 So let me start with all you need to know about politics, money and banking in 30 minutes it might be 35 I'm not quite sure and of course I will be immediately falsified because several other speakers will talk on money and politics as well but that's how it goes sometimes you are immediately falsified after you have said certain things. Imagine that you are in command of the state the state being defined as an institution that possesses a territorial monopoly of ultimate decision-making in every case of conflict including conflicts involving the state and its agents itself and by implication as a second defining characteristic the state has the privilege to tax that is to unilaterally determine the price that you as the subjects must pay to the state to perform this task of ultimate decision-making. Now let's leave aside the question of how such a wondrous institution could ever have come into existence. Suffice it to say that it took hundreds of years to do so but it did and its continued existence today seems assured by the fact that most if not all people nowadays think of it as an indispensable and unquestionably good institution or at the very least as a necessary evil with the emphasis on necessary and assume further that you are not an angel or a saint but a regular person with normal human motives and desires. In particular assume that you are a person that prefers more wealth to less and that rather grows richer than poorer. Now to act under these constraints or rather under this lack of constraints is what constitutes politics and political action and it should be clear from the outset that politics then by its very nature always means mischief not from your point of view of course but mischief from the point of view of those subject to your rule as ultimate judge in every case of conflict predictably you will use your position to enrich yourself at other people's expense rather than preventing and resolving conflict you will cause or provoke conflict and then solve it by deciding it consistently in your own favor. You may not be able to do whatever you please because occasionally you run into resistance on the part of your victims but as long as a necessity of state rule is held to be in no doubt whatsoever in public opinion you will be a permanent mischief maker always trying to further enrich yourself at the expense of others more specifically based on these very sparse assumptions we can now predict in particular what your attitude and policy vis-à-vis money and banking will be. Assume that you rule over a territory that has developed beyond the stage of a primitive barter economy and where a common medium of exchange that is a money is in use first off it is easy to see why you would be particularly interested in money and monetary affairs as a state ruler you can in principle confiscate whatever you want and thus provide yourself with an unearned income but rather than confiscating various producer or consumer goods you will naturally prefer to confiscate money because money as the most easily and widely saleable and acceptable good of all goods allows you the greatest freedom to spend your income as you happen to like it on the greatest variety of goods first and foremost then the taxes that you impose on society will be money taxes whether impose on property or on income and you will try to maximize your tax money tax revenue in this attempt however you will quickly encounter some rather intractable difficulties eventually your attempts to further increase your tax income will encounter resistance in that higher tax rates will not always would necessarily lead to higher tax revenue but they might also need to lower tax revenue your income your spending money so to speak declines then because producers burdened with increasingly higher tax rates will simply produce less in this situation you have only one other option to further increase or at least maintain your current level of spending namely by borrowing such funds and for that you have to go to banks and hence your special interest also in banks and the banking industry if you borrow money from banks these banks will automatically take an active interest in your own future well-being they will want you to stay in business that is they want the state to go on in its exploitation business and since banks tend to be major players in society such support is certainly beneficial to you on the other hand as a negative if you borrow money from banks you are not only expected to pay back your loans but you're also expected to pay interest on top the question then that arises for you as the state ruler is this how can I free myself of these two constraints that is the constraint of tax resistance in the form of falling tax revenue and of the need to borrow from and pay interest to banks now it is not too difficult to see what the ultimate solution to your problem is and given what this ultimate solution is it also becomes immediately apparent what intermediate steps you must take from whatever happens to be your starting point from which you have to begin with your politics in the pursuit of this ultimate goal of yours you can reach the desired independence of taxpayers and tax payments and of banks if only you establish yourself first as a territorial monopolist of the production of money on your territory only you are permitted to produce money but that is not sufficient because as long as money is a regular good that must be expensively produced there is nothing in it for you except expenses more importantly than you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero instead of expensively producing quality money such as gold and silver you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money normally as an aside normally of course no one would accept worthless pieces of money as payment for anything pieces of paper are originally only acceptable as payment only in so far as they are titles to something else that is in so far they are property titles in other words then what you must do is you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing now under competitive conditions that is if everyone were free to produce money a money that can be produced at almost zero cost would be produced up to a quantity where technically speaking marginal revenue equals marginal cost and since marginal cost is zero the marginal revenue that is the purchasing power of money would be zero as well hence the necessity to monopolize the production of paper money so as to restrict its supply and preventing it to falling to the status of worthless pieces of paper in order to avoid hyperinflationary conditions and the disappearance of money from the market all together and a flight into real values and you must monopolize this the more so the cheaper the money commodity becomes in a way you have