 Good morning ladies and gentlemen our subject this morning is the economics of legal tender law This sounds like a fairly arcane subject, but as I will Try to demonstrate it is not The context is that today we have in all countries a monetary system Characterized by two essential features one is the the presence of a central banking system But what is more important here is not that We have central banks, but these central banks are in fact producers of a particular type of money namely immaterial fiat money The second characteristic feature is the presence of central of fractional reserve banking so the question is Why do we have This kind of monetary system How did it come about in former times until the 17th century approximately Monetary system in Western countries, but also in all other countries did not have these features rather we had Money system based on a commodity money particular precious metals silver essentially would also go to some extent and fractional reserve banks did exist here and there occasionally, but they Did not play the central role that they have come to play in our present monetary system So the question then is why the former system has been abandoned and why has a fractional reserve banking becomes so important Most economists believe that the transition has resulted from advantages of this of this new system and so these advantages can for example be Greater efficiency and lower cost lower cost was the argument of the classical economists Rockentalists economists and today the Keynesian economists also some visarion Austrian economists believe that Fiat money material fiat money and In particular fractional reserve banking are more efficient Economic institutions and that therefore they have proven their efficiency in the market process in a competitive process They have just driven out less efficient institutions. I will argue my present talk That the transition did not result from such advantages, but from a political process of monetary interventions and That the transition therefore essentially resulted from the imposition of legal tender laws legal tender laws play a very important role in this transition this transformation Across time of our monetary system and therefore the arcane subject of legal tender laws becomes suddenly more interesting So how do we define? Legal tender law legal tender law forces the citizens to accept the money chosen by the government So this we call legal tender for the settlements of all their financial obligations That's what you find for example on US dollar notes I don't know whether you've ever considered it in more detail. So it's written on the on the greenback that this note is legal tender for all debt public and private and The crucial thing now is that this law Applies to overrule private contracts that stipulate payments in terms of other monies So even if we make a payment and say that stipulates a payment in euros or in silver coins or in gold coins the legal tender law means that our data Well, if we are the data then we can insist on paying back Money that we owe or any payment that we owe in terms of gold silver euro Swiss francs and so on in US dollars and The creditor can do nothing about this such a law in practice then Requires the definition of a fiat exchange rate that the government not only has to define what the legal tender is But in case the legal tender is newly introduced into the market The government also has to define what is the exchange rate as compared to the prevailing Monies that are being used or money substitutes that are being used that is Those media of exchange that the market participants have spontaneously chosen our lecture will Proceed in four steps We shall first consider the the basic law that Helps us to understand the economic consequences of legal tender laws and this is Gresham's law and Then see how Gresham's law explains our government interventions through legal tender laws have ruined the coinage in the past And thereby already promoted fractional reserve banking But how legal tender laws then can also be used to more directly promote fractional reserve banking and finally we'll shall see how The transition occurred from fractional reserve banking to fiat money all of this Is explained in some more detail in my book the ethics of money production still on sale downstairs In chapter 11 Okay, so let's turn to Gresham's law the economics of Gresham's law Suppose we have a monetary system in which we use gold coins and silver coins So these gold coins and silver coins Exchange I exchange against one another at some market rate if we look at the present market rate Why gold is about thousand six hundred dollars silver is about forty dollars. So we have a mark current market exchange rate of Forty grams of silver equals one gram of gold Grain Alton's it's always the same thing right plus weight units on a fixed exchange rate As it's not fixed, right? That's their market exchange rate now in in such a system we in such a case we speak of parallel currencies and in more Recent parlance. We could also talk about currency competition. Both monies are being used competitively market participants are free to Bring about their exchanges either with the help of gold coins or silver coins and they will do this based on for example the physical Qualities of these metals silver coins have a lower purchasing power Therefore, they are more suitable for the today exchanges gold coins have a much higher purchasing power Therefore, they're more suitable to bring Money or wealth from the US to Europe or the other way around these days is probably from Europe the US to Europe or to Maybe not to Cuba but some of some other places Well, so what