 Joe Salerno has been very precise in giving the title to this talk, the economics of fractional reserve banking. That means we will set aside for this discussion legal questions. We're not really interested as economists primarily in legal questions, you know, whether fractional reserve banking is fraudulent or under what kind of configurations legally it's, you know, permissible in the private sector and so on. These are interesting questions, but again, we want to focus on the economics and for maybe too long there's been an overemphasis perhaps in the literature on these legal questions. It's not to say that I won't bring up a few legal issues, but it won't be the focus of our discussion. Okay, with that, let's just review real quickly something that we had in a previous lecture yesterday where Dr. Engelhardt spoke about the development of money on the market. And here, following Mengder's famous presentation, we see the logic of how money arises on the market through the selection by people trading in a barter economy of a saleable good, a readily saleable good that they can use to make indirect exchange. And that this readily saleable good must be something already traded on the market. It must be some good that's being exchanged already. There must be money prices or prices I should say, exchange ratios in this commodity for it to be selected by people as the medium of exchange. Now, once the commodity is selected as the medium of exchange, whatever it happens to be, and is sort of improved by entrepreneurial innovation over time. So live cattle and raw tobacco and cocoa beans are given up for precious metal and so on. Entrepreneurs will take the next step in the market all on their own initiative to certify the money. Because without certification, the silver nuggets or the gold dust or the raw commodity that people would be using as a medium of exchange would have to be weighed in a shade each time a trade was made. So the entrepreneur can have a successful business by certifying the fineness and weight of the metal with a stamp, a certification to make coins in other words. This would be a viable business activity for which entrepreneurs would conform in their production to the standard economizing principles of production in the market that we've all heard about this morning. They would earn profit or suffer losses depending upon the cost of mining and minting equipment and labor they use and so on, and then the market value of their output, the market value of the money that they produce. So money production on the market, money proper, its production on the market, would be integrated into the regular economizing processes of profit and loss. This is how money would emerge on the market itself. Then secondly, we can talk about, we can move on now to banking. Banking could arise for other reasons. We could have institutions that historically we've called banks. For example, making money exchanges, foreign currency exchanges. So banks arose historically to do this function and to provide maybe let's say investment advice to rich clients and things like this. But eventually banks, once money comes into existence in a certified form, we have coins, then banks can engage in another entrepreneurial innovation to provide certification separately from the coin itself. They can provide certification that they're holding for redemption of the certificate holder with coins in reserve or in their vaults. Now this too is just a business proposition. This would succeed or fail based upon the profitability of offering this service. And so customers would pay a fee to have this form of certification maybe on paper like banknotes or maybe in bank accounts, electronically, in checking accounts. So we would pay fees or these customers would pay fees and those fees would have to cover the costs of producing the money certificate, warehousing the gold and providing the banknotes, printing them up or again warehousing the gold and doing the accounting of the deposits and so on. Now the customers then would get a benefit from this certification in terms of safety and convenience. As we all know it's easier to swipe debit cards or to write checks and put them in the mail than it is to lug around gold coins and so on. So there is this benefit to the customer and this benefit not only accrues to the customer who receives the bank account or the bank note but also to what in the literature we call the clientele who would be accepting the money certificate in lieu of money itself. So we always would ask the question logically would the merchant accept the money certificate, the bank note or the bank account deposit instead of money itself? And the answer is well with the bank note he gets the same convenience as the customer, right? This benefit accrues to him as well or with the bank account it accrues to him as well and so I'm sure he would favor that form of the medium of exchange to some degree at least relative to money proper. This again would just be a regular business activity that banks would perform. Their performance of this activity would conform to the regular standard profit and loss calculation. If we as customers wouldn't pay fees because we didn't find it as convenient to do this that were high enough to cover the costs of providing the money certificate then banks would not provide it. There's nothing wrong with that, right? It's just how the market would configure production as always in anything. The production is always configured to what we prefer more heavily. So again we could imagine then the market just logically thinking about this thought experiment the market would develop these two different forms of