just accomplished what all alchemists and their sponsors wanted to achieve you have produced something valuable namely money with purchasing power out of something that is practically worthless that is out of pieces of paper and just as alchemists if they had accomplished this miracle would have had to keep their recipe secret as otherwise everyone would and could copy them and just rob them of their magic wand so you as a money producer must since you cannot keep the making of paper secret insist on your privilege as a monopoly as a monopolist in order not to lose your wondrous power now having monopolized the production of money and in a conscious cost-cutting effort so to speak having reduced the production cost and the quality of money to virtually zero you have made the marvelous accomplishment unless you are a saint that is under as the assumption that you are just a normal person you can and will now and for ever print more money when in need for it after all it costs you almost nothing to print it and you can then turn around and buy yourself something really valuable such as a house or a Mercedes for your paper and you can achieve these wonders not just for yourself but also for your friends and acquaintances of which you discover that you have all of sudden far more than you used to have in the past including of course many economists who will explain to the public why your monopoly is really good for everyone now what are the effects of this first and foremost more paper money does not in the slightest effect the quantity of all other goods of all non-monetary goods neither the quantity nor the quality is changed there exists just as many other goods around as before this immediately refutes of course the notion which is apparently held by mouse if not all mainstream economists that more money can somehow increase social wealth to believe this as everyone proposing so-called easy money policies these days as an efficient and socially responsible way out of economic troubles everyone who believes this is to believe in magic that stones rather or rather paper can be turned into bread but that tells you something about the level of sophistication of the economics profession rather what the additional money you printed will affect is two-fold on the one hand money prices will be higher than they would otherwise be and the purchasing power per unit money will be lower than it otherwise would be in a word the result will be what we call inflation but more importantly all the wire the greater amount of money does not increase or decrease the total amount of presently existing social wealth or the total quantity of all goods in society it redistributes the existing wealth in favor of you and your friends and your acquaintances that is those who get your money first you and your friends are relatively enriched you own a larger part of the total social wealth at the expense of impoverishing others those own less now as a result of your policy the problem for you and your friends with this institutional setup is not that it doesn't work it works perfectly always to your own and your friends advantage and always at the expense of others all you have to do is to avoid hyperinflation for in that case people would avoid using money altogether and flee into real values thus robbing you of this magic wand that you have the problem with your paper money monopoly if there is one at all is only that this fact will be immediately noticed also by others and recognized for what it is namely a big criminal rip-off that it is but this problem can be overcome also if in addition to monopolizing the production of money you also set yourself up as a banker and enters a banking business yourself with the establishment of a central bank because you can create paper money out of thin air you can also create credit out of thin air in fact because you can create credit out of nothing that is without any savings on your part you can offer credit even at an interest rate as low as zero or even a negative rate with this ability of creating credit out of nothing and offering extremely low interest rates with this ability not only is your former dependency on banks and the banking industry eliminated moreover you can make banks now dependent on you and you can forge a prominent alliance and complicity between banks and state you don't even have to become involved in the business of investing the credit yourself that task and the risk involved in it you can safely leave to commercial banks what you and your central bank need to do is only this you create credit out of thin air and then loan this money at below market interest rates to commercial banks instead of you paying interest to banks banks now pay interest to you and the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still sub market interest rates to earn from the interest differential in addition to make the banks especially keen on working and cooperating with you you may permit the banks to create a certain amount of their own new credit of checkbook money in addition and on top of the credit that you have created this is what we call fractional reserve banking now what are the consequences of this monetary policy to a large extent they are the same as was an easy money policy the print and spend policies that I described earlier first an easy credit policy is also inflationary more money is brought into circulation and prices will be higher excuse me I need some more so the consequences are largely the same more money is brought into circulation and prices will be higher and the purchasing power of money lower than would have been the case otherwise second the credit expansion to has no effect on the quantity or quality of all goods that otherwise exist in society it neither increases nor decreases their amount more money is just that that is more paper it does not and cannot increase social wealth by one Iota third easy credit also engenders a systematic redistribution of social wealth in favor of you the central bank and the commercial banks within your banking cartel you will receive an interest return on money that you have created out of sin air at practically zero cost instead of on money costly saved out of an existing income and so do the banks who earn additional interest on your costless money loss both you and your banker friends thereby appropriate and unearned income you and the banks are enriched at the expense of all real money savers because these real money savers receive now a lower interest return than they otherwise would have that is without the injection of your and the banks cheap credit into the credit market on the other hand there also exists a fundamental difference between an easy print and spend money policy and an easy print and then loan out money policy first off an easy credit policy