happens now if the government comes and imposes a legal exchange rate So it says a different from from the one. Let's say for example the government says well silver hands forth shall be our legal tender Everybody for settlement of it of money that he owes has to accept silver coins. He does not have to accept gold coins But he has to accept silver coins. So if the initial contract has been made in silver That's all good and fine that the law doesn't change what's actually going on but if the initial contract has been made in terms of in gold a payment of gold has been stipulated for example, I owe one ounce of gold then I could Now payback Settle my debt with the payment of 20 ounces of silver So on the market my debt is worth 40 ounces of silver the law authorizes me to pay back 20 ounces of silver even though I owe one ounce of gold So what shall I do? If I'm an egotistical person. Well, I probably will settle in terms of silver And what will be the consequence while the consequence will be that henceforth no more contract will stipulate a payment in gold because the the debtor can always Claim the legal tender laws in his favor and then payback the debt that he owes in gold in terms of a Some of silver that has a minor value so As a matter of fact then that the consequence will be that gold will be driven out of the market our payments henceforth Will be made exclusively in terms of silver Where will the gold go? Well, we'll either be hoarded Talk into the ground Hidden in some places in the house or something or typically more typically send abroad right send to other regions of the World where this legal tender law does not apply so the consequence then is oh What well you can also consider the The inverse case right in which we say well the exchange rate is fear exchange rate is 60 to 1 in this case then We have we have the opposite right the market exchange rate is 40 to 1 so it's now the opposite its Advantages for a debtor Where's the debt in silver to settle this debt in gold for example? Let's say I have a debt in Silver of 120 ounces of silver On the market this these 120 would be worth three ounces of gold Now I can claim the legal tender law in my favor and say well, I will pay you two ounces of gold And so the consequence is in such a case that our gold will make its comeback in silver will be driven out of the market now We see therefore that the definition of a fear exchange rate and Makes that Only in the precise case in which the fear exchange rate is identical with the market exchange It will it not affect the market at all in all other cases such a system Which we define a fixed exchange rate between two Commodity monies which in the case of gold and silver is then called by metalism In all other such cases either one Silver will dominate the market or gold will dominate the market So we are legal exchange rates a creator system of by metalism and By metalism in practice does not mean that both metals Circulate on the market at a fixed exchange rate, but it it infectively means that I one of them will dominate So we have a system of alternating Mono-metalism in the 19th century we could observe this in several countries for example in the United States the United States in 1792 fixed the legal exchange rate between gold and silver that overvalued Silver So it was more advantageous for debtors to make all payments in silver So gold was crowded out of the US market and silver came to dominate the circulation And then in 1834 there was another law the coin egg of 1834 Which did the opposite which now overvalued changed the fear exchange rate between gold and silver and overvalued gold And so it was the exact opposite when silver started disappearing from the market and gold came to dominate the exchanges so This is this phenomenon is called Gresham's law, but now let's look how to formulate this law precisely According to one very widespread very famous formulation It's Gresham's law means that bad money drives out good money, and this is the formulation given by Irving Fisher As an American economist Was working at the end of the 19th and the early half of the 20th century So what is the bad money the bad money see the overvalued money and our previous example Silver was overvalued later than what gold was overvalued overvalued as compared to what as compared to the mark the value It would have on the market And so if silver is overvalued it is the bad money That drives the good money the undervalued money gold out of the market now the problem with this formulation is That it makes no reference To the legal interference that occasions in fact this phenomenon in fact Fisher has been unfortunately very influential in Conveying the notion that bad money drives good money out of the market under all circumstances It's always the bad money that drives out the good money Which is a counterintuitive result right usually in all markets It's the good products that survive in the competition against bad products We don't buy the worst cars where you don't go after the lemons and so on But we try to buy good cars and we don't try to buy the the most ugly ties I sometimes we go wrong, but we try to buy the most beautiful ties and so on so it's always the bad better product that drives The worst product out of the market So according to Fisher then and according to the definition that he has given of Gresham's law in money It's the other way around the completely different universe and that's the reason why we cannot have a free market in money production If we permitted a free market in money and the bad product would always drive out the good product, so Unfortunately help is available our friendly government Takes the charge monopolizes