Yeah. So, so if we increase here the fiduciary media, no more real, no more consumer goods. suddenly, suddenly, suddenly appear. Yeah, it's, it's almost like if we, yeah, if we add a zero now to a bank account of an entrepreneur, then he can invest more, of course, but, but not more real Stuff, yeah, it's not more real consumer goods available. Of course, he has more savings in the sense that he has his stock of savings has increased, yeah. Yeah, if the government, prints fiat money and gives it, gives it to, to an entrepreneur, then this entrepreneur has a higher stock of savings, but the real savings in the economy, they hasn't, they haven't changed, yeah. And this is exactly what happens here with the real bills doctrine as well." }, { "speaker": "stephan", "time": "01:00:22", "start": 3622.46, "text": "Fantastic. Yeah, so look, I think, we've covered a lot there. let's try to summarize some of the key points then. So from, as I recall from the conclusion, and sort of towards the end of the book, you sort of spell out that- Raios' idea of real bills credit expansion, it maybe it's somewhat of a step in the right direction away from like just full bore credit expansion, but it doesn't do enough, I guess. And so that's where you analogize with the Peel Act in the book about how they tried to do this, and in their understanding, the proponents thought that they would stop business cycles, but actually they didn't because they missed this other mechanism by which, again, fiduciary media can come in and be unbacked by real savings. So if you had to sort of summarize your critique, would that be the main critique or how would you, you know, summarize that?" }, { "speaker": "philipp_bagus", "time": "01:01:17", "start": 3677.58, "text": "Yeah, in, in a sense, it's a step in the right direction because, Raio sees it as, problematic if a bank creates fiduciaria and grants a mortgage by granting a mortgage, yeah. so- By saying no, you should restrict it only to real bill credit expansion, he's restricting, the possibility of, of distortions. Yeah. However, what he doesn't see is that he doesn't limit it to zero and it's, it's the quantity what is important here, because if the new money is created against a real bill Then we don't know where this new money will finally end up, where will it, where it will be, invested. Because from the real bill thinking, it's okay, we have just to transport the goods to the consumers in thirty days, so there will be no long-term investment project financed by the new money, like in the case of a mortgage. Yeah? There would be a thirty-year project, yeah? We have just the thirty days. However, money is a fungible good, so we don't know where in the economy, economic system, it will end up. For instance, yeah, just to the, the, the, the entrepreneur who before financed the transportation of the goods out of his equity Now has a real bill and doesn't need the equity anymore to finance the transportation. He has free equity. Where will he invest it? Where, where it's more profitable, which is in the, in the long term, yeah? So if you inject, in the loan market, New money, the restrictions, the general credit restrictions will be lowered and there will be long term investments because they are affected as well. So yes, so it's somewhat similar to the Pils Act in the sense that, it's restrict-- restricting somewhat, but there still is a loophole. Of doing it through, real bill credit expansion, and then we will have the business cycle," }, { "speaker": "stephan", "time": "01:03:29", "start": 3809.07, "text": "right? And so we're back to square one again, and it doesn't actually solve the problem. Yeah. Fascinating. So listeners, make sure we've, you know, today we've only covered just like kind of a basic, you know, overview, of course, go and read the book. I'll put the link in the show notes. It's available mises.org. The book is called Full Reserve Banking versus the Real Bills Doctrine. I do have a couple more kind of areas I wanted to discuss with you. obviously I like talking about Bitcoin, a lot of listeners are interested in Bitcoin, so it might be interesting for them to also discuss. Bitcoin substitutes. And so just to understand, you know, if we take hypothetically we're treating Bitcoin as money proper, right? If you have on-chain Bitcoin that you're storing, you know, in your, let's say, in your hardware wallet, in your cold card or whatever, but there are other- I guess mechanisms and ways that a banking system could evolve on top of Bitcoin. so as an example, you know, just the basic level today, people can use, let's say, custodial Bitcoin, right, with Coinbase or Kraken or Binance or any of these big exchanges who also act as a custodian, and people can use the apps that, you know, transfer around amongst them. that's one way to think