 So I was very glad to see one of my slaves, that is doctoral students sitting in the front row. So he will do the beeping because I always screw up if I have the beep on their hand then I need to talk and so on, I never get it done. So I can focus on my manuscript and the slides will follow us through the invisible hand. It will be invisible to you. So our subject is the ethics of money production. We'll first start with a couple of definitions. So ethics is a body of systematic normative propositions, often also only about a type of human action, but can also be about human actions in general. So we have here the distinction to make between positive and normative propositions and economic science. We're typically concerned about positive propositions that are statements about matters of fact, whereas normative propositions are statements about how reality should be. Of course, in ethics and we are concerned about how reality should be, this is the difference as compared to a positive proposition such as the increase of the money supply, an increase of the money supply entails higher prices than would otherwise have existed. It is customary to make distinctions and philosophies very often make them between morals and ethics, but I will leave this aside in my talk today and also in my book, by the way, I've used these two terms as synonyms. Within ethics, we have two, broadly speaking, we have two approaches. One is the approach of deontology and the other one is the approach that could be called consequentialism. In deontology, we try to identify acts, so we qualify acts as being intrinsically good or bad. And with a consequentialist approach, we judge the goodness or badness of actions by their consequences. And today we will be mainly concerned with this second approach, which will allow us to bring economics into play because economic science being a science of the causal relationships between human actions and their consequences and also between the causes of human actions and certain human actions. So human actions are both caused by previous events and are themselves the causes of subsequent events or have consequences. So we can apply economics to understand these consequences and thereby judge whether they are good or bad in the light of these consequences. Another approach to ethics, of course, and this is one of the first approaches that has been applied was to use religion as a source of ethics. And this will not be our approach, but it's an approach that can be taken to especially to the case of money. So one of our faculty members here, Gary North, has written a book on honest money which tries to derive the principles of a good monetary system from biblical teachings. So we have fear, if you click one further, if you get the book cover of North's book. So it's on sale here, little advertisement for a colleague because I will do advertisement for my own stuff later on. Ha, ha, ha. Much has been written about ethics and monetary things as far as the acquisition and use of money is being concerned. This is a great classic actually. So I mean, if you look for example at the Bible which is full of references to monetary problems, problems of banking, problems of how to wisely use money and problems of how to acquire money, not to acquire money and so on. So this has been there from the dawn of times such teachings have been with us and still occupy people and also scholars nowadays. But the focus of my talk and also of my book is different. It concerns not the acquisition and use of money but the production of money. This subject has been neglected. It has been dealt with by few scholars on a systematic basis. The first one was Nicolas Oresmi in the 14th century, a French Scholastic. Scholastic is a philosopher working on the basis within the paradigm established by Saint Thomas Aquinas. So it's the application of realist philosophy and Oresmi was a scholastic working in particular in the realm of physics, geometry, but also economics, in particular he wrote the first treatise dedicated exclusively to an economic subject, namely to the subject of money. The title of his treatise was treatise on the alteration of money, on the modification or change of money. But I won't go into this because today I want to approach my subject from the point of view of the history of economic thought but go more directly into the substantive matters that concern us. So the point is the production of money has been neglected as far as ethical questions are concerned and the production of money appears to us as far as production techniques are concerned, so we have to hand subject production techniques to an ethical question that is, we can raise the question, is it intrinsically or good or bad to use this kind or that kind of money production? We can apply the same question to the social organization through which we, money production is being carried out, firms, governments and so on. And of course, speaking of governments, we will especially be interested in the use of coercion, which is of course a characteristic feature of governments. So let's turn to our lecture outline here. You see the cover of my book, which is on sale here right next door. It's not very far. So if during the lecture you have the urgent need, you feel it, but you must immediately get a hold of one of the few copies left because all your evil competitors in this room get a present. Well, then don't hold back. Jump there, I will excuse this. I also have a few spare copies at home probably which I will then sell at higher prices to the highest bidders. Well, so our plan today is to go through four steps first we'll talk a little bit about natural monies and so the ethical and economic issues related to natural monies. And then turn to the alleged shortcomings of natural monies and finally in two steps analyze the logical alternative to natural monies namely fiat money and talk about their disadvantages. Of course, these has already been highlighted here by several other speakers at this conference. And I will go into more detail explaining why fiat money is a tool of expropriation and why fiat money is destructive. We will cover quite a ground. So I will sometimes I will move fast. We will go through not all points in great detail. I will go into more detail tomorrow