the money production therefore prevents that the bad money drives off the good money So we have bad money from the outset probably right so I mean this formulation is wrong right so we What would be a correct formulation of rep Gresham's law? It would be that legally overvalued money drives out legally undervalued money or in another formulation still Bad money drives out good money under feared exchange rates Gresham's law is a law of monetary interventionism. It's not a law of the free market It's not a law that characterizes that phenomena occurring in a competitive economy By the way Gresham's law is so-called after Sir Thomas Gresham of the it was a financial agent of Queen Elizabeth the first in the in the 16th century and He wrote to her Regular market reports and one of these reports he described this phenomenon Phenomenon was known before Gresham It was known in the 14th century by Nicholas or res me who have already mentioned in one of my previous talks It was also known already in antiquity But it's been called in the 90s from the 19th century a British Historian of economic thought called it Gresham's law because he ignored the previous occurrences And so this is Gresham's law And as opposed to Gresham's law in a free market setting when there are no feared exchange rates then good money drives out bad money Just as any other good product would drive a bad product of the same type out of the market So let's see now how this applies how this law applies in different settings First setting would be the production of coins Precious metal coins and we can see here how monetary interventionism legal tender laws ruin in fact the coinage So let's consider again the first scenario in which we have a silver currency silver Coin circulation these here by the way are Mexican coins of the of the 18th century. So these are the Eight Ocho reales and so the also called the pieces of eight In other words the dollars and what has been called in the United States dollars So we have a coin circulation and in such a case the the market is exchange ratio so to say between different coins is one to one right one Dollar exchange against another dollar and you see already that the word exchange rate is somewhat awkward in this In this context because I mean the two two coins of the of the same type are all to be the same Right, so we have a coin system which the exchange rate in fact corresponds to to the weights Contained in the different coins and a coin is nothing else, but a Certified amount of precious metal and so is a coin is precisely is the definition of a coin is precisely that it certifies this contains whatever 30 grams of pure silver Right, and if it's there's another coin of the same type and it certifies exactly the same thing this coin to contains exactly 30 grams of silver, so The exchange rate by definition that is one to one right and that's also what we do in our exchanges Why we always take one dollar so you could be equal to another now something ugly has happened right some crook has introduced A bad type of coin what you see here, maybe you cannot see this clearly see it This is is a base metal. That's not it's not silver. There's only a silver plating here This is typically what coin counterfeiters do and the various techniques this technique is one of them you take not a Weight of silver, but some other base metal aluminum or whatever else and you coat it with silver So it looks from the outside like silver, but it contains much less silver than the real thing, okay So this may work for a while and typically it's it's detected the thought is detected because the metal that you use inside The main metal has a different weight and silver So you you can and then when there is wear right you also discover. Wow. I mean what what is inside? It's not The cat in the box that was promised or something completely different and so after a while people would find out and on a free market that That the actual silver contained in the plating is worth only one 90th of the silver Contained in a real coin. So these two coins might actually conceivably theoretically might circulate on the market, but only at this exchange rate, right? I would change that 90 to 1 and The prices paid in terms of these bad coins Would be 90 times higher than the prices being paid in terms of the good coins But the more probable result would be that as soon as people realize, okay It's a certain coin circulating in the market that are not of good quality at all in effect. Okay here We have measured. I mean the the the silver content is one 90th of the of the real coin But how do we know it's actually one night 90 of it could be 150th or something like the plating could be reduced again And again, this is actually a quite thick plating usually can be much smaller so as soon as people had any Assission that it's just a plating rather than a full-bodied coin It would probably not use it at all. That is these types of coins would disappear from the market and The good coins in this example therefore would die about the bad coins things are completely different of course if The bad coins Benefit from the protection of the law That is if the government not only produces such coins But protects them through legal tender laws So here now they make a comeback and the government says you have got to accept these coins as though they were full-bodied coins What happens now now we have clearly a case of Gershom's law The plated coins are overvalued by the law as compared to the full-bodied coins So nobody will make any more payments right if you have a bad coin in your pocket and a good coin and You owe a dollar to somebody. Well, you will use the bad coin to make that