 Good afternoon ladies and gentlemen. It's 2 p.m. time to start especially since I've only 45 minutes Our subject this afternoon is finance in financial markets in a free society it's important to situate and explain The problem of finance within a larger overall economic context rather than assimilating it to a mere problem of financial markets Or too often you have the impression by reading the financial news, but also the business news in general whenever there's a problem of Getting a company started and getting companies running and so on that this is a problem of inadequate supply of Financial means through financial markets in particular credit was also on the stock market and so on Now to some extent this is justified, but on a deeper level it is Very strongly misleading because finance is a much wider Phenomenon a much wider problem then the mere financial markets the financial markets are just one means one tool within the overall economy of Solving financial problems. This is the main message that I wish to communicate in the present Lecture and we'll proceed by first Giving you a few reading recommendations Then I'll Come to talk about The meaning of finance from a general economic point of view And then in the third step I will discuss the various forms that finance can take in a free society Of course, I will define what I mean by the free society head of this So as far as readings are concerned the numeral is of course a very Substantial literature on financial markets. There are a few textbooks Out also that have some value, but by and large the existing literature is Deficient as far as the theme of our lecture is concerned finance from an overall point of view If you look at the standard textbooks for example Frederick Mishkin's money banking and financial markets You will see that what he discusses under the rubric of financial markets is essentially an introduction to financial institutions as they are as we have them today and there are some discussions of basic financial mechanisms in particular as far as Central prices such as the interest rate or the foreign exchange rate and so on are concerned but there's no discussion of financial markets within the overall economy and as No comparison of financial markets as Related to other in contrast to other forms of finance within a financial within modern economy so This is then one of my ongoing research projects My my next publication will be a book on the political economy of finance and I hope to get this done Next year to have it published next year so will be published by the Mises Institute Meanwhile to get some rough idea of where I'm heading to you can have a look at two English language texts That are published last year and there's more forthcoming this year So this article and we have a second article which is a presently only a working paper This article also still exists as a working paper version for those of you who Do not have the financial means to acquire the book Then we have as far as the Austrian literature is concerned a classic text by Fritz Maklub The stock market credit and capital formation a book that was first published in German in 1931 As the habilitation thesis of Fritz Maklub and Ludwig von Mises was his advisor and he liked the book very much And then eventually an English version came out in 1940 Mises like this book a little less and I will there are good reasons to like it a little less because it fails and precisely in respect to the The problem that I mentioned already which is central to my lecture Mises and Rothbard themselves did not bestow any Considerable attention to financial markets you find occasional remarks here and there in Mises books as far as financial Markets is concerned and the same thing for Rothbard now this has a lot to do with the fact that during most of their lifetime and especially in in the time after World War one Financial markets led the most of the time a rather secondary existence Within the overall economy so there were no means as important as they are today and have become in the course of the past 30 years so in a way right when you write a Treatise on economics, of course you try to deal with those subjects that are somehow important in the world as you know it and In those years, especially after World War two and until 1980 roughly Financial markets were not very important. Of course the same thing holds to for the war years So in Mises and Rothbard, we don't find much especially not much systematic on Financial markets then we have two mainstream texts that I also recommend which are McKinnon and Shaw Writing in the publishing in the same year In both dealing with the financial causes of economic under development So these were this was the heyday of the development economics literature and Shaw and McKinnon argued that part of this Applied of the underdeveloped countries was due to the fact that financial markets were not sufficiently well developed So this is a very Keynesian way of looking at the world and looking at the economy And so the general idea is that we That the spending of money is the driving engine of the economy So the more we spend in the faster we spend the better it is for the economy We are lubricating the economy and more than this we are creating revenues and these revenues can then be spent elsewhere So create second round revenues and so on so on. This is the Keynesian story There are a variant of this was to say well if financial markets are underdeveloped Well, then the only way to use your savings or to create savings is cash hoarding and cash hoarding in those countries is generally not possible either Because they are very inflationary So people save in very inadequate and inefficient ways for example Pharma might acquire a second tractor that it does not really need But it's a way of acquiring a durable economic good that will store value sort of say over time All right. So the way out of this is to create first of all a stable money and then thereby encourage Deposits in the banking system whereby in turn through the fractional reserve principle about which you just heard just a lecture We are we can expect to