WEBVTT NOTE The Ethical Rules of Producing Money 1 00:00:00.000 --> 00:00:05.200 Ladies and gentlemen, I'm very glad to be with you here this evening, this early evening, 2 00:00:05.200 --> 00:00:10.800 not only because the Mises Institute is a great place to be in general and to meet wonderful people, 3 00:00:10.800 --> 00:00:18.300 but because they gave me a 30-minute commercial break for my new book. 4 00:00:18.300 --> 00:00:28.100 So this book has just been published by the Mises Institute, 5 00:00:28.100 --> 00:00:34.100 The title is The Ethics of Money Productions and I'll give you just a short introduction to this very important work. 6 00:00:34.100 --> 00:00:44.100 It's a sturdy bind. It can be an assault weapon or defense. 7 00:00:44.100 --> 00:00:53.100 And you see here on the front cover an excerpt, an image from the Saxon Spiegel, the Saxon Mirror. 8 00:00:53.100 --> 00:00:58.100 The Saxons is a German tribe. We still have lower Saxony in Germany today and Saxony. 9 00:00:58.100 --> 00:01:04.100 And in the Middle Ages, that was the way you composed law books. 10 00:01:04.100 --> 00:01:08.100 Not with words, but stayed with images. It was kind of a comic. 11 00:01:08.100 --> 00:01:11.100 And this is the scene where it says that, 12 00:01:11.100 --> 00:01:16.100 render unto Caesar what belongs to Caesar, unto God what belongs to God, and various other things. 13 00:01:16.100 --> 00:01:23.100 and various other things. And so that's how the populace was educated in basic terms of law, the common man. 14 00:01:23.100 --> 00:01:34.100 And I started reading this by curiosity and showed it to my girls. I found this very wonderful picture and thought it would be fine for the cover of my book. 15 00:01:34.100 --> 00:01:45.100 And it is also significant in that the book is the result of research that started with a short course that I gave in the last year when I was here in Auburn, 16 00:01:45.100 --> 00:01:50.100 A short course on the history of money and the history of monetary theory in particular 17 00:01:50.100 --> 00:01:56.100 was a course that I gave to a group of retired people 18 00:01:56.100 --> 00:02:01.100 at the request of a great supporter of the Mises Institute 19 00:02:01.100 --> 00:02:06.100 who was the leader of this group and asked me to do this. 20 00:02:06.100 --> 00:02:12.100 And so one of the thinkers that we discussed in this class was Nicholas Oresme 21 00:02:12.100 --> 00:02:29.100 which is a scientist from the 14th century, he was an astronomer, mathematician, physicist, economist and least of all he was a bishop. 22 00:02:29.100 --> 00:02:41.100 He was the bishop of the French town of Lisieux which much later on became famous because it was the town where St. Teresa of the Child of Jesus 23 00:02:41.100 --> 00:02:48.180 of the Child of Jesus lived in her order. So Nicholas Oresme wrote in fact the first 24 00:02:48.180 --> 00:02:55.300 treaties that we have in the history of economic thought are exclusively dedicated to an economic 25 00:02:55.300 --> 00:03:01.980 subject. So there was a lot of writing before on monetary questions but dispersed in writings 26 00:03:01.980 --> 00:03:08.380 mainly dedicated to other subjects, ethics for example, how to run a country and so on. 27 00:03:08.380 --> 00:03:14.460 And Oresme was the first one to dedicate an entire treatise on this subject and the title 28 00:03:14.460 --> 00:03:19.220 of his treatise was a treatise on the alteration of money. 29 00:03:19.220 --> 00:03:25.940 And as we can infer from this treatise, Oresme thought that it was a mortal sin to alter 30 00:03:25.940 --> 00:03:27.780 money at all. 31 00:03:27.780 --> 00:03:32.860 Now money in his day was essentially commodity money, it was composed of gold and silver 32 00:03:32.860 --> 00:04:01.860 In the 13th or 14th century there were hardly any gold coins circulating within Europe and he therefore proposed the essential conclusion of his deductions on the ethics of money production that once a coin has been introduced into the market it should be preserved by the government, by its issuer, in a physically identical form throughout the ages. 33 00:04:01.860 --> 00:04:12.860 The ages. It was a sin to alter money, in particular to debase money. Now the debasement of money was the inflation of those ages. 34 00:04:12.860 --> 00:04:24.860 To inflate the money supply, from a physical point, from a technical point of view, implied that you imprinted on the same coin, which was, for example, a 10 gram of silver coin, 35 00:04:24.860 --> 00:04:41.860 and you imprinted that it was worth now 20 grams of silver or 40 grams of silver, the very same coin, it has a higher denomination, all the other way around, you take the same coin which was 10 grams silver coin and you take half of the silver out of it and replace it with something else. 36 00:04:41.860 --> 00:05:00.860 So this is of course inflation. It's an increase of the nominal quantity of money beyond the level it would have reached if the debasement had not taken place, if the money producer had adhered to Orisma's principle. 