Episode Transcript
Speaker 0 00:00:00 Well, thank you everyone for joining us. I'm Scott Schiff with the Out in Society <inaudible>, our senior scholar, Richard Salzman, who will be discussing, uh, distrust and hatred of finance. While Richard is offering his thoughts, uh, feel free to raise your hands with questions and we'll bring you up to the stage to ask once he's done with his opening. Uh, I encourage everyone to share the room. Uh, Richard, thank you for doing this topic. It, I think you alluded to this, uh, you know, during your discussion with David on anti-Semitism, part of a broader, uh, you know, this, this being the broader topic.
Speaker 1 00:00:42 Yes, thank you Scott. And, uh, thank you everyone for joining. Uh, I, uh, did, we did mention this, David and I, in that, uh, great session on the relationship between anti-capitalism, anti-Semitism, uh, and particularly as it relates to money making and merchant activity and lending. So some of that I'll cover here, but my main theme tonight is that the financial sector of any economy is not only productive and not as the detractors believe parasitical, but that it's actually one of the most productive sectors. Now, as an economist, I'm reluctant to start grading the sectors as more or less productive. They're all productive, but it, it is true that if I said, you know, basket weaving versus r and d on an, on an objective level, you can say that one activity is more productive than or contributes more to the overall result. And that is a controversial thing to say as I'll get into, to claim that this sector, and by the way, as opposed to, well, not as opposed to in relation to call it the extractive industries, agriculture, mining, fishing, extractive, economist, refer to as taking stuff out of the earth, the fabricating or manufacturing industries where they take the raw materials and turn 'em into something.
Speaker 1 00:02:08 Then what's called the, uh, service sector or retail, where you're distributing manufactured goods to the consumer. But then there is something called, and service sector, by the way, would include things like advertising and, uh, retailing and even lawyering. But finance, uh, we all know of Wall Street and we all know of the city in London as it's called, financial districts in Boston, Philadelphia, everywhere. Why, why finance? Why financial districts? What is it about this sector? How does it relate to the other sectors? There is, I'll point out today, and by the way, I'm gonna speak for about 20 minutes and then open it up for comments, um, criticisms and compliments questions. Um, quick thing about the relationship between it and other revolutions. There is actually, if you google this, something called the financial revolution. Now, what we're used to hearing is the industrial revolution, okay?
Speaker 1 00:03:09 That's a much well known, better known industrial revolution. The introduction of heavy equipment and machines and tools and factories and, uh, division of labor and assembly lines. We all know that. Why, cuz it's concrete. It's very tangible. It's easy to see. And, um, you can even see retailing and trading and exports, imports, things like you can certainly see farming. Uh, but there are main three main revolutions that coincide with the rise of capitalism. And by this I mean the last 400 years, and it's the financial revolution, the agricultural revolution, and the industrial revolution. Now, interestingly enough, the financial revolution comes first. Uh, it's not an add-on at the end. The Marxist theory will see is that finance comes way at the end and it's the most exploitive of all the exploiters. It's the most blood sucking of all the blood suckers. No actually historic give to look, uh, in Holland, in the Nets and elsewhere where trading was the beginning, not so much manufacturing and factories trading associated with finance and the lending and the financing of trade.
Speaker 1 00:04:23 The Amsterdam stock market, I mean, we're talking about the 15 hundreds and the industrial revolution is usually dated to the 17 hundreds. So the, the sector known as finance, and I'll talk more about what it is, uh, in a moment, but that's sector which we see today, even on Wall Street. Now, what, what predates, uh, these other more famous revolutions in sectors. Now, the agricultural revolution, I'll just say quickly, the idea of going from nomadic, um, hunter gatherer to, uh, uh, partitioned, um, property ranches, fencing, settlements, and not just that agriculture basically with private property, right? But also the implementation of technical means to agriculture enormously caused an agricultural revolution, meaning an enormous productivity advance on per acreage. Something that malus in 1798 couldn't fathom and imagine, cuz he is looking around himself saying, wow, I don't see food production growing very fast, but I do see population growing fast.
Speaker 1 00:05:33 And he had this very, um, pessimistic outlook on what would happen. Why? Cuz he didn't anticipate that the industrial revolution, the industrial sector would contribute, um, mechanical means of producing food. Well, finance is doing all this in the background and it's not really heralded as much. And in part you could argue, and this is part of the theme, maybe this is maybe the nicest thing I'll say about those who are prejudiced against finance, they're ignorant. They don't know. They don't know what it does. And often people will distrust or possibly even hate something if they don't get it, if they don't understand it, if it's mystifies them. Now, why professors and intellectuals and journalists wouldn't explain this to them as a separate issue. Why should they remain ignorant of this key sector of the economy is a question. But, but let's just say at the outset, it could be due to ignorance, but I think it's due to other things.
Speaker 1 00:06:32 Now, going way back, way back to a favor of objectives, Aristotle, sadly, Aristotles economics is not that good. His politics and philosophy and logic are very good, but he had the kind of conventional economic outlook at the time. Remember he actually endorsed the idea of slavery. Some people are just prone to be slaves in the economy. But apropo our topic tonight. He famously said, money is Barron. Money is Barron, money is not productive. But what did he mean by that? Well, he saw money being used. It wasn't barter in, um, ancient Greece. It was a fairly advanced economy actually. But his view was that no, the money is Barron argument is you cannot lend money and make money with any legitimacy. That to him was just incomprehensible. It was incomprehensible that anyone can lend money to another and get it back in principle. And that plus interest, that was seen as a theft of some kind.
