 Okay, everyone, I think we will begin. So if everyone could take a seat. For those of you who don't know me, I am Patrick Newman. Unfortunately, I have some bad news I have to mention at the beginning. You have to listen to me twice in a row. I'm giving the talk on banking and the talk on Austrian capital theory. So if during either of my talks you feel the need to take a nap by all means, please go ahead because I'll probably be doing that as well. So anyway, all of you are fully realizing the ramifications of having that cookie at lunch right about now, I'm sure. So anyway, the title of my talk is on banking. It's building directly off of what Dr. Klein discussed regarding money right before this. So what am I gonna be talking about? Well, banking is very important in Austrian economics, especially as we go through building up to Austrian business cycle theory, discussing how central banks can distort interest rates and that causes a boom and bust, as well as just the general laissez-faire orientation of Austrian economics. A lot of economists would say, well, you can have a free market and good X, but having a free market and money, well, that's just too radical, right? And that's, well, you can't have banks be unregulated. Banking is so important. The government needs to get involved and make sure banks aren't abusing their powers. Austrian economics sort of just proves this and I wanna be talking about that briefly in my talk. So anyway, I wanna discuss the main things that I'm gonna go through or why banks exist, why they're important, the types of services they provide. The differences between loan banking and deposit banking, right, so what loan banking is, what deposit banking is, how they're similar, how they are different. I wanna look at you how deposit banking affects the money supply. So we'll see that under deposit banking, banks can increase the money supply by creating additional demand deposits, okay, checking deposits. Then we're gonna briefly talk about how competition among banks, unregulated competition among banks, we can call this free banking limits credit expansion, which I'll define in a little bit, but this is banks increasing the money supply. So contrary to the fears of many historians who said, oh, well, before you had a central bank of the United States, all of these banks were just recklessly expanding credit and so on, well, that actually wasn't due to the lack of a central bank, right? Free banking limits banks' abilities to engage in, to increase the money supply. And I'm gonna talk about something known as the adverse clearing mechanism, a very important market mechanism in Austrian banking theory, okay? And last but not least, I wanna discuss how central banking affects the money supply and how central banks can increase the money supply in ways beyond traditional the market, okay? In order to do so, I'll go through the money multiplier process. So we've got a lot to cover. We're gonna be looking at balance sheets. So it's gonna be probably the most enjoyable thing you can think about doing in the middle of the summer. So anyway, let's jump in. So just a brief review of what we discussed in the talk before proceeding. Money originated on the market. It's not a creation of the government, okay? Money solves the double coincidence of wants and facilitates economic calculation. It allows complex society, modern civilization to exist because we can now compute revenues and costs, profit and loss under one common denominator, all right? Marginal utility theory can be applied to money. We learn that there is a demand for money, okay? And this is based off of the marginal utility to hold money so the benefits that comes from using money, okay? So it's no different than any other good. The supply of money and the demand for money determines its purchasing power, all right? And if you increase the supply of money that's going to lead to a lower purchasing power, the prices of goods will rise, okay? And the purchasing power is an array of prices and it can't be aggregated into a price level, all right? We learn that it's not a rising C level but instead certain prices are gonna rise more than other prices, okay? So anyway, with this basic review, we can go into what exactly is banking, all right? So we learned before that money is a generally accepted medium of exchange. Gammo is the acronym and we can sort of narrow this a little bit. When we think about money, the first thing that comes to my head, I think of dollar bills, cash, right? We're increasingly moving to a cashless society but I still dream of having my paycheck being given to me in a suitcase just full of unmarked $100 bills or something like that because I think, oh, that's money, right? Mises would call this money in the narrow sense or you can think about this as money proper. And this is what we think about is the real deal. Even the debit cards we use at the grocery store, we still think that, okay, we can go to an ATM and we can get cash for