37 00:05:00.860 --> 00:05:06.860 And Orisma thought that this was not only a sin, it was a mortal sin. 38 00:05:06.860 --> 00:05:15.860 Mortal Sin, for those of you who are not catholic, might be some, implies that you go burn in hell. 39 00:05:17.860 --> 00:05:25.860 Now, Oresme was not only a bishop, he was the confessor to Charles VII, King of France. 40 00:05:25.860 --> 00:05:51.860 Now you imagine the poor Charles, his pockets empty, his wife crying for new riches, his subjects and his evil princes and so on in the countryside, his vessels on whose corporation he depends, crying out for more subsidies, and what has he got to give them? 41 00:05:51.860 --> 00:06:01.860 He has just a few pennies in his purse left, he would have to raise taxes, encountering the bloody resistance of his population, if he ever dared to raise taxes. 42 00:06:01.860 --> 00:06:05.860 There's nobody there to give him credit in the 14th century. 43 00:06:05.860 --> 00:06:12.860 And then comes his confessor and tells him he will go burn in hell if he inflates the money supply. 44 00:06:12.860 --> 00:06:20.860 Okay, so I found this just wonderful. 45 00:06:20.860 --> 00:06:24.860 It was more than charming, it was admirable. 46 00:06:24.860 --> 00:06:31.860 And I thought it was time to have an update on this for the 21st century. 47 00:06:31.860 --> 00:06:34.860 So that's what this book is all about. 48 00:06:34.860 --> 00:06:41.860 Now of course we have made great progress from the 14th century onward. 49 00:06:41.860 --> 00:06:45.860 If we compare now Oresme's relationship to his government, 50 00:06:45.860 --> 00:06:51.860 to the relationship between our government today and their monetary experts. 51 00:06:51.860 --> 00:06:55.860 Of course, well, George Bush doesn't have a confessor, right? 52 00:06:55.860 --> 00:06:59.860 At least I wouldn't know, and Bernanke probably not, almost certainly not. 53 00:06:59.860 --> 00:07:05.860 So, I mean, what is their relationship with monetary experts? 54 00:07:05.860 --> 00:07:10.860 Well, they have all the monetary experts around telling them that it's actually good to inflate the money supply. 55 00:07:10.860 --> 00:07:20.860 That's what you need to do. It's perfectly innocuous from a moral point of view and it's good from the point of view of collectivist morals. 56 00:07:20.860 --> 00:07:26.860 It's good for the aggregate because you promote growth, you prevent catastrophes such as deflation. 57 00:07:26.860 --> 00:07:29.860 And so it's the thing to do. 58 00:07:29.860 --> 00:07:56.860 Now, so here, of course, you are in the capital of the disagreeing few who do not share this mainstream consensus who hold up the position that has been first formulated by Oresme in the 14th century and has been developed in the century that would follow by the classical economists and by their successors in the 19th century and in the 20th century. 59 00:07:56.860 --> 00:08:14.860 That what today figures as mainstream opinion on monetary thought was discredited at the end of the 19th century and at the beginning of the 20th century as monetary crankism. 60 00:08:14.860 --> 00:08:24.860 It was only due to what we today know as the Keynesian Revolution that we have a complete revulsion of the picture that those who were before the monetary cranks, 61 00:08:24.860 --> 00:08:33.860 and other things whom nobody took serious, now are the great experts, writing the obits in the journals and having the chairs at the universities, 62 00:08:33.860 --> 00:08:45.860 whereas those who were the orthodox monetary theorists in former times will give conferences in other places that are not covered by the New York Times, 63 00:08:45.860 --> 00:08:53.860 but attract increasing numbers of good people that will change the picture eventually, again. 