or is it the day after tomorrow, I don't remember in my lecture on deflation. So those of you who are interested in these monetary issues, the deflation lecture is the natural follow up. So let's turn to natural monies and we'll start off with a quick typology of monies and a few definitions. And natural money is a generally accepted medium of exchange that is produced and used under the respect of private property rights. Now what are concretely speaking natural monies? Typically we have here commodity monies and speaking of commodity monies, in particular the precious metals. If we look at the history of monetary history, the most important type of money that has been used has been silver. There's a lot of talk in Austro-liberal Italian circles today about the gold standard and the importance of bringing back some form of the gold standards and so on. But one should not infer from this that Austrians somehow have a fetish with the yellow metal. It's not that Austrians want to have gold money circulating gold coins and so on that this is the highest objective of an application of Austrian monetary thought. That's not true. Austrians ultimately argue for is currency competition. It is a free market in the production of money and the production use of money just as there should be a free market in the production and use of any other good, lamps, stools, chairs and so on. So, historically speaking, gold has been used as money only during a relatively narrow time frame, more precisely as from the late 19th century on board and then through to the early 1970s. And it actually circulated in the form of coins and so on during a small part and only in certain countries during that time. Germany had an effective gold coin circulation, France as well. But other countries, in other countries, you virtually never saw a gold coin circulate, a gold coin actually being used to make payments. For example, in Britain, even during the time of the gold standards, few Brits actually used gold coins. They paid with checks. That was the main means of payments that they use. And of course, the reason is that gold has a very high purchasing power per weight unit. So even today, let's say you take a standard gold coin which would be, for example, be the French 20 franc piece which is about five grams or six grams in weight. So that makes 0.2 ounces to give you any idea. So it's fairly small. It's about as thick as circumference as my thumb. That's a small gold coin. And its price on the market is something like 200 euros or so. So which makes $2,500. So there are few things that you can actually buy with such a coin, even with a small gold coin. So it's not really practical to buy a cup of coffee or to buy even a pair of shoes. I mean, very expensive shoes like the ones that professors buy. But you guys are all poor. So gold coin would be not for you. So in actual practice then, in historical practice, silver has been the standard money throughout the ages. So we were speaking about commodity money and the natural money. I mean, it would really be silver. And the French even in their language, they call money argent. And argent is also the name for the metal silver. So I mean, it's like in the U.S. they say, well, we're paying with silver in the sense of money, right? So the two terms are synonymous. Another form of natural money would be credit money. For example, I mean, this now we are talking already about theoretical possibility. So let's say for example, you used US Treasury bonds to buy a car. You can do this. And if you find somebody who sells his car against Treasury bonds to the extent that anybody wants to have your Treasury bonds these days. All right, then Treasury bonds would be a medium of exchange. And it is imaginable, though there are good reasons to which we do not need to go now that make this improbable, that something like financial titles could be used as media of exchange. And then we would have credit money. That would also be a natural money. And of course, as compared to money, I mean, there are also money certificates issued by banks. And so banks create bank accounts that are fully covered by gold or by silver would have a money certificate. These would also be natural monies. A second type of money is forced money. And the difference between natural money and forced money is then that forced money owes its existence to violations of private property rights. A standard example would be counterfeit coins. So counterfeiting would be a technique of forcing the type of money in the middle of forts coin into existence. Another example, although it concerns rather the creation of money substitutes and not the creation of money proper, it would be fractional reserve banking. And finally, we have fiat money, which is a particular type of forced money. And here the force is institutionalized. That's the difference. Forced money, if it's being created by private citizens, private counterfeiters and so on, does not actually have a very important, big importance, precisely because it's bad money that market participants try to get rid of. So it never actually turns into something that is money that is generally accepted because sooner or later you detect the fraud and then you get rid of this. So it's only government coercion that actually can bring into existence and keep into existence type of money that the market participants would not voluntarily accept. So this is fiat money. And it owes existence to coercive governments. Now, based on these distinction, we can make a prima facie case for natural monies. The first thing to note then is that such natural monies, and this is the case that has been made famously by Murray Rothbard, whom we see here. So natural monies, first thing is, can be and are being produced competitively. So their production is part of the market process. It's very hard to reject the competitive production of money on ethical or moral grounds because we would have to come up with an argument that only applies to money, whereas we would accept it for all kinds of other things. So why should we allow the competitive production of socks or of milk or of suits and so on except the principle of competition there then rejected in the case of money? That's the first point to be made. In the case of money, this