Multiply credits bestowed within the economy so there will be more spending going on and you have the Keynesian story again So why do I recommend this well because it's a particularly clear Exposition of the Keynesian vision of financial markets and which has come back to the forefront of current discussion about five years ago In the context of increasing financial regulations So what McKinnon and Shaw called at the time financial repression, which has become important again so let's move on to a definition a general definition of finance to finance Means to provide the means necessary to accomplish a human activity Because when we think of finance we we think of money and because we are used to live in a monetary economy so that's all good and right but money is just means of exchange is an intermediary of human cooperation And as we know right we can if we increase The money supply too fast and this money becomes Validless because we have the law of diminishing marginal utility the more money you have right the less value any unit of this larger stock has and and so we even risked the That the market participants rejected money completely so just having more money does not necessarily mean having greater means of Finance so money is a way to finance activities only to the extent that it Provides us with real purchasing power that enables us to buy things Non-monetary goods that we can buy And what we need to buy in particular are those goods that keep human beings going and this is the most important Way to finance a unique human activity is to provide consumer goods for the persons who are involved in activities That do not create themselves the consumer goods that they need to survive so therefore We can even narrow this definition down and say what needs to be financed especially those activities That do not nourish the human person engaged in them So for a hunter and gatherer and we can imagine that at the end of the day He has through his activity acquired all those consumer goods berries and dead rabbits and whatever That he will need right to fill up His body and make it through the next day again So this activity therefore does not need finance in the strict way except if you say well, I need to finance my energies All right today out of the consumption of yesterday evening or something like this. All right, so this is correct But in a developed economy we have lots of activities That do not aim at creating Immediately consumable goods, but that take part of the division of labor therefore create goods that are of no or negligible immediate use for the person who is concerned And so if you're an accountant you do not produce anything that is that you could eat or sleep and and so on at the end of the day If you're an economics teacher, it's the same thing Even if you're engaged, let's say in a factory and you're producing cars and so on you cannot You're producing maybe just a car door or something of this sort and you could not Eat or sleep in and cloth yourself with this car door at the end of the day So how do these people make it through time then make it through time by being able to obtain consumer goods And so we finance them by providing Consumer goods to them. This is the most basic form of finance. What needs to be financed truly is always human activity And last year somebody said well, but we also have animals. Okay animals right Most animals by the way can feed themselves Just let them roam and so on so we do not need to make any special precautions on that behalf But sometimes it's true. We need to feed animals as well And so what needs to be financed are the activities of living beings and human beings in particular We do not need to finance inanimate objects inanimate economic goods Sometimes we say colloquial language Well, we need to finance the acquisition of this and that machine or this and that car or this and that building now this is a Everybody understands perfectly what it's meant by this but the economic economic substance really What needs to be financed is not the house per se The house is there It does not need any finance. It's just there it belongs to somebody. It's true So what we need to to finance is from a general economic point of view is the activity of the people who build the house Who want to keep going so maybe they are specialized in house building and so on so what we do by handing over money to them we enable them to make it through the next rounds of their life and continue living a productive life so objects economic goods inanimate economic goods do not need finance From an overall point of view What always needs finance are human activities now in a free society these means that unnecessary to accomplish human activities come out of savings the savings as you know Is this part of current revenue that is not currently consumed? So it's always this trade of with consumption In a society that is There's also another form of saving about which I will say a few words later on namely the production of money Right so you can also Use as far as monetary finance is concerned you can use freshly produced Units of money to finance human activities, but in a free society by and large savings dominates So we will focus on the the meaning of savings Um Why are savings so important? Well, we can explain it in Contrasting savings to consumption. What what does consumption mean? From an economic point of view. What does what what is consumption? What does it mean to consume something to enjoy services? Okay, but okay It's not correct because you can enjoy for example the look of a landscape or something like that. You're not consuming the landscape Thank you sir, you're extinguished right you you destroy The economic good more precisely what we do is to destroy the value of that economic good Strictly speaking we human beings we sometimes we imagine we have but really truly we do not have the power to destroy Any material object whatsoever? What we do is to transform it and You can transform This piece of furniture by burning it for example So it is transformed in a heap of ash and so on and then various gases that come out of it All right, so we do