 I missed the talk of my predecessor, the title of which was discouraging everything you want to know about inflation. So I said, well, either he grossly underestimates the intellectual curiosity of this forum, or he overestimates the speed at which he can compress knowledge within 30 minutes. So my talk now is based on the hypothesis that he did not manage to talk too fast within 30 minutes. And we'll talk about the culture of inflation. It's a subject of great interest that has the importance of which has been realized as from the 19th century. So if we read important 19th century economic monetary theorists such as William Goode or Charles Holt, so they always come in and says, yes, these inflationary practices have even important cultural impact on society's consequences that do not concern the prices and the organization of markets and so on, but reverberate more generally on the behavior of the population. But then they didn't elaborate really very much. And astonishingly, in the 20th century, few economists have tackled the subject. Many have said, yes, it's an important subject, but we won't even start going into this. So I wrote a little chapter in my book, The Ethics of Money Production, which was first published in German in 2007 and then the English manuscript in 2008, and added another chapter with some new stuff on the ethics on the cultural consequences of inflation in my German language book, Krise der Inflationskultur, which hopefully will appear maybe next year in an English translation. The translation is already there, but I was too lazy or did not have time to turn it into the final manuscript. So we have the culture of deflation. Maybe it's useful to start with a few definitions. You will forgive me. I'm a professor, so it's a professional bias, so I'd like to say a few words about what would mean by culture and what I mean by inflation. So culture I would define quite generally as the totality of the way we do things, the way we think, the way we talk, the way we behave, the way we go about different things that are essential for human life, the way we dress, different ways to dress, different ways to eat, different things you can eat, what we consider to be problematic, how we go about solving problems and so on, the different ways of doing this and the totality of which reflects culture. I cannot say that the way Europeans dress or traditionally address is in some respect superior to the traditional Turkish way of dressing or Arab way of dressing, but it's just a different way of doing it. So in economic analysis, what can we say about culture? Of course we can, could develop a theory of the production of culture, nobody has done this so far to my knowledge from an economic point of view, but what I'm mostly interested in are the cultural differences that result from government interventions and these can be explained in a comparative way. So we can compare the changes in behavior, the changes in attitude that result from interventionism as compared to behavior attitudes and so on that would exist without those interventions. So you have some dispositions that exist anyway, so people are more or less, more or less strong time preference for example, in government interventionism, interventions not in all forms but in most forms tend to increase the preference for the present, so they increase time preference. Inflation, a second term. Inflation in mainstream economics is defined as a permanent or as permanent increase in the price level, in Austrian circles this definition is not considered to be particularly useful in the US, as a definition it's impeccable, you can define the word in this way, it's perfectly meaningful, but Austrians prefer as a rule another definition at the heart of which is the notion that there can be such thing as a politically induced increase of the money supply, governments can intervene to increase the money supply to a level that is higher than the level it would have reached otherwise. So this is the starting point of theory of monetary interventions, why do government do this? Well as a rule because they themselves profit from this, these are the famous canteenon effects and they justify these interventions in terms of various theories that we deal with at the universities in which they explain why such intervention are beneficial from an overall point of view. Now we will leave this out this afternoon in my talk at any rate, so I'm not concerned about the reasons why interventions might or not be beneficial from an overall point of view. So my point is simply that if we want to talk meaningfully about inflation the most suitable to go about this is to understand this as a consequence of monetary interventions. So what I'm really talking about this afternoon is the culture of monetary interventions, what kind of cultural difference or cultural impact do monetary interventions have. Now there are actually a great number of different consequences and I'm not quite sure what the most suitable way to classify those would be. In my books I just listed them, so it was more of a bullet point, different sections within the chapter 7, 8 major points and today I would like to maybe propose three major types of consequences, I wouldn't say this is a definite classification but one that could be retained anyway, one concerns the consequences that result from the fact that inflation always benefits a special class of beneficiaries. The second group concerns the culture of debt that results under certain circumstances from monetary interventions and the third group concerns the moral or ethical standards that prevail in society. So let's start with the first one, inflation always creates, monetary interventions always create a special class of beneficiaries. Now that invariably is so because if you increase the money supply then some people use these new money units first and therefore obtain a higher purchasing power which necessarily goes at the expense of other people whose purchasing power is thereby diminished. I can buy more, I can bid higher prices for apartments and for nice suits and for vacations in five-star hotels in Turkey and so on and to the extent that I obtain the