production is then steered by the same criteria, it's directed by the same criteria as the production of all other economic goods. The ultimate criterion is the return on investment. So we can say ROI rules, the return on investment rules. If the return on investment on producing money increases above the level of the return on investment gained by the production of socks and in carpets and lamps and so on, then, well, factors of production will be taken out of the production of these other goods and invested into the production of money. So capital will be taken out of the lamp business and all of the carpet business and invested into the mine business, the silver mine business. And as a consequence, then more silver will eventually come on the market because more silver will come on the market so the market prices will rise, the market prices for factors of production will rise so the return on investment silver production will diminish until it will eventually equilibrate with the return on investment gained on all other lines, in all other lines of business. Okay, so in such a setting then, there is a natural balance between the production of money and the production of all other goods. Just as there is a natural production thanks to the market process between the production of lamps and of carpets, there would be a natural balance between the production of lamps and of gold or silver and so on, all goods are being held up to the same standard and all are being produced in this balance. Now, how does this present itself from the point of view of ethics? Well, the crucial question then is, of course, in the competitive market economy, competitive market economy is based on private property rights. How do we, you need to wait there. Yeah, but the hop, the hop, I wanted to bring him into, with great distinction. Yeah. All right, so the question is, how do we justify private property rights and Hans-Haman Hopper's contribution was to point out that actually only private property rights can be justified without contradiction. As soon as we try to justify violations of property rights, we run into eternal contradictions, we contradict ourselves because we must presuppose that our discussion partners with whom we exchange arguments are owners of their bodies, just as we claim ourselves ownership of our body, so we cannot, in the same breath, sort of say, deny the existence of self-ownership if we are addressing our argument to somebody of whom we must implicitly affirm self-ownership because otherwise it wouldn't make any sense to address ourselves to him. So, there is a coherent ethical moral case that can therefore be made for the production of natural monies, at least the prima facie case that is an intuitive first approach case for natural monies. Now we need to go into some more detailed considerations. First, we'll consider some of the alleged shortcomings of natural monies. And I've done so in chapter four of my book, The Ethics of Money Production, in which I summarize, ultimately, because that was not the main focus of the book, but still it's an important part of the argument, in which I summarize, by and large, what you find in much more detail spread out in the monetary chapters of Austrian textbooks and Austrian treatises. So, in order to go into more detail, you would have to read Mises' Theory of Money and Credit, Human Action, what is it, 17 on money. In Rothbard, same thing, you would have to read chapter 11 in Men's Economy and State on money and its influence on the economy. So, here I summarize some of the basic arguments to the extent that they pertain to our case, the ethics of money production. So, first argument that is commonly being used against natural monies is that the money supply needs to be elastic to accommodate growth. So, the idea is, well, natural money production is all good and fine, so we are producing silver coins and gold coins, wonderful, and it's true that their production is equilibrated or balanced through the return on investment with the production of lamps and of oranges and so on and so on, that's wonderful, but we are suffocating the economy because if we want to have 10% growth, then we better have also 10% increase of the money supply because, if not, where do we get all the money from that is needed to buy those goods, okay? And more goods available, but not more money, and money reflects those other goods, so if there are more goods there, and the money supply doesn't catch up, all these other goods wouldn't be sold. Of course, you're laughing because you have already read some Austrian stuff and you've followed some of the other lectures, the basic error here is that the markets clear through prices, right? So, if there are more goods and services available that are being sold on the market and the money supply does not increase at all, well, then these goods and services will now be sold at a lower price, okay? That's the, ultimately, it's the only consequence, right? So, even if the money supply does not change at all, it's possible to sell all goods and services that we have produced, okay? So, this is, of course, then, I'm the typical Keynesian economist or so to address this kind of argument and hesitate a little bit and say, yeah, of course, okay, you can, of course, sell off the silverware and so on, right? All the goodies that you have at home and you can just bargain them to people ready to pay only bucks for them, but that's, of course, not the point, right? We want to operate profitably. So, we have to sell at lower prices, doesn't this mean that we now incur losses? And here again, so there's a misunderstanding, respectively, a non-understanding of the operation of the market economy because the losses do not come from the fact that we sell at lower prices, but that the revenue that we now gain and it might be a lower revenue is too low as compared to the cost of production. It is too low as compared to the money that we have spent on the factors of production. And let's say I'm a carpet producer and I've produced more carpets and the lamp producers produced more lamps and the car producers produced more cars and so on, everybody has produced more. The money supply hasn't increased. So, I'm now forced to sell at lower prices and actually it might be that my revenue