Russell Napier, "Money Creation in Peace and War".

Good evening folks. Uh thank you so much

for for making it. Uh sorry to keep you

waiting.

Um

welcome. Uh welcome to Library Mistakes.

We are very fortunate this evening to

have uh Russell Neighbor who needs no

introduction, the the founder of the

Library of Mistakes and author of a

couple of wonderful books that are both

at the library. Um he'll be talking to

us this evening about uh money printing

and war and peace which is a

unfortunately a more uh pertinent

subject than we would like to prefer for

it to be but nonetheless better better

think about it now than than later. Um

um we'll we'll have questions afterwards

uh obviously as always uh and I think

Russell probably will stick around uh

for a bit after after the the the

official bit as well. Um, so without

further ado, I I pass the floor to

Russell.

>> Thank you, Boris. It's fantastic to be

back. This is my third trip and uh I

just thought I'd fill you in in the

Boris calls it a global movement. And I

think I always thought that was a bit

premature, but Boris, it is becoming a

global movement. So thanks to Boris, we

have Library Mosaics. Lausanne, that's

number three. Edinburgh first, Punea in

India second, Luzanne third, Singapore

next year. Uh but in November Montreal

and in London we will have a library of

mistakes next year. We have the money

very close to having a premises. So

those are the ones that I'm going to use

the word now will happen. And then we

have about three or four others that

might happen.

So the obvious question is why? First of

all, I can assure you that it's nothing

to do with me running around the world

telling people they need libraries and

mistakes. Uh this is people coming to us

and saying to us we need libraries of

mistakes. So why what's what's happened?

Well what happened is this a lot of

people not me actually I'm I'm trained

as a lawyer. Boris what what are you

trained as again?

>> Bachelors in finance.

>> Finance.

>> But there's a lot of people in the

industry who've got bachelors in

finance, masters in finance, economics.

uh and what they were taught is really

that this is a mathematical pursuit

where it has a lot of maths in it and

there's not really much more to it than

some very complicated mathematics and

then they look out the window and they

see Donald Trump or they see Xi Jinping

and they say what earth is maths going

to tell us about this and then they

realize that before economics was

economics it was something different it

was called political economy

That is what it was founded as. And as

political economy, it wasn't just mass.

And I'm not here to tell you mass is

bad. Maz is wrong. I'm saying mass is

just part of it. What else was in

political economy that is very difficult

to put in your spreadsheet? Well,

psychology philosophy

sociology, politics. So the world is now

saying, well, it was pretty stupid for

us not to have that. So how do you get

an education? I mean do you really go

and spend three years studying

sociology, three years studying

psychology, three years studying

philosophy, three years studying you

read financial history? You read about

the way the world has been as a guide to

how it will be not to see patterns but

to understand mechanisms and to put

human beings back into this equation

where they had been taken out. So the

analogy I like to give because I live in

Scotland is whiskey. The Scots are very

good at making whiskey and it's a

process of distillation where you throw

lots of things away. Well, our job is to

put them all back in again and that is

why we study financial history. So, with

that in mind, uh I'm going to talk about

money creation in peace and war that is

backward-looking, but there will

definitely be some forward-looking

conclusions from this about what's going

to happen uh in this world of money. I

think you all have copies of this. It's

got a rather dramatic title, tax, print,

borrower, plunder, but that is really

for those who are at war. That's not

necessarily for those who are at peace.

So, the three tests of money, you'll all

be familiar with them, and I just want

to discuss them in in the context of the

new form of money we have coming along

called crypto, which I'm not going to

spend a lot of time on, but as we go

through this, you can think where crypto

might fit in in this whole thing. So a

medium of exchange will you accept it as

payment for good service or asset? Well

uh I think uh bitcoin maybe not but we

are getting to a word where that will be

true of stablecoin.

So the Americans in particular have

packed the thing passed a thing called

the genius act. I don't know who thought

that up you know obviously some genius

but anyway they have a genius act uh or

someone who thinks they're a genius

anyway. And what that stable coin is is

effectively a money market fund linked

to the blockchain. So it is as good as a

money market fund. And as you probably

know, I think it's very very rare for

any money market fund ever to break the

buck for the nominal value to go down.