Speaker 1 00:07:33 And if money is Barron, meaning not productive, uh, it seemed improper that anyone would take interest on money. Now, the real fall, the real fight against taking interest for money, even the idea that they would call it taking, that's very common in the literature, taking interest, not earning interest is uh, the medieval period, the medieval period, specifically leveraging off of love of money is the root of all evil. Leveraging off of a rich man shall not enter the kingdom of heaven leveraging off of Jesus through the money changers out of the temple. So in religious terms, and, and religion has a longer history, uh, being anti not only just money making, but money lending. And to the extent the Jews, for the reasons David and I talked about, specialized in this, a special hatred for the Jews. Not just ethnic, cultural, religious, but my God, they were also very good at lending.
Speaker 1 00:08:31 So they must be the devil because lending itself is bad. And so usually was considered evil. I think in Dante's Inferno, there's a level in hell actually for users, I forget what number it is, you can look it up to burn in hell forever. You guys who lend now usually in the beginning just meant lending an interest. It did not mean lending at a high interest rate. And that came later. Now, the real wonderful positive change occurred shouldn't be a surprise to this audience. During the enlightenment, during the 17 hundreds, there were the beginnings of a defense of lending. Um, um, um, his name escapes me from the moment, but a defensive, oh, Bentham, I'm sorry, the utilitarian Jeremy Bentham, a defensive usy in the mid 17 hundreds. Uh, an enormously influential defense of lending. Now, somewhat utilitarian argument, but the argument was this is a legitimate ac economic activity.
Speaker 1 00:09:31 What's being Lent is savings. What in effect is being lent is capital. And those who borrow are using it out of self-interest to go start a business or engage in some productive activity. So of course, anyone who arranged this, what would be wrong with compensating them? It was a very enlightened and important argument. And John Locke was, uh, favorable in this regard as well, a little bit earlier than Bentham and others. And Smith, Adam Smith and the Wealth of Nations has a discussion of banking and borrowing and lending. He's not quite as good as some of the others, but it's in there. So basically you get about a hundred years of a re of a recognition that there's something important about this sector. And of course, also this sector is growing in prominence and in visibility. So it's going to come to the attention of political economist to explain what this is and whether we should be for it or against it.
Speaker 1 00:10:27 Now, interestingly, the the term capitalism theism as a system has of course at its root capital. And I've written about this in my book in the opening chapter called The Etymology of Capitalism, the, the word origins. And so the word origin, of course, is capitalists capital. But here tonight we're really talking about what's called capital markets, sometimes called financial markets. And so that alone tells you that there's something very critical and crucial and central and core about the capital markets being part of capitalism, not just being part of capitalism. I would go so far as to say they're the brains of a capitalist system. Now you can take this metaphor too far and you can call manufacturing, say the muscles, or you can call agriculture or something else. So I, I, I don't want to anthrop, I I don't want to, um, anthropomorphize the economy, but in, in many crucial ways, it is true that the circulation of money and credit and borrowing and lending and investing, which is really what this sector does amounts to basically highly specialized brainiacs.
Speaker 1 00:11:48 And in some cases, many of them just nerds. I mean, that's true on Wall Street and elsewhere. I've been there, I worked there for about 20 years brilliantly figuring out where to invest money, where to invest people's savings. And they're doing this, of course, at a, at they're being compensated for this. And why would people give them their money? Cuz they're not themselves specialists. People who save money are not necessarily astute at investing money. They don't know the business world. They don't know the next new thing, the next new product, the next new company, the next new industry. Well, if you have a group specializing in that, focusing every day on that, and then out of self-interest trying to direct resources so they, uh, maximize what's called their return on capital, that's a very important function. And so the financial sector not only induces people to save because they can do something with their savings other than put it under a mattress and earn nothing.
Speaker 1 00:12:50 It induces people to save and invest. And that is a source of getting capital goods and capital goods, meaning the things that produce consumer goods. And that alone is, um, something that promotes the productivity of labor and therefore higher standard of living. So I won't go into a full fledged defense here at the financial secretary, but that's just a taste, that's just an indication of what this sector does. And by the way, epistemologically, how it actually promotes longer term thinking. Longer term planning, after all, saving and investment is not some, it's not living hand to mouth. It's looking forward and saying, I need to provide for my future. I'm gonna save money, but I'm not gonna hoard it. And same thing with any business, any business person worth his salt is looking way ahead and is not trying to make a quick kill or a quick fix, uh, a quick buck.
Speaker 1 00:13:53 And so contrary to, by the way, the myth that Wall Street is the short termist quarter by quarter myopic industry, and only the politicians in Washington give us a, you know, a multi-generational outlook. That's totally bizarre. Now, a couple of, um, reasons why people would distrust and hate finance other than they don't know what the hell it is other than ignorance. There is long term in the history of economic thought, the concept, two key concepts, which are anti finance. One of 'em is cracy. You don't hear that word anymore much. But, but in the founder's time, and it came out of France, by the way, cracy was the theory that all value came from farming, that only the farmer was productive and that anything outside of farming, including trade and exports, imports and man, including manufacturing, the beginnings of early manufacturing and definitely finance, what the hell are they doing up on Wall Street?
Speaker 1 00:15:01 Now, the Jeffersonian view in the founders period was only the plantations and the farms produced wealth and everything else was taken from that. I won't go into the details of it, but you can see why that would lead to a distrust of not just anything non-farming, but anything as remotely removed from Ron farming as finance. So actually the whole Jefferson Hamilton debate is in part comes down not, not only is it over federalism and other things, the role of the government, it is over this idea of which parts of the economy are productive or not. And it's not an either or for someone like Hamilton, it was, well, the financial sector is productive as well as manufacturing and, and, and farming. So they, they mutually support each other. But the Physiocrats had the view that it was a zero sum game, that what was ever gained up in trade and Wall Street and finance was at the expense of the farmer.