of it, but I'm, I'd be curious to get your take on some of the other- Possible, let's say substitutes. I'm not sure how-- I know you've, you've been on a few Bitcoin podcasts and you've spoken at a few conferences, but I'm not sure how familiar you are with all the different aspects of the ecosystem. So you, you tell me if you're familiar with them, but for example, there is, Liquid Bitcoin. Do-- Are you familiar with that or no? Okay. So basically, what that is is- People are, it's, it's a side chain, it's a custodial side chain. It's used as a, it's like a multi-signature, I think it's like eleven of fifteen multi-signature, but there, these are like functionaries around the world. But the idea is you can cryptographically know how much Bitcoin has been pegged into that side chain. And then once money is in that side chain, people can transfer it around. Now, in terms of withdrawing it out, you're trusting that, you know, in this example, I think twelve of fifteen or whatever, or Exit, let's say, or your redemption, but in that way you can, you cryptographically know that every Bitcoin in LBTC, it's kind of, you, you can see it's been pegged in. So in that sense, would we view that as a perfect money substitute?" }, { "speaker": "philipp_bagus", "time": "01:05:53", "start": 3953.44, "text": "Yeah, I mean, the, the key here is always if it's, if they are full reserves. So as I understand you, it's a fully reserved, system. Yes. Yeah. The problem would be if, some- Some of these custo- custodians, yeah, would, issue substitutes, more substitutes than they really have Bitcoin, yeah. and then we could have, if we would have, Bitcoin standard, then we could have the same phenomenon of cycles as, as today. Yeah. If more monetary substitutes are issued, then there's money proper, so which is the definition of fiduciary media. So I see. The fiduciary media" }, { "speaker": "stephan", "time": "01:06:32", "start": 3992.41, "text": "are, are issued. So, yeah. Interesting. And so I guess the- I think in this case, with, with the example of Liquid though, it is kind of publicly visible, so you can see how many LBTC there are and how many have been pegged in. So in that sense, it's kind of an interesting use of cryptography to sort of allow this kind of alternate system that's kind of pegging in and out of Bitcoin. So that's an interesting one. there are also, I'm not sure how familiar you are with eCash, Chameleon eCash. Have you heard of the idea or no? Okay, so the, the gist of Imagine you could create this kind of, using, you know, privacy techniques and cryptography, you can create, let's say, centralized, custodians. Now, what people are doing as an example is they can put some Bitcoin into that and they can trade that e-cash around. Very privately. Now, the trade-off of that is the eCash custodian can inflate, right? So that's one thing. So there's kind of, single custodian protocols, as an example, Cashu, and there's another example called Fedimint, and that's like multiple mints where they kind of have to agree. Now, I guess the question that I'm-- I would have for you, and maybe might be an interesting discussion, is The idea is that these mints, theoretically, like you said, they can go fractional, right? Like they can just-- they could fraudulently, you know, either in the single case, just fraudulently create more eCash than what they have Bitcoin, you know, money proper, or they-- or in the Fed, Fed mint case, they could collude together to sort of create more tokens, to create more eCash tokens than the actual amount of Bitcoin, you know, money proper that they have in their vault per se. So I guess the question would be, do you see it then that, you know, in that world, if a lot of people were to onboard into these e-cash and sort of use them to sort of as like a transactional layer? Are we sort of dependent on there being enough, let's say, bank runs, to sort of keep the custodians honest? Or do, do you-- I'm curious if you have any reflections on that?" }, { "speaker": "philipp_bagus", "time": "01:08:40", "start": 4120.64, "text": "Yeah, of course, the, the, the runs, will keep, keep them at bay, but I would also bring the legal aspect. In here. So in my opinion, of course, I, I, I, I don't know the, exact details how, how these work, but as I see it, is that it would be, against legal principles, yeah? to, to inflate, yeah? It would be fraudulent in my, my opinion to, to do so. So, you would not only need, the bank runs, of course, the runs are, are one thing, but the other thing is the The enforcer of the legal system would tell them not, not to do that and prohibit it. It would be a criminal behavior, in my opinion." }, { "speaker": "stephan", "time": "01:09:30", "start": 4170.58, "text": "I see, yeah. And so I guess that's an interesting, maybe that's kind of a parallel back to, you know, a hundred years ago or so, when, maybe bankers are arguing that the state should, you know, let them suspend redemption in specie, right? And so that's kind of coming back to the same argument where, you know, some people might-- Now, of course, I don't agree, but some- Some people might sort of say, \"Oh, that's just the free market. They're just kind of redeeming, they're just not re-,\" whereas like the full reserve camp, of which I would, I would be in that same camp, would say, \"Uh, no, that was wrong, that the state allowed you to not, redeem in specie, right? Like, i- in that world...