not really destroy the substance we transform it in in another form That has less value than the formula had before All right, and the same thing holds of course also for consumer goods. I won't go into into detail All right, that's the same thing. We transform them into objects that have much less value for us that are actually economic bads for most cases All right, so to consume needs to destroy and good friend of mine German economists always when you try to refute the kanjan approach to wealth creation You always say well you you cannot enrich yourself by consumption. It's just a matter of definition I think to consume means to destroy you cannot become richer by destroying things It's impossible. So if we encourage product consumption, we do not become richer. We actually become poorer All right, what you want to do if you want to Set an economy on a wealth creating path On a growth path. You want to encourage the opposite of Consumption which is then saving you want to have people produce a lot and not save a lot Producing a lot not saving and not consuming a lot and you can accumulate Economic goods That increase your productive abilities in the future as you can build up capital goods You can build up infrastructure of all kinds machines and so on which will facilitate production in the future And this is in fact how invariably how a growth process works out so savings enable us to Perform what austrian economists since berm bar back have called roundabout production As is a term that you are now familiar with right so roundabout production means To increase the roundaboutness of production means that I reduce that part of labor Dedicated to the creation of currently consumable goods And that increase that proportion of labor dedicated to the production of Capital goods so goods that will help me to increase production in the future All right, so savings do that the more savings we have The more roundabout our production processes can be therefore the higher is the productive potential in the future Of course, this comes at the cost of reducing consumption in the present So if we Dedicate less labor and less other resources on the production of consumer goods Well, of course, we will consume less goods in the present. That is at least less than we otherwise could have could have used savings also enable us to Engage in research and development. So it is absolutely fundamental for Technology what is called technological progress All right So very few great ideas and actually no product springs out of thin air just by an idea like this I'm just like by a brilliant Inside that comes like like this and sometimes a great idea may be okay Yes, but even then right if you have a great idea Maybe the theory of relativity The theory of the time preference theory of interest and so on might have come As a struck of lightning, but then in order to elaborate the theory you actually need to spend a lot of time So then the question is again How do you survive all those days and weeks and years that you dedicate to developing this theory? And the answer is there is no other means than having savings at your disposition Either your own savings Or the savings of other people that they Use for you So that you can engage As a scientist as a researcher on the production of a theory Or an engineer on the production of a prototype of a product It takes a lot of savings So more the more savings we have the greater is the rate of technological progress And finally the division of labor about which your head elector yesterday is also indirectly dependent on The accumulation of capital because the more round about our capital structure becomes Also the amount more round about the production process is The more distinct Productive steps take place and so therefore the opportunities for specialization increase If you have a very primitive economy, no savings, no capital good production and whatsoever The only way to specialize is In the production of the various consumer goods that can be immediately created just with your hands You can become a hunter. You can become a fisher. You can become Caretaker of old people or children and so on my large. That's it A few other things But as capital is being accumulated Yes So more activities more other types of activities become possible And so you have the production of machines. You have the production of various equipment. So all these are Different opportunities for specialization and eventually you get accountants You get lawyers you get a lot of economists and so on and so on And all these specializations are only possible if the economy becomes more and more round about Which is only possible if we have more savings So this is how this this works in in a free society Now what distinguishes a free society From an interventionist society, which is of course what we currently have We need to make An assumption well first of all we need to Define what a free society is in a perfectly free society All social interaction would be based on the respect of property rights Of private property rights Okay, so this is the definition that the economists in the in the 19th century used Ferdinand Bastia There is other economists and then of course Ludwig von Mises took out the same thing and Marie Rothbard and present-day Austrian economists as well And so what distinguishes a free society is that There's a perfect a perfectly free society would be a society in which the only Private law principles would apply that is you have perfect respect for private property rights As soon as we have something Like a government in place we get institutionalized partial violations of property rights And so we get interventionist regimes Now this is just an analytical distinction. It does not yet answer the question whether such institutionalized Interventions are sometimes necessary as a different question But what we do in economics is to analyze the consequences that follow from Interventions that is from violations of property rights And that that is what I will do in my lecture on Thursday Also dealing with finance in an interventionist regime this time So in a free society We have