payment And you will keep the good coin in your pocket. It is again, right? The good coins will be hoarded or eventually exported to some other place where you can use them as their at their real value and The bad coins will come to dominate the circulation Only bad coins will rule and the bad coins here then drive out good coins. This ladies and gentlemen was the reason why European coin systems throughout many centuries were very often in shambles Always the same thing and the United States was similar George Seljin has written recently a book on sound money In which he describes very vividly the the conditions prevailing in the British British coins system at the end of the 19th century And but this of course is the consequence then of monetary intervention is my government has fixed legal tender laws for such coins and Nobody has an interest in producing Good coins and using coins. So you have all these orders bad coins, and nobody knows exactly how bad they are so Monetary exchanges are severely hampered So let's make a few conclusions considering this first case for a few preliminary conclusions the first thing to Underline is that the competitive production of coins is both possible and beneficial Contrary to to Irving Fisher It's possible because a coin systems in the case of coin systems of the same metal and also in the case of coin systems of different metals and you can have a coin system for example with with If I'm the producer of silver coins I can say well My silver coins have too much of a purchasing power to really make them usable for very very small Transactions when right in terms of present dollars Several cents have to be paid. So their silver coins would be too too big So I propose to my customers some token coins for example Copper coins or some some notes and so on that can be converted in my in my company In a fixed proportion against silver coins. So you would then have a coin system The competitive production of coins would be beneficial Because good coins to have bad coins because competition is always stimulates innovation I knew more reliable production techniques techniques for the Fast and reliable Identification of the metallic content for example if we today had a gold system or a silver system Then I'm sure that coin producers would supply firms retailers with instruments that allow for the the fast and Reliable identification of the metallic content of coins and so on right so in order to stimulate a use of their products and Of course also simulates honesty because as soon as there's the slightest doubt that coin producer Is not reliable in his production that he is kind of sometimes a As a crookie tendency and he goes over to plating and so on that people would simply not use this No longer use those the dollars coming from producer a but would switch over to the new cards or whatever of producer B Second as we have seen legal tender laws ruin the coinage let the bad coins drive out good coins and Second point to underline here is that competitive legal tender coinage now becomes impossible. Why is that? now imagine you have several producers of of coins That are under the protection of legal tender laws and that may debase their coins To producers A and B now let's say both of them now have an incentive to debase their coins A has an incentive to let's say reduce the metallic content silver content of his coins to 50% because He can impose his coins on the market as a legal tender And he pockets the difference between what should be in the coin and what is effectively in the coin But producer B then has an incentive to reduce the metallic content even more that if they start with the same amount of silver They have one ton of silver each initially right and then a producer a can make whatever 1,000 pieces of 1,000,000 pieces of silver coins then producer B in reducing the metallic content even further Let's say to 25% he could produce twice as many coins and also impose them on the market because they are on equal legal footing With the other coins so you see the point in fact each producer in under such a scenario You have different debasers all of which benefit from legal tender privileges in such a scenario There is a race to the bottom in the basement And each of them has an incentive to reduce the metallic content of his metal as fast as possible In fact if he did not what would happen? Let's say producer B keeps 75% of metallic of pure metal in his coins then producer A in fact He would try to get those coins as fast as possible from the market Melt them down right get the metal out of this and produce new coins with a lower metallic content So there is a race to the bottom therefore, which means that competitive production of legal tender coinage is in fact impossible. It's something that ruins the coinage within a year or two empirical in fact there were two cases two dramatic cases in which metallic content of such coins was run down to zero within a year the first one was in 1461 in What is today Austria? the second one in 1599 1600 in In Spain in both cases that the government as you might guess Had financial difficulties, so it's not an exceptional situation that we confront today in the US I saw there run out of money and so in It's despair The king in question offered to several of his fellow noblemen Legal tender laws on coin production was a very profitable business before so the king was the exclusive owner of all the The coin production facilities of the mince and then he so to say sold this legal prerogative To other people so in the case of the the emperor in 1461 He sold this to the Archbishop of Salzburg and to two or three counts around Vienna So you had in within one area you had