diminishes, okay? But I've bought in the past, I've bought factors of production, I've hired people, I've bought raw materials, I've bought intermediate products, I've bought tools, machines and so on, rented cars. All of this was expenditure. So now it is indeed possible that my revenue might not be sufficient to cover those costs. But what does this mean? Well, it means then that I'm a bad entrepreneur, right? Because I did not anticipate this event. If I'm a good entrepreneur and I'm in a growing economy, I see, well, everybody's producing more, I'm making plans to produce more, right? All my neighbors are going to produce more. The money supply is not increasing. So we will all have to accept cuts, not only in unit prices, but potentially even decreases of revenue. What am I going to do then? Well, if I go and talk to my suppliers and to my employees, I will tell, look, friends, countrymen, we're not going to operate as before. Prices will be falling, our revenue might be falling. Doesn't matter ultimately from a real point of view, but we have to all take cuts in our revenue, starting with you. And if you don't accept this, well, then we'll stop right here, okay? So this is the deflationary growth talk that entrepreneurs would lead in a natural free market environment. We'll constantly have this kind of talk. And that's precisely one of the tasks of entrepreneurs, right? Entrepreneurs are not just executioners. I mean, there are people who need to convince all people who cooperate with them, customers, but especially suppliers, employees, and so on, of the common project and of the only way to approach this, this project or their way to approach this project. So a good entrepreneur, he would make his case before his suppliers and his employees and he would convince them and he would not make a loss, even though prices fall and even though his monetary revenue will fall in the future because his costs have fallen even more. So he would stay profitable, okay? So the whole, what are you doing there? Go back, go back, go back, go back, go back, back, back, back, stay there. So the whole idea of an elastic money supply is premised on a non-understanding of the actual operation of a market economy and of the function of the entrepreneur. Entrepreneurs can operate profitably in any monetary environment or let's say virtually any monetary environment we will go into some more detail tomorrow. Doesn't matter if the price level falls or rises, doesn't matter whether the money supply increases by 10% or by 5% or the 0% money supply increase. Entrepreneurs can operate profitably in all such environments and they do. And so the idea of the elastic money supply is just wrong. Cross out, good. Second argument is a variant of this first one, right? Hording suffocates the economy. So again, the opponent of natural money says, oh, what you've said is good and fine. All this ROE stuff and so on and balanced money production fine but what if you have people who are just hoarding to the money, it was a great concern in the middle ages, people who are misers, who are clinging to their coins and then hoarding them, holding them back and so on, right? So like the vampire sucking the blood out of the economy. So we need to do something here, right? And if you have only natural money you cannot do anything because the production of natural money is constrained by its profitability, right? If it's not more profitable to produce more money, well then not more money will be produced. Even if it were more profitable to produce more money then it would take time, right? The creation of a new gold mine or silver mine takes about seven to 10 years. It takes a while to get this going. So during seven or 10 years all the blood is being sucked out and we are slowly dying under the impact of the money hoarders, right? So of course you see that it's just a variant of the first argument, right? If prices are free to adjust, we have a competitive, truly competitive pricing process and a free market and all that even excessive or even what seems to be to us because we don't know the individual situation of the money hoarders, what seems to be excessive money hoarding ultimately only as a consequence that the price level falls. So but then at the lower price level, again, entrepreneurs can operate profitably, right? Let's say before our annual revenue was 120 million and our cost was 100 million so we had a return on, growth return on investment of 20% and if then the hoarders come like a plague on our economy they're taking half of the money supply out of the circulation, right? So our prices will fall, our revenue will fall to 60 million but we will have a cost expenditure of 50 million. Producing the same amounts of lamps, carpets and so on and just sending them for half and buying our factors of production for half, it doesn't matter. So we forget about this argument. The next argument is that we need to find fight deflation also for other reasons and well, so in a way I would have to anticipate here a lot on my lecture of tomorrow whether the actual order of the two lectures is not the good one. I would have to talk first about deflation and then this lecture on the ethics of money production so we'll do this better next year. So we'll leave this out but in any case the argument is essentially wrong. Okay, so you must trust me on this and verify tomorrow when you come to the lecture. But we've seen here already two reasons, right? Or two scenarios in which the falling price levels seem to be problematic namely when the price level resulted from increased growth and when it resulted from increased demand for cash balances from increased money hoarding. In both cases it's not actually a macroeconomic problem it is just one additional problem for entrepreneurs that they can very well handle. So let's turn to a fourth argument, namely that our story is good and fine but in reality markets don't clear instantaneously because prices are sticky. People are not ready to accept any decline of prices for the goods and services that they sell. Now this is certainly true, right? It's true that prices are sticky, right? And but no, I mean you can read Murray Rothbard from page one to last where I think on a main state and you can read human action you will nowhere find