\" You know, these so certain individuals have just been allowed to reneg on their contracts, right? They've just been allowed to just not, perform the obligation that they said that they would do, right?" }, { "speaker": "philipp_bagus", "time": "01:10:21", "start": 4221.64, "text": "Yeah, they would get, get away with the behavior that is, that is illegal only because the state, looks to the other side. Yeah. So, so what happened with banks would then repeat there in, in the Bitcoin sphere." }, { "speaker": "stephan", "time": "01:10:37", "start": 4237.27, "text": "Yeah. So it, it remains to be seen exactly what kind of- Safeguards and checks. Now, some of the guys working on this, like Cashu and Fedimint, they are thinking about things like, as an example, could they do proof of reserves to prove how many bitcoins are in those, custodians or vaults, or could they do some kind of automated bank run kind of thing, and also in the Fedimint case, again, getting a little bit technical, I don't need to kind of bore you with technical details, but the, the- Let's say in order for the, for those Fedimints to work, they still need Lightning gateways. So Lightning is like a, a faster way of doing payments, faster and cheaper way of doing payments, generally speaking, for, Bitcoin. And so that, that gate-- those gateways are going to have to hold some eCash balance. And so in that way, they need-- those gateways have to get comfortable with the eCash custodians that they're not just gonna inflate, right? So I guess there's like a little bit of, maybe there's an a-element there of like a market check and balance there that maybe- some of the gateways are gonna have to sort of scrutinize, the custodians, and I guess maybe there's some historical parallels where maybe banks, they were different, dollars. Like it wasn't all the same dollar, they had to look at them as, you know, how credit worthy are they? So I'm curious, do you have any view on that? Do you think that would be like a parallel there?" }, { "speaker": "philipp_bagus", "time": "01:12:06", "start": 4326.69, "text": "Yes, the difference is of course that, today it can be virtually done at the speed of light, the bank run. Yeah. Like in the, in the 19th century, you would do a bank run, you would have to transport the notes maybe with carriages over a long distance, But here, it's the slightest doubt, yeah, it can be, the, the run can be done without, within minutes, so this is, a much more effective way to, to keep them in, in check." }, { "speaker": "stephan", "time": "01:12:38", "start": 4358.98, "text": "Yeah, and that reminds me of, even I'm sure you know, a couple years ago, maybe one or two years ago, there was a big, you know, in the US, Silicon Valley Bank, Silvergate, and, I, I forgot the other, there was, there was basically three banks that like- Because the contagion happened so quickly, it was all over social media, and it just happened in the space of maybe like a Friday afternoon, and then the regulator stepped in, and, and that's still in the fiat world, right? That's not even talking about if we were in a Bitcoin world with FedHmints and Cashew and all these things." }, { "speaker": "philipp_bagus", "time": "01:13:08", "start": 4388.78, "text": "Exactly, yeah, that's also the example what I thought, thought of, yeah, this Silicon Valley Bank, yeah." }, { "speaker": "stephan", "time": "01:13:14", "start": 4394.97, "text": "Yeah, and so then I guess the, our signature was the other one. So the signature, so, Silvergate and, Silicon Valley Bank. But nevertheless, I think- It's an interesting time, and I think in that way, those of us who are fans of Bitcoin can also see that, there's potential for it to evolve as a full reserve banking system. Because I think, as you said, I think there are more checks and balances available for the everyday users. Now, to be clear, I think there will be some users who get rugd or who lose out, and obviously that's sad. I'm hoping people don't-- I'm not hoping for that, but nevertheless, the fact that it's faster to do a bank run And more automated now, and people could get like notifications on their phone, like, \"Hey, people are doing a bank-- like, withdraw straight away, right?