several guys producing legal tender coins the legal tender pennies in fact And they very quickly realized The logic of the game so each of them was debasing as fast as possible because that's the only way to gain market share and in such a context so they ruined the The coinage in no time There's also and that is the true reason why Coinage was monopolized during Other the Middle Ages Namely because those coins were always legal tender coins and were debased you cannot run Debased coin system with competitive legal tender producers. It's impossible So whenever it happened it happened only because the government was in a desperate financial situation and preferred having some money Immediately now to carry on a war to finish a war to make peace or whatever and therefore paid the price of Destruction of the monetary system the third conclusion is That the and this is an important point that the debasement of legal tender coinage entails fear deflation and this is important important phenomenon to understand the role of fractional reserve banks The emergence of fractional reserve banks The basement by its very nature is a time-consuming process What do you need to do you need to collect the old coins? Melt them down and then produce new coins with a lower metallic content This takes time So if a government in order to finance its expenditure sets out on on the basement Cannot do this from one day to another and it has to engage in this time-consuming process which Typically takes I mean depending on the area if the king of France did this well, then it took a couple of months Account in some some German principality There was more might have done this in a couple of days or a couple of weeks But in case it's a time-consuming process So what does this mean? It means That the during this time when people realize wow, oh, listen to the new coins are coming So new bad coins are coming. The good old coins will be melted down and so on. So what do they do? Well, they start hoarding the old coins Start hoarding the old coins or export them Try to escape the law as far as possible now. This means in practice then that The amount of money in circulation diminishes right the money supply is the demand for money increases So the amount the aggregate Aggregate spending within that economy diminishes. So we have here a case of fear deflation dramatic reduction of the price level Resulting from government interventionism. So it's a bad kind of inflation deflation, right? The day before yesterday I was talking was saying to you that deflation is Beneficial in virtually our case and said virtually our case some cases where it's not beneficial. This is the case where it's not beneficial It's precisely because it's not a result of the market process, but result of institutionalized violence. So what does happen now? We so we have problems for all debtors in the country when I guess who is the biggest debtor well It's traditionally the government So Financing itself through the debasement of the coin it has significant disadvantages From the government's own point of view as we have already seen from an aggregate point of view eventually, okay Changes ownership and so on even in that case deflation It does not really paralyze the economy for all times But the point is it has significant disadvantages from the government for the government And by the way, this applies not only to the case. We were just considering where we have coins of different qualities But it also applies to the case of Bimetalism and same thing That goes on right if the government imposes Legal tender laws in favor of silver right and the gold will disappear from Circulation so there will be pressure on the price level there will be trouble in store for the government It's even worse if the law benefits gold as compared to silver And the reason is that it's worse because gold in the actual daily exchanges plays a much minor role The gold benefits from legal tender laws that overvaluate as compared to silver And then silver will leave the market, but what will take silver's place? You cannot buy a cup of coffee with the gold coin Well, I don't recommend that you try you have to buy many many colors a whole batch of coffees They have to throw party right to you to use a gold planet So you cannot use these for small transactions impossible So it follows there from there for so what can take the place in actual practice what took the place are fractional reserve banks Because fractional reserve banks if they have the right to issue small denominations can fill in the gap Left by the money that disappears from the market so legal tender laws Applied to coinage by metalism, but also coin systems and so on was a shot in the arm for Fractional reserve banking came to play out fully as starting from the 17th century But legal tender laws promote fractional reserve banking also in a more direct way and that's what we will consider now Oh Stop I need to well I need to conclude on the coinage And so the question then is if we have all these negative consequences Why do we impose legal tender law to coins and the standard line that you hear from governments is that these such laws protect the citizens Against bad coins, but This I don't need to go into detail to explain to you guys that the best protection is in fact the competitive Production process and which benefits the production of good coins A more realistic assessment. That's something that we also hear from official sources it Legal tender laws protect businessmen against the vagaries of the market. That was the main argument advanced to justify Bimetalism and fixed fixed legal exchange rates between gold and silver coins Was in the absence of such