64 00:08:53.860 --> 00:09:11.860 Now, in my talk, I will first of all make the distinction between enforceable ethical rules and not enforceable ethical rules and we'll move on to discuss three different topics, namely, first of all, how a natural monetary order would operate, 65 00:09:11.860 --> 00:09:22.860 what a natural monetary order is and how it would operate, and then we'll try to set out for a brief ethical assessment of the natural monetary order 66 00:09:22.860 --> 00:09:37.860 and in the last step we'll talk a little bit about monetary systems which cover our present-day monetary systems and see how they present themselves from a moral point of view. 67 00:09:37.860 --> 00:09:50.860 So as far as ethical rules are concerned, I will mainly focus on enforceable rules and enforceable rules concerned especially the protection of property rights and the respect of property rights. 68 00:09:50.860 --> 00:09:59.860 So violations of property rights in the form of theft or robbery, fraud, embezzlement and so on 69 00:09:59.860 --> 00:10:03.860 are violations of ethical rules that can be enforced. 70 00:10:03.860 --> 00:10:16.860 We enforce with the use of the police and armies, if need be, that these rules be respected among all members of society. 71 00:10:16.860 --> 00:10:46.860 On the other hand, there are non-enforceable rules. For example, there are things like, you should be polite or we should care for others in our relationships with them, we should seek for good ends in the pursuit of the use of our means, we should be moderate in the use of our means, we should have courage if we confront resistance to the pursuit of good ends and so on. These are also ethical rules, but they are not enforceable ethical rules. We would not use 72 00:10:46.860 --> 00:10:56.860 I will focus mainly on the central ethical rule, which is the respect for property rights, the respect and protection of property rights. 73 00:10:56.860 --> 00:11:02.860 And this central ethical rule is constitutive for a natural monetary order. 74 00:11:02.860 --> 00:11:08.860 In a natural monetary order, we have the right to a natural monetary order. 75 00:11:08.860 --> 00:11:13.860 The central ethical rule is constitutive for a natural monetary order. 76 00:11:13.860 --> 00:11:19.860 In a natural monetary order, we have universal respect of private property rights. 77 00:11:19.860 --> 00:11:28.860 All private property rights are acquired by homesteading, by production and by exchange and by gifts. 78 00:11:28.860 --> 00:11:32.860 These are the only ways to acquire property rights. 79 00:11:32.860 --> 00:11:43.860 and they may not be acquired without the consent of the previous owner, that is why theft and robbery, fraud, embezzlement and so on. 80 00:11:43.860 --> 00:11:53.860 In such a world, which is of course a hypothetical world because such a world has never existed but which could exist and could serve as an example 81 00:11:53.860 --> 00:12:09.860 We have also a natural monetary order in which money is produced naturally, that is, money is being produced under the respect of other people's property rights. 82 00:12:09.860 --> 00:12:20.860 In such a natural monetary order we have certain types of monies that are being produced, which I suggest to call natural monies, which are called natural monies in this book. 83 00:12:20.860 --> 00:12:45.860 What are natural moneys that are those commodities that are very marketable, in particular the precious metals for the reasons that we explain to our students in our first year classes, so they are easily recognizable, they have a high purchasing power per weight unit, they are homogeneous, they can be subdivided into small units and so on. 84 00:12:45.860 --> 00:12:58.860 So therefore the precious metals are natural monies. They are natural monies because they serve two purposes, a non-monetary purpose and a monetary purpose. 85 00:12:58.860 --> 00:13:10.860 They are used for jewelry and other industrial employments and are therefore evaluated outside of a monetary economy. 86 00:13:10.860 --> 00:13:17.860 And because they have such value outside of their use in indirect exchanges, they can also be used as monies. 87 00:13:17.860 --> 00:13:24.860 They can be used to serve as intermediaries in exchanges. So they are natural monies. 88 00:13:24.860 --> 00:13:28.860 And such monies are therefore being produced under the respect of property rights. 89 00:13:28.860 --> 00:13:35.860 Therefore, there is in such natural economic order a natural growth of the money supply. 90 00:13:35.860 --> 00:13:44.860 This natural growth is constrained by the same principles that constrain the growth of the quantities of all other goods. 