Speaker 1 00:15:57 Now, the other one coming later from March is the labor theory of value. So un so it's just a version really of cracy. Instead of saying farming is the only source of economic value, the labor theory of value said only physical manual labor creates wealth. And by the way, unfortunately this was shared by Adam Smith and Colonel Marks the first being allegedly pro market. He was. But then Mark saying, well, no, that's a, uh, an argument against capitalism. Uh, you can see why the labor theory of value would make people come to distrust and hate finance. And of course, marks very much did. He's the one who called financiers blood suckers. He's the one who contributed to others like later Rudolph Hilfer d writing finance capitalist study of late phase capitalism, 1910. So the theory was capitalism goes through these stages just as there's futilism and then capitalism and socialism.
Speaker 1 00:16:58 Within capitalism, there are stages according to the Marxists. And the last stage is finance. The last stage for them is the most exploitative, disgusting, unjustified sector finance. Now a quick comment on Kanes, cuz he contributes to this as well. And although he is not quite a Marxist, he is the British economist who most influenced the 20th century. Kanes also was bigoted against finance. He said the stock market is arbitrary. The stock market is a casino. All it does is, uh, benefit what he called the renters a French word for bond holders. And it contributed to that long bigotry. We hear about things like the idle rich idle. Why? Cuz they're just investing. They're not getting their hands dirty, they're not on the assembly line, they're just investing in stocks and bonds. That's so easy. Anyone can do that. They're lazy bastards who ought to be confiscated or even in the tax code today, if you call up the IRS and say, I have interest and, uh, dividend income, they'll say it's what?
Speaker 1 00:18:14 Unearned income. That's what they call it, unearned. What is earned wage tips, salaries, that the bias and the bigotry exists still today in the tax code. They call it unearned income if it's financ income. Gaines is a famous phrase in his 1936 book that influenced all US textbooks. After that we must euthanize the renters. Now, he didn't say actually kill them, he meant get interest rates down to zero so that they have no reason for investing anymore. So today, when you see Central banks bringing interest rates down to zero, I would submit it's not just what they claim to be an attempt to quote, stimulate the economy. It's also an animus toward lenders and savers. Why let them profit? Uh, why not bring interest rates down to zero?
Speaker 1 00:19:12 All right, a couple more things and then I'll quit. It's an interesting aside by the way, in Atlas Shrug, for those of you interested in Ayn Rand's, um, treatment of this as a wonderful two characters in Atlas, Midas Mulligan and Eugene Lawson. Now most, uh, fans of Iron will remember Midas Mulligan, the wonderful, I think he had Irish or Scottish origins, and he was the hero lender financier in Atlas Shrugged. And he went at things rationally and calculative and, you know, maximizing his profits. And he would finance industries and rearden metal and other things that nobody would touch. And it looked like he was a gambler. And someone said to him, Monte, you're a gambler. You're just a gambler. You, you, you're in the, you don't really earn this stuff. It's just arbitrary. And Mil Mulligan said something like, I think you hate what I achieved because you think what I do is gambling.
Speaker 1 00:20:09 And Eugene Lawson was, what did she call him? The banker with a heart. He didn't care about balance sheets and income statements and profit on loss. He cared about who needed a loan? I need a loan, please give me a loan. Oh, I feel so bad, let me give you a loan. And the loans would all go on default. Of course, I believe he was the banker who funded the 20th Century Motor Company. After gat left, after the Sterns, people took over and instituted the Marxist principle of from each according to his ability to each according to his need.
Speaker 1 00:20:47 Now, just recently, just to give you a flavor, if you think I'm overstating this, I just, it took me all of five minutes and I've read some of these to collect recent books on finance. Now, maybe some of this is due to the 2008 crisis. I don't think that's all of it, because this goes all the way back to Marks. But these are just titles of books that have come out in the last, I don't know, 10 years or so. Here's one by Divinsky in 2009, finance servant or deceiver financialization at the crossroads. Now, by the way, if you see the word financialization, it's the argument that the financial secretary's getting too big and it's like a cancer. And if it gets too big, it eats up the rest of the economy. <laugh>. That's, that's financialization. Now, there are a handful of economists out there who've documented the financial revolution of the last three or 400 years and knows that the sector is productive and, but they're a rare and, and, and quiet group relative to these others.
Speaker 1 00:21:50 Now here's another one from, uh, uh, 2010 Mirai, the Violence of Financial Capitalism. Here's one from 2013, profiting Without Producing How finance exploits us all. Here's one from 2014, just money, how society can Break the Despotic Power of Finance. Here number, here's one from 2015 Hudson, killing the host, how financial parasitism and debt bondage destroy the global economy. 2016, a best seller from foyer horror makers and takers, the rise of finance and the fall of business. You see the either or here you see the zero sum, it's Main Street versus Wall Street, and which one's the parasite Wall Street and which one produces stuff Main Street. It's just the Marxist theory of class conflict brought to bear on the financial issue 2016 by Westra, unleashing Usri, how financialization created and then Swallowed Capitalism. Couple more. 2017, uh, an author named Standing The Corruption of Capitalism, why Renters Thrive and Work Doesn't Pay Renters or Bond Holders.