no institutionalized violations of private property rights and in particular We also have a free monetary system That is the government does not intervene in the production in the use of money Now in such a situation there is a strong tendency for A certain for the emergence of a certain type of a monetary system And we most notably we get the emergence of a commodity money based system that is People would use Commodities that are particularly suitable for the use as a medium of exchange Historically the assessment the case with precious metals. So precious metals are most likely to be used in such a setting We cannot exclude from the outset also that there might be product innovations or other types of money might be developed Bitcoin is usually brought up in this context. Yes from a theoretical point of view Definitely that would be a possibility because what distinguishes bitcoin from the current the Immaterial monies that we have which are fiat monies is that bitcoin by the logic of its operation Has a limitation in build in its very nature So the the principle of bitcoin the idea of bitcoin is that you cannot produce more than a certain quantity of it That's your Exponentially increasing production costs. That's the idea, right? So the idea of course might be wrong Maybe it's possible to hack the code of bitcoin and so on I'm not enough of an it expert to answer this question But let's say if the idea could be perfectly realized Then of course bitcoin might be a suitable medium of exchange also for a free society But the crucial point is then the following all free market monies have this in common that they are That the amount of of them which you can create Spontaneously is not subject to human arbitrary will Which is the crucial difference as compared to the present fiat money Systems that dominate the world economy Fiat money in the strict sense is a money that can be created at libido The authorities can create as much of it as they wish they can double the money supply from one day to the other or triple it or Quintipulate and whatever Even from one second to another And on a free market of course people would tend not to use because I mean this is very convenient for the people who produce the money It gives them great power So it's a desirable money from the point of view of the money producers It's not a desirable money from the point of view of a money user And as a money user you would wish to have a medium of exchange That has so to say institutional safeguards and institutional insurance That it not be multiplied And to such an extent that it lose its value All right, so people would tend to prefer precious metals because they're costly to produce It's not an advantage. It's precisely the institutional safeguard against excessive production All right, and they might also use bitcoins for exactly the same reason because there might be institutional safeguards against excessive production of bitcoins So what does this mean? Then in a free society There would be a distinct tendency for the money supply To grow at a relatively slow pace In any case, it might grow at a much slower pace than the rest of the economy This is what we had in the Anglo-Saxon countries in the 19th century and even up to World War I And it's a similar situation that we also had in most European countries in the last third of the 19th century And in that historical experience, the money supply grew, but it grew at a much lower pace than the rest of the economy And the consequence was then an environment in which prices tended to fall, and we had what is called today deflationary growth, price deflationary growth So the point is, if we have a free society, there is a tendency for growth to be price deflationary Free society means a tendency for diminishing price level This is very important for a free society to be price deflationary And this is very important when we think of financial markets, as I will more fully explain in a few minutes So this needs to be kept in the back of our heads Now what are the forms of finance in such a free monetary economy? There are three main forms that we need to distinguish The first one is what McKinnon and Shaw have called self-finance Not a perfectly nice expression, but we'll use it because it's already there in the literature So self-finance means that I myself as the saver am the user also of those savings So I've saved an unmonetary economy by accumulating cash So this is what I do, it's the first in elementary form of savings And now I can use this form of cash in two ways I can spend it on the goods that I need for myself Let's say I'm a consultant, a service provider and so on Then I use my savings to finance my current consumption So I buy food stuff and so on, but also buy means of transport, housing, clothing and so on So I use my savings to get myself through the months Through which I'm engaged in the production process and until I'm being paid living out of my own savings The other way to use those savings is to spend them on factors of production Produced by other people or owned by other people I might buy a machine, I might rent a machine I might buy a computer, almost certainly today I would buy a computer I might rent office space, I might hire people, I might hire employees and so on So in these ways then I use my own savings on those factors of production That I acquire to produce whatever product Now it's clear, well maybe it's not clear so far I should stress that an economy could operate entirely on the basis of self-finance And so it's not necessarily necessary to have financial markets You could operate an economy entirely on this principle It's possible, if everybody is his own entrepreneur Or maybe employee and you could work or operate on this principle Now that's not what we do and there are good reasons why Self-finance exists in our developed economy but it does not monopolize the scene and it's not even dominant What are the reasons? What are the limitations of self-finance in a free economy? Well the limitations are again free in numbers but this is my little scheme you might find Other ways to cut this up and come up with a