91 00:13:44.860 --> 00:13:53.860 What are these principles? Well, it's actually one basic principle, namely that demand rules production. 92 00:13:53.860 --> 00:14:01.860 Demand rules production because by spending their money on various goods, 93 00:14:01.860 --> 00:14:08.580 Consumers determine the receipts, the selling receipts of all producers and the different 94 00:14:08.580 --> 00:14:15.220 producers compete on the factor markets for labor and land and produced factors of production, 95 00:14:15.220 --> 00:14:25.220 machines, trucks and so on and this competition therefore determines the cost of production. 96 00:14:25.220 --> 00:14:31.540 Cost of production ultimately determined of course by the expected receipts that will 97 00:14:31.540 --> 00:14:39.460 from selling a product so consumer demand rules both the receipts and the cost of 98 00:14:39.460 --> 00:14:45.380 every single company every single investment project and consumers are 99 00:14:45.380 --> 00:14:50.580 therefore called sovereign so that's essential teaching of Austrian economics 100 00:14:50.580 --> 00:14:55.060 now in such an economy money is no particular case at all it's just a 101 00:14:55.060 --> 00:15:00.460 commodity like all other commodities it is being produced to an increased extent 102 00:15:00.460 --> 00:15:08.460 If the demand for money increases, it is being produced to a smaller extent if the demand for money diminishes. 103 00:15:08.460 --> 00:15:19.460 Therefore, there is in such an economy, as a general rule, no reduction of the money supply, 104 00:15:19.460 --> 00:15:27.460 there is a constant moderate growth of the money supply, there is no sudden strong increase of the money supply, 105 00:15:27.460 --> 00:15:43.460 No very strong growth rates of the money supply simply because it's costly to produce money and if we want to create something like a 10% or 20% or 50% increase of the money supply, 106 00:15:43.460 --> 00:15:51.460 this would entail costs to a very considerable extent that simply would make the production not worthwhile, would become non-profitable. 107 00:15:51.460 --> 00:15:55.900 so such growth rates of the money supply would not simply not exist and as a 108 00:15:55.900 --> 00:16:01.060 consequence the variations of the price level would be moderate too there would 109 00:16:01.060 --> 00:16:05.700 be some decrease of the price level some increase of the price level but no 110 00:16:05.700 --> 00:16:10.060 strong increases and no strong decreases of the price level and in such an 111 00:16:10.060 --> 00:16:13.500 environment as the professor Klein has explained to us this afternoon 112 00:16:13.500 --> 00:16:19.980 entrepreneurs can operate perfectly well the essential tool of entrepreneurs is 113 00:16:19.980 --> 00:16:27.980 This economic calculation essentially means that we compare the profitability of different investment projects. 114 00:16:27.980 --> 00:16:35.980 Let's say you have an investment project A where you spend 100 ounces of gold on factors of production 115 00:16:35.980 --> 00:16:39.980 and you can expect selling receipts of 130 ounces of gold. 116 00:16:39.980 --> 00:16:43.980 You have another project in which you also spend 100 ounces of gold on your factors of production 117 00:16:43.980 --> 00:17:13.980 of Production and you can expect 150 ounces of gold of receipts and we have a 30% return on investment here and a 50% return on investment here so we can compare these to physically different heterogeneous investment projects in terms of the same unit namely profit rate and can decide ourselves if we so like to realize the ones that in our judgment promise the highest profit 118 00:17:13.980 --> 00:17:19.380 So this is the mechanism that integrates all of the entire economy and this 119 00:17:19.380 --> 00:17:24.820 mechanism works irrespective of the level of the price level and it works 120 00:17:24.820 --> 00:17:30.660 irrespective of the evolution of the price level. We can calculate profit 121 00:17:30.660 --> 00:17:37.140 rates at a constant price level, at a decreasing price level and at an 122 00:17:37.140 --> 00:17:41.180 increasing price level. In order to compare different investment projects 123 00:17:41.180 --> 00:17:45.180 plays no role, whatever, how the price level moves. 124 00:17:45.180 --> 00:17:53.180 So the market economy works perfectly well or can work perfectly well and smooth in such a natural monetary order. 125 00:17:53.180 --> 00:17:57.180 Let's then turn to assess this natural monetary order. 