the assertion that market prices are just instantaneous. It's just not there, right? They don't. But it doesn't, that's not crucial for the argument. Prices are sticky, they're always relatively sticky but relative to what? Well, relative to the situation as it prevails. And if you as an entrepreneur come out of the blue and talk to your employees and you say, well boys we need to have a 10% cut or 20% cut you're likely not to get much of a hearing on that point. Because they must say, okay we'll just walk out and work for the guy next door. You don't have to accept such a cut or we can work there maybe for just 5% less or something. So it depends on the context but on the other hand if you have an economy in which all prices fall more or less regularly as in a growing market economy in which the price level constantly falls well then this kind of deflationary growth talk right by entrepreneurs will get a hearing because the employees and the suppliers know that there's nowhere else where they can turn. So this means that price stickiness is not a natural constant that falls from the sky, right? It's a dependent variable. It depends on the economic and in particular on the institutional context. Among the institutional context we have to mention laws such as minimum wage laws and we have also to mention things like unemployment benefits from a public unemployment insurance. And if my boss tells me you've got to accept a 50% cut because my revenue is also likely to fall by about 50% but on the other hand I only have to accept a 20% cut or a 30% cut if I go on a door then indeed my market price will not adjust, right? I will rather become officially unemployed than qualify for unemployment relief and all of the public purse rather than accept a much lower market revenue and work for my present boss or for somebody else, right? So price stickiness does exist, right? But it's not actually a problem unless it is institutionalized through government interventionism, right? So my price stickiness exists but it can be actually very low and there's empirical evidence if you look at what happened in, for example, in Germany in the past years, right? So I mean, we didn't have 50% cuts and so on but we did have sometimes significant cuts and also deteriorations in work conditions and so on all arranged through entrepreneurs who could convince their employees and their suppliers that this was necessary to survive in the present difficult environment, right? Again, that's precisely one of the core missions of the entrepreneur. Entrepreneur is not some sort of a high-grade technician or an engineer or something like this, right? His main mission is not to steer a production process, technological production process, his main mission is to rally the group of persons who cooperate on this project and win the support of everybody. Now, of course, he does this by paying things but also by giving the vision of the situation which the firm finds itself now and how it can develop throughout time. That's one of the main, or probably the main entrepreneurial mission. So we forget about sticky prices preventing market clearing. The next argument, and this, of course, a famous argument which has already been addressed by some lecturers is that natural money does not allow for interest rate policy. So if we have a gold money or silver money, then it's impossible to decrease interest rates below the level they would otherwise have reached on the market. Of course, I'm free, right? Let's say I'm a very rich guy, I'll be even richer than now because, of course, it paid millions of euros from the University of Angers. And of course, then I'm ready. I can lend out my money at an interest rate that pleases me, right? So I can say, well, actually to you, I will give it at 0% or some other guy at five and so on. I can fix this, or I can sort of say make up my own interest rate policy, right? But this is, of course, not actually how it happens in the actual market economy and even if somebody felt such a philanthropic inclination, it would have only a marginal impact on the market. So a major impact, a major decline of interest rates is indeed possible only if we have something like immaterial fiat money, right? The money that costs us nothing to produce, such as paper money or electronic money that we can impose through various laws on the market participants. In that case, we can, for example, double the money supply if we still feel from one day to another and we can have a major impact on the interest rate. So that's possible. And the whole point of the Austrian theory of the business cycle is, of course, to argue that this is an illusion and we cannot enrich ourself by printing money tickets, I don't know, by creating electronic money, but it's actually the reverse. I will come back on this point very briefly later on. It's actually the reverse. We create inter-temporal misallocation of resources so we squander resources through this type of policy so we can forget this as well. Now there are two remaining arguments that I would like to address very quickly. The first one is that natural money is not stable enough and the perfect stability of the price level can be obtained only through something like fiat money, immaterial fiat money. And this argument is correct as far as it goes. It's true that in a system of natural monies, there would be a secular tendency to the decline of the price level. So if we wish really to perfectly stabilize the price level, we would need something like fiat money in order to compensate the depressing influence exercised by increased production, by increased money supply. But of course the argument does not reach very far because as we have already seen, it is not problematic for the economy to work and actually to flourish in the environment of a declining price level. So I mean we shouldn't make a fetish out of the idea that the purchasing of power of money should remain stable. And it's actually in entrepreneurial calculations and also in credit contracts and so on, it plays virtually no role. So we forget about this argument too. The last argument, this has been very popular of the classical economists, doesn't play a big role in the present context is that commodity money is too costly to produce so we can realize aggregate