house, I can buy the, or rent the apartment, I can buy the suit, I can rent the room in the five-star hotel, other people of biological necessity are deprived of the same service. So it's a redistribution game. Now the important point of monetary interventions is that as a rule and I would say this is more than a rule, it's almost a praxeological necessity, the group of beneficiaries is known in advance and fairly stable across time. It would be imaginable that we set up a monetary system, we increase the money supply and each year there's a different group of beneficiaries. So this year it's the bank, next year it's the shoe industry, the year after it's the members of the Property and Freedom Society and so on and so on. So it would be imaginable, but of course you start laughing and for a good reason. It's difficult to imagine that so much efforts be undertaken in terms of justification of the system setting up the system as a whole organization and so on, only so that the benefits then spread out randomly across the site. So the people who make this investment and who justify and hide the hidden costs and so on, of course they want themselves to reap the benefits. So it's not surprising really that the beneficiaries, there's a hardcore of beneficiaries that doesn't really change much across time. Now who are these beneficiaries? Here we, if we look at the history of monetary institutions because the beneficiaries depend on the institutions that you set into place to execute the monetary interventions, we can distinguish roughly before and after, so two periods before and after the 19th century. Before the 19th century, very largely monetary interventions concerned intervention into a precious metal coin system. And so the money of the different countries was precious metals, typically silver coins, to a smaller extent also gold coins and the government intervened in the monetary system, typically by debasing the coinage. That is, it mixed the coins with base alloys of a lower value so as to pocket the difference. One member of this meeting was so kind to give me actually three coins or four coins from Costa Rica. Who is this gentleman? Yes, thank you very much. Could you tell me your name again? Sebastian. Sebastian, what's the family name? Hortis. Hortis. Hortis, okay. So that's what my students were left to learn, Sebastian Hortis, benefactor of economic students in Anjie. So he gave me the coins of recent times with the nice silver coins from the mid-1970s, was a pretty full-bodied silver coin, and then debasement, so the coin becomes smaller, firstly has a higher denomination, and then the same coin becomes smaller. So it's the typical debasement process, even still alive in those countries that have some precious metal coinage. So this was by and large the way things were handled until the end of the 18th century, and so the main beneficiaries were invariably those who were running the mint, which was typically in the hands of the government. The king, the prince, and democratically organized societies was of the government that ran the mints. Now as from the 19th century, an institution that started to become noticeable in the 17th century, namely banking, especially fractional reserve banking, so banks that produce money, tickets, money, representatives based on the precious metal coinage became important and came to dominate the production of money now in the wider sense, including money substitutes in all Western countries. I could show you, I didn't bring my charts and so on because that would have taken longer than to analyze the different movements, but it's very clear if you look at the change of the composition of the money supply in Britain, in the United States, in Germany and so on. In the 19th century, at the beginning of the 19th century, it was pretty much based on precious metal coins, only England is an exception, and then from there it goes precious metal become less and it's important, and bank created money, so deposits, checking deposits and bank notes become more and more important. As you know, and as it has been said by my distinguished predecessor, all of this was represented by a great pedagogical or shall we say propagandistic default on the side of the governments as a great progress. We have these new types of money, so necessarily it must be good, it must be great innovation that benefits mankind. Anyway, my main point is the following. In this process, the creation of money no longer lay in the hands of the government, now we have a distinct group from the government, a private group, that suddenly, just like the government itself, received an artificial source of revenue, a source of revenue that did not spring from typical market activity, productive activity. So you produce something, you sell it, you provide a service and you sell it and so you work for something, you sell it. So here we have a type of revenue that is created out of thin air, the ex-neuro creation of money and provides revenue just to a group of people without corresponding services just as the government by taxing the population or by using the debasement process before earned additional revenue that was not based on any services or any production. So this is noteworthy and it's certainly a reason for the sudden popularity of fractional reserve banks in the 19th century because it became popular because everybody could become a banker. In fact, we see during the 19th century various crowds of the creation of commercial banks that were created in the hundreds and in the thousands. In the early 19th century in the U.S. and also in Britain and then later on, same thing in Germany, France and so on. Not in all periods, but for example in France it was during the Second Empire, 1850 to 1871, that the banking business was liberalized and pretty much everybody who wanted could set up a bank and so people were enthusiastic. Yes, riches for everybody, the banking profession was a state-sponsored profession just like lawyers and medical doctors and also were under the protection of the government and was by the much-decried trinity from a Marxist point of view of the new bourgeoisie that had served the position of power of