126 00:17:57.180 --> 00:18:03.180 First observation is, of course, the ethical rules of money production are respected, 127 00:18:03.180 --> 00:18:10.180 at least the very fundamental, the enforceable rule, namely the one that says, well, low-shale, not steel. 128 00:18:10.180 --> 00:18:23.180 Those shall not even think of stealing, two commandments dedicated to this point, which is therefore not quite a detail. 129 00:18:23.180 --> 00:18:33.180 So the ethical rules are respected, and one might think therefore that everything is to the best in the best of all possible worlds, 130 00:18:33.180 --> 00:18:56.180 But so do not think our friends the Cajuns, before them our friends the mercantilists, before them our other friends, the inflationists, the plague that has existed from ancient times, recorded in Greece and in Roman literature, in our day of course. 131 00:18:56.180 --> 00:19:04.180 So what is their argument? Well, it's not sufficient that the ethical rules are being respected. That's an individualistic point of view. 132 00:19:04.180 --> 00:19:09.180 We need to take into account the operation of the system as a whole. 133 00:19:09.180 --> 00:19:18.180 And in such a case, it might be worthwhile to create through government intervention, create through force, 134 00:19:18.180 --> 00:19:23.180 through a violation of those individualistic property rights. 135 00:19:23.180 --> 00:19:29.180 A higher growth rate of the money supply than would otherwise have existed. 136 00:19:29.180 --> 00:19:36.180 Now such a higher growth rate that would otherwise have existed, that only comes into being through the violation of property rights, 137 00:19:36.180 --> 00:19:42.180 I call in my book inflation. So that's what inflation is all about. 138 00:19:42.180 --> 00:19:49.180 So our friends, the inflationists say, inflation can be beneficial. 139 00:19:49.180 --> 00:19:59.180 And here we have, well, it's obviously impossible to address all their arguments because that's the whole point of the discipline that we call monetary economics. 140 00:19:59.180 --> 00:20:06.180 It's the analysis of cause and effect as far as increases and decreases of the money supply are concerned. 141 00:20:06.180 --> 00:20:13.180 And it's precisely on this point that Austrians disagree with all the rest of the profession. 142 00:20:13.180 --> 00:20:31.180 There are many points of agreement between Austrian economists and other economists, free market economists as we call them sometimes, as far as housing market is concerned and agricultural policies and education and so on, we always find alliances. 143 00:20:31.180 --> 00:20:34.940 But when it comes to money, the Austrians are suddenly alone. 144 00:20:34.940 --> 00:20:39.440 So there the Austrians are the only ones today who defend the positions that had first been 145 00:20:39.440 --> 00:20:44.060 defined by Oresmy in the 14th century and then by the classical economists later on 146 00:20:44.060 --> 00:20:48.140 and their successors. 147 00:20:48.140 --> 00:20:54.500 So Austrians do not believe that we can, by inflation, improve the aggregate behavior 148 00:20:54.500 --> 00:20:55.500 of the economy. 149 00:20:55.500 --> 00:21:02.520 I'll just go through maybe three or four examples in order to illustrate this point. 150 00:21:02.520 --> 00:21:07.800 One essential idea of the inflation is, a typical point is, it's not necessarily an argument 151 00:21:07.800 --> 00:21:15.620 that is firmly held by academic economists, but it's very popular within the non-economists, 152 00:21:15.620 --> 00:21:20.420 rest of the population, according to this argument, you need to have a growing money 153 00:21:20.420 --> 00:21:35.420 Money Supply if the economy grows. Let's say the economy grows by 5% or by 10%. Then it's necessary to accommodate this growth by corresponding increase of the money supply. 154 00:21:35.420 --> 00:21:49.420 Otherwise, so the argument goes, you could not sell all these new goods. So you have 5% more goods and services entering the market. How do we sell them? All the money is already being taken by the other goods. 155 00:21:49.420 --> 00:22:04.420 What's wrong with this argument is that the prices of goods and services is not independent of the money supply and of their own quantities. 156 00:22:04.420 --> 00:22:09.420 What happens in such a case is simply that all the prices start to diminish. 157 00:22:09.420 --> 00:22:16.420 If the quantity of those other goods increase, then their relative value diminishes. 