the medium of exchange, money proper, some commodity coinage and then money certificates, claims to redemption claims to money proper. Okay, now the next step is just to see what effects this has on both banks and there's financial effects on the banking system and effects on the broader economy. Now again we could imagine different legal arrangements for the issue of money certificates and some of these would not involve the kind of banking implications that I'm putting up here on the PowerPoint. We could imagine for example, we could imagine that customers form a relationship with a bank when they get a money certificate that is simply a warehousing receipt. This is how Murray Rothbard introduced this idea in his writings on money and banking that the banks would simply warehouse money for us and the money certificate, the bank note or our checking account balance is just a title of ownership to the goods that the bank is warehousing. Now if that's the legal arrangement that's made between the customer and the bank then this wouldn't apply, right? The bank would not have the money proper as an asset on its balance sheet. It would just be storing the goods. So an analogy would be, you're all familiar with those storage facilities for your personal goods that are along interstates and you're moving someplace and you can put your belongings in storage and get them out later and you pay a fee. So a bank could be like that legally, right? It could be that the customer owns the gold that's held by the bank and the bank is just warehousing the gold and the bank has paid a fee in order to keep the gold safe and to issue the bank certificate, the money certificate. But my assumption is different here. My assumption is that there's a legal arrangement. I want to do this just to make a contrast between this case and the case of fractional reserve banks. So that's the only reason to do this. So my assumption is that the banks and the customers make an agreement to transfer ownership of the money to the bank in exchange for instantly redeemable claims to that money. Okay, so, again, this is sort of weird and we don't need to go into the legal niceties of this. That's not the point. The point is to simply make the contrast between what 100% reserve banking would look like, however it's legally configured and fractional reserve banking. That's, again, the main point of this. Anyway, we can see that if the bank takes ownership of the money, so on the left-hand side, it becomes an asset. They own the gold now. But they have a liability against them in the checking account of the customer. So this is what it would look like. Now, clearly, the point of doing this is to highlight that if the bank proceeds in this way, that the issue of the money certificate does not impair the bank's liquidity. The bank is exactly as liquid as it was before it issued this money certificate. It has an instantaneous liability, the checking account. The customer can come back at any time. It's a demand deposit. The customer can come back at any time and cash out and get back the money being held. And so it has an instantaneous liability and instantaneous asset. It's holding the gold on the premises. So the time structure of its assets and liabilities are not impaired at all by the issue of the money certificate. They're perfectly matched. By the way, Mises calls this matching of the time structure of assets and liabilities. He calls this the golden rule of finance. You know, if you run a business, you need to pay attention to this issue of liquidity. They're two important financial aspects of your balance sheet, right? Liquidity, which we're talking about now, and then solvency, which we'll get to in a minute. Now, the reason why this transaction leaves the bank's solvent is because the value, the actual market value of the assets and liabilities correspond. That isn't always true, right? You could take on liabilities against asset values and your asset values could fall in value, right? And then you would be insolvent to some degree. But if you're holding money proper, then the nominal value of the money is always the same. Its nominal value can't go down. And so, and you're not issuing, this bank is 100% reserves. It's not issuing liabilities in excess of its assets. So it's perfectly solvent and liquid when it performs this function. Nothing is impaired in the finances of the bank. Now, the other thing to notice here is that the issue of money certificates does not change the money stock in society. So banks have no independent ability in a system like this to influence the overall stock of money that exists in the economy. What the bank does is they take money proper and they turn it into a reserve and they issue an equivalent amount of money certificates that then perform the function of the medium of exchange. Remember, the Austrians always pay attention in analyzing human action. We always pay attention to the purpose or intentions of the actors, right? That's a crucial thing. We always trace back the analysis to the purposes or intentions of the actors and not to mere objects, right? So when we talk about money, we're talking about the item that people use is the general medium of exchange. We're not talking about a particular object like a gold coin or a cow or a raw tobacco or something. That's a secondary issue. We're talking about the use to which the object is put, right? So if someone takes a, to give you a modern example, someone takes, you see this frequently, right? At least in movies, somebody will take a dollar bill. The first dollar they earn is an entrepreneur and they'll frame it on their, you know, and put it up on their