Speaker 1 00:23:21 Uh, here's one from, uh, one more 2017 by Duran Fictitious Capital, how finance is appropriating our future. Marks used the phrase fictitious capital fake. And even some of, I hate to say this, even some of the Austrian economists who tend to be free market, if they see stock prices rising for any, any sustained period of time, say during the twenties or during the 1980s, they're prone to calling it what? A bubble. A bubble, an inflated fake thing prone to being popped, always do say to central banks. And it's not, by the way, the ask me in the q and a, if you will, the, the role of central banks and government in finance. You notice, I've not focused on that. I focus, I focused on finance as a legitimate private sector subset of capitalism. But, uh, part of the problems we're dealing with is government has corrupted the financial sector. Government has co-opted the financial sector. So sadly, today, many of the, much of the animus toward finance, bailouts, Fannie Mae, Freddie Mac, the Fed, things like that, inflation are not due to the private sector of a, of a capitalist country. But due to government intervention, central banking, the government borrowing with excess and things like that. Very sad.
Speaker 1 00:24:44 Um, let me just say quickly, for those of you who wanna investigate this more on the positive side, there are about 10 or 12 really fabulous heroic financiers in history. Uh, it's mostly US history, I'll give you here, but some of them are foreign. Robert Morris, 1734 to 1806 helped finance the American Revolution of a Philadelphia banker, Alexander Hamilton, who started one of the oldest banks in America, the Bank of New York, but also the Great Treasury Secretary under Washington, Stephen Gerard, 1750 to 1831, Nathan Rothchild from Germany, 1777 onward, Marcus Goldman, who would be part of Goldman Sachs later all the way back to 1821. He was born to 1904. So he, he, he straddles the entire 18 hundreds. Amazing. How about Henry Wells and Bill Fargo? Wells Fargo, which have started in the mid 1850s. Um, Jay Cook, who was a great financier, Andrew Mellon from Pittsburgh.
Speaker 1 00:25:51 Well, we know of Mellon, uh, Carnegie Mellon University, but Andrew Mellon was a great Pittsburgh banker, 1855 to 1937, no Central bank at the time. No federal reserve, no government intervention in the economy. You get these giants, these giant names. He, well, also was Secretary of Treasury, by the way, under Coolidge and JP Morgan, probably the most famous. 1837 to 1913 symbolically died the year the Fed was formed. Bank of America, an immigrant from Italy, AP Gini started Bank of America, 1870 to 1949. Are his dates more recently, Bernard Baruch, I think this is a Baruch College in New York still, 1870 to 1965. Charlie Merrill of Merrill Lynch, 1885 to 1956. He lived more recently. Henry Kravis of K K R, um, uh, invented LBOs. Mike Milken, who invented junk bonds still alive. 1946, he was born. Warren Buffet. I would include even George Sorrows, even though he is a lefty.
Speaker 1 00:26:59 There are many wonderful, amazing stories of productive financiers in history worth studying, worth reading about. There are decent biographies on some of them. And so I just make this like final pitch for financial sector. Under free market system is very, very important. Very, very productive. A key allocator of capital, a key instigator of savings and investment. We can talk about technical things like PE ratios and interest rates and mergers and acquisitions and speculation and derivatives and stuff. But those are the technical interesting but technical aspects of finance that sometimes people will say, what the hell is that all about? That seems contrived, that seems made up. And so when you get a combination of bigotry that says something like this, I don't believe that sector is productive. In fact, I think that sector is parasitic. Point one, 0.2. They actually make more money per per person than any other sector.
Speaker 1 00:28:06 So it would be one thing to say, oh my God, that sector is parasitical if they made, you know, very little income. But the, the, the thing that explodes brains and makes people very envious is they don't, they not only think it's unearned, they're the highest paid people in the economy, <laugh> usually. So, um, unless you understand, you know, in a free market, of course they would be paid more cuz they're, they're contributing more to the overall success of the economy. So, looked at, from my perspective, there isn't any paradox at all. If they're not, if they're not only productive, but they are in effect, the brainy acts, the nervous system of this body, we call the economy, then it isn't, um, uh, a mystery at all why they get paid so well. And also they're rare. There's just few of them. There's few, there's very few people who can do this and do it well. And many of them on Wall Street, you will know or burnouts that it, it's hard to do this for more than say a decade. So often they'll just burn out. They'll, they'll work so hard in long hours and it's so taxing mentally that, um, you know, often they'll just quit and go on to do other things. But for the period that they're there, um, they're just amazing. So, so I'll leave it there and take, um, questions, comments, compliments, criticisms. Thanks.
Speaker 0 00:29:26 Uh, I, I thought it was a great presentation. I've got some questions myself. Uh, I'll first, uh, defer to, uh, our founder David Kelly, and also our C e o Jag. Thank you both for joining us.
Speaker 1 00:29:41 Go ahead, David.
Speaker 2 00:29:43 Uh, thank you and thank you Richard. Um, your, your knowledge of this industry and its history is prodigious. Uh, I wanted to ask you two questions. One is, um, some years ago I was talking with, uh, bill Dunn. He was a very highly successful, uh, commodity trader, uh, very wealthy and supported a lot of libertarian organizations. And I found myself, um, alone with him one time at a, uh, recent foundation meeting. And I said, okay, what bill? He, by the way, he was also a physics PhD, so, and then got into finance. Um, so he was a good, a really good thinker as well as a, um, TruD investor. Anyway, I asked him what, you know, okay, tell me, I'd just been writing about this, uh, some of the issues about Milkin and so-called decade of agreed. And I asked him, well, what, what in your view is the, um, is the function, the economic function of finance? And he said, well, it's really two things. One is, uh, it provides a market for savings and investment, which Richard, you have talked about a lot. And the other thing he said is, it provides a market for risk offloading and risk, and adjusting how much risk you're willing to bear. That may be more commodities related than anything else. And I was just wondering if your thoughts about that as a, as a also one of the functions of Wall Street.