158 00:22:16.420 --> 00:22:24.420 The more you have of a thing, the less it's valuable, the less it's scarce, and so the prices that we pay for them diminish. 159 00:22:24.420 --> 00:22:36.420 If you hear this for the first time, well, you're ready to accept this and then you might actually move on to the second objection that goes something like this. 160 00:22:36.420 --> 00:22:44.420 Okay, so we know then that our prices will diminish, we'll have something like a deflation, a price level deflation, but isn't this a bad thing too? 161 00:22:44.420 --> 00:22:51.420 because now our poor entrepreneurs, they have bought at higher prices in the past, now they need to sell at lower prices in the present. 162 00:22:51.420 --> 00:23:03.420 Now that's the wrong argument, too, because entrepreneurs, at least, well, those who we Austrians call entrepreneurs, they do not operate that mechanically. 163 00:23:03.420 --> 00:23:14.420 An entrepreneur is not somebody that has a fixed idea of what he wants to do, launches his production plan and then sees at which price he will be able to sell his goods. 164 00:23:14.420 --> 00:23:26.420 That's not how it works. An entrepreneur works is to imagine a production that he will sell at some point in the future on the market and imagine which price he can realize for his goods. 165 00:23:26.420 --> 00:23:30.420 What is the total selling receipt that I can realize with my production? 166 00:23:30.420 --> 00:23:47.420 And based on this estimate of his future selling receipts, he then goes to the factor markets and sees whether he can realize his project, whether he can buy all the factors of production that are necessary at a price that is sufficiently low. 167 00:23:47.420 --> 00:23:58.420 So if such an entrepreneur anticipates that prices will diminish in the future because the economy grows, well then he will simply start bidding down factor prices in the present. 168 00:23:58.420 --> 00:24:11.420 And if he is not able to do this, if he doesn't find anybody who is working right now for a lower wage and doesn't find any land owner who is willing to rent his land for a lower price and so on, well he will simply not start his project. 169 00:24:11.420 --> 00:24:15.420 No fundamental problem here. 170 00:24:15.420 --> 00:24:25.420 Well, I'm running out of time, therefore, maybe just one other typical argument that is advanced, it concerns the cost of gold and silver, 171 00:24:25.420 --> 00:24:34.420 we are told that from an aggregate point of view, it's more suitable to use gold and silver rather than, excuse me, 172 00:24:34.420 --> 00:24:43.420 more suitable to use paper money rather than gold and silver because gold and silver are costly, whereas paper money is less costly, 173 00:24:43.420 --> 00:24:48.420 It's actually cheap to produce, you just need a little paper and a little ink. 174 00:24:48.420 --> 00:24:56.420 If you want to increase the quantity of money by the factor of 10, you just add a little ink and you add a zero on each bank note. 175 00:24:56.420 --> 00:24:58.420 So it's easy. 176 00:24:58.420 --> 00:25:03.420 Now, this argument presupposes, it holds only true for the following case. 177 00:25:03.420 --> 00:25:10.420 In the case that the only service rendered by money consists in its exchange value. 178 00:25:10.420 --> 00:25:22.420 And it's being exchanged for other goods. First assumption, second assumption, the only kind of costs that are relevant are those that are needed for the production of the physical object. 179 00:25:22.420 --> 00:25:31.420 In this case, it's true, paper money is less expensive than gold and silver money. But that's not the relevant comparison. 180 00:25:31.420 --> 00:25:37.420 In fact, the benefits are not the same. It's not just an exchange service that is rendered by money, 181 00:25:37.420 --> 00:25:44.420 but gold and silver also render at least one other service, namely a guarantee against a sudden depreciation of the purchasing power. 182 00:25:44.420 --> 00:25:52.420 It's precisely because gold and silver are costly to produce that their quantity cannot be increased at libitum. 183 00:25:52.420 --> 00:25:59.420 So there's an inbuilt insurance against inflation in them. 184 00:25:59.420 --> 00:26:10.420 So, and then even if they are more costly to produce because they do not provide the same service, they provide greater services than paper money, it's no longer clear whether they are more or less expensive. 