the former nobility. So we have a popular activity with incomes out of nothing, special class of beneficiaries. And because of this special class of income, it's not surprising that we have the slow emergence, not from one day to another, but the slow emergence of some sort of a shadow government. And as a further consequence, then the removal of ultimate decision-making in politics from the political scene, from the visible political scene. Because then as a consequence of this new source of revenue that came into existence, which was in competition with tax revenue, it became more or more important for kings, princes, parliaments and so on to have access to this funding and that was not discussed in the public forum. So we have a distinguishing feature of our own day. Sometimes we have the impression, well, every four years and every five years we can elect a new government, but nothing really changes. And the program that the announces is not put into practice and so on. All of this is a reflection of this process, certainly not only caused by this process, but also caused by this process. I come to the second group of consequences, the culture of debt. The age of fractional reserve banking that began in the 19th century, went in hand with an increased fragility of the banking sector. Before the 19th century, banks were fewer in number and they tended to be well financed, that is, they had relatively few debt and important treasuries, important liquid means. Then starting in the 19th century as fractional reserve banking grew large, the banks reduced their equity, that is, they went into more debt and they kept less cash on hand to satisfy redemption demands. So they became more fragile, more vulnerable to shocks coming from their customers and at the same time they also became more interdependent. And if one bank goes bankrupt, it is typically in commercial relations with other banks, either directly because they receive credit from other banks or indirectly through common customers. So a bank that goes bankrupt entails the bankruptcy of other banks, especially if they are not well endowed with equity and so on. So with this fragility and this interdependence, we have the new phenomenon of banking crisis, which in fact is a phenomenon of the 19th, which starts in the 19th century. Before the 19th century, we didn't have any systematic banking crisis. We had occasional banking crisis. So you mean you were unheard of events, right? There was a famous banking crisis in France in the 1710s. There was a monetary crisis in the US, right? The inflationary continentals and the revolutionary circumstances, so exceptional circumstances. As from the 19th century, so starting after the Napoleonic Wars, banking crisis became a regular feature of Western economic development. And it is a fruit of the factional reserve banking system. Now crisis invariably entailed different sort of responses. And there are four major categories of responses that we always got. One was process of centralization. So banks either merged to be able to better withstand the crisis situation, or they were helped out by centralized institutions like central banks. There was greater dependence between them and vis-a-vis a central organization. And they were regulated to an ever greater extent. And because the government in helping banks out felt obliged, morally obliged to what the population to justify this help. And so at the same time they introduced greater banking regulation. So we have a cultural feature of the financial industry, which was always very strongly regulated, increasingly regulated so in the 19th century. Now before World War II, this movement was limited to the financial sector. As we have this movement of ever greater regulation, ever greater socialization, if you wish, going in and with ever greater dependence vis-a-vis a central institution, and going in and with ever greater fragility, but limited to one sector of the economy. So the real sector was not really concerned. Households were not really concerned. Governments were concerned to a stronger extent, but rather limited. Now what happened after World War II was that this type of behavior that we find in fractional reserve banking and the type of consequences were generalized to the rest of the population. Why is this? It was a consequence of the fact that money production, so monetary interventions were pushed to such a quantitative level that a permanent increase of the price that all resulted. Before World War II, roughly speaking, in the 150 years or so before this, the price level in virtually all Western countries had a shrinking tendency. It was a price deflationary movement. Now if the price level shrinks, this provides a very strong stumbling block against debt. If you take our debt today and you know you have to pay the same sum, what about $1,000 or $100,000 tomorrow or next week or next year, and you can expect that the price level will be lower than today, so you have to pay back in the money that is more purchasing power than the money that you lend out today. So under such circumstances, there is no strong incentive for you to go into debt. Quite to the contrary, you have a very strong material incentive to avoid debt as far as possible. It does not mean that companies might not go into debt because even though they have to pay back money at a higher purchasing power, they might earn things to the credit much more money than before. But for a household, it's typically not the case. For a government, it's typically not the case. So what happened after World War II is that money production was pushed to such a level that the permanent increase of the price level resulted in virtually all countries. And as such circumstances, it is worthwhile for people to go into debt. You take out a credit today, if you can expect that the price level always increases in the future, you can expect your own revenue to increase, even if you do not become smarter in the course of time. Of course, we all do become smarter in the course of time. But I think even if you don't, and you stay just as dumb as you are today, thanks to the general increase of the price level, it might be a repercussion