And that is what stable coins are going

to be. So they are acceptable as a

medium of exchange or are becoming

acceptable as a medium of exchange. And

other countries are now accelerating

looking into this. The governor of the

Bank of England, you may have seen just

three days ago in the Financial Times

talked about stable coins as something

that can be useful. The Americans see it

as a weapon as well against China, a way

to lure capital out of countries that

try to stop it from coming out, whether

that be Venezuela or China. Americans

have quite a long list of people who

they'd like to see uh suffering from

capital outflow. So, medium of exchange,

we all know what that is. uh a unit of

account. Can we price everything in the

room in the medium? Well, I think you'll

be able to do that with stable coin, not

with Bitcoin because it moves up and

down a lot. So, which doesn't make it

impossible to go out and buy a pound of

beer with something that's moving 5 to

10% every every day just makes it a bit

difficult. So, stable coins will not be

moving like that. They'll be linked to

the value of US Treasury securities or

perhaps maybe British uh British

government securities. Well, and a store

of value. Well, the last one is

peculiar, isn't it? because it's the

avoided intention of our central bankers

to make sure that you lose 2% of the

value of your currency every year. That

is the target. So, is it a store of

value when their entire goal is to make

sure that next year you've only got 98%

of the purchasing power of the year

before? Anyway, as a store of value,

paper money has not been wonderful. Uh,

but if it's it serves, it works and

people accept it. So, it passes all of

the three tests. So with those three

tests in mind, we're going to go through

the the history of money. So we need to

begin with with who makes money. And

this is the maybe the only bit of this

talk that is important or must never be

forgotten because it is grossly

misunderstood. Money is not made by the

government and money is not made by the

central banks. Money is made by

commercial banks. Now when I say that

people tend to disbelieve me. So I

wanted to read something from the Bank

of England. Usually when the bank of

England say it people don't disbelieve

them. So in the modern economy, most

money takes the form of bank deposits.

But how those bank deposits are created

is often misunderstood. The principal

way is through commercial banks making

loans. Whenever a bank makes a loan, it

simultaneously creates a matching

deposit in the borrower's bank account,

therefore creating new money. That's it.

That's where money comes from. Now if we

look at sterling for instance, it's 87%

of all sterling created in history. I

the total amount outstanding has been

created by commercial bankers. 3% is in

the form of notes, bank notes which is

created by uh the government uh and the

rest is balances reserves created by the

central bank. So the vast majority of

all sterling has been created by

commercial banks which means of course

that money is actually backed. You know

we often talk about fiat currency and

your bank note is not backed by

anything. Let's see if I've got a proper

bank note in my pocket.

So, here we have a 20

Swiss Frank. Nope. So, it is unbacked.

Well, maybe unless you could include

shares and Apple, which maybe be backing

this, but let's leave that aside.

Uh, but if I take it to the bank and put

it in as a deposit, it becomes a

liability of the bank. And of course,

it's backed it's backed by all the

assets of the bank. And what are those

assets of the bank? Well, they basically

let's let's take the big ones, loans,

securities, which is usually debt

securities and reserves that it holds

with the Swiss National Bank. There's

other things. There's a bit of equity in

there. Uh there's some, you know, some

tangible assets, etc. But when this

becomes a deposit, it's it's backed it's

backed by those assets. So, when we're

looking at how much our money may or may

not be worth, one of the things we also

have to look at is the assets of the

commercial banking system. I'm calling

it banking system in in Switzerland.

Maybe you just call it bank system, do

you? Because there's just the one. Uh

the Swiss Frank is effectively backed by

the assets of one bank uh predominantly

by one bank. So that's how most money uh

in the world is made. Let's just sort of

run through all the different types of

money. So coins, you'll not be uh

surprised to know what coins this is one

from. Marcus Aurelius. Many of you will

read the meditations of Marcus Aurelius.

If you haven't, you should read the

meditations of Marcus Aurelius 160 AD.

Uh but the coins have been around since

the 6th century uh AD and it's or BC.

And it's interesting that that will

probably be the first one to disappear.

I'm sure many of you don't even see a

coin uh anymore. It's quite possible to

spend a whole year and never see a coin.

That will be the one that's

disappearing. The interesting one is le

what we call ledger money. Now ledger

money is probably precedes well does

precede bank notes. So I want you to

imagine that all of us in this room we

all know each other very well and we all

trade with each other and some of us owe

debts to some people and uh

so Boris owes me 50 Swiss Franks but

it's just done on a piece of paper that

he owes me 50 Swiss Franks. But this

gentleman knows Boris. So when it comes

to me paying you, you think I know

Boris, Boris's credit is good. I assign

my what Boris will be to you. That's

money. We've just done a transaction.