different number So the first limitation is that in the case of self-finance we have a limitation of the intellectual division of labor You can set up a company or some productive venture only if you yourself have the savings So you need to have the ideas, you need to have the drive, the initiative and so on And you need to have the savings And if the savings are lacking, well even though you might have drive and you are young You have lots of ideas and so on, you could not start up a company So clearly this is a limitation Second, there is no financial division of labor Now this is a Hutzmann expression, so you wouldn't find this in the literature It's a financial division of labor, what does this mean? Well it means that there is a separation between the people who save and the people who use the savings Which is of course characteristic for financial markets So in a self-finance, purely self-finance economy, most people would only save for themselves There is in fact only one part of the population that indirectly or that well That saves immediately for other people, for the immediate benefit of other people Who are these people? How do we call them? Params Oh wow this is a good one, I didn't think of this Yeah okay, two groups But thank you very much, thank you very much So caretakers and so on, who was the other one? My search Yeah, entrepreneurs Capitalists, entrepreneurs And a capitalist entrepreneur, he creates, let's say you have a car maker, a car manufacturer He sets up his car manufacturing firm So he buys, I mean he himself he might, of course he's also interested in writing a car and so on But he's going to produce hundreds of thousands of cars and so on So much more than he personally needs So he starts hiring people, he starts buying raw materials He starts buying specialized equipment and so on Not for his own immediate interest But for the benefit of other people, for the immediate benefit of other people Because at the end of the day, or at the end of the year, whatever his production period is He has all these cars which he cannot really use So he will provide a benefit to other people if they don't like the cars He would just dump them at very low prices So that's great for them and he has to stop his firm because there's no way going forward And so he has provided a service to other people In the hope of course that he be remunerated at a price high enough To make this whole thing worthwhile for him So the ultimate beneficiary is of course himself and his family and so on So that's the hope But the immediate beneficiary is always the customer So in a self-financed economy only entrepreneurs save directly for other people Which is a limitation So there's no financial division of labor The people who save are also the people who invest And the third limitation is that is related to the first one Is that the use of capital tends to be relatively inefficient And precisely because you can only invest when you have yourself savings and the ideas It follows that in some areas there might be over investment Because people just tend to invest again and again in a line of production that they're already Pursuing with which they are familiar and so on So even though the return on investment is relatively low Which means that the market is already relatively saturated They might still go on investing there Whereas in other areas where there are also human needs And we have huge returns on investment But nobody's investing there either because the capital is lacking or because the specialized knowledge is lacking So these are the limitations of a self-financed economy And out of these limitations we can then explain why it comes to the development of financial markets Financial markets Help to partially Overcome these limitations A financial market can be defined as an exchange of promise of a promise of a future payment It's a financial exchange As somebody who hands over money And what he receives in exchange is a promise Okay, that's a financial market So he buys a promise This is unusual to think this way But this is how economists think He buys a promise And the other person is buying what he's buying savings of the person who hands over the money Because clearly that money is not consumed by the person Himself or herself He hands over the money as the savings are sold And a promise is bought And the person who uses those savings, he buys the savings with a promise Of course promises are cheap as we say So therefore the things are not quite as easy as that Of course you don't just promise anything So usually we take great care and selecting carefully whom we can entrust our savings It must be a trustworthy person and so on And in fact much reputation or trust has to be produced in many ways Just as any other economic good It's a precious economic good And it must be trustworthy and trustworthiness can be produced By using first of all always by keeping promises that you've given in the present By being transparent and so on Do not need to go into this And then by additional guarantees and so on So we have on the markets we have As a rule we do not have oral promises We have as a rule written promises So we call them financial titles And most of these titles are actually backed up with additional Institutional safeguards for example Securities insurance contracts Third-party guarantee and so on And if they are so protected with various other Surrounding institutional safeguards we call them securities So what is being exchanged on a separate exchange is a financial title But more narrowly it is a security But this is all of secondary importance for us So what's the impact of financial markets on an economy? What's the overall impact of financial markets? Now as one error that needs to be avoided is that the financial markets make us per se richer It's not because you have an exchange of savings That anything has improved from an overall point of view It's just you hand over your savings to this other person Okay, you don't have your savings anymore at your disposition But this other person has So society per se, society as a whole is not become richer What changes therefore in the