on your own revenue, which is likely to increase. Therefore, you will be in a better position to reimburse any credit that you've taken out in the past. So this kind of behavior, or this kind of incentive, exists for all sectors. It exists for governments. And governments can anticipate that their future tax revenue will be higher than today. So they can take out more credits in the belief that their tax revenue will be higher tomorrow so they can pay all this credit back. Plus, they know, of course, that also the central bank is behind them. Households have the same incentives. We can expect our revenue to increase. Therefore, we have a strong incentive to go into debt. Therefore, younger households, as soon as there's any permanent income in the family, take out a credit, buy a house, buy an apartment, and then pay back the debt ever less paying because their revenue increases. And firms do the same thing for the same reasons. So we get the phenomenon of the financialization of the economy. The non-financial agents behave increasingly just like banks. What does a household do that takes out a credit in order to buy a house? In financial language, that would be called a leverage. The household leverages its own current spending thanks to credit. It's a financial behavior. Firms do the same thing. Firms, especially in America, a little less so than in Europe, they did another thing, especially in the past 30 years. They invested an ever greater share of their capital in financial assets. So if you look at the balance sheets of US non-financial companies, you will see that in the case of corporations, about 40% of the capital today is invested in financial assets and not in equipment, machinery, and so on, right, vehicles. It's an amazing fact. So this is called financialization. Financialization is a consequence of monetary interventionism. Marxists call us who are not interested, contrary to Marx and the monetary system, have difficulties understanding this. It just falls from the sky. It's a new mode. It's a new mutation of the capitalist system that somehow drops out of nothing. It's just there because there's always some progress, productive forces that you don't know about. But it is a direct consequence of monetary interventionism. Then we get, in such a world in which debt grows and spreads wide, in such a world in which it ever becomes more fragile and more interdependent in all sectors of the economy, you get various types of anti-fragility behavior. For example, one very non-financial anti-fragility behavior is the great increase of the exchanges on the so-called derivative markets. I won't go into the detail, but it's very clear, right, the growth of derivative markets, which is what works like some sort of insurance against price changes of shares and of bonds and so on, is directly related to this ever-greater debt. Then a phenomenon that is better known to all of us is the phenomenon of urbanization. Why do people increasingly go to big cities? Why do they prefer to live in cities rather than on the countryside, live and produce in cities? Again, sociologists, Marxists, and so on, if difficulties grappling with this phenomenon, of course, there is not just one cause. But clearly, monetary interventionism is a very important cause because it creates greater fragility. And so people must behave in such a way that they reduce the risk for their own household, but also especially for their firm. So they flock to urban centers because for a firm, you have a greater pool of suitable suppliers in the urban center. You have a greater pool of potential customers. And therefore, you reduce the risks related to your current operations. Same thing for a household, you cannot withstand any significant period of time, months, years without income because you need to serve huge debts that you've taken ours to pay your nice house or your nice apartment. So you need to stay close to fairly reliable labor markets. If you live in a little village outside of the country, there are few employers. You're dependent on just one or two of them. And if they go bust or they go out of business diminishes, well, your ability to serve your debt might be impaired. So therefore, you have a very strong incentive to remain close to urban centers. We have access also to medical infrastructure and so on and so on. Everything that helps you keep going. Then one rather surprising consequence that I've discussed in my German language book is that as a consequence of monetary intervention in a debt economy, architecture tends to become more ugly. So this is the economics of ugliness. Why is this? Well, if you have no debt, then you build a house, you set up a house. Then of course you, because it's a long-term investment that will benefit yourself now, but also future generations of your family, you try to build the house up to the best standards, up to your own taste, which because you have money is likely to be more developed than the taste of previous generations of your family that were just peasants and had to live from day to day so couldn't educate themselves and so on. So you have refined taste and you have nice architecture, original architecture, idiosyncratic architecture, but something nice. Now, if you are heavily indebted, then of course it becomes very important for you that your assets, among which is real estate, be as liquid as possible. So it becomes important that you be able to sell your house, your partner as quickly as possible in case there is a financial emergency. Now that means, of course, that if you buy the house or if you build the house, it's no longer your own taste that is primordial, but it's the taste of what you expect to be the average buyer on the market. And so the whole orientation changes is no longer the refined taste of people who have education and so on, but it's what's supposed to be the average taste of everybody who's likely to buy this. So things become more standardized, more marginalized, and less appealing, shall we say, oddly. And of course, to top it all off, the worst, of course, as soon as the government gets involved with public housing projects and so on, then I won't go into this. A last