And that's the sort of money that was

kind of hiding in the shadows for a long

long time, but it's coming out of the

shadows now. And it's credit. Credit is

money. The difficulty with that is

unless you know Boris, you're not really

going to do that because you don't know

how good his credit is. But in small

societies, that happened. Now there's a

a pretty new book out by a man called

Paulo Zenoni looking at medieval Italy

and losing some of the records of

charities. One of the people who were a

sort of clearing system for this were

charities. So charities had a bigger

scope than the people in this room uh

were having some view on the

creditworthiness of people and they

could match these credits off against

each other. So long before there was a

bank note, there was that form of money.

It wasn't a coin at all. It was an

important form of bank note but

particularly amongst merchants which is

why it really gets predominantly

important uh up up in Italy. So is that

paper money? Well, not represented by a

piece of paper but represented on a

piece of paper. The banknotes come along

and only after bank notes do we get bank

deposits and I'll talk about that. And

now we have crypto. And that's that's

it. That's your list of of money. We're

going to talk about uh each of them.

So, as I mentioned, I've got a little

one here from uh

165 AD, but the first one was 6th

century BC. Now, this is mainly uh

focused on on America because I

originally did this presentation to the

West Point Military Academy. So, uh

that's why it's focused on America.

Uh but America is interesting because

America obviously becomes independent

1782

treaty of Paris and then its money is

worthless. It has destroyed the value of

its money and it has to begin to build

its money from scratch. So the first

thing they do is they start using other

people's money. And the type of money

that is used there effectively is is one

of these.

This is effectively a 1 silver coin. And

from 1515

to 1978, this was a global currency. So

you'll hear it said that there's never

been a global currency, but there has.

and it was a 1 oz silver coin. Uh I have

one which I've just bought this morning

from 1851, one of the very first Swiss

Frank uh Confederation coins ever

created because why was this a global

currency? Because everybody knew it had

1 oz or nearly 1 oz of silver in it. So

when America arrives as an independent

nation with no money, it simply ends up

using Spanish money.

And a Spanish coin of that size is

called an eight realale piece. Also

known by pirates as pieces of eight.

And when they come and they'll be having

German money as well. Tallers would have

been circulating and a few maybe still

British crowns.

So when it comes to creating their own

money, this actually is a silver dollar.

And guess what they do? They create a 1

oz silver coin. And really just about

every country in the world did this. But

the important thing, it was made of

silver and therefore it could trade

absolutely anywhere in the world. In

1707, Scotland merges with England. And

when they called in the currency in 1707

to remint it, called in the silver

currency, less than half of it was

Scottish.

And you might think, well, that means

most of it was English. No, most of it

was not English. Most of it came from

the continent of Europe, particularly

the Netherlands. Scotland traded a lot

with the Netherlands. A lot of it was

Spanish. Because the thing about money

is people accepted what they thought was

good money and what they thought was

good money was 1 oz silver coins. Now

you will probably know that as of today

this 1 oz of silver is now worth for the

first time since 1979 I think is worth

$50. It's the first time we've got

through $50 since 1979. So this is a

effectively $50 worth of purchasing

power. That's quite a lot of purchasing

power, but it's not an impossible

purchasing power to buy a pint of beer

with, to buy a meal with. So, it wasn't

gold that circulated as coins. We were

on the gold standard. Uh, and I'll come

and explain that if you like, but gold

didn't circulate in the economy. What is

a 1, everybody in this room will now

know what is a 1oz gold coin worth?

>> $4,000. We'll try buying a pint of beer

with a $4,000 US coin.

>> Lots of beers.

>> Lots of beers. We can try later. Okay,

I'll bring the I'll bring the coin. You

bring the beers. So, for all intents and

purposes, the word was definitely on a

gold standard, but the sub thing that

really circulated was this. Now, of

course, there was lots of brass money

going around as well. Uh, but that

silver courage, so 1515, first minted in

a country we now call Czech Republic.

And the last country to mint it was

1978. And I have one. This is the very

last one or the very last year anyway.

Minted in a country with a huge silver

mine. Does anybody want to guess which

country had a huge silver mine that kept

going till 1978?

>> Mexico.

>> Mexico is the right answer.