gains if we substitute cheaper money for a more expensive one. Gold and silver cost a lot of things, are very expensive to produce. We need to hire a lot of people working in the mines and so on, have equipment. And we can do the same thing also by simply printing paper tickets or creating electronic money. Now this argument is wrong on two accounts. This is, I mentioned it because that is interesting for those who have not yet heard it. The first error is to suppose that we are producing here the same kind of service. And that's not true, it's not the same kind of money. Natural monies are monies of a better quality than fiat monies. Because in natural monies, we have an inbuilt insurance against excessive increases of the money supply. It's not a disadvantage that silver and gold are expensive to produce, that's precisely one of their largest, greatest advantages. It prevents that there be any excessive production of these metals. And one of the greatest disadvantages of material fiat money is precisely that it can be produced at a marginal cost of virtually zero. So it's just subject to the whims of the monetary authorities. The second error related to this argument is to consider only the production costs insofar as they pertain to the creation of the physical object. It's true, a banknote costs just some sense in the making, whereas a gold coin of the same weight or silver coin of the same weight would cost, well, sometimes several hundred dollars. But these are not all the costs involved here. Consider, for example, the fact that central banks are not actually operating on the implicit premises of this model, namely that all that you pay for is actually only the paper, and otherwise you have one president of the central bank, you have one guy standing at the machine who turns out the new banknotes. We have two or three people on the payroll and otherwise just a printing press. That's not actually how it works. And the Federal Reserve has some 20,000 employees. The German central bank, the Bundesbank has some 10,000. I'm just counting 10 year personnel, right? So, civil servants, France, the same thing. So if you just take these three countries, you have 40,000 people on the payroll. I can tell you, this is not the same level of wage rates that they pay them in the mines in South Africa, okay? So it's not even, I mean, it would be interesting for somebody of you, if you're writing a master's thesis or potentially also a doctoral thesis, just looking into this into more detail. And what are the actual costs? We'll just sum up the dollar value of the actual costs of the operation of fiat money systems, right? And then the other costs, for example, we have the whole industry of Fed watchers and so on. Why would you need such people? You wouldn't need them in a natural money system. People are guesstimating what the Federal Reserve will do next week and so on. And they don't work for peanuts either, right? So it's actually a very, very expensive system. So we forget about this argument too. And natural money does not have these disadvantages. So what does the basic case for fiat money rest on then? First, as we have seen, it rests on the claim that fiat money allows to repair the shortcomings of natural money. And the second claim is that fiat money allows to stimulate the economy. The idea is that thanks to fiat money, more growth is possible than with natural monies. How is this miracle possible? And here we confront always the same mechanism. The idea is that by paying higher prices for factors of production, we somehow motivate more owners of such factors of production to sell their goods onto the market. That is, some marginal owners for whom the price has not been high enough before, they are now ready to sell this goods. There's some wives who before had been staying at home, right, the wage rates that they were being proposed were not high enough and now comes the Bernanke. And he increases the money supply by 30% or something and say, wow, now I earn really a lot of money and I should enter the workforce now. So more work is being delivered, more goods and services are being churned out, growth is higher than it would have been under a system of natural monies. So Cain speaks here of involuntary unemployment that existed before, right? So the wife that eventually then decides to go work was involuntarily unemployed. But as has been pointed out by Austrian economists and also by many others, this whole argument rests on the presence of money illusion that is on the confusion between monetary and real revenues. In the short run, in the immediate run, if I create more money, do I really create more goods and services? No, I've just created more money. So what I can buy with this money is still the same as before. So some people will gain these additional, or earn these additional money units that I've created. So they might be willing to work more or enter the workforce whereas they have not been there before, right? So they will now buy these goods and services, but if they buy them, then they're no longer available for other people. So other people will experience a decline in their real income, in their real wages. So they, for the same reasons as some might enter the workforce or extend their working hours, other people will leave the workforce and reduce their working hours. So even if we just take this argument on, for the sake of argument, it just doesn't work. Now here come the Keynesian economists then and they make the following claim. Say, well, whatever the theoretical side of the whole issue, it's an empirical fact that expansionary monetary policy demonstrably increases real GDP in the short run. And they show us the data and, okay, I'm ready to accept the data. So what follows from this? Go down, go down. Further, further. On. Oh, I talked about this. Yeah? Okay. Ha ha ha ha. You need to anticipate. You know, you're a bad end up, you know. You need to anticipate my wishes. So. Ha ha ha ha ha. So what does follow from this, right? So here, first of all, we are confronted with the riddle of present day Keynesian economists, right? Gregory Mankiew, he has a very, very good book from macroeconomics, well, very good book given that he's a non-Austrian. So he ends the book by saying, yeah, and so we have the