immediate run through financial markets Is the allocation of resources As a technical expression in economics The allocation of resources It changes the way we use the available resources If I hand over my savings to an entrepreneur Rather than using them myself It means that he now can buy specialized equipment Higher people and so on rent office space Whereas the other way around I might have Maybe set up my own firm So I would hire higher people but other people I would have bought specialized equipment but other types of equipment I would have rented office space but not necessarily at the same place as he did So what financial markets do is to change the way resources are being used People are working for him now rather than for other people If I hand out a consumer credit It means that the benefiting household is now able to buy a nice house Rent a nice apartment or buy a nice apartment, buy a bigger car and so on Whereas in the absence of that credit Other people would have used the same house Other people would have bought the same car Etc. Etc. Only at lower prices Because what the financial exchange does is to enable certain people To have more money so they can Bit up the prices to obtain the resources that otherwise would have gone to other people So they do not make society as a whole richer They change the way the resources the available resources are being used So financial markets can have an impact not in the immediate run but only in the long run Because this use of resources might be better But there's also a second reason why financial markets Tend to improve the productive abilities of an economy in the long run Namely because they encourage savings In the financial exchange typically you do not say well I bum it by your promise and your promise is well I'll give you back the money exactly the same amount one year later or one month later Typically the person who promises promises not only the restitution of the sum of money that he has obtained But the payment of a remuneration often called interest rate or profit or whatever So there is the expectation as the hope for a remuneration of our savings By handing it over to somebody else And this remuneration is of course a powerful incentive to save more And as a consequence then financial markets bring into place what I've called the financial division of labor And it's not something that nobody has known before me I've just used this expression as a weird expression financial division of labor, but truly that's what it is So now people who are not themselves entrepreneurs Start saving for the immediate benefit of other people this they might specialize in saving Some households are good at leaving a frugal life. They're not particularly brilliant and Agile and so on would not be good entrepreneurs, but they can lead a frugal life So they specialize in in saving And thereby enable other people to use those savings to produce something So this is truly right. So these are the the two Mechanisms through which financial markets might have a beneficial impact on the overall economy They might create a better use Put into place a better use of the available resources But I consider to be this without giving you a numerical quantitative expression But I consider to this to be the relatively less important mechanism The more important one is the second one Financial markets encourage savings So people tend to save more Then without financial markets if we can compare two economies that are equal in every respect Except for the presence of financial markets in the one and the absence of financial markets in the other Savings would tend to be higher in the first one that has financial markets Because there are these strong incentives to save Okay, what are the limitations of financial markets? In a free society again They are free I don't have any obsession with the number of free whatever they turn out to be free, right? So but again, right? It's it's a non exhaustive list. You might come up with additional limitations Or correct me on one of them. So I think there are three main limitations The first one comes with the disadvantages of financial markets that we all know first of all We become dependent on other people right This is of course a big off And we hand over our savings to somebody else. We become dependent on that person If we kept it in cash would not be a perfectly secure solution either because we might be robbed Right. So it's nothing perfectly safe. There's no such thing in the world And but at least we might be we feel to be in full control of our savings if we invest on the As we buy a financial product A promise a specialized promise to pay We become dependent on that other people these other persons So even if they are not frauds Right, they might be wrong in their judgment, right? The the thing that the the venture in which they're engaging just turns out bad as possible But then of course they might also be frauds All right, and there are lots of those on financial markets All right, so it's a it's a big limitation. So therefore people tend to hold back and then Go buy a financial title only if they are very propitious circumstances The second limitation is that in a free society There is a tendency for the rate of return on the investment of capital to decline In a growing economy the more capital we accumulate The lower is the return on capital Is again the law of diminishing marginal value, right? The more plentiful any good becomes the more plentiful savings become All right, the lower is their value. So the return on capital will decline Of course in practice, right? They are also countervailing forces. There are other things that might happen There might be technological progress as a consequence for a while, right? The return on capital might be increased because suddenly with this new technology You need lots of capital to produce the specialized equipment and so on There's not enough capital there so capital becomes scarce again so the rates of return go up Okay, so that was but Ceteris paribus All other things being equal. There is a tendency with the accumulation of capital for returns to