Speaker 1 00:31:19 Yes, I would, yes. Good, good, David, I would endorse that idea. Now, the market, the, uh, market for risk or risk management, you could include, by the way, within finance, the financial sector, insurance people often don't put the two together, but insurance and banking, uh, insurance that, yes, insurance does something very similar to banking in the sense that it takes not your deposit, it takes your premium payment and pools. It does this sound similar to pooling the savings and investing. And the insurance company does invest, insurance companies are full of investments in stocks and bonds and things like that. And then by actuarial calculation, they pay out when there's a loss of life or property due to fire. So that whole, there's a science to that of course. And there are people called actuaries. And on Wall Street there are underwriters. Now these people are mathematicians.
Speaker 1 00:32:17 So that alone tells you something about, well, why would an industry like that hire? They're not just brainiacs. Um, actuaries are some of the smartest people in the country because there's a science to this and there's a science to risk. And risk involves probability and probability of loss. And how do you price that? That's what a lender does when they charge an interest rate. That's what an insurance company does when it, it charges a premium rate. So, so was it build on, you said Build on is absolutely right about this. Now here's another way of looking at it. You make a lot of money in a business like you specialize in, right? But you don't know other businesses. You know the business you are in, but you make amount of money on it, and you don't wanna stick it in your mattress. So you give it to an investment advisor or a banker or Wall Street or trust support department.
Speaker 1 00:33:00 They specialize in finding the companies and the products and the industries of the future, the ones that will make money and they invest it for you, and then you get the return on that investment. But of course, they're going to be paid for having found this for you because they're the founders, they're the brokers, middlemen generally, you know, David, in all sorts of trade, retail, finance, whatever it is, the middlemen have always been distrusted as chisels and, uh, you know, taking, taking their pound of flesh and taking their commission, whereas in fact they're, they're productive too. And financial intermediation, that's the fancy word for a broker between savers and those who need the savings, who lend, uh, it's a very productive activity. So, but you mentioned he was in trading commodity trading that alone is distrusted. So like, even if people say, well, I understand why the stock market exists in terms of company raising money, you know, and for initial, uh, offering, they don't understand what the point of the trading is every day.
Speaker 1 00:34:02 Well, the, the trading every day is you get to liquidate your investment whenever you want, which is unlike, you know, your house or unlike a pro proprie, if you own your own company with stocks and shares as they call them, or, and, and let's include bonds, at any point you can call up your broker and say, sell, I want the cash. And so the mobility and the liquidity and the movement of capital is promoted by financial markets as well. And that's a very good thing. And people can diversify their investments. That's another big principle, right? People, investment advisors will tell you, don't put all your eggs in one basket, uh, diversify your holdings. And, uh, that's another, uh, management of risk, isn't it? So that's just a short answer, David.
Speaker 2 00:34:46 Yeah, thank you. That's great. Um, I wanna ask, this is a second question I have, and you can take it now or, um, yeah, uh, along the way, but, uh, over the years, uh, I've seen numbers about the relative, um, income and, uh, total, you know, GMP related wealth, uh, that goes to the different sectors of business, actually you just define them. Finance, agriculture, manufacturing, business, et cetera. Yeah. And it seems like the, the financial sector has, you know, it drawn more funds is relative than rich on a microscopic level. Yes. And I'm wondering, I I've always suspected that's probably the government, um, running the banking system, but, uh, I'm curious about that, what
Speaker 1 00:35:36 Your thoughts about that are. Yes, apart from the role of government, which is important, if you just strip that out and ask yourself why would certain economies, you know, say, specialize in agriculture or manufacturing or trade or finance? And, and this gets just back to the basics of division of labor. What, what is available locally. And it's a perfect, it can be a perfectly natural thing that some specialize in and do better in agriculture versus the others. Hong Kong, for example, and is, is an example of what is Hong Kong almost no manufacturing and agriculture, almost entirely trade and finance. Now, is that because the government twisted it into that position? No, it's a rock. It's an island on a rock, <laugh>, and, and specifically has a history of people fleeing the mainland. And that's another principle of finance, by the way. Unlike, uh, real estate, you can't pick up your real estate and flee status.
Speaker 1 00:36:41 It's often hard to pick up your physical labor and flea status. But capital can be sent across the border, and the Jews used to do it with diamonds. And today it's done with electronic, uh, keystrokes and sent money is sent to the Cayman Islands. So the idea that, uh, finance finances like Quicksilver or Mercury where it can be sent is another benefit of finance. But, but, but the, but the basic answer, David, is that, uh, just as people specialize in what they're good at and then trade their surplus for what they need from others, com countries end up doing that at an aggregate level. And some will be more financial oriented and some will be more agricultural oriented and some will be more manufacturing oriented. As a country develops, it goes through that, um, shift. So the US for example, at 1900 last time I checked the number of people in agriculture was something like 35% of the labor force.
Speaker 1 00:37:41 Today, it's three. Um, why, why cuz we're starving? No, because, um, the labor force in agriculture is so much more productive and the financial sector is much bigger in the US Why? Because there's more brainiacs and knowledge, uh, finance in the US than there is elsewhere. So, but the second issue you raised should be mentioned, but in, in case we miss it tonight, my point about government, the, the problem in all this is if the government, well, not, let me not say conditionally, if when a government becomes status, um, the first thing it does other than becoming militaristic is get its hands on. Finance is get its hands on money. So money is like half of every transaction, right? <laugh> in a, in a division of labor, monetary economy, money's exchanged for goods and services, right? So if you can get your hands on money, if you can become the monopoly issuer of money, you enormously increase your control over the economy.