it, right? So money proper is, you can think about it's either a commodity such as gold and silver, right? Something that has use value or it's irredeemable by decree, right? So dollar bills, right? So dollar bills we think about as the money proper. Now there, what are checking deposits can be redeemed into, okay? Now, originally dollar bills were redeemable for gold. We'll sort of show that in a little bit but that's just important to go through, especially because once we talk about the types of money substitutes, banks can create, okay? Substitutes to the money proper. A bank is an institution that facilitates loans and or issues money substitutes to the money proper, okay? So it either grants loans, connects savers and borrowers and or it issues money substitutes, right? Claims to the money proper, okay? The first function is called loan banking and the second function is called deposit banking. Most commercial banks engage in both, okay? They are financial intermediaries between people who save money and people who lend money excuse me and people who want to borrow money and there are also institutions where people can deposit their cash, all right? For something that's more easily spendable but in order to really understand both functions we kind of have to analyze them separately, all right? So why does banking exist? Well, we think about deposit banking, right? Well, we say deposit banking exists because starting from a gold standard, gold and silver coins, they're cumbersome and they can easily be stolen, right? So if you go to the grocery store, it's a gold standard, you go to the grocery store and you wanna buy your groceries with silver coins, you're gonna have to walk in there, you have a giant bag of silver coins and it goes, you throw them down on the checkout line and then the cashier presses the button and it moves across and then she's gotta look at all of them, et cetera, it's cumbersome, it's kinda annoying to carry around and they could also be stolen, et cetera. On the other hand, banknotes are easier to carry and especially for small transactions. So instead of carrying a bag of gold and silver coins, you can just open up your wallet and you've got a couple banknotes, okay? That's the reason why people will prefer to use banknotes, they'll prefer to deposit their gold and silver at a bank in exchange for a money substitute known as a banknote, which we'll talk about. Building on this, bank deposits are like banknotes. You think of a checkbook or your debit card that you use, most people don't use checks anymore but we do use debit cards a lot. These are, people prefer to use these because they can be precisely divided. You don't even have to have the exact number of banknotes. If something costs $19.76, well you can just write a check for $19.76 or you can use your debit card and it will take out $19.76 from your bank. You don't have to have the precise bills and the change, et cetera, right? And there's also a verification. If someone steals your wallet full of your banknotes, well, you're still out of luck because they can use them but if they steal your wallet and all you have is your debit card, you can quickly, one, there's usually a pin and you can quickly cancel that card, okay? So we can see from this, deposit banking performs very useful functions, right? Loan banking also performs very useful functions. You might say, all right, well, if a bank is, we'll show, let's say I want to lend money and someone, my brother, Benjamin wants to borrow money from me, right? Well, why does a bank have to take my money and lend it to Ben for me and collect the finders fee? Shouldn't I just go to Ben and directly lend him money? Well, there are costs to doing that. I have to figure out that Ben wants to borrow money from me and then I also, Ben has to know that I want to lend money to him and it becomes much more complicated when we're not talking about family members but we're talking about someone across town or in a different part of the country, right? Banks as financial intermediaries engaging in loan banking lower the cost of finding borrowers and lenders. This is not exploitation, right? They're not doing something that, the greedy capitalists taking, sucking things out of the economic system. It's a very useful function, okay? A lot of people don't understand that, all right? So let's jump in to loan banking, all right? So when we talk about banking, one of the things we have to use is a T account, okay? We have to show how a particular business is organizing. It's revenues and costs and it's profit and loss, right? So since the renaissance businesses and banks have engaged in double entry bookkeeping, this has allowed them to track their financial operations. Since the late 1800s, they've been using specifically the familiar T account assets equals equity plus liabilities. So you think about assets as the monetary value of what you have, liabilities is the monetary value of what you owe and equity is your net worth, okay? So