\" And so it's just gonna be a very different dynamic in that world when people can just like instantly bank run, And, and, and hopefully-- well, we'll see, but hopefully the government doesn't come in and protect them and let them go under, right? Let them go bankrupt. Yeah," }, { "speaker": "philipp_bagus", "time": "01:14:19", "start": 4459.4, "text": "that, that is the key, if there will be a connection. To, through the government system, like if, a big player, JP Morgan or whoever, invested, invest somehow in there and would be affected negatively by this, ban grant, yeah? Then the, then maybe the background will not occur because, the p-uh, participants think that, the government will, will stand behind this player. Yeah. So, it would be important that the government wouldn't be in-involved in any indirect way through the traditional financial system in it. Yeah. so the best would be of course to have, have no, no government. Then, then it would be, Very qu-quickly the, the bank run that runs into the system." }, { "speaker": "stephan", "time": "01:15:14", "start": 4514.08, "text": "Yeah, I see. And so, my understanding as well is from Mises and others I think the way Mises called himself, you know, a free banker, not in the fractional sense, in the full reserve sense, b- I guess his view was that over time, just naturally, without government intervention The reserve ratios of these banks would be naturally pushed around, close to one hundred percent, or maybe they'd be just a little under, but they would generally speaking be around a hundred percent, just through natural market checks. Is that, is that your view that it might not always be literally one hundred, but there might be times where it's kind of fluctuating?" }, { "speaker": "philipp_bagus", "time": "01:15:52", "start": 4552.33, "text": "Well, it depends. there can be situations where there are like implicit guarantees for, for these banks. And then it would be, possible, to, to reduce the reserve ratio. On the other hand, it, as we said before, in today's, informational system with the internet There, that can be done as we have seen, with last year or the year before, in an, in an afternoon. So this would then oblige banks to, to hold, yeah Very close to one hundred percent reserves, e-even if, if there's no legal enforcement of the traditional legal principles." }, { "speaker": "stephan", "time": "01:16:37", "start": 4597.25, "text": "Yeah, fascinating. And so I think coming back to, you know, the why question as well, I think part of that is, I think That's why it's such a good thing to learn a bit of this monetary and banking theory so that you have a clear perspective on how to proceed, right? Because if you don't You can end up running into errors where you just kind of recreate, you know, meet the new boss, same as the old boss, right? Like you just kind of recreate and re- a rehypothecating fractional reserve banking system on top of the new thing, which obviously we don't want. I, I don't believe it will go that way. I think it will be naturally a full reserve system, where maybe there will be people who try, right? We can't stop. There'll be, of course, there'll be criminals and fraudsters who try to cre-" }, { "speaker": "stephan", "time": "01:17:24", "start": 4644.23, "text": "Have enough checks and balances to stop that. At least that's how I'm viewing it. I'm curious if you have any reflection." }, { "speaker": "philipp_bagus", "time": "01:17:31", "start": 4651.32, "text": "Yeah, I, I hope so. Of course, of course too. yeah, and I, I agree that it's important to- To know about this, because to go back a-g-again to the analogy of the Pils Act, you know, if, the, the error was of the currency school not to understand, that, demand deposits form part as a money supply in the same way as cash So, due to a theoretical error, they didn't, consider this, and then the business cycles continued. So, the-- when we get into a, Bitcoin standard and, we don't take into account the lessons from fractional reserve banking then the system may be somewhat better than we have today, but there will be still the cycles, business cycles, yeah. Yeah," }, { "speaker": "stephan", "time": "01:18:23", "start": 4703.87, "text": "interesting. And" }, { "speaker": "philipp_bagus", "time": "01:18:24", "start": 4704.27, "text": "this won't be legitimated, because this was a legitimation of the currency school bankers, because they said if we do this People's Bank Act, there will be no cycles anymore. okay. So then the, the public can" }, { "speaker": "stephan", "time": "01:18:34", "start": 4714.1, "text": "say, \"Oh, look, see, you promised us this, and you didn't, and we didn't get it,\" and, yeah. Exactly. Yeah, interesting. Okay. one other area I'm curious, I know you've been commenting on this