consequence of this that I mentioned is the increasing feminization of the workforce. Now again, there are different aspects here, but an arm is a little bit more speculative because as an economist I'm, of course, not particularly qualified to express myself on, as we shall say today, gender differences, right, sex differences. But I'm just talking from my own observation and what I read here and there. So my own observation, OK, there are differences between the sexes, unfortunately so. And one big difference in which is well discussed in the literature is risk aversion or risk-friendliness. So males are typically much more risk-friendly. Females tend to be much more risk averse, and this for very good reasons, which is also then of one reason why males and females tend to fit good together. It might give good couples. Now, so the point is, if you have an economy that is increasingly prone to debt, in which therefore risk increase, part of your anti-risk behavior is to put risk averse people into leadership positions, among which tend to be more women than males. So again, there's not one, not the only cause, but it's one of the causes that brings about this phenomenon. Finally, Hans, you told me I have five extra minutes. A few words on morals. Now, clearly, in an environment in which money prices constantly increase, there are less incentives to save. Of course, there are no more incentives to save in cash, which has been the traditional, the preferred, way of saving of low income, low wealth groups. So all of these are, of course, disadvantage in such an environment, but nobody cares for them except on Sundays when we come out of churches. So they say something nice about the poor, the working poor. So their form of saving is no longer work. So what can they do? So you can either buy real estate, you can buy financial titles, or you spend more on current consumption, or a combination of all those. But in any case, we have a greater tendency now for current consumption. So the aggregate level of savings diminishes to the benefit of current consumption. The savings culture is undermined. Responsibility, accountability are undermined, because precisely you have a central bank that backs up all major institutions and that the voting citizens expect to prevent any major recession from happening. So personal responsibility, foresightedness, circumspection in one's decision making is undermined because we all hope that somehow we'll be bailed out. Independence is undermined. As a matter of fact, we become more interdependent. Because we become more interdependent, we also have a very perverse incentive to look with an envious or concerned eye on the activities of our neighbors. If a major market participant goes bankrupt, well, this might have repercussions on everybody because the whole pyramid, the whole house of cards of debt might collapse, it might affect myself. So I have a personal material incentive in asking the government to regulate the other guys so that they don't do any inconsiderate move. So we get this very perverse incentive that Thorsten Polites called collective corruption. That's correct. And finally, as far as morals are concerned, it's important to notice that in an interventionist system, we get a very strong presence of what economists call rationality traps. That is, people behave in a behavior that they themselves would admit is unsuitable from an aggregate point of view. But they do it nevertheless because it suits their own at least short-term interests. An example is the flooding of people into the financial sector, right? So people looking for employment in the financial sector. From an aggregate point of view, it's clear that this is not beneficial. More people are shuffling around money because by and large that's what you do in the financial sector. Rather than providing services that you could buy with money, right? So rather than becoming a baker, a shoemaker, somebody who knows something about road construction, engineering, and so on, right? So less people have an incentive to do this and more people have an incentive to go into the financial area. Even though they know that from an aggregate point of view, it's not conducive to grace or well-being, but for them personally, right? They can place themselves in this way among the winners of the redistribution process that goes on thanks to monetary interventionists. So it's a typical case of a rationality trap. These are very wide, very numerous in interventionist economy. Now rationality traps, as you can imagine, are of course debilitating. So they are discouraging for the moral orientation of individuals, right? You say, well, on the one hand, I should be doing this, but I'm really drawn to this other activity. Why doesn't it pay to behave in a moral way? So I've got to become a swine, right? And so in order to earn my living, whereas I should be doing something nice and so on, right? So we have this debilitating effect and which, of course, is devastating from a moral point of view. If it knows morals in the traditional perspective, it's precisely what helps us to be successful in life. And good morals should pay the bills not immediately, but in the long run. Good morals help us to lead a successful life, finally, and ultimately to get us in heaven if it's really perfectly done, right? But in an interventionist system, there's a permanent conflict between what should be done from an overall point of view and what is in your short-term interest to do, right? And that, of course, and that's the last consequence is, of course, it can lead to, well, inner conflicts and depressions. And so these, again, have many causes. One, one are the rationality traps that constantly create inner conflicts within individuals. So to make it short, then the culture of inflation is characterized by greater ugliness and greater depressions and various other nasty economic consequences more than enough to get rid of them. But I cannot give you the full picture. All you need to know and all you want to know about the culture of inflation within almost 40 minutes. So I need to follow up next year or somewhere like this. Thank you very much for your attention.