185 00:26:10.420 --> 00:26:15.420 And it depends on the subjective value judgments of all market participants, whether they are so. 186 00:26:15.420 --> 00:26:26.420 We wouldn't say to somebody who wants to drive a Mercedes Benz, we say, look, I mean this car only renders transportation services, why don't you drive a Fiat Panda or something, right? 187 00:26:26.420 --> 00:26:31.920 Another small car, I don't want to take the smallest cars that you have in the US, a Kia, right? 188 00:26:31.920 --> 00:26:37.620 Nothing against Kia, it's a wonderful company probably in producing now in Georgia, their cars. 189 00:26:37.620 --> 00:26:44.820 Well, these are very inexpensive cars and they provide less services than Mercedes-Benz cars, okay? 190 00:26:44.820 --> 00:26:48.020 Now, whether that's better or worse is for each consumer to judge, right? 191 00:26:48.020 --> 00:26:52.420 Some buy Mercedes-Benz and others buy a Kia, so there's nothing wrong with the one or the other. 192 00:26:52.420 --> 00:26:57.920 But why should we say in general, well, that's the thing to do and the other thing is not the thing to do? 193 00:26:57.920 --> 00:27:09.120 Now, I could go on for quite a time, well, going through the list, but in every single case the conclusion would be the same. 194 00:27:09.120 --> 00:27:20.320 From an Austrian point of view, paper moneys or, let's say, the production of money through the violation of property rights does not confer aggregate benefits. 195 00:27:20.320 --> 00:27:27.320 What it does is to benefit one segment of the economy at the expense of all others. 196 00:27:27.320 --> 00:27:36.320 For what happens if we increase the money supply is to confer a new purchasing power to the first users of this additional money. 197 00:27:36.320 --> 00:27:44.320 And they will start spending the money bidding up prices, so prices will slowly increase one after another throughout the economy. 198 00:27:44.320 --> 00:27:54.320 and other people will therefore have to start paying those higher prices even though they have not yet received any additional monetary income. 199 00:27:54.320 --> 00:28:04.320 So what paper money does and what inflation does is to redistribute income within society, it does not confer any aggregate benefits. 200 00:28:04.320 --> 00:28:17.320 Final point on monetary systems, that is monetary orders that are premised on the violations of property rights that entail therefore some sort of inflation. 201 00:28:17.320 --> 00:28:27.320 We can distinguish the following forms of violations of property rights that are discussed in more detail in the book, in particular four forms. 202 00:28:27.320 --> 00:28:33.320 The first one is the legalization of fractional reserve money certificates. 203 00:28:33.320 --> 00:28:39.320 Fractional reserve certificates can be banknotes, covered only partially by underlying reserves. 204 00:28:39.320 --> 00:28:42.320 It can also be debased coins. 205 00:28:42.320 --> 00:28:48.320 Second, violation of property rights comes through the imposition of monopolies, 206 00:28:48.320 --> 00:28:51.320 legal monopolies for certain types of money. 207 00:28:51.320 --> 00:28:57.320 For example, we shall only use gold coins rather than gold or silver and copper coins and so on. 208 00:28:57.320 --> 00:29:05.320 Or we shall only use the coins and the banknotes made by the company A and not by other companies, so and so. 209 00:29:05.320 --> 00:29:09.320 So we have monopoly rights, this is an infringement of property rights. 210 00:29:09.320 --> 00:29:20.320 Third, we have, most importantly, legal tender laws, which oblige all market participants to accept certain types of money 211 00:29:20.320 --> 00:29:30.320 In view of payments stipulated in terms of another money, for example, if we make a contract, I'll buy your car for a thousand ounces of silver, 212 00:29:30.320 --> 00:29:42.320 then illegal tender laws in the US allow me not to actually pay in silver, even though I promised so in my contract, but to make an equivalent payment in terms of US dollars. 213 00:29:42.320 --> 00:29:52.320 Okay, dollar notes. Now this of course leads to the very perverse incentive for each market participant to use the money that is least valuable. 214 00:29:52.320 --> 00:30:00.320 That is called Gresham's Law, so actually the least valuable money is being used at the expense of the better monies. 215 00:30:00.320 --> 00:30:08.320 And the fourth violation of property rights comes when central banks suspend payments, so this is no longer the case today, 216 00:30:08.320 --> 00:30:12.320 Today central banks are no longer suspending payments, they are producing paper money. 