we can show a business when they buy something, they can, they'll record values on both sides, so-called balance out the equation, all right? If assets goes up, well, that means something, either equity or liabilities also have to go up, all right? So suppose we're looking at a particular individual, one Patrick Newman, and let's say he wants to create his own bank, so he decreases his spending on consumer goods by about $10,000, and he starts a bank with these savings, all right? So we're going to assume we're at a gold standard, so this $10,000 is in gold, right? A dollar is one 20th an ounce of gold, okay? So we're going to start off with a gold standard and sort of progress to a more modern economy. I'll be talking about savings later in the next discussion, but right now we can just think about them as it's a restriction of consumption, right? You're foregoing the ability to purchase consumer goods, right? So I set up my bank, and again, we're abstracting, let's say, you know, from the money I have to spend on the building and the workers and et cetera, on the asset side, I've record gold at $10,000, and on the equity plus liability side, I haven't borrowed any money, so my equity, my net worth is $10,000. So $10,000 equals $10,000, okay? We're good, no one's cooked the books, I'm doing good so far, et cetera. But of course, this isn't the end of the story, this is only the beginning of the story because I wanna make money, right? I'm not just setting up this bank for fun, I wanna make money. So I'm gonna make a loan to Chipotle, let's say I value them, they value me, I'm a customer, I say, well, lend you $9,000 for you to expand your business, et cetera. I make a $9,000 loan to Chipotle for one year, right? So what I have from Chipotle is a contract they've signed saying IOU $9,000 plus interest, okay? Plus an extra premium on that money, right? We'll talk more about interest later, particularly tomorrow in Dr. Hermner's class, but it's just important to know interest again, it's the reward for foregoing consumption, okay? It's the premium on present consumption over future consumption. So the amount of gold I have has declined by $9,000 on the asset side, but replacing that as an IOU worth $9,000 at least right now, the present value, okay? And my equity is still $10,000, all right? Both sides balance out, what's gonna happen over time is that Chipotle, if they've done a good job with that money, they're gonna pay me back my $9,000 plus interest and I'm going to add some money to my equity, right? I'm gonna get that interest put in my equity, my net worth will go up. I'm doing a good job. Important for our purposes is that the money supply has not changed, all right? All that's happened is my cash balance or really the Newman bank's cash balance has declined by $9,000 and Chipotle's cash balance has gone up by $9,000, okay? So there's been no change in the money supply, just a change in the composition of cash balances, all right? So that's all that's happened. So this is why we say loan banking is non-inflationary. Inflation is being increased in the money supply. It doesn't change the money supply, okay? We can look at a little bit more complex loan banking where now the bank isn't lending out its own money but it's borrowing money from someone else and then turning around and lending it. So suppose the Newman bank borrows $5,000 in gold from a certain Ludwig in the form of a certificate of deposit, all right? And then the Newman bank makes a $5,000 loan to the Mises Institute. So Ludwig, he's gonna loan money to his own business. So it's an institute in honor of him, it'd be a good idea. So what's gonna happen is, so a certificate of deposit is, it's a financial instrument you can purchase where if you put money in a one-year certificate of deposit, you're making a loan. You can't spend that money. You're relinquishing your ability to spend that money within the timeframe of the certificate of deposit, okay? So it's a loan. Ludwig is loaning to the Newman bank. I'm promising to pay Ludwig interest in one year and I'm gonna take that money and I'm gonna lend it to someone else at higher interest. And I'm going to pocket the difference, right? This is the compensating me for finding the borrower of the Mises Institute as well as finding the lender, Ludwig, okay? So with our example, once again, the money supply remains constant, right? All that's happens to change in cash balance when Ludwig puts money in the certificate of deposit, he is relinquishing his ability to spend that money. So his cash balance goes down and on the other hand, the Mises Institute's cash balance has gone up. So with the IOU from the Mises Institute, my assets goes to $15,000 and my equity plus liabilities goes to $15,000. My net worth is still $10,000 but my liabilities goes up in the form of now I owe money to Ludwig, okay? So once again, whenever we're adding something to one side, we've always gotta add something to the other side. This is how it