wall. Well, that's not a medium of exchange anymore, right? I mean, that's a consumer good now. He's just admiring it. He's showing off to his friends, you know, my first dollar and so on. So objects are not the final arbiter of what the thing is. It's the intention or use that people make. Okay, so anyway, the money supplied does not change when this happens. Now, oh my. Something got cut off here on that. Well, this is, you know, we're gonna have a mystery speaker later in the week. So this is my mystery quote. Maybe I'll just ask this as a question since I had the author's name down there. I don't know where it went. Somebody hacked my PowerPoint. Okay, this is a quote from a famous economist. The bank money, bank money, speaking of these checking account balances, the bank money just offsets the amount of ordinary money, gold or currency, placed in the bank's vault. No money creation has taken place. A 100% reserve banking system has a neutral effect on money and the macroeconomy because it has no effect on the money supply. Now, contrary to what you might think, that is not an Austrian economist who said this. This came from the pen of Paul Samuelson. So I call him to witness to the veracity of this claim that the Austrians make. This is a widely understood implication of 100% reserve banking. Okay, so now, oh, there it is. Look at that. Samuelson, 19th edition of his textbook, economics. All right, so you can look that up. I didn't dream that. Okay, so here's our next, let's just run through a quick diagrammatic analysis because we're going to do the same thing again with the issue of fiduciary media in a minute just to see, just to kind of conceptualize the difference here. So let's suppose we start here at point A in the money market. This is the total stock of money, the total amount of money, plus money certificates that people are using as a medium of change at any point in time. And this is the total demand to hold money. And so the purchasing power of money, just like the price of any good, is set by the interplay of demand and supply, right? So this again is not doing anything special. We're just applying the regular marginal utility analysis that's supplying demand to money. Now, if nothing changed with respect to the demand and supply conditions in money, then the purchasing power of money would stay stable. That would just stay there at PPM sub-zero. It wouldn't change. Something must initiate a movement either in the supply or the demand side of the market, right? But the argument that we're making here is that supply, at least through production, supply never changes independently of demand. Quite the contrary. Changes in supply through production are always dependent upon changes in demand. It's only through an increase in demand that greater production is called forth because it generates greater profit, right? But if demand doesn't change, if demand stays here at TD zero, then supply is not going to shift out here to TS one. That would never happen in the market. If demand for bags of apples stayed the same in society, there'd never be an increase in production, unless, again, demand is changing for apples relative to other things, right? So demands are always based on preferences, which are relative. But if it's stable with respect to all of the things which money demand would be since it's being expressed against all of the goods, there'd be no reason to change production because this price would just be earning the normal rate of return from the production of money. So only if demand goes up, so if demand shifts out, then the value of money in the market goes up, then there's profit to producing more money. And then that would set in motion then an increase in supply through production. And so we get this movement to point B over time, and that higher PPM is justified by the increasing costs of production because of the principle of the law of returns we spoke about earlier, involved in extracting more gold and drawing resources out of more valuable opportunities to draw them into coin production and so on. Again, this analysis is no different than the dynamic process of increasing demand for any good in the market. Exactly the same argument we would use to explain that. So again, I give you this mainly for contrast, as we'll see with fractional reserve banking in a minute. Now the other thing that would develop in the banking industry on the market is financial intermediation. Now here's where we get to a point of some debate in the literature on the economics of fractional reserve banking. Here I'm taking the phrase intermediation just in the general sense of an intermediary. An intermediary is a go-between, right? So there are a lot of intermediaries or middlemen in the economy. So for example, Walmart performs the function of an intermediary or middleman. Not in credit, right, but in goods, in consumer goods. So they buy wholesale, they sell retail, they earn the price spread as their revenue between wholesale and retail, and then that revenue stream they use to pay for their costs. So they pay for their buildings and their transportation and their labor and so on and so forth. So that's how middlemen operate generally in the economy. So banks are middlemen in the credit market. That's what financial intermediation means. At least that's how we'll define it. So banks borrow funds from savers and they pay a wholesale interest rate and then they lend money to investors, the borrowers, and they earn a retail interest rate. Now, why would the savers put up with just receiving the wholesale rate? Why don't they go for the retail rate? Why don't we try to buy directly wholesale as customers? Why do