problem. We don't really know how the short run relates to the long run, right? So in the short, in the long run, actually he said, well, no, it's not possible to enrich ourselves by printing more money. But in the short run it is. Then, of course, there's some hesitation. Wow, in the short run it is, no, no, no, no, no. So why don't we just add one short run up after another? We always do short run, short run, short run, short run. And then we're finally richer in the long run. See the point, right? So, and then, of course, he struck himself. Yes, he doesn't quite put it that way as I do now, but of course that's the logical, it's a logical riddle, right? So it's a blatant contradiction. If this is, there is something completely wrong in this whole picture. So what's the error? Well, the basic error of the Keynesians is that they neglect the capital structure. That is one of the main themes of Austrian economics and particularly of Austrian macroeconomics. We turn to the next slide. So we do here a quick comparison between, and again, I will go into more detail on this tomorrow, but we just need to summarize the basic findings, right? We need to compare and increase two scenarios. In the first scenarios, there is an increase of savings at a constant money supply. Then we'll analyze how this, which repercussions this has on GDP, nominal GDP and real GDP, okay? And the second scenario is an expansionary monetary policy. What are the implications of this for nominal GDP and real GDP? So we turn to the first one. So look at the first line, right? So we have here the nominal GDP, savings increase. Savings increase, what does this mean? More expenditure on factors of production, less expenditure on the consumer goods. If we spend less money on consumer goods, well, then the monetary value of final goods will diminish, okay? Consumer goods are final goods. And in GDP, we measure the monetary value of final goods. We don't measure the monetary value of our goods, the intermediate goods in particular that we use and also the monetary value of labor that we use and so on. That's not in the GDP. We just measure the monetary value of the final goods. So if consumer expenditure diminishes, that means that nominal GDP will diminish. So nominal GDP will diminish both in the immediate run that at the moment when people decide to save more in the short run in the long run if they keep up this decision. What implication for production? Well, production will not move in the immediate run. The production of final products, consumer goods, will not move in the immediate run because just because we decide now to save more and spend less on consumer goods doesn't mean that some of these goods evaporate, that they vanish, right? But it doesn't mean that there are more goods now available. So there's no immediate impact on production. In the short run, production will actually diminish. Why is this? Because the increased saving requires now that we rearrange our structure of production. The old structure of production will therefore be gradually abandoned and we put a new structure of production in its place. But through this transition, we lose some of it out. Now we'll go into more detail about this tomorrow, right? So production will diminish in the short run. And eventually in the long run, when the new structure of production is in place, production will increase substantively because we have higher savings, so more roundabout production, so we're more physically productive. What does this mean for the change of the price level? Well, it means that the price level in the immediate run, price level of consumer goods will diminish, CPI falls. And if we go on saving more and spending less on consumer goods, then the price level will be permanently lower, also in the short run. And in the long run, it will decrease even more because our economy is growing, right? Under the impact of increased savings, there are more goods and services being churned out and we are spending less money on consumer goods, so prices will fall substantially. What does this mean then for real GDP? Well, real GDP follows production, so there's no impact in the short run, right? In the immediate run, and then there's a decrease of real GDP in the short run and an increase of GDP in the long run. So that's the scenario that we confront in a free market economy, operating at a buy and large constant money supply growing under the impact of increased savings. Now let's turn to analyze the impact of expansionary monetary policy. Here we have a completely reversed picture. Nominal GDP will increase because people will now spend, there's more money around, so people will spend more money on consumer goods. They have not decided to save more, as all we did is just to increase the money supply. So people will buy and let spend their money in the same proportions as before. Let's say before they spend whatever, 40% of their money on consumer goods and the rest were saved and they will keep up the same proportion, henceforth. So the new money comes into the economy so they will spend 40% of this on top of the previous expenditure on consumer goods. So expenditure on final goods increases, nominal GDP increases and already we'll feel richer. What happens with production? Now something unforeseen happens and there's something unforeseen that is also described by Austrian capital theory. Because the prices of consumer goods increases, the production of consumer goods becomes more profitable. Therefore, the structure of production will be modified in an unanticipated way. More capital will be invested in the production of consumer goods. Less capital or less money will be invested in the production of intermediate goods and in fixed capital. So we do get actually an increase of the production of final goods in the short run. But in the long run, it is clear that the production of final goods must diminish because what we are doing now is to reduce the production of all the intermediate stuff that we would need in order to have a higher production in two years and three years and five years. And this is no longer there. We've now, it's like if you say, this is the example that Mises gave, you want to heat your living room. This is a cold day and so on, right? You can either go out and, whatever, buy