works. We've gotta balance the books, so to speak, okay? So now we wanna move on to deposit banking. We wanna show how it's different, okay? So not all banks are only engaging in loan banking, okay? Most banks are engaging in some form of deposit banking, okay? We're here, the results are going to be different. Banks are going to be able to change the money supply, okay? So we're gonna start over. So we're gonna start over the new balance sheet just to remove all the other prior complications. It's say I set up a bank, the Newman Bank, and I wanna become a deposit bank and so what's gonna happen there, right? So let's say Bob deposits $10,000 of gold at the Newman Bank. He wants to deposit it in the form of a checking account because he wants to have his money be safe. He's had prior experiences with theft in the past. So when he goes to the grocery store, he'll be secure and he also doesn't wanna have to constantly break down his gold coins into specific amounts, right? So this checking deposit is a money substitute. Bob perceives it as redeemable for a fixed amount, right? He perceives that his $10,000 checking deposit can be redeemed for $10,000 and he could spend it and someone else will accept it for $10,000, okay? So it's a subjective perception, right? That it is as good as gold, so to speak, okay? So he could spend it at the grocery store, he could convert $1,000, $2,000, $9,000, $10,000 for gold and he could also convert it into banknotes if he wants. So if he wants to change the composition of his cash balance, he could say convert $5,000 of his checking account into banknotes, okay? And the Newman Bank would issue banknotes. I've got a picture sort of showing that on the next slide. Once again, the money supply has not changed. All that's changed is the composition of the cash balance, okay? So Bob's cash balance in terms of gold has declined, right? By $10,000 and it's gone up by $10,000 in the form of notes and deposits, right? So let's say Bob is keeping some of it in the form of notes, right? So here's an interesting picture of a banknote back in the day. This is from New York. It is the St. Nicholas Bank, right? And they've got a little picture of Santa Claus back in the day, so, you know, St. Nick, right? It's good advertising. And it says, you can't read it into the fancy handwriting, but it says the St. Nicholas Bank will pay $5, which is one fourth an ounce of gold, to the bearer on demand. So if you had this note and you went to an institution that belongs to the St. Nicholas Bank or there was some sort of partnership with them, you would be able to get gold coin, right? It was redeemable to the bearer on demand. That's what the banknote said, okay? That's even, in fact, what our dollar bills used to say back in the day. But anyway, so right now the Newman Bank operates with a 100% reserve ratio, okay? We can calculate the reserve ratio as reserves divided by deposits times 100. So with $10,000 in gold and $10,000 in deposits, the reserve ratio is 100%. All money substitutes are what's known as a loot of God and means is called money certificates. All right, they are claims to the money proper, okay? They're backed. There's a one to one correspondence, right? So if Bob redeemed all of his money for gold, he would be able to get it, okay? However, the situation is going to quickly change. Let's say the Newman Bank makes a $90,000 loan to a gym in the form of a checking deposit. So gym wants to borrow money to expand his business and Patrick Newman is the entrepreneur of the Newman Bank. I say, sure, I can grant that loan to you. Let me just open up a checking account to you. So you could redeem this checking account for gold if you or another business would like to or you can just spend money. You can just spend this money at other institutions, right? This is what's known as credit expansion, okay? Banks are increasing the money supply by making loans through unbacked money substitutes. What's known as fiduciary media, okay? If you've noticed right now, there's $100,000 of claims to only $10,000 of gold reserves, okay? $90,000 are basically unbacked. Everyone wanted to redeem all of their deposits for gold. The Newman Bank would be unable to do this. Furthermore, it's important to note that the money supply, at least right now, has increased by $90,000, right? Because Bob's cash balance is still $10,000, right? And Jim's cash balance has gone up by $90,000. So just like that, the bank has been able to increase the money supply, okay? This is what's known as deposit banking, right? This is, more specifically, what's known as fractional reserve banking, okay? So the Newman Bank is now operating at a 10% reserve ratio, okay? It's pyramiding off of its reserves. You can, this is how sometimes how people describe credit expansion. They flip a pyramid, so it's upside down triangle. There's, you say like $100 in deposits, $10 in reserves, right? It's really $100,000 and $10,000, right? In such a situation, the Newman Bank cannot meet