fixed legal exchange rates because between these coins There was some market risk and for entrepreneurs buying factors of production For example in terms of silver and selling them selling their products against gold payments So we had a market risk here, but again, this is certainly not the From an aggregate point of view. This is not it's not necessary to put Protect a special interest right businessmen can protect themselves against this through adequate speculation a more Permanent explanation why legal tenderloins were applied to coins Was to say well that they this technique allowed was boiled in fact down to a hidden default the government Henceforth could pay back debt in terms of bad coins that is While it took out a debt of let's say one ton of silver Imposing silver plated coins that could be used to pay back debt allowed the government to pay back only 200 kilograms of Silver so it was in fact defaulting on its debt And as I've told you already whether the consequence was then promotion of fractional reserve banking, which might actually have been also a motivation of such legal tender coins, but this is very speculative And Results from debasement in bi-metallism right so The bottom line is the bottom line is right that in fact legal tender laws are Instrumental in promoting an increase of government spending right to allow the government to take out more money over the market than the citizens Pay in the form of taxes so now let's turn to the Ways in which Friday fractional reserve banking has been promoted more directly through legal tender laws again basic scenarios the following with an initial Coin system in which exchange rates so-called exchange rates are defined by by weights and Now we have fractional reserve banks and so They they issued notes and I've here very interesting note This is a note of the Royal Bank of Scotland Royal Bank of Scotland is not a central bank But still issues notes and in fact only is only in Scotland Scotland is the only country left today In which private banks may issue banknotes In fact, there are three private banks that use this this right that the law gives them One is the Royal Bank of Scotland Second one is the Bank of Scotland the third one is a cliff worth or something I forgot the exact name right so they issue notes We're fear the Royal a Royal Bank of Scotland So the difference between such a note and a Bank of England note is the following this note is a Money substitute that is it is in fact It's the fractional reserve bankers would say the legal document promising and representing the promise to pay In terms of base money so the Royal Bank of Scotland redeems these notes in terms of Bank of England notes and Bank of England notes are the base money's money in the proper sense within Scotland and these are money substitutes Just as a checking account as a check would be a money substitutes Gives the the owner the right to claim at the bank a payment in terms of base money So the Bank of Scotland issues among other things one pound notes And these one-pound notes then not today Informatimes could be used could be redeemed against base money and So today would be a redemption against the Bank of England note But during the times of the gold standard they could be redeemed against a gold coin of the same denomination So we're fear sovereign The standard British count Which has the domination of one pound so of course today, right so the purchasing power of Of a pound is about one thousandth of the purchasing power of the gold contained in the No, excuse me. It's it's not one thousand. It's all it's a little more but only a little more than what we find It's about one two hundred and fiftieth what is contained in a In a software, okay, so we now have a competition between The bank notes and the coins market participants can use the bank note all can use the coin to make their payments What are the factors that determine that their choice? Well, what is important is that of course in the case of bank notes There's a default risk The bank might actually default might not be able to pay back Risk might not be very high, but it's it's there and in the case of the coin. It does not exist so this means then in practice that Bank notes would play a subordinate a very subordinate role within the market economy It's a matter of convenience and so on especially when high higher denominations are involved It might be more convenient to pay two hundred pounds Right with with a bank note rather than With a coin as you come up you have to carry all these coins around Therefore people would use a bank notes in such cases, but in most cases actually they would use the coins Things are different if the law imposes a legal equivalence. That is if it makes the The bank notes legal tender because then the default risk does not matter Even if the bank is not able to to redeem Its notes you still have to accept them And so you don't consider the you just consider the the convenience in that case then gold disappears from the market So we can conclude on these aggressions law in this context that legal tender Got lost here. Okay legal tender Fractional reserve tickets draw media drive-out coins They drive out Bad coins that drive bad coins out of the market, but the point is that they also drive out good coins so the Bank issued money comes to dominate the market and banks become The center of the entire monetary system. So this explains the transition from debasement to fiduciary media in fact In the case of debasement we have seen the big disadvantage is that it entails A fear deflation and which hurt the government. No such thing exists in the case of an increase of Bank notes that I issued right you issue