And of course, the reason that this

couldn't go on anymore is where the

price of silver was getting to in 1978.

So the face value was a peso. The market

value was much higher. So as soon as you

printed these, there was a risk-free

profit of just taking these and melting

them down. So it had to end in 1978. But

for that long period, this was a global

currency circulating all around the

world to such an extent actually that

the Bank of England had to specifically

make coins just to trade with China.

There weren't enough silver coins to go

to China. So they had to make a coin

called the silver dollar. The Bank of

England actually made a dollar so it

could trade with China. Lots of

countries had to make these silver coins

to satisfy demand in China. So, it's a

classic example of how there is one

money when it's a metallic money and

people have faith in it. Clearly, if you

are a country who had a reputation for

not putting silver in your coins, they

didn't trade at par with everybody else.

They went to a discount. And if you were

sitting in Edinburgh, I suspect in

Lausanne in the 18th century, you would

have had a great big list of the coins

that were considered to be good and the

coins that were considered to be

slightly diluted. And the world ran on

that system for a long time. But it has

a problem. The obvious problem is who

controls the supply of silver. And is

the supply of silver going to grow at

the right pace or not? Too slow, too

fast. Uh but it's not really up to to

human beings. So the realale, the

taller, the great British crown, the

silver dollar. So it's 1964 when America

last minted one of these. Now this one

was made in actually 1996. This was

given, this is a gift given to me in

1996 by the United States Treasures

Association, but the last one minted for

circulation was 64 because that's when a

dollar was pretty close to the price of

silver. These are still minted today and

these are minted in commemoration. Uh

these are no one's going to spend this.

I mean, I'm not going to buy anything

for Jared for $1 and hand him a coin,

which is worth I think it's $46 now,

actually, cuz it's not quite an ounce.

As of today, there's $46 in this, but

they still mint them uh as commemorives.

So, you can still get them, but they

haven't actually circulated. It's

difficult to foresee a time when they

would circulate again. So, 64 the US

stops making those. 79 actually that

Mexico stops making them. And uh yeah,

so that so a silver dollar today when I

wrote this and you can see on the piece

of paper here it says 34.5 an ounce that

was May

that was May and it's now 50. So there's

another problem with using precious

metals uh in terms of the volatility of

the price. So that's uh you know as you

probably know we could do six hours on

coins but that is what I'm going to do

in coins just at the minute. We'll come

back to a few in a minute.

So ledger money is important because it

can happen without anybody seeing it.

And I think this has been a problem for

historians that they didn't actually see

it and didn't know it was going on. I've

described earlier uh how it works, but

you need a trusted record keeper for

that. That's the most important thing.

If the record keeper can't be trusted,

it doesn't work. So if we look at the

Italian example, you find quite often

it's a charity. Everybody trusts the

charity. So therefore, the charity can

keep the records. we don't think they're

going to adulterate the records, but

unfortunately it works more in small uh

geographic areas.

So now we get to money creation. So I

want to just run through the uh the

mechanisms through this on the bank that

I happen to know relatively well which

is the bank of Scotland which was formed

in 1695.

Uh so this is how you form a bank in

1695 and we do this because it will

explain how money is made uh today.

So the the shareholders raised the money

and then they rented a room in the Royal

Mile of Edinburgh if you know the Royal

Mile and they put behind the counter the

assets of the company. The assets of the

company were gold. So they raised cash,

sold the cash, had the gold, put it

behind the counter, gold in any form,

coins or bullet or whatever. And

everybody in town knows they've got

gold. And then what they started to do

was to lend money. You didn't launch a

bank by accepting deposits. These guys

didn't accept deposits until 1710. So it

was literally 14 years before they

accepted a single deposit. So here's how

it works. The first person had to happen

one day somebody walked in said, "I'd

like to borrow £10."

And I wrote a piece of paper saying this

is the entitlement to £10 worth of gold.

And of course charged interest. Now the

person walked onto the Royal Mile of

Edinburgh with this piece of paper to

buy a horse and cart for £10. and he had

to find somebody who would take that.

But of course, most people knew the gold

was there. It was a receipt for the

gold. And very quickly, people started

taking these notes because they knew the

gold was in the vault. After a while,

something really interesting started to

happen, which is where we are today. And

that is the bank began to realize that

people were not bringing the notes in

and asking for the gold. And therefore,

the temptation was just too much. and

they began to create more notes than

there was gold. Now you remember every

time you create a note you're charging

interest let's say 6%. This is

incredibly profitable. This is called

fractional reserve banking and it's a

tremendously good business. It's the

business we still have today and that is

how money is made. The bankers make uh

more money every time they make a loan.

