Gold Research Videos

Conference presentation by economist Jesús Huerta de Soto

Professor Jesús Huerta de Soto: Good afternoon. It's a great pleasure to be here today. And first of all, I would like to tell you that I'm a professor of political economy, so I will try to deliver a lecture on economic theory. But, please, do not forget that there is not something more practical but a good theory. But before I begin, I would like to thank a lot Tuur Demeester for his great effort translating into Flemish my book, Money, Bank Credit and Economic Cycles. I thank you very much.

[applause]

Tuur Demeester:  It was a great pleasure. It was a genuine education.

Professor Huerta de Soto:  OK. I hope that the book has been already published, hopefully. It's the seventh language in which the book has been translated. Now it's being printed simultaneously in Germany, Italy, and France. And we will see the Chinese edition very soon. Altogether, the book has been translated and will be published into 14 different languages. I'm the first surprised for the success of this book. I wrote the book in 1997. And I think that, thanks to the huge financial crisis and economic recession, the book is so popular nowadays. [laughter]

Professor Huerta de Soto:  Well, all the problems we are suffering today began with something that happened on July 19th, 1844. In that date, in that fateful day, Peel's Bank Act was enacted in England. And Peel's Bank Act was a very important step forward in the right direction, because Robert Peel realised that all the problems England was suffering before 1844 - I'm meaning all the economic problems of bubble bursts, bubbles, financial crisis, and economic recessions England was suffering before those days ‑ were the result of a single fact, that they saw that bankers were issuing certificates of deposits of money in a greater amount than the true money that was deposited in the banks. In those days, the world money was gold. And bankers realised that when the gold was deposited in their vaults, it was either for a long period of time, their vaults, so they were tempted to begin to issue a greater amount of certificates of deposit than the true amount of gold originally deposited in their vaults.

Of course, these certificates of deposits were paper bills. I cordially disagree with James Turk. Those paper bills are not credit titles against anybody. They are just certificates of deposits, certificates of demand deposit. So, they act, as Mises called them, pure money substitutes. In the same way that people have a 100‑percent confidence of banks, everybody was using these paper bank notes as if they were gold in their economic transactions.

Of course, the temptation for the bankers was huge. Why not issue a greater amount of paper bank notes, of certificates of deposits? This is what, in fact, they began to do, since the creation of the Bank of Stockholm at the beginning of the 17th century, when they began to develop the business of creating banknotes, paper bank bills, in a greater amount than the gold originally deposited in their vaults.

This created, at the beginning, a bubble, because the injection of new money, a certificate of deposit, it's like a shot of drug, of heroin. The economy reacts in a way that Alan Greenspan called 'irrational exuberance.' Everybody's happy at the beginning. Because, imagine that bankers were spending these banknotes in consumer goods. Well, these would be affecting the prices of consumer goods, increasing them, but the problem is that these new paper bills were lent – this is the real problem – to entrepreneurs. So, a lot of entrepreneurs were able to find very easy and cheap financing, to any investment project, no matter how crazy it was.

So everybody, all investors were very happy with this new, cheap financing. At the same time, consumers were very happy. They were getting a lot of paper money that they could use to consume. And also, workers, very happy, a lot of demand for their services. Governments, very happy. They were seeing a lot of increase in their tax income.

But, what happened in those days? What happened is that the result of this inflation, this expansion of credit finance through the emission, the issuing of new paper banknotes was increasing the price level in England. And it was cheaper to buy goods and services from the continental Europe, so a huge increase in imports and a decrease in exports was the result. And as a result of that, as continental Europeans were asking not for paper banknotes but for real gold, bankers began to see losing their reserves in England. And then, all of a sudden, the bubble became a burst. This was the cycle that affected England before 1844.