we buy retail and pay the higher price? And the answer is the intermediary provides services to us that we value. The main service that Walmart provides to us is no questions asked returns. I buy something at Walmart and use it for a while. I don't like it, take it back, get a full refund. That's just some value to me as a customer, right? If I buy directly from the producer, I probably would actually have to pay a higher price anyway because Walmart can get also a discount by buying in bulk that I can't get individually. But I would have to deal with the producer. If I wanted to return it, I'd pay the shipping or I'd have to hassle with somebody on the phone or something and so on. So no, it's a great convenience to do this. Some people have a preference for actually shopping in brick and mortar stores. Walmart provides that too. I don't particularly hold that preference, but apparently some people do and they just like to go to Walmart and walk around and see what's available. So there are these benefits. Now what about banks? Well, banks provide benefits to the savers. For one thing, it's a benefit of the division of labor. So if I'm going to directly lend to an investor, I have to investigate on my own all of the different possible lending opportunities that exist in the market. I would have to bear the risk directly of default by the person I lend to. But the bank will absorb that default because my contracts with the bank, I still have the problem of assessing the creditworthiness of the bank to pay me back, but at least that's just one institution that I can be more familiar with perhaps as a customer in the market than some far-flung entrepreneur that I might lend to or some, let's say, neighbor who's trying to start a business that I might be kind of talked into lending money to because, well, he's my neighbor and I want to keep up good neighborly relations or maybe he's my near-dwell brother-in-law or something like this. Okay, so there are some benefits to the saver and this generates the interest rate spread. That in and of itself generates the interest rate spread. The interest rate spread does not require a bank to leverage in order to create an interest rate spread. That's not financial intermediation. That's just risky investing strategy, a riskier investing strategy to leverage. We'll talk more about that as we go along, but what we're saying is not that the banks can't leverage, we're just saying that even if they don't leverage, there's an interest rate spread that's available to them from what we're calling financial intermediation, borrowing from savers and lending to investors. They're the middleman. Okay, now when they do this, when they intermediate credit, it again does not impair or at least not necessarily, it does not impair either the liquidity or the solvency of their operation. Now again, I'm taking an extreme example here that wouldn't look exactly like this on a bank's balance sheet, but roughly speaking they do something like this, right? They have customers who come in and they offer $5,000 in one-year CDs. The customers come in and they say, no, I don't want a five-year CD, I want a one-year CD. They have intentions to get the money back, principal plus interest and then buy something in a year. And so the bank takes those funds and they make one-year loans. They get a higher interest rate because the savers are investing their own labor effort and other resources into looking at all the dossiers of the different investable projects and trying to figure out which one to lend to. The bank is absorbing that, right? And they're better at it. They're more efficient, presumably, because they're engaged in the division of labor to do this. They're experts in it. Okay, now it doesn't have to, again, it wouldn't have to look exactly like this. There could be some reasonable variation that's done, some reasonable leveraging that's done. But again, we'll set that aside just for the point of seeing the two extremes. What would the 100% reserve banking system look like? What would the fractional reserve banking system look like? Okay, so the liquidity is still intact here. The bank is not illiquid at all in doing this. The time structure of their assets and liabilities matches exactly. When they have a $5,000 obligation to pay in one year, they'll have a $5,000 asset. The loan will be paid back and they'll have the money. No problem, right? As long as they make sound loans, then they're still solvent, right? And this is what they're in the business to do, to make sound loans, to make loans that'll be paid back. So there's nothing inherent in this operation that would impair the financial condition of the bank. Okay, now when the banks do this, what's the effect on the broader economy? Well, we would call this the absence of credit expansion. There's no credit expansion. So notice, in this analysis, we're able to give precise definitions to monetary inflation and credit expansion. These are very important phenomena in the real world, and we need to have precise analytical definitions. So as we saw before, monetary inflation is not every increase in the supply of money. We can have an increase in the supply of money as long as it's brought forth by an increase in demand for money that makes the production of money more profitable. That would not be monetary inflation. That would just be an increase in the supply of money that's meeting demand. And the same with credit expansion. We can have an increase in the supply of credit and a driving down of the interest rate in this system, but only if people's time preferences go down. So if people's time preferences go down, they'll save more if the