Now you might say well we don't have

gold in the vaults of the banks. We

don't. I've described earlier what the

assets of these banks are. where the

liquid assets are obviously cash and

notes in the bank but primarily the

liquid asset today that would satisfy

you if you came in would be reserves

that the commercial bank owns with the

central bank. So that's not gold but

that is effectively if you think of the

same mechanism that is how it operates

with the reserves uh replacing gold. Now

why is that so incredibly important?

Whoever controls the banks

is the monetary authority.

That is something that we've we're

missing in modern money understanding.

There is some great mystery somehow that

the central bank has to control money.

But what happens if one morning you woke

up and the banks were controlled by the

government? The central bank would be

omnipotent or sorry, not omnipotent,

impotent.

It would be impotent.

So what is the central bank supposed to

do to control these banks? Because at

the minute the central banks are the

monetary authority.

They let's assume you're all the Swiss

bankers here. One of you will be more

important than the other but you're all

Swiss bankers. Uh I'm the Swiss National

Bank. What I try to do is to control the

way you make money and I do that through

lots of mechanism. Obviously I can have

interest rates and if I put them up I

can slow the demand for credit make it

more difficult for you to expand your

balance sheet. I could demand that you

have more capital and if you have more

capital then slows the pace at which you

grow the balance sheet. I could maybe

demand you have more liquidity

to do the same thing or I could maybe

change the risk waiting of your assets

and trying to work out your capital

adequacy. That's just four ways in which

a central bank plus regulator sometimes

the same thing sometimes separate can

control the pace at which commercial

banks expand their balance sheets and

create money. But during co something

very different happened and that is the

governments went to the banks and said

lend lots of money and they did and they

created lots of money and from 2020 to

2022 uh I'm just looking at the the

United States here the the supply of

money went up sorry I'm looking at the

Euro zone the supply of money was up

20%.

From 2009 to 2019 Europe had hardly

created any money because it was the

central bank that was trying to do it.

The central bank was buying assets. The

ECB was buying assets. The assets

predominantly government bonds and they

were buying that money or buying those

bonds from savings institutions

primarily and banks. Uh and that money

wasn't getting used by the public. So

what we call narrow money, that reserve

money was growing incredibly quickly,

but the total supply of money wasn't

growing quickly at all. And then

suddenly 2020 everything changed. For

the first time and I think it's for the

first time in in probably in human

history banks started expanding their

balance sheets into the worst recession

in history. The worst recession by speed

not by magnitude. The world is falling

apart and banks are letting into it.

Why? Because the government is telling

them we'll we'll make sure you're okay.

So from in the next two years the supply

of euros goes up 20%. Guess how much

broad money goes up? 20%. And with a bit

of a lag, inflation goes up 20%.

There is a very clear lesson from 2009

to current about how money is made, who

makes it, and what the implications of

that are. And anybody who can control

that bank controls the supply of money.

So you probably know one of the great

debates in finance is will the central

bankers always remain independent? Will

the governments change their targets?

Well, they don't have to. If they can

tell the banks to lend at a certain pace

then they the central banks are

redundant. So once we understand the the

make how money is made we can get into

the business of working out what happens

next. Now one of the things I haven't

mentioned in the these things is called

credit controls.

Credit controls were utilized

particularly in Europe post World War II

and it was in when I as the government

not the central bank would go to you the

commercial bankers and say next year

your balance sheets are growing at 10%.

Get on with it. That's it. So I the

government and the monetary authority

and that's what we have to look forward

to. That is what if you like saved a

portion of the citizenry during co and

that is what is coming back and in that

world you should expect more inflation.

That is a world where the reason that

this power was gradually taken away from

governments and past the central bankers

is they tended to make too much money.