also, is, Millah down in Argentina. I know there's been, you know- A lot of talk about this from a positive and negative side. I'm curious to get some of your thoughts there. I guess the way I'm seeing it, it's on the good side, obviously he's done some deregulation, he's dramatically reduced the staff, the size of the government. he has, you know, for example, deregulated the housing market, and we saw more housing supply, rental market supply, which is obviously running counter to the whole price controls and all that. On the negative side, though, it sounds like he kind of sort of supports like the, you know, And, I guess, Safdie's critique is also that, it sounds like he's just kind of getting it ready for another IMF bailout, and he should have, repudiated the debt instead of trying to, you know, take on IMF money. I'm curious how are you viewing things so far?" }, { "speaker": "philipp_bagus", "time": "01:19:39", "start": 4779.29, "text": "Yeah, actually, I- I've been writing with, Bernardo Ferreiro in an article actually on this, well, there can be many things be said, about the Israel and Ukraine thing, for instance," }, { "speaker": "philipp_bagus", "time": "01:19:56", "start": 4796.52, "text": "First of all, Argentina is not important player in geopolitics, so, it's not really relevant what the stance of Argentina is. The other, the, the other idea is in South America, you can be on two sides, or you are on the side of, the socialist camp of, of Maduro, Lula in Brazil, and these people, and Argentina was on this side, in the, before, yeah, before Mila. Or you say, \"No, I, I'm against those, but then I'm with the US.\" Yeah? To be totally, outside any alliances is," }, { "speaker": "philipp_bagus", "time": "01:20:42", "start": 4842.81, "text": "Maybe the ideal, but in practical politics, is it may be quite, quite difficult. And on part, on the repudiation of, of that, of course. This, this would be the Rospanian line, but in practical politics, it, it, it probably would have meant social unrest and that he wouldn't be in power anymore, yeah, that he would be Bush get, got out of power, in three days, if we would have repudiated that, there would be have an hyperinflation and there would have been riots, and then, the opposition would have used this, where they would have steered, of course, riots, there would be have been that, that, that people and, he would have been ousted, from power. So the politics is, is the art of the possible. So what is possible in any circumstances? And, there are many restrictions that, we don't know and, but, but have to be taken into account. So I think he is moving in the right, right direction, also with his monetary reform. Of course, I would like to see it, quicker. yeah. But and what about the" }, { "speaker": "stephan", "time": "01:22:04", "start": 4924.63, "text": "idea that he's meant to be ending the central bank?" }, { "speaker": "philipp_bagus", "time": "01:22:07", "start": 4927.42, "text": "Yeah, yeah. So I, I asked him, he's still in, he still wants to do that? You have to take into account that he has, I think 17% of the members of parliament, 10% of the senate. Nice. So there's a lot of, concessions" }, { "speaker": "stephan", "time": "01:22:23", "start": 4943.82, "text": "required to make things happen." }, { "speaker": "philipp_bagus", "time": "01:22:25", "start": 4945.63, "text": "He needs political alliances. He has several ministers from another party. Which are, well, let's say not Austrians, but are rather monetarists, so these people really would like to have the central bank to keep it. H- his aim is it, yeah? So, so the good thing is that he has this theory and he knows where to go. He wants to eliminate the central bank," }, { "speaker": "philipp_bagus", "time": "01:22:52", "start": 4972.21, "text": "but can't do it now, yeah. And he wants, currency competition, yeah. So this is something that all Bitcoin enthusiasts should be, very happy about, yeah. And everything market people should be happy about this, yeah?" }, { "speaker": "stephan", "time": "01:23:06", "start": 4986.02, "text": "Yeah." }, { "speaker": "philipp_bagus", "time": "01:23:06", "start": 4986.64, "text": "And some-sometimes people distort it and say, \"Well, he wants to get into the US financial system by dollarization,\" but they are, they aren't looking at the reality in Argentina that Argentinians aren't using dollars, they, they are holding dollars. So if you do a- If you go towards a free market system, then people will, first have, the, these dollars, indigenous dollarization, yeah, he, he calls it, yeah, and, and then we, then we'll see what will happen, what will happen later. The dollar, of course, will be much, is, is much better than the peso that had, two hyperinflations, yeah. And, very high. They, they, they limited thirteen zeros