Speaker 1 00:38:47 So if you can create a central bank and then cause call everyone else counterfeiters as the US did with the Fed in 1913, or go off the gold standard, not just, not just monopolize money, but then be able to issue it without convertibility, without redeem ability, without limit. In effect, you can enormously finance government activities without taxing people. It's a, it's actually brilliant. It's a brilliant all albeit surreptitious nefarious way of financing government. Now to the extent that happens, it co-ops the finance sector, you know, the government starts borrowing a lot relative to corporate borrowing, or the government starts manipulating exchange rates and, and fx uh, currency trading, you know, becomes a big part of trading under the gold standard. There's no currency trading, uh, under the gold standard. Every currency is fixed in value to another. And there are literally no currency traders. So the minute government comes in and wrecks money, it creates these whole sectors of people who are trading financial instruments and assets, which they would not deal with and, and, and trade in a capitalist setting.
Speaker 1 00:39:58 So in that regard, the financial sector is inflated. And, and some of it is quote unquote fake, but it's not really fake. I mean, people still need to deal with floating foreign exchange currencies, you know, so it's a legitimate service provide provided by Wall Street. But we do have to remember that if government were not in, uh, in vaguely itself into the sector, there's lots of derivatives and currency trading and things that would not be necessary, but is necessary cuz people are trying to immunize themselves from crazy government financial dealings. So I didn't wanna leave that out because that will be something people bring up a lot, that the financialization is the concept that you are talking about, this greater and greater wedge that we seem to see of income earned in the financial sector versus earned in other sectors in a free market. Um, that would be perfectly legitimate. It's just the division of labor and specialization. But today we live in a world where governments at every level and every part of the world is intervening and intervening in this very financial sector way, and that does inflate these financial sectors.
Speaker 2 00:41:08 Wow, Richard, that is, uh, uh, amazing <laugh>, I, I I I, I'm gonna have to listen to this again so I can digest everything. That is just amazing. Thank you. I, I had no, no clue about some of that. Um, so thank you, David. Great.
Speaker 1 00:41:23 Thank you. Thank, thank you, David.
Speaker 0 00:41:26 That's great. Well, um, I do want to, uh, give, uh, Clark a chance. Clark, thank you for waiving.
Speaker 3 00:41:35 Oh yes, thank you. And thank you, Richard. Again, an excellent, excellent presentation. Um, I just had a question about, uh, it seems like there's a bias even among free market, uh, you know, free market adherence, uh, even in money and banking, there seems to be a bias against high interest rates. Uh, you know, and of course we, we know that with high interest rates, of course, people save more. And often it's, it's just really, it results in the liquidation of mal-investment. And, uh, but we still, we still have this bias, it seems. And in fact, um, I was trying to think, uh, historically, I don't, as the fed, as e Central Bank ever artificially raised interest rates above what, you know, we would consider what would possibly be the market level of, of interest. And I thought, you know, I know, I think Milton Friedman and his book way back, you know, way back in the early sixties, he, I think he tried to make the argument that during the Great Depression, the Fed kept interest rates too high. And then I was also thinking about when you and I were in college, Richard, I know Volker, you know, they had the misery index under Carter. Now of course, none of us are Carter or even maybe vulgar advocates, but, but I mean, there was a, a, you know, recession at the time and you almost had to have higher interest rates. So, so I wa I wonder if you could, uh, address that.
Speaker 1 00:42:53 Well, that's a good question. And the first thing I would say is the minute we talk about a context of central banking, which is not just a government monopoly and of, of fiat money, they call it fiat for a reason. It's mandated, it's not voluntarily accepted money, Fiat means, uh, coerced. And then not just that, but invertible, I mean, the Fed briefly was on the gold standard, so it monopolized the dollar, but issued a gold convertible dollar that lasted about 20 years. And then they went off the gold standard in 1933. That didn't take long. And we've been off the gold standard completely worldwide since 1971. So that's 50 years. Now, the interest, the, the, the issue of interest rates, well, my point about central banks was, if you have that context, Clark, I would say almost everything is artificial. But that's a tool fulfill.
Speaker 1 00:43:43 I mean, it's, it's not that, you know, everything is arbitrary and nothing is real. Whether it pump becomes much more difficult to figure out whether a particular price and, and an interest rate is a price. An interest rate is the price of borrowing and lending money. It's a cr it's one of the most crucial prices in the economy, actually. Um, there is this difficulty of disentangling, what part of it is real and what part of it is fake due to fake money do due to the, the central banks. But longer history, this might interest you. There are books on the history of interest rates that would put most people to sleep, I suppose, but wonderfully constructed charts of actual interest rates. And guess what the principle is? The principle is the more civilized you become and the more enlightened and the more there is a protection of property rights, you can tell where I'm going here, what interest rates go up or down.
Speaker 1 00:44:39 And the answer is they go down. Now, they don't go down to zero, but interest rates reflect time preference. This is a very philosophical concept. Time preferences, whether people are future or present oriented, a very myopic orientation, a very near term range of the moment. Orientation is someone who discounts the future enormously and they prize and put a premium on the present. That's a high interest rate. Interest rates literally come from time preference. I mean, they come from borrowing and lending in practical terms. But in terms of the epistemology of interest rates, interest rates are gonna come down. If people are longer range in their attitudes and longer range in their planning, longer range in their saving and investing, they don't place as high a discount on the future if you get the idea. So that has been the history of capitalism. The more enlightened and the more capitalistic Britain and America and others became, you can chart this, it's actually, it's like a fever chart of the advance of civilization.