all potential withdrawals, right? If both Bob and Jim want to redeem all of their money for gold, the Newman Bank can't do it. It's estimating that well, only about 10% of the money will be redeemed, right? The bank is, if the bank can meet all current withdrawals, it's liquid. It has enough reserves to meet them. So if people want to redeem $5,000 of their money substitutes, the Newman Bank will be able to do so. On the other hand, if people want to redeem more than what they have in reserves, it's illiquid. It can't meet all current withdrawals. And then it has to close its door. So a bank, a fractional reserve bank is going to try to estimate, and obviously it doesn't want to make a bad judgment, or else it's going to quickly go out of business, okay? And as we'll see, the Newman Bank has made a bad judgment. It will quickly go out of business if it makes a $90,000 loan with only $10,000 of reserves, okay? Most economists, if you take a standard economics course when they describe fractional reserve banking, and then when they get into bank competition, or excuse me, when they get to central banking, they're going to quickly say, well, fractional reserve banking's unstable. Banks will be able to increase the money supply endlessly. The free market will be unable to stop this. You're going to have what's known as wildcat banking, right? So here's a wildcat bank. This is referring to the past in American history when you'd have these fly-by-night operations. Someone would set up a bank where the wildcats roam, so they speak out in the boonies in the West, which back then was like near the Mississippi River, right? So they would set up a shop, they'd set up a bank that makes some loans, make some money, and then the next day they'd leave, right? So they'd say, well, this is why you need a central bank to regulate the money supply, regulate banking, blah, blah, blah, blah, blah, blah, blah, et cetera, et cetera. Austrians respond and say, well, free banking and competition is going to limit credit expansion. The instances of wildcat banking were drastically overblown, and the problems that were caused under this period were caused by government intervention. That's a story for another time. But anyway, most economists don't know that. Why will free banking limit competition? Well, you're gonna have what's known as the adverse clearing mechanism. And this is when an overexpansion of a bank's deposits leads to an outflow of reserves. So if a bank expands credit beyond its supply of reserves, well, it's going to lose those reserves because another bank is going to want to redeem the money substitute for the money proper, okay? This is the market at work, okay? So if the Newman Bank made a $90,000 loan to Jim, it would quickly go out of business. And why? Because let's say Jim is going to spend his loan at Ace Hardware, he's going to use his debit card, or he's going to use his, he's going to write a check. And Ace Hardware stores its money at a different bank. Let's say this is the Bank of Salerno and run by Joseph Salerno. And Joseph Salerno is going to present the check to Patrick Newman for redemption and gold. The owners of each bank are friends, but they're not that good of friends, right? So Joe says, well, you're a good guy, I like you, but again, I got a $90,000 in bank notes here. I want the actual gold, right? And I'm going to cry, I'm going to plead, I'm going to say, well, come on, we've been such good friends all this time. And Joe's going to say, well, we're friends, but we're not that good of friends. We are competitors, right? And so I'm going to go out of business. I'm going to fail, right? So vigorous competition is going to prevent banks from engaging in credit expansion, right? The only way banks are going to be able to engage in credit expansion is when they are, was when there's an increase in the supply of reserves, right, such as gold, okay? So free banking under a gold standard is going to be a major deterrent to credit expansion because it's only when the supply of gold goes up will banks be able to increase their loans and we'll show this process in a little bit, okay? So the best way to stop credit expansion is to allow people to freely open up banks, right? Because that's going to put a limit on credit expansion. So you might say, okay, all right, well, what if Patrick and Joe really are that good of friends, right? Where Joe's bank, the bank of Solarno, gets my money substitutes, the Newman Bank's money substitutes, and he says, well, all right, I'm not going to redeem them for gold, right? I trust them, it's good enough, right? So in other words, this is a cartel, right? When you have two or more organizations, they work together. In the case of banks, they're not going to be restricting production, but they're going to be working together to expand credit, right? To increase the money supply. So what happens if banks just work together, right? Well, it's still going to fail because of internal and external pressure, like