Uh and that is the world we're going

back to. So are we there today? No, I

don't think we are. I thought we were in

2020 because the commercial bankers were

doing exactly what they were told. But

the inflation that came was so

terrifying for the governments that they

handed the reigns back to the central

banker and said, "You better sort this

out. What a terrible mess and it's all

your fault." Well, if we get a economic

shock, which I think we will very soon,

then the governments will be back and

they'll have learned their lesson from

20 to 22. It's not quantitive easing

that solves this problem. It never was

going to be quantitative easing that

solves this problem. It's getting the

commercial banks to lend more money. You

might have to guarantee that that

credit. You might have to offer them

lots of incentives. You might just have

to force them. But that is what happens

next. And that is why the future is one

of inflation. So if you see anything at

all happening in any economy in the

world which tells you that the

government's having more control over

the commercial banking system, that is

when you have to say yes, the future uh

will have more inflation and we're not

quite there yet. So that's most of the

money in the world. So when they take

it, when they take control of the banks,

remember you don't have to own a bank to

control it. You know, we go back to post

World War II France, they own the banks.

It was quite easy to do this. But

through the powers of regulation and

taxation, uh you can control a bank

without actually owning it. That's what

they did during CO. There were no

nationalized banks during CO, but the

banks did exactly uh what they were

told.

I think I've covered bank deposits as

modern money. Uh let's talk about

inflation and money and how you create

inflation in the modern economy. You'll

see that infamous famous quote from

Milton Fle Freeman. Inflation is always

an everywhere monetary uh phenomenon.

And in Freeman's world, it's really

whether you accommodate a supply side

shock. So be two oil shocks in the 70s.

I think in terms of aggregate pricing,

uh Friedman would argue that if you

hadn't allowed the money supply to

expand rapidly, your aggregate inflation

level would have stayed pretty steady.

In other words, the oil price still

would have went up but the whole of the

economy would have collapsed and price

of everything else would have come down.

Unfortunately that is or fortunately

that is not the way the political

economy works. The idea that you can get

a supply side shock like the oil shock

where the governments of the world say

oh what the hell let's just keep money

supply growth at four 5%. Let's take a

15% contraction in GDP nominal terms

let's move on. That is not the way it

works. So what failed in the 1970s was

the political economy because they they

worked out quite rightly that this could

not be accepted by the population. So

they printed money into it. They printed

through the banking system they

generated money and they accommodated

the oil price shocks and we got much

higher inflation. So to an economist it

doesn't have to be that way. To a

political economist it had to be that

way because the consequences of doing it

any other way are dire particularly

today.

because debt is so high. Now a deflation

which is what you get if you do not

accommodate that the rest of the economy

really contracting viciously when debt

is very high just gives you gross

defaults. So from a political economy

perspective uh we can't do that. We're

going to have to provide monetary

accommodation. I think co shows you

exactly that. Nobody or very few

countries Switzerland was one of them

actually stood back and said we're not

doing anything here. we're not really

getting the banks to lend more money. So

that is the uh political economy of

this. So you all know that money can be

printed in the form of banknotes. I

brought my uh one 100 billion Zimbabwe

bank note. But of course Boris out did

me because Boris has a $100 trillion

Zimbabwe bank note.

Uh

that this one you'll be more familiar

with from not far from here. That's the

5 million Vimar bank note 1923.

So you kind of because of the history of

this you kind of think that that's what

it's going to look like. But of course

it isn't going to look like that.

Remember this stuff today. Let's pick

the Swiss ones. This is well in any

other economy this is 3% of the total

issue. I think it's higher in

Switzerland because you have a 500 Frank

note which tends to sort of doesn't

thousand tends not to move around so

much. Let's put it that way. Uh so I

think uh it's probably slightly higher

than three but you're not going to

inflate Switzerland by by creating this

stuff. Well, you are going to inflate

Switzerland by creating more bank

deposits by lending more money. And that

is exactly how it was done during co the

inflation that we've had postco is

nothing to do with there being more

banknotes in circulation. I think we

know that there actually probably fewer

banknotes in circulation. It's because

we drove up uh the supply of uh

deposits. So printing will will come in

many different forms. I have a question

in here uh about what the VHimar German

inflation achieved well arguably World

War II.

This is serious stuff. You know, the

idea that this is something that you do

in spreadsheets, that you can forecast

the future simply by working from a

spreadsheet.

This led to World War II. It wiped out

the middle classes of Germany. It made

them looking for any answer. And any

answer came in the form of Adolf Hitler

and fascism.