supply curve for credit will shift to the right, and there'll be some diminution in the demand for credit. If time preferences go down, some people will borrow less, and on balance, the interest rate will be lower and the supply of credit traded in the market will be larger. So we can have an increase in credit in the market without having what we'll define it in a minute, what we'll call credit expansion. This is just a natural increase in credit that comes about because our preferences have changed. Just like an increase in the production of money because our preferences to hold money of increase, the corresponding increase in the production of money would not be monetary inflation. So this market system, this pure market system then would not experience monetary inflation and it would not experience credit expansion. It simply can't occur in this system. Of course, there could be entrepreneur errors and so on, right? But it's not systematic in this system. Okay, now let's turn to the issue of fiduciary media. And here we're relying on Ludwig von Mises's terminology. So this is how we define fiduciary media. Fiduciary media are money substitutes for which a bank holds only a fraction of money reserve. So we saw in the 100% reserve system, in the market system, in the pure market system, there would always be an equivalent money reserve being held by the bank corresponding to the issue of its checkable deposits or whatever form the money substitutes come in. Fiduciary media is different than in disrespect, right? So the bank is only holding a fraction of its checkable deposits as money reserve. So we get fractional reserve banking. And this instance of fractionally backed money substitutes, Mises like to call fiduciary media. So anytime a bank is holding only a fraction of reserve, and again, we don't mean by mistake. Again, a bank could just mistakenly do this, right? Not make good entrepreneurial predictions, but we mean systematically it's done this. Now the question then arises as to how does this fiduciary media come into existence? And the answer is the bank simply lends it into existence. They just create it out of thin air. As Maya example indicates, they start with $1,000 money reserve or cash reserve. They start as 100% reserve, let's assume, with 1,000 in checkable deposits. How do these checkable deposits get from 1,000 to 10,000? Well, the bank just make loans to their customers of $9,000. A customer comes in and says, you know, I want to buy some new capital equipment for my business. And they check the person's credit history and they say, okay, that looks like a reasonable loan to us. And they'll just write the balance of the loan into their checking account. They're just creating the funds out of thin air. Notice they're not intermediating anything here, right? That's the point? That's the basic economic difference here. They're not intermediating created credit. They're not borrowing it from anybody. They're just creating it out of thin air and lending it to someone else. Okay, so that's the basic principle, the basic distinguishing principle of fiduciary media. Okay, now once we have fiduciary media, we can have monetary inflation. Now we can define monetary inflation in a systematic way. And let's run through the economic analysis of this and then we'll provide a kind of summary definition of monetary inflation. The thing to notice here is that the issue of fiduciary media, since it's done through credit creation out of thin air, the issue of fiduciary media cannot be regulated by profit and loss. It's always profitable for a bank to issue another loan where they create the funds out of thin air because the bank earns the interest on the loan and they don't have to pay anybody to borrow the money so they're not earning an interest rate spread anymore. They're earning the full rate of interest as revenue and it costs them very little to issue the loan. They have loan origination fees or whatever. So they have some minimal cost to issue the loan itself that corresponds to the revenue stream of the interest they get on that loan. So notice if they took the rule, if the bank took the rule, we're going to issue every loan, we're going to create every loan that we can possibly create out of thin air that generates profit for the bank. If they took that as their rule of production, then they would immediately bankrupt the bank. They would issue a billion dollars worth of credit because every additional loan that they issue is profitable for them and this would force them almost directly into bankruptcy because eventually they would have to, after the first tens of millions, they would eventually have to loan to people that they know aren't going to pay back. It's a very risky extension of the loans. They'll be creating this illiquidity in the bank that they can't manage any longer and a certain degree of insolvency. So they can't take that as the rule of deciding how much fiduciary media to issue. They have to regulate this issue of fiduciary media now not by the rule of profit and loss but by some policy. They have to say, look, we won't put our asset to equity ratios. We'll only extend them so far. We'll only leverage up to this point and then we'll stop. Just some sort of a practical rule like this that they'll impose upon themselves. And as Mises points out in 30-minute credit, this rule will depend upon circumstances. It'll depend upon the way in which the government has intervened in the banking system. The extent to which the banks can extend their fiduciary issue will just depend upon circumstances of government intervention and so on. So there's no economic law about this. It's just a practical