a heater, right? If this is too long for you, you can of course also start burning your furniture, okay? So if you start burning the furniture, then of course you will feel immediate heat. It will be nice and so on. The problem is the next day, you will have no sofa to sit on and various other things, all right? And that's the exact equivalent. This policy of expansionary monetary policy induces entrepreneurs to produce, to put more resources into the production of consumer goods quickly done, and less resources into the production of intermediate goods, final goods and so on that will be needed in the medium and the long run in three years and in 10 years. So eventually the economy impoverishes. And this is then reflected in the price level. So the price level will increase, of course, not necessarily in the short run because it takes some time to have an impact on the price level, but eventually in the long run, prices will increase substantially because there will be less product, right? Sold against more money. So price per unit increases. And real GDP will therefore increase in the short run but diminish substantially in the long run. Now we say it diminishes substantially in the long run, right? You always need to keep in mind that we have here a counterfactual comparison, right? So in the long run, GDP will be much lower than what it otherwise would have been because these two processes in actual practice often occur simultaneously. People are saving more, right? And at the same time, we are pursuing an expansionary monetary policy. Without monetary expansionary monetary policy, our growth rates would have been 8%, 10%, 12%. But because we are wasting money thanks to the expansionary monetary policy, the actual growth rates are 2%, 3%, 4%. Okay. Okay, now we need to get to the end. I still have so many things to say. Yeah. Okay, the first thing is, well, we can probably go over this very fast, that fiat money is an instrument of expropriation, right? And this story results, we'll go click through this very fast, results from the Kantian effects, right? Increased money supply entails a redistribution of income in favor of the first users of this new money and to the detriment of the later users. Something that we have already heard in previous lectures. Now we need to point out that this is actually in a free market economy, right? This is actually a beneficial stimulus for the production of more money. This is what insights gold and silver miners to produce more money. But of course, there are constraints, constraint that the producers of silver and gold are constrained by the competitive bidding of all other producers. Now fiat money does away with these constraints, right? It is imposed on its users through legalized falsifications, monopoly money, legal tender law, suspensions of payments. These are things that I discussed in my book. And thereby the natural constraints of money production are destroyed. So what follows from this? Fiat money is by its very nature, or by its very nature cannot be justified. It always relies on violations of property rights. And we've just seen and re-emphasized that it entails an unjust, justifiable and actually massive redistribution of income in favor of the first users of immaterial fiat money, which in our day happens to be the banks, commercial banks, right? And companies intervening on the financial markets. Because central banks do not send out checks to the citizens of their respective countries, right? Have you ever received a check from the central bank? Probably not, I didn't. So the way that they bring the money into circulation is by lending it to financial market participants. So banks, investment firms, et cetera, et cetera. These are the first users of the new money. So these are the winners of, among them, the biggest market participants, of course, the government itself is the biggest market participant on the financial markets. Okay, last point, fiat money is destructive. It's destructive for the reasons given by Mises. If you're a case of policy-induced malinvestment, his Austrian theory of the business cycle explains that artificial decreases of the interest rate make it that more investment projects are being started but cannot be completed eventually because the real resources necessary to complete these processes are lacking. But fiat money is also destructive on other grounds because it entails a greater fragility of financial markets and banks. Central banks are lenders of last resort and thereby create moral hazard in banks, in commercial banks and financial firms. The central banks assists them in two ways. One is by lending directly, but the other way is by stabilizing the market. The central bank, so to say, stabilizes, puts on a lower floor to the value of all the assets held by commercial banks and by investment firms and therefore investing on the financial market is much less risky than otherwise. So this allows, because right, we have this wholesale, monetary insurance, full risk insurance through the central bank, so the market participants start reducing their own precautions. They run down their liquidity. They run down their equity ratios. They go into more risk. And of course, if only one market participant does this, this is maybe tolerably, like if you have, in Auburn, Alabama, there's a very nice, very careful driving on the streets and so you can tolerate it if you have one, from time to time, one crazy guy who's just running too fast and so on. But if everybody does this, then of course you're prone for accidents like if on these streets, everybody had an incentive to run very fast, run over red lights and so on, run through red lights and so on. So we get a poisonous cocktail that creates business cycles and crises. So to conclude then, can conclude in five points, natural monies are ethically justifiable. They work well in practice, whereas fiat monies are prima facie problematic from an ethical point of view because they're imposed, they're coerced and they do not provide any overall advantage. At least if, well, let's say short term, the same short term advantages the result from burning one's furniture. And as we've seen, they are ultimately destructive and therefore should be suppressed as fast as possible. Thank you. Thank you.