authors the production structure that is it changes what is produced and by whom in a very significant way you the chief of the central bank can create it out of sin air you do not first have to save money out of your money income that is you do not have to cut your own expenses and thus abstain from buying certain non-money goods as every normal person must if he extends credit to someone else you only have to turn on the printing press and can thus undercut any interest rate demanded of borrowers by savers elsewhere in the market granting credit does not involve any sacrifice on your part which is why this institution is of course so marvelous if you are in control of it if things then go well you will be paid a positive interest return on your paper money investment and if they don't go well well as a money producer money monopoly producer you can always make up losses more easily than anyone else namely by covering your losses was even more printed paper without cost then and no genuine personal risk of losses you will then grant credit essentially indiscriminately that is to everyone and for any purpose without much concern for the credit worthiness of the debtor or the soundness of his business plan because of your easy credit certain people in particular investment bankers who otherwise would not be deemed sufficiently credit worthy and certain projects in particular projects financed by banks and their main clients that would not be considered profitable but wasteful or too risky instead do get credit and do get funded essentially the same applies to the commercial banks within your banking cartel because of their special relationship to you as the first recipients of your costless low interest paper money credit the banks too can offer loans to prospective lenders at interest rates below market interest rates and if things go well for them they go well and if they don't they can rely on you as a monopolistic producer of money that you will bail them out in the same way as you bail out yourself out of any financial trouble namely by printing more paper accordingly the banks too will be less discriminating in the selection of their clients and their business plans and more prone to fund the wrong people and the wrong projects and there's a second important difference between a print and spend and the print and loan policy and this difference explains why the income and wealth redistribution in your and your banker friends favor that is set in motion by easy credit takes the specific form of a temporal boom bus cycle that is of an initial phase of seeming general prosperity or of expected increases in future incomes and wealth followed by a phase of widespread impoverishment when the prosperity of the boom period is revealed as a widespread illusion the boom bus feature is a logical and physically necessary consequence of credit created out of sin air of credit unbacked by savings or as we economists call it also of fiduciary credit and of the fact that every investment of course takes some time and only shows later on in the future at some time in the future whether it is successful or not now the reason for the business cycle is as elementary as it is fundamental imagine Robinson Crusoe and Robinson Crusoe can give a loan of fish which he has not consumed himself to Friday Friday then with this loan can convert the savings provided to him by Robinson into a fishing net he can eat the fish while constructing the net and with the help of the net then Friday in principle is capable of repaying his loan to Robinson plus interest and still earn an additional profit for himself additional fish but all of this is physically impossible if Robinson's loan is only a paper note denominated in fish but unbacked by any real fish savings that is if Robinson has no fish because he has consumed at all then and necessarily so Friday must obviously fail in his investment endeavor in a simple barter economy as in the Robinson Crusoe Friday case in a simple barter economy of course this would become apparent immediately Friday will not simply not accept Robinson's paper credit in the first place but he would accept only real commodity credit real fish credit and because of this the boom bust cycle will not get started at all in a barter economy but in a complex monetary economy the fact that credit was created out of sin air is not noticeable every credit note looks like any other and because of this the notes are accepted by the takers of credit now this does not change the fundamental fact of reality that nothing can can be produced out of nothing and that investment projects undertaken without any real funding whatsoever but that is by savings must fail but it explains why a boom that is an increased level of investment accompanied by the expectation of higher future income and wealth can get started Friday does accept the note so to speak instead of immediately refusing it and begins to build the net and it explains then why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory because of a lack of true funding in order to complete all investment projects that had begun now but what's a little crisis to you even if your past to riches is through repeated economic crisis brought about by your paper money regime and central bank policy from your point of view that is from the viewpoint as a head of state and the chief of the central bank this form of print and loan wealth redistribution in your own and your bankers friends favor while less immediate than that achieved with a simple print and then spent policy is still much preferable because it is far more difficult to see through and recognize for what it truly is rather than coming across as a plain fraud and parasite in pursuing an easy credit policy you can even pretend that you are engaged in the selfless task of investing in the future rather than spending on present free volatiles and even government and you can pretend that you are healing economic crisis rather than actually causing them and even government deficits financed by the sale of interest bearing government bonds to commercial banks or to the general public look like normal deficits and like normal corporate bonds the government must pay interest on its bonds and it looks like it must productively invest its loans in order to do so yet in fact the loans granted by commercial back granted to commercial banks are made possible what the loans that commercial banks grant to the government are made possible only because first your central bank provides these commercial banks with the necessary funds or reserves to give them a loan to the government and in any case the repayment of your loans plus interest can be always assured by your own central bank in producing still more money and credit in the future so what a crazy world is this thank you very much