an additional bank note That does not mean that people I mean even if people now start hoarding Their gold right you can substitute very fast right in in no time You can substitute additional fiduciary media to the place formally taken by precious metal coins So the problem that we confronted in the case of metallic coin systems disappears So there's no fear deflation and it's therefore less disadvantages for the government a second advantage is that competitive legal tender fractional reserve banking is possible a case is the Italian banking system in the 19th century, but the Our assessment is of course different if we regard the same thing from an overall point of view, right? so they are Distinct advantages from the point of view of the government And no such similar advantages from the point of view of the citizens as a whole right we still have the fact that These legal tender laws encourage greater production of money than otherwise would have taken place on the market So the can tion effects coming to play right the first users of the additional money Benefit at the expense of of later users. And so it's ultimately it's a it's an advantage that obtains for some Sectors of the economy related to the government at the detriment of all other sectors And then of course the other question is do we really get better money here? Well, in fact as we have seen it's not the better money that drives out the good money It's the worst money that drives out the better money because the coins do have a default risk And still they come to dominate the market precisely because they are inferior Namely because the law imposes them on equal footing with the good money So we can explain the transition from debasement to fiduciary media has not resulted from greater efficiency of Bank issued money from legal tender laws Okay, now I need to Speak very fast, right? I mean, but it's a storyline that you know already We just need to explain all the the transition from a fractional reserve banking to fiat money and the the basic The basic consideration here is that fractional reserve banking systems are inherently Instable right they are fragile and because there is an incentive for each fractional reserve bank to issue as Many fiduciary media as possible because that's how banks earn interest income But by issuing more fiduciary media banks become more vulnerable and become more fragile And so there might be a natural balance somewhere, but the natural balance is That would preserve on a market exists in a market economy is disrupted here because the legal tender laws actually Encourage banks to go on with their with their issues So it's if then there is a banking crisis. This will have negative repercussions For the economy because then again, there would be a deflationary Correction of the market and this would hit all debtors and in first line, of course the government again So the government has an interest in preventing a meltdown of the fractional reserve banking system How do we do this? Well the technique that has been used historically was the creation of central banks And the authorization of central banks to suspend their payments that is central banks before we're issuing Banknotes that could be redeemed into a metallic base money and the government came and said well look I mean if things are really going bad, you cannot redeem anymore Well, we authorize you to suspend your payments as you you don't have to redeem your notes And this authorization this legal act then completely changed the monetary system was before we had a metallic base money Henceforth, thanks to the suspension of payments. We obtained a fiat money system or more precisely if immaterial Fiat money system and this allows them to Go about to to overcome any liquidity problems the problems that we have in our today crisis are not liquidity problems Central banks can produce as much money as we can think of Problem is that we have Greater huge solvency crisis is a different issue right but again, so the main point is then that the transition from The traditional monetary system based on metallic metal to a fiat money system has not resulted From the greater efficiency of the immaterial Money but from the fragility The crisis pro-ness of the factional reserve banking system So we can conclude then in in well one switch over to this this slide conclude in In three points first by by stating again that Until the 17th century virtually all countries had a monetary system based on silver banks played virtually no role in these systems second Fact is that today all systems have a monetary system Featuring immaterial fiat money and fractional reserve banking and that the reason for this transition is that inflationary legal tender laws When they apply to fiduciary media and immaterial money are less disadvantages for the state That's really what it boils down to The traditional monetary system has been abandoned because manipulating this monetary system entailed greater short-run disadvantages for the governments that were concerned and the consequence has been the historical consequence has been An alliance between government and bankers a long-standing alliance which now dates back to the 17th century Not based on personal friendship, but on the logic of the monetary system And of course the redistribution through inflation has been great dramatically increased I mean you can rob the population by debasement of the coinage, but you cannot rob it as fast and as as sorely as by the increase of fiduciary media and of fiat money and It finally is as entailed an ever-increasing Fragility in particular of our financial system and the fruits of this we see today Thank you for your attention