Speaker 1 00:45:48 Interest rates come down. Now, unfortunately in recent times, you can't take zero interest rates as a sign that we've become very civilized. I, I wish that, I wish that were true. But of course, zero interest rates means the lender isn't being compensated at all. The he's being robbed, he gets no interest. And, and, and to the extent this is, and it is largely to the exact, um, instigated by governments trying to finance themselves cheaply. That is really what's going on. Governments are overextended, the welfare state is unsustainable. They cannot find finance it with taxation or else there be taxables. So they use other forms of taxation and one of them is inflation. One of 'em is they just print money and make prices go up. And that's like an indirect inflation that the consumer doesn't attribute to the government. It attributes it to the local grocer or gas station owner.
Speaker 1 00:46:47 And same thing with borrowing government. Borrowing is just deferred taxes cuz eventually they have to pay the money back with taxes. So by borrowing a lot, they wanna say, wow, we can't pay much. We're borrowing so much. We need to keep the interest rate down, the interest expense down on our borrowing. And that's what's happening. The economist today call it financial repression, repression as in dictatorial. The repression in the sense of keeping interest rates artificially low, not because they care about people borrowing cheaply, but because they care about the government borrowing cheaply. So that's, it's a huge topic as you know, Clark, the raising and lowering of interest rates, we could go into that as well. Uh, the Fed's raising interest rates now to quote fight inflation. It's a totally bogus approach. They had caused inflation by printing too much money. What is the solution to that?
Speaker 1 00:47:44 Don't print as much money. Their solution though is raise interest rates and cause a recession is just maniacal, they will cause a recession. But see, you don't fight inflation by fighting production. You don't fight inflation by throwing people out of work. Inflation is a debasement of money. It's a decline in the value of money. It's a decline caused by the Fed creating too much money. They just shouldn't, they should just stop creating so much money. But why are they creating so much money to give it to the government, to give it to the propagate Congress who's spending, uh, beyond its means. Uh, that's a mouthful, but sorry about that.
Speaker 0 00:48:22 <laugh>, this is gonna make a good recording. Um, JP thank you for your patience.
Speaker 4 00:48:29 Thank you, Scott. Richard, let let me just start by saying that you make it impossible to maintain an inner dialogue and prepare your question. Uh,
Speaker 0 00:48:40 <laugh>, you're cutting out a little bit. It
Speaker 4 00:48:41 Was, yeah, that, that was mind blowing. Um, and I, I, I always, uh, replay my, my rooms at least once because, uh, of the, the sheer value of what I get from, from, from these interactions. Um,
Speaker 1 00:48:59 Thank you. Thank you jp.
Speaker 4 00:49:01 It is to a, um, uh, an interactive podcast, top five Nation podcast. So
Speaker 4 00:49:08 I wanna thank David as well, uh, for maintaining this, this thi effort going, uh, with the audience that we get. But, uh, I I, I, I really derive a lot of value from, from coming in here that said, uh, Richard, I remember that I've been on this rabbit hole of, uh, investigating finance out of my dissolution with, um, I may had the luxury of having come from, from the two extreme stands, finance from extreme hate to extreme love to extreme hate again, and now somewhere in the middle. And I, it made me revisit, I think it was Actins, um, <inaudible> and Markets. Is that, is that the, the author?
Speaker 1 00:50:03 You're breaking up here so I couldn't hear fully what you said. What was the question?
Speaker 4 00:50:08 Uh, so, so it made me revisit, I don't know how much you didn't hear, but, uh,
Speaker 0 00:50:15 You bring up Lord Acton
Speaker 4 00:50:16 Lord. Yeah. Morals and markets. What is it by Acton? Um, oh, it, it became kind of like the, the, my, my current thing, I'm, I'm trying to think about it. And my disenchantment again with finance came from the crypto scam that, uh, is turning it all out to be,
Speaker 1 00:50:42 Yeah, well if I, you're breaking up again. So let me just, uh, in the interest of time, let me jump in cuz I think I know where you're going. Yeah. But by the way, I, I myself have gone through hate, love, hate with finance, being in finance all those years, I loved finance and I could see straight up that it was productive. But I, I myself remember a, uh, talking to colleagues on Wall Street and elsewhere, many of whom were multimillionaires, and I would ask them what if they could explain, uh, the productivity of what they were doing and they couldn't. It was amazing to me. And, and it came with guilt, which is understandable if you can't explain. I remember, um, was it bonfire to the vanities, a book in the mid eighties by Tom Wolf? I think Tom Wolf was actually right-leaning or bonfire.
Speaker 1 00:51:30 The vanities had that scene where the bond trader is having breakfast with his, I don't know, six-year-old. And the six-year-old asks him, daddy, what do you do for a living? And he couldn't explain it because he is a bond trader and his, but his conclusion was, I must be a parasite. Cuz if I can't explain what I do every day to my daughter, then I'm probably not doing anything now in, in fact, the answer is, what I'm doing is so conceptually advanced. It would be like Einstein, uh, trying to explain to his six-year-old daughter what he does. The answer is not, therefore, I'm a parasite. The answer is, a six year old's not gonna get a high, highly conceptual answer. Now, if she, if he was a fireman and she said, daddy, what do you do for a living? He would say, I pay, I save people from fires and here's a match. You know, she'd get it. So that is very common. But let me just say something JP quickly about scams, um, Ponzi schemes, anything, uh, fraudulent that happens in that leads to, you know, bailouts and stuff. Every industry has frauds, every industry has scammers. Enron, you know, wasn't a financial institution. It was a trader of energy. Um, not to just pick on, uh, Enron, but, um, the issue is whether the financial sector has a disproportionate, uh, number of these people. And actually the answer is they have a disproportionately low number of people. But,
Speaker 4 00:53:02 But from the point that I was trying to make that I couldn't finish is, is, uh, because of the, the connection, um, what I'm I was trying to get at is that maybe the fact that the, the, the, the principle of finance, which is money is fraudulent, doesn't make finance extremely prone to fraud. Because when, when things like in modern finance, when they became instruments, things like futures and, and, and leverage and many, many, many things that are very, very high risk speculative, um, yeah, began to appear only because the, the, the, the, the unlimited supply was not money. And that <inaudible> in its core. Yeah.