any cartel fails. Internal pressure refers to secret cheating, right? I might tell Joe, oh, I'm not going to redeem your money substitutes for gold, but when he's not looking, I'm going to send some officials who don't look like they don't belong to my bank to redeem gold at his institution. External pressure refers to the fact that someone else, a new bank, Klein & Klein, right, run by Peter Klein and Sandy Klein, they're not in the cartel agreement and they could present money substitutes, our money substitutes for redemption, okay? So bank cartels, just like any cartel, are not going to work on the free market, okay? So the free market, far from being a source of a massive increase in the money supply, it's actually going to limit increases in the money supply. They're going to be really good at it, okay? Of course, governments aren't going to tell that to you because they want to say they're even better at doing so, but anyway, so we come now to the final evolution of money or as Austrians we would say a devolution, right? It's declining, right? Because central banking is not as advanced as fractures of banking. What do we mean by a central bank? Most people think of a central bank, at least in the United States, do you think of the Fed? So if you say, the feds are after the get me, you're referring to the FBI, right? If you're saying the Fed is after the get me, you're referring to the Federal Reserve, maybe you had a nasty tweet, right? Or something and now Powell's out to, he's sick the dogs on you, he's out to get you. We can help you if the feds are after the get you. If the feds are after the get you, we can't do anything for you. You've done something wrong, I don't know. But so what do we mean by a central bank? What are the characteristics of a central bank? Well, one, they have a monopoly on note issuance. So now banks can no longer redeem, or excuse me, they can no longer issue bank notes. The central bank is going to issue all of the notes. So when the Federal Reserve was created in 1913, banks could no longer issue notes, right? The St. Nicholas Bank could no longer issue notes. A bankers bank is all, excuse me, a central bank is also a bankers bank, right? What we mean by that is now fraction reserve banks are gonna hold their reserves at the central bank. So you and I can't conduct business at the Federal Reserve, but we can conduct business at a bank that conducts business at the Federal Reserve. So the Federal Reserve is where reserves are located, right? Fracture reserve banks, they're not gonna keep gold in their vaults or cash, they'll keep some cash, what's known as vault cash. Instead they're going to have member bank deposits. They're gonna keep all of the reserves at the Fed. Okay, so the Fed is, it's a bank for bankers. It's also a regulator. So it regulates fraction reserve banks. It makes sure they're holding a certain amount of equity or they're holding a certain reserve ratio. They're going to institute what's known as reserve requirements. They're gonna make sure they're only making certain types of loans, et cetera. In a more advanced class, we would talk about all of these nuances. They're also a lender of last resort, right? So what we mean by this is if banks need to borrow money, they can go to the Fed, right? When they can't borrow from other banks, they can go to the Fed. The Fed is the, or the central bank is the, is the lender of last resort. Okay, and last but not least, they can conduct monetary policy. Okay, so what we mean by monetary policy is when you are trying to adjust the money supplying interest rates to stabilize economic activity, like GDP, inflation, unemployment, et cetera. Central banking strengthens bank cartels. The Fed might deny this, or they might say, well, we don't do that, but just like every other government agency that strengthens cartels, they really do strengthen cartels because they can increase the supply of bank reserves, which is gonna make it easier for banks to expand bank credit, and they can block out entry. They could raise requirements on banks to prevent that external pressure. So Murray Rothbard in the Progressive Era, he goes through the origins of the Federal Reserve and he shows how well it was really just the main lobbyists behind this were a bunch of bankers, New York City bankers in particular, who wanted to get crony special privileges and increase the strength in their own bank cartels as opposed to banks in other parts of the country. So when we go to the monopoly on note issuance, we can show that you've got Federal Reserve notes back then, so when the Fed was created, you could, they would issue these notes, they look just like our cash, and again, you might not be able to read the fine print, but it says $20 in gold coin, so again, that's one ounce, payable to the bearer on demand. You could redeem, you could go to a bank, you said like to redeem this for gold, the bank would then go to the Fed and it would redeem it for gold, okay? So this is, we