decline Now if the returns on capital decline then of course A financial exchange becomes comparatively less interesting than just keeping the money in cash right Because let's say the rate of return is 0.5 percent. We're almost heading there thanks to our central banks Okay, all right. So then there's a huge incentive to just keep the the cash in The savings in cash rather than handing them over to somebody else and risking that To be exposed to a fraud or to an incompetent manager and so on Right now in a free society, there would be this tendency therefore there is an increasing tendency for The hoarding of cash to grow relative to financial markets okay The third limitation and it's related to this is that In a free society for the reasons that I've mentioned at the beginning of my lecture The price level would tend to decline a free society a growing free society is a society Exposed to deflationary growth now if Prices the price level declines. It means that by just holding cash All right, you obtain a real return On your savings So again, right savings in the form of cash are benefited at the expense of savings in the form of financial exchanges Okay, so financial markets in a free society would not grow over proportionately they They would be a very strong limitation to the growth of financial Markets within a free society Now this brings us to the last form Which is cash holding Now I've just said so there's very strong tendencies for cash holding to become ever more important Ever more important relative to financial markets and relative of course also to self-finance in a free society and This is considered by Keynesian economies, but in fact today by most economies because they are very strongly Inspired by by Keynesian type reasoning as a Devastating critique of a free market economy as far as finance is concerned Because they reason as follow. Well, we need Financial markets To make it possible that one group or person Who does not save themselves benefit from the savings of other people So the only way for this group to benefit from the savings of another group Is through and for financial exchange So if people hoard ever more cash and we are suffocating this financial division of labor And as a consequence we are reverting back to the disadvantages of self-finance Okay, so therefore we need government interventionism We need government to intervene in the economy in order to stimulate the production of money So that the price level would no longer tend to decline but rather increase so as to discourage Cash hoarding Which is exactly what we read today In the press community case of Of our central banks and they aim at a positive price inflation rate in order to discourage the hoarding of cash And this in order to well stimulate spending of money So we need to look into this And if we look into this just a little bit we find that this sort of reasoning is unfounded and because The hoarding of cash has in fact structurally the same impact As a financial exchange The hoarding of cash Reduces the amount of money being exchanged in the economy. So money becomes more scarce relative to the other goods But this means then that money prices will diminish All right less money will be exchanged for a given non-monetary good right increased hoarding of cash therefore has the consequence of reinforcing Uh the reduction of the price level Now this means That of course each unit of money will have a higher purchasing power than it would otherwise have had All right If before the price level was whatever 100 and now it diminishes to to 50 then with each dollar you can buy twice as many goods as before Now this implies that If people hoard cash All right the beneficiaries will be other people if you hoard cash there's a tendency for the price level to decline And therefore the money that is being used by other people will have a higher purchasing power So this boils down to being the same situation as the one that would have obtained if you had handed over a credit To some some other person right rather than saving cash. You had handed the money over In the form of a credit. So this person would have been able to buy more Now you save in cash and as a consequence the price level declined so other people can buy more. It's the same thing Right So it's not the case that cash hoarding Suffocates the economy that it deprives the economy of Of finance It's it's a very subtle way of financing the activities of one group by the savings of another group, but it's there nevertheless There are two main differences between Financial markets and hoarding again. So they are similar in from a structural point of view both Allow for interpersonal or finance savings of group one say Finance the activities of another group be They're different in two respect that are related Most notably as we have already seen financial markets remunerate savings So as a consequence then there is a greater incentive To to save through financial markets But they remunerate savings because financial markets allow us to Target the beneficiary of our savings if I save in cash Right, there is a general tendency for prices to decline But nobody can tell exactly which prices will decline to which extent And the impact of each of the beneficiaries will tend to be marginally that is infinitesimally small So there's no way of being remunerated for this But financial markets allow me to target my savings target the on a given beneficiary and this allows Makes it possible to be remunerated right But again from a structural point of view there is no no difference So in conclusion then now I've spoken more than 45 minutes, but thank you for your patience All right, so in in conclusion then In in a free society Financial markets would fulfill An important role. There would be one element One important mechanism for the transmission of savings from one group of persons to another group Would therefore play a by-notch a beneficial role within society, but they would be limited I would not be the only way to accomplish this task And in fact would tend to become less important as the economy becomes More important Thank you for your attention