Speaker 1 00:53:53 Well, let me, let me just say that just as I believe the, um, hierarchy of the sectors leading people to think finance is detached from reality and therefore illegitimate, you know, it's not farming, it's not manufacturing, it's not even retail trade. It's this shuffling paper on Wall Street with white collar, not blue collar workers. It's similar with the, the principle is similar with money, stocks, bonds, mortgage titles. These are claims on wealth. I mean, they are wealth in the sense that they're claims, but they have a derivative value money as opposed to a barter economy money as a medium of exchange. That's why they call it a medium. It's in between enormously facilitates the trading of real wealth, right? But it also represents wealth. So just as in epistemology, we want our words to represent real things. We don't want nominalism, we don't want names detached from real things.
Speaker 1 00:55:02 We also don't want monetary nominalism, we don't want financial sector nominalism. But the government has given us that they've given us money not tied to gold, not tied to precious metals. The free market gave us money that was tied to reality that gave us, uh, redeemable convertible monies. But it, it should be remembered that possibly one of the biases and and bigots, bigotry and hatred of the financial sector is, uh, the marxian hatred of private property. Private property requires legal instruments, uh, evidencing your ownership in things. And that's why they call them shareholders. They have shares in a company. There are stock, they are evidence of, of titles to private property. And money is that way, and stocks are that way, and bonds are that way. And I think, as I mentioned, mortgage titles, you can think of a a whole bunch of things, but it, it could be the hatred of private property itself. You would hate the instruments that facilitate private property ownership and exchange. And that's what these things are. But in a, in a real world capitalist system, money is not this floating abstraction printed without limit and invertible into nothing. That's the status system. So we have a very sad situation today where people maybe come to hate finance because government's corrupted it.
Speaker 0 00:56:30 Yeah. Um, that's, uh, great. I do think one of the most important points you made was about how, um, you know, there are some people today that are upset about finance being more of a, an agent for Stateism. Um, and you know, and, and that doesn't take away from all of the just reflexive anti finance, uh, people out there. A actually some of what you said about the, uh, the farmers, uh, you know, at least maybe 200 years ago, it was just an honest, uh, misunderstanding about what finance is, but it changes over time.
Speaker 1 00:57:12 Yeah, yeah. So it takes a special kind of analysis to say, you know, say in 2008, uh, finance is a productive sector. If the government gets involved by saying, Hey, everyone should be able to get a mortgage, uh, regardless of their financial condition and regardless of whether they put anything down and, and regardless of a blah, blah, blah, blah, blah, in order that everyone own a home. You see how you corrupt the whole mortgage sector. Now, why would Wall Street and mortgage sector get blamed for this? They could have pushed back, I suppose, and said, get the hell outta here. We don't want Fannie and Freddy. But the government was lowering lending standards in order to promote a national goal of higher home ownership, ignoring the underlying reality that certain people couldn't own, couldn't afford homes. So they just lowered the standards. And then surprise, surprise, people started defaulting on their mortgages.
Speaker 1 00:58:09 And what did they say? Wall Street greed did it, or predatory lenders did it. What what do you mean predatory lenders? The lenders lost money. People borrowed money and then defaulted. So who was the predator? They were predatory lender. It was predatory borrowing borrowers, predated financial institutions. They robbed them. They went to financial institutions and said, give me money and I'm gonna go buy a house and then default. And so the bi the bias in the bigotry is so enormous that even in cases where there's predatory borrowing promoted by the US government through Fanny and Freddy is flipped into being something that is predatory lending, which is bizarre because if you make a loan and it isn't paid back, you have been robbed and you'll probably lose your lending job. The predation is the people who, uh, borrowed it and then didn't repay, which were trillions, trillions borrowed and didn't repay, but they were seen as victims, not as perpetrators.
Speaker 0 00:59:16 Yeah, it's, uh, become almost a backdoor redistribution. But, um, that is, uh, this has been such a great, uh, episode that we had. Um, we could have done another hour on it. Uh, thank you so much for doing this, Richard. Uh, do wanna let everyone know that, um, Tuesday, Lawrence and I at 4:00 PM Eastern will be back on Clubhouse for a happy hour. And then, uh, Wednesday of next week at 6:00 PM Jag will be interviewing Esther Cheki. Uh, and she is the mother of, uh, at least two major CEOs. Um, so, um, look forward to hearing her story on raising, uh, successful children. She's got the credibility for it. Go ahead,
Speaker 1 01:00:01 Richard Scott, I just wanted to thank you David Clark, jp, others who chimed in. Um, I enjoyed it. I hope you did.
Speaker 0 01:00:10 Yes, absolutely. Thank you. Thank you for a great room.
Speaker 1 01:00:13 Thank
Speaker 0 01:00:14 You all. Thanks everyone. Thank you.