were on a gold standard when the Fed was initially created. Now we don't have anything, we're not on a gold standard. The notes we have, they're not redeemable for anything, right? So since 1933, you can't redeem them for gold, right? So in 1933, the government, Darth Vader, they said, well, I'm altering the deal, pray I don't alter it any further, right? Everyone hopefully knows this is from Star Wars. So this is basically what happened, right? The government said, yeah, we were on a gold standard, not anymore, sorry, bye. And that was that, all right? All right, so let's talk about monetary policy, right? Or at least the ways in which a central bank can conduct monetary policy. Really gonna go through only one of these in depth. This is the most commonly used tool. This is open market operations. When the Federal Reserve buys or sells assets or really anything it wants, it buys government securities or mortgage-backed securities, et cetera from fractional reserve banks. This is going to increase reserves, right? Other policies that it can engage in, it can use the discount window, which it can lend money to banks. It's gonna also increase reserves. It could adjust banks' reserve requirements. So it could lower reserves from, say, 10% to 5%, or it could raise them from 10% to 20%, et cetera. And there's also a new tool. Since the financial crisis, banks have held a lot of excess reserves at the Fed. We'll briefly talk about what excess reserves are. And the Fed can adjust the interest it pays on these excess reserves, right? So it can adjust the interest rate it pays on its reserves, just like the interest rate on all of the loans that it grants, okay? So we wanna talk about open market operations, which is the most common monetary policy tool. And in doing so, we wanna look at the money multiplier. This is the step-by-step process of how banks increase the money supply when they engage in credit expansion. We saw earlier that if banks get an increase in reserves of $10,000, they're not gonna increase the money supply, or one bank isn't gonna increase the money supply by $90,000, okay? Instead, it's gonna be a much more gradual process, okay? So let's say we're looking at open market operations. Traditionally, the Federal Reserve would only buy or sell short-term government securities, but since the 80s, it's basically been able to buy whatever it's wanted, and that's what it's been doing for the past 10 or so years, and especially over the past two years, at least last March and April. So let's say the Fed writes a $1,000 check to bond dealers Jones and Co in New York City, all right? So it wants to purchase securities, from this company in New York. It literally just prints money out of thin air. We're not on a gold standard, it doesn't have to worry about anything. It's just simply, all right, you wanna get the, you wanna sell these to us, how much for $1,000? Okay, all right, here's $1,000. They just add that money into that organization's account. All right. Now, the bond dealers that say they have the check that the Fed has given them, and they're going to deposit the Fed at what they consider the most trustworthy bank, which is obviously the Newman Bank, we all know that. And the Newman Bank is gonna have these reserves, and it's going to deposit it at the Fed. All right, that's not shown. What we see here is that the Newman Bank has reserves of $1,000, and it has a deposit to Jones and Co for $1,000, okay? So the Newman Bank isn't going to engage in the massive amount of credit expansion depicted earlier. Instead, it's only going to expand its loans by that formula, the change in reserve times one minus the reserve ratio, okay? This is a much smaller and gradual increase, but it's gonna allow the bank to stay in business, all right? So if the Newman Bank is operating at a 10% reserve ratio, all right, then this is how much it's going to increase reserves, excuse me, increase its loans by. Traditionally, banks don't want to hold excess reserves, they want to loan everything up to what is possible, what they feel is feasible, all right? So it will expand credit, all right? This is not loan banking again, this is deposit banking, it's going to expand credit by $900 through a loan to let's say Macy's, all right? And then let's say Macy's takes this money and it spends it, and then the institution it spends the money on belongs to the Bank of Solarno and et cetera, et cetera. So the Bank of Solarno redeems the check, the Newman Bank will now have enough money, okay? So initially what you see is that the Newman Bank is going to grant this loan, it's going to add an IOU worth $900 on the asset side, and then it's going to create a deposit for Macy's, that's a liability, and then what's going to happen is when the Solarno Bank redeems the money, I guess you can't see it, the reserves are going to be reduced by $900 and the deposit to Macy's will be reduced, all right? So the bank is still in business, its assets have declined, but it now has