217 00:30:12.320 --> 00:30:17.320 But suspension of payments is a violation of contractual obligations. 218 00:30:17.320 --> 00:30:25.320 Final word on paper money. Paper money, or what is the same thing, electronic money, 219 00:30:25.320 --> 00:30:33.320 electronic money issued by central banks today, is by its very nature an inflationary form of money. 220 00:30:33.320 --> 00:30:39.320 And that is so because it can only be produced under the violation of property rights. 221 00:30:39.320 --> 00:30:44.320 There is no free market situation. There has never been a single historical free market situation 222 00:30:44.320 --> 00:30:49.320 in which free paper money tickets have been introduced competitively. 223 00:30:49.320 --> 00:30:58.320 An example I always give to my students is, well, imagine I show up and say, well, I print my piece of paper and I write on it, 224 00:30:58.320 --> 00:31:08.320 Three Hultzmanns. I tend this to you and say, now you're going to work for me for a year. Great deal. I assure you, it's a great deal. 225 00:31:08.320 --> 00:31:17.320 And they know that something fishy is going on. And the reason is simply, well, how can you evaluate the sheet of paper that I'm handing over to you? 226 00:31:17.320 --> 00:31:23.320 Because it's not being used. Nobody has ever accepted this as a means of exchange. 227 00:31:23.320 --> 00:31:29.320 So how can we evaluate this? How can we form an opinion on its value? 228 00:31:29.320 --> 00:31:36.320 So that's the logical problem that prevents any introduction of paper money in a competitive context 229 00:31:36.320 --> 00:31:44.320 and therefore as a matter of fact paper monies have exclusively been introduced by imposition 230 00:31:44.320 --> 00:31:48.320 by the force of government power in the form of legal tender laws 231 00:31:48.320 --> 00:31:54.320 and in the form of suspension of payments of former banknotes. 232 00:31:54.320 --> 00:32:00.320 And the impact of paper money of inflation in general then is negative. 233 00:32:00.320 --> 00:32:08.320 The two main negative forms of impact are, first of all, an enormous redistribution. 234 00:32:08.320 --> 00:32:11.320 You've just seen the slides from Professor Salerno. 235 00:32:11.320 --> 00:32:22.320 The money supply in M2 has increased by the factor of 4 and money base has also increased by the factor of 4 within the last 20 years. 236 00:32:22.320 --> 00:32:25.320 Now imagine what this means in terms of redistribution. 237 00:32:25.320 --> 00:32:32.320 It means that those who were at the high end of this injection of the new money into the economy 238 00:32:32.320 --> 00:32:52.320 were in each single year, were commanded an extra 10% of national revenue at the expense of all other market participants, a form of redistribution that cannot be justified by any ethical principle that I'm aware of. 239 00:32:52.320 --> 00:33:00.320 And the second negative consequence is the business cycle that several speakers have mentioned this afternoon. 240 00:33:00.320 --> 00:33:15.320 And if we increase the money supply, especially if we increase it very strongly, there's a risk that we decrease the interest rate below the equilibrium level and therefore create inter-temporal misallocations and therefore impoverish our society. 241 00:33:15.320 --> 00:33:25.320 So in conclusion, therefore, we can notice three points. First of all, there is such a thing as a natural monetary order. 242 00:33:25.320 --> 00:33:39.320 and this natural monetary order is possible and beneficial can serve us as an orientation for monetary reform that was precisely realized by all Austrian writers from Mises to Rothbard to present day writers. 243 00:33:39.320 --> 00:33:50.320 Second, the performance of a natural monetary order cannot be improved through government interventions, cannot be improved by the force of the state. 244 00:33:50.320 --> 00:33:58.320 All that the state does is to increase the money supply beyond the level it would otherwise have reached, thereby only entailing redistribution and business cycles. 245 00:33:58.320 --> 00:34:09.320 And the third point is that the monetary order deteriorates when the rules, the basic ethical rules of money production are violated. 246 00:34:09.320 --> 00:34:19.320 It deteriorates into fractional reserve banking, into paper money systems that create these negative aggregate consequences and are unjustifiable, 247 00:34:19.320 --> 00:34:26.320 Thank you very much for your attention.