from the peso in the last fifty years. So of course, for, for people, the, the dollar would be something better. Still, it's fiat money, of course, yeah? But it's, an improvement, yeah. So important is that you do-- you don't go in the wrong direction, but you go as a politician in, in the correct direction. But we have to take into account that Millet isn't an academic right now. Who can, write down the ideal solutions, but it's, he's a politician. So, and I, and I think he's doing a great job moving in the right direction" }, { "speaker": "stephan", "time": "01:24:25", "start": 5065.88, "text": "I say, yeah, okay, fair enough. I think, that's, one thing that maybe similar to the idea you were saying with the PEARL Act and so on, that maybe libertarians now, many of us might be, you know, broadly supportive of the idea. Now, I don't speak Spanish, I don't have like a lot of friends in Argentina, I know a couple people, but it's not that I know a lot of people on the ground, and so I guess in one sense you wanna be supportive, but in the other sense you're also Or it blows up because maybe he was, you know, making it good, you know, packaging it up for the IMF kind of thing, right? Just kind of branded in a way that would appeal to us as, let's say, libertarian free market guys, so I guess that's kind of the concern, but, as you said, if he, if he's, ideally stepping in the right direction, and hopefully if, if things that do blow up are at least able to be said, well, that wasn't his fault, then maybe that's," }, { "speaker": "philipp_bagus", "time": "01:25:23", "start": 5123.32, "text": "Yeah, of course they will, if it blows up they will blame it on libertarianism or Austrianism. Yeah, but the alternative would have been- To, to continue on the socialist path. You know, I, I know Millet, personally, and I know that he's generally, he's a libertarian and Austrian economist, so, So I, I trust, I, I trust him. when he says the, \"I have these restrictions and therefore I can, I cannot do it,\" yeah." }, { "speaker": "stephan", "time": "01:25:58", "start": 5158.31, "text": "Yeah, I see. I'm curious as well, while we, you were touching on as well, in Argentina and in various other parts of the world, we're seeing this phenomenon of people using stablecoins or fiat coins, let's say like Tether and things like this, I'm curious if you have any commentary on that. Like, do you think that that ends up supporting, like, I guess it allows people to escape from even worse fiat currencies, but in, in some sense, it end-- do you think it ends up also supporting the US government because ultimately they're buying? Fiat coins or stable coins that ultimately hold government bonds, US government bonds, and help fund the US government. I'm curious what-- or if you have any thoughts on that, on what that looks like from a monetary perspective." }, { "speaker": "philipp_bagus", "time": "01:26:44", "start": 5204.72, "text": "Yeah, the problem is here, of course, the involvement of the US, US government, yeah." }, { "speaker": "philipp_bagus", "time": "01:26:52", "start": 5212.45, "text": "Of course, indirectly it's, it's supporting the US also if, Argentinians use dollars, not only in TISA or something like this, but also on the ground. Yeah, if the US can export dollars to other countries, it means that they are exporting the inflation. To other countries and can be more ex-inflationary than, than otherwise, yeah. So, this dollar imperialism is, is increasing, yeah, by, by this, yeah. So So of, of, of course I would prefer, and, people would go as soon as possible to, to real money." }, { "speaker": "stephan", "time": "01:27:31", "start": 5251.0, "text": "Yeah. yeah, and I think, and to be clear, I mean, the way I see it is, you know, those of us who can access a US dollar bank account, we're not in a position to cast stones on people who can't access US dollar bank account, and that, that's why they're going for- Stablecoins, fiat coins, et cetera. So I'm not, casting stones on the individuals because, if I was in that situation, I would probably do the same, right? So I'm not blaming them, but it's just kind of there is a-- Of course, we want to get, get, you know, separate money from state and, that's the long-term, goal, but it sounds like, it seems like this is gonna have to be a, an intermediary step for a lot of people, and so that's just the Phillip, so listeners make sure, again, I'll put it in the show notes, mises dot org, the link, the book is called Full Reserve Banking versus the Real Bills Doctrine. Phillip, thank you very much for joining me today." }, { "speaker": "philipp_bagus", "time": "01:28:24", "start": 5304.28, "text": "Great, thank-- I thank you, Stephan, it was a pleasure, and thank you for all your great work, distributing, the ideas for lib-- of liberty." } ] }