an interest earning asset, okay? And now the process will continue as the Bank of Solarno makes a loan based off of its new reserves, okay? The Bank of Solarno is going to engage in credit expansion by the same formula, so it gets $900 in reserves, it's going to increase credit by $810, right? It's going to make a loan to say McDonald's, McDonald's is gonna spend it to expand the business, then money's gonna wind up at another bank, all right? That bank's gonna wanna redeem some of the money substitutes from the Bank of Solarno and so on, all right? So then you got the bank after, let's say Herbner and Rittenauer Incorporated, they expand credit by $810 times .9, which is $729, and so on and so forth. So the new reserves basically is spread around the economy like a hot potato and with each bank it goes through that bank's making a loan by a smaller and smaller amount. And I just kind of have plus, dot, dot, dot, dot, dot, dot, right? It technically is increasing by smaller and smaller and smaller and smaller amounts and so the overall increase from that $1,000 of open market purchases is $10,000. And this, how we get that $10,000 is equal to the formula change in reserves times one divided by the reserve ratio, okay? So it's a thousand times 10, 10,000. So the overall money supply will increase by $10,000, okay? The one divided by the reserve ratio, this is the money multiplier, right? This is how much the money supply will increase if reserves increase, say by a dollar, well the money multiplier with a 10% reserve ratio in the economy tells us that the money supply will go up by $10. If the reserve ratio was higher, say 20%, well then the money multiplier would only be five. If the reserve ratio was lower, say 5%, well then the money multiplier would be 20, okay? We can see that, well, from this basic analysis, the central bank can increase the money supply as much as it wants to, why? Because unlike free banking, the central bank can just simply increase reserves, right? Before the federal reserve had to operate under a gold standard and once that gold standard became too much of a constraint, then the fed just, they altered the deal, right? And then they said, pray I don't alter it further and then they altered it again in 1971 with Bretton Woods, right? So, but anyway, I mean, that's what happens with Darth Vader. So again, this is the basics of the monetary expansion process, right? Now, it's important to go through the increase in the money supply, what does this look like on a supply and demand graph? Well, we've got the money supply, it's a vertical line, the demand for money, as I was discussed before, is downward sloping and with each amount of credit expansion, the supply of money increases to the right, okay? Until you get the overall increase. So initially the money supply increases by 1,000, then it inches up by $900, then $810 and so on until you get the full $10,000 increase and each of these loans are injected into the economy at a certain point, raising prices and changing production unevenly, okay? This is the non-neutrality of money, okay? This is a very Austrian insight, okay? So we now wanna see, all right, well, if banks are able to engage in this type of credit expansion, what is this going to do for a more complicated analysis, okay? What is this going to do to interest rates, right? I've kind of abstracted from that. So if banks are engaging in loan banking, someone's saving money and a bank is lending that out, how's that gonna affect interest rates? When banks are engaging in credit expansion when they're increasing the money supply, how is that going to affect interest rates? Well, in order to explain that, you first have to know what is an interest rate, okay? And that will be described later, right? We also wanna know how do changes in savings from loan banking and increases in credit expansion affect the structure of production? Okay, well, we have to know what exactly is a structure of production, okay? So in order to figure those out to learn the answers to these questions, you're gonna have to stick around, you're gonna have to listen to my talk on Austrian capital theory, Dr. Herbner's talk on the theory of interest, and Dr. Jonathan Newman's talk on the Austrian theory of the business cycle, okay? So we're gonna slowly build up step by step the basic understanding of Austrian economics, where you go through money, then you go through banking, then we wanna see how banks actually affect the economy, we wanna describe this economy using the structure of production, we wanna describe and define interest rates, and then we wanna look at Austrian business cycle theory. Again, so this is the step by step we're building the edifice of Austrian economics, okay? So for more on banking, I encourage you to read Murray Rothbard's The Mystery of Banking, and for more on the structure of production, I encourage everyone to come back here in 15 minutes. So thank you so much, I'm happy to answer any questions. Thank you.