question as to how far this can extend. And finally, let me point out another aspect of this. This is the middle bullet point. When the bank creates money out of thin air and they extend the loan to someone else, notice they do not compensate the people who bear the opportunity cost in society of the person who gets this loan and is able to buy things with the funds. When a bank intermediates credit, they persuade someone else to reduce their spending by lending them the money. And then they compensate them by paying interest. And then they lend that same money to someone else who then can use it without any sort of inconsistency in the overall demand for resources in society. They've just transferred the purchasing power from the saver to the investor and they've compensated the saver. So the saver says, I'm perfectly happy to wait and not spend my money. I'm perfectly happy to do that in compensation for the interest the bank pays me. But when the bank issues fiduciary media, they don't do that, right? They just issue fiduciary media, they make a loan to somebody. That person goes out and buys things and they displace some other buyer who the bank does not compensate. This is a difference. We get a different economic effect than the issue of fiduciary media. By the way, that effect is very similar to what happens when a government just engages in the printing of fiat paper money. It's print fiat paper money out of thin air, right? And they go and they spend it and now the government gets the resources and then some of the rest of us are displaced. We didn't consent to this. That's not how the market works. We didn't form some sort of contractual arrangement to lower our consumption in order to provide these resources to the state. So it's a similar kind of effect that fiduciary issue generates. Okay, so let's now turn to the financial effects. And these again are not really highly disputed in the literature. The issue of fiduciary media makes banks a liquid, as we mentioned. There's now a systematic mismatch of the time structure of assets and liabilities. Again, if you return in your mind to that T-account that I gave you of the bank having a thousand in money reserve and 9,000 in loans and 10,000 in checkable deposits, they now have 10,000 dollars in instant liabilities against them and yet the loan structure will be time bound, right? Their loans won't be paid back until the borrower fulfills the agreement to pay back the loan in a year or five years or ten years. So they've systematically created illiquidity on their balance sheet that now has to be sort of artificially managed. It's unavoidable, right? They can't move to a position. Once they issue fiduciary media, they can't move to a position where they're fully liquid as they would be in 100% reserve. And banks also become less solvent, at least if not insolvent, eventually they become insolvent, but they become less solvent in the following way. The banks, if they're 100% reserve, then they've intermediated their credit and they've made the loans to the best investable projects that exist in the market that they're aware of. They've made the loans to the best in the best areas that they perceive. Now, if they want to issue credit out of thin air, if they want to increase their loan portfolio by 20%, they have to extend loans to less credit worthy projects. There's no other possibility, right? They have to extend the loans to people they were unwilling to give loans to when they restricted themselves to financial intermediation. But those loans are less likely to pay back. And so it makes them less solvent, right? It becomes a problem now that they have to manage. They can't avoid this, again, that they don't have if they're just engaged in 100% reserve banking. There, they have problems of people not paying back loans, but they don't have this extra problem, right? That they must extend loans to people that are less credit worthy. Okay, so this becomes a problem. Now, in the broader economy, what happens is that financial markets become more volatile then. If banks can create credit out of thin air, then some of the borrowing that's done that wouldn't be done otherwise is spent to buy assets. The homeowners come in and they borrow more from mortgages and they bid up the prices of houses. And this sets in motion then the imputation process that Professor Salerno has spoken about a couple of times. So now lumber prices go up and cement prices go up and then timberland prices go up and so on and so forth. And investment then moves toward expanding capital capacity in the production of lumber mills and forest land and lumber jacks and chainsaws and roofing material and so on and so forth to build more houses. And we get these lines of boom in the economy. We get these lines of excessive malinvestment that proves in the long run to be excessive in these particular lines that are driven by credit creators and credit creation. And then finally I put up this other point that this process actually not only affects financial markets or asset prices throughout the economy, but it makes the banks themselves, whether or not they engage in the process of credit creation, it makes the banks themselves unstable. It makes the whole system unstable. Again, what happens is the credit creation, let's say if it goes into mortgages, it makes housing prices up. Now if I own a bank and I haven't engaged in this credit creation, I've still made loans on houses and now the asset values of those loans go up, right? The asset on my balance sheet, if I'm carrying my assets at market, the value goes up. And now I have equity. And if I'm just sitting on excessive equity, I'm liable just to start making loans, right? Because I actually have equity now. This is what homeowners did. This isn't confined to the banks. It's what homeowners did when the housing bubble occurred. You were out in Vegas and you bought your house in 1960 for $25,000 and then during the boom in 2006, it was a million dollar house and you had a mortgage or whatever. Well, you probably paid your mortgage off completely. You now have a million dollars of equity in that house and people are running down to the bank to borrow second mortgages, right, against their equity. And then what happens eventually, right? The asset price is correct and everybody's under water. And so even the sound part of the banking system can be affected by this. It just, again, creates this possibility. Not just credit creation institutions pay the price for this. Okay, now let's just then run through the phenomena of a monetary inflation and credit expansion. So here would be the chart of monetary inflation that we get in this system. Here the demand for money has not changed at all and the production of money would be no more profitable than it was before. But the banks are simply creating money substitutes out of thin air and putting a greater stock of money into the market, right, extending credit to people and then these people are buying their houses and then that money is going to the construction companies and they're paying their workers and their workers are going and they're buying new cars and so on and so forth and prices overall in the economy begin to move up as the purchasing power of money moves down. So now we have a sort of systematic, analytical way of defining monetary inflation. It's an increase in the money supply that occurs outside the confines of economic calculation. It's just not according to economic calculation. It's just arbitrary with respect to the normal entrepreneurial process of economic calculation. And it leads to the continuous decrease in the purchasing power of money. It explains that phenomena. And then a similar thing happens with credit. So the companion activity is going on with credit creation. We have a certain demand for credit. It's not changing or we can just assume it's not changing. But the supply of credit can be continually increased regardless of what happens to demand for credit, right? Regardless of what happens to time preference, we're assuming here that nothing has happened to time preference. It's just that banks are creating credit out of thin air. Now that credit will have to push interest rates down to clear the market. Banks don't really care if the interest rates are pushed down because remember on created credit, they're earning the full rate of interest. It was better to earn 3% than nothing. And if they issue enough credit creation to push interest rates down to 2%, still better than 2% than nothing, right? So they do it. They have monetary incentive to do this. And so again, we can give a technical analytic definition to a systematic definition, one that's useful for our purposes of doing analytics to credit creation. It's an increase in supply of credit outside the confines of economic calculation. It's not based on a change in our preferences at all, but just on this ability of fractional reserve banks to issue fiduciary media. Now let me close with one last point. And then though, I'll have a one last, we'll see if it turns out to be a mystery quote or not, but I do have one last quote. I have to show you. Anyway, this is the question of, okay, so now we've just done the economics of fractional reserve banking, right? We've just done a comparative study, comparative analysis. What would happen in a market economy that had 100% reserve banking commodity money? What would happen in a market economy that had fiduciary media? We can still assume it has commodity money, but it has fiduciary media, right? So we've done that analysis. We might turn just briefly to the question of, okay, so that's an interesting sort of abstract imaginary comparison, but what would real markets generate? Would real markets generate a fractional reserve relationship? Would they generate a banking system like this? Would they generate something like 100% reserve system? And obviously, again, this depends upon legal questions. As I said before, we're not going to go into. So it's a much more complicated question that I'm alluding to in my quick answer, but what I would say in answer to this is, we mentioned this earlier. If we had, we know the logic of the development of banking is it's going to develop money certificates first. Initially, there are going to be money certificates because that's necessary to build a clientele for the use of the money certificates as a medium of exchange. And so any bank that wants to issue fiduciary media will have to be competing against banks that are issuing money certificates. Can they develop a clientele, in other words? Will merchants at large accept their fractionally backed money substitutes instead of money certificates, or will the merchants refuse and require the money certificates? That seems to be the issue. And again, since the banks cannot reward merchants in general for using fiduciary issue, they can reward their customers, they can pay their customers interest, but they can't pay a non-customer interest. It seems unlikely that fraction reserve banking would develop in a market economy. Again, we can imagine different legal configurations where it would happen, but that would be then, we'd have to do the analysis to see whether or not that was an intervention in the economy or part of the private property system. Okay, at that point I'll stop. Thank you.