Money matters. It doesn't just matter to

how much money you have. It matters for

the stability of society. And if you

want to wipe out a middle class in

particular and leave it susceptible to

that, then it takes you to uh and it can

take you to a very dark place. So this

is important stuff. And the idea that

this is all in a spreadsheet is kind of

nuts. Imagine sitting around in 192425

when the market stabilized stabilized by

a man whose book is here. Hajimmore

slacked my first 76 years. Amazingly he

never got a second 76 years. But anyway,

Hajar Horus Greley Schlack actually is

his full name because he was born in

America, Hitler's central banker.

Uh, imagine sitting there Schlack

stabilizes the currency and say, "Oh,

thank goodness for that. Everything in

Germany is going to be okay now."

But the legacy of the old and the

destruction of the middle class lingered

on. So when you're talking about money,

there's many, many, many more things to

forecast that where it is. It's the

damage it's done and the damage it's

done to society, the damage it's done to

the rule of law, the damage it's done to

property rights. So going forward, as I

said, money printing will be well, how

would we do it today? Well, the

government could borrow directly from

the banks and hand it to the citizens.

That is the balance sheet of the

commercial banks expands. This is a

direct loan to the government. The

government takes the newly created

deposits and it just gives them to the

citizens. I think we got pretty close to

that during co. So you can do that

again. You don't have to print another

one of these notes. Uh you've you've

achieved that. Uh the government could

borrow from the central bank and do

that. That's another way of doing it. In

fact, some of the great hyperinflations

have simply been caused including the

Vimmore Germany by the government

borrowing from the central bank. Central

bank makes it money, hands it to the

government, and they just hand it to the

citizens. Unlike quantitative easing

where the central banks bought assets

from financial institutions, kind of got

stuck in there somewhere. didn't really

get out so much into the public. But if

you take the government, put the

government in there instead and print

money and hand it to the government, it

gets into the economy, you get the

inflation.

Or the government could create a new

form of money that circulates. You

probably remember Januz Varfacus was

very keen on this uh as a way for Greece

to get out of its problem. There would

be two currencies and apparently that

wouldn't affect the exchange rate. So

Mr. Varafakus never got to put that into

action, but you could create uh another

currency that would also circulate. So

these if you're looking at a world of

inflation, these are the things I think

you have to look out for. What I would

say at the minute is is there's no sign

of this happening. Now that's a hell of

a big assertion. Uh there is clearly

signs of inflation. I think that's a

legacy of the last money creation. But

if I look at well I've just done this.

I've just written the piece for clients.

What is the growth rate in the lending

of the German banking system to European

residents? So Euro lending by the German

banks is well it's contracting at 1%

yearon year.

Now you might say, well that's the

biggest banking system in Europe

contracting. Well, you'd be wrong

because that's the second biggest

banking system in Europe. When we look

at what backs the euro

today, the biggest banking system in

Europe is France. It is 31% of all the

credit assets. Germany is 25. You say,

"Well, thank goodness the French bank

system is lending." It isn't.

It's not Euro loans to euro area

residents in France are up 1% yearon

year. Germany down 1% year on year. Now

both of those banking systems are fairly

aggressively buying government bonds but

they're not lying to the uh lending to

the people. In a world in my world where

we create more money and inflation,

you'd have to see significant increase

in bank credit and money creation before

that would follow. 60% of all the money

growth in Europe and it's very meager

money growth is coming from the

Netherlands, Ireland and Spain which

make up I think 22% of GDP. So it's a

very unbalanced. You've got three

economies are doing pretty well and

creating money and the two biggest

economies making up 57% of the entire

European banking system are really

struggling to lend money. That's not

going to stay like that. At some stage

someone's going to have to change that

whether it's Mr. Merz or Mr. Macron or

maybe somebody else. Time will tell. Uh

but at the minute, if you're trying to

forecast whether we're going to go to

inflation, I would say no, we're not. We

will have to, but we're not going to.

I think the interesting thing when we

look at money and what backs it, which

is bank assets, is to look at the change

in the euro since its launch. So on

launch 41% of all of the bank assets,

credit euro denominated credit assets

that back the currency were from one

country.

That country was Germany. 41% of the

total was German bank credit effectively

loans to the people of Germany. Today

it's 25%.

And France has gone up to 31%.

This is a banking system that has really

dominated by French credit. Now there's

another problem. When the euro was

launched, France and Germany in terms of

their debt were really remarkably

similar and they were slightly

different, but they were roughly about

210% of GDP. So you took the whole debt

of France, which would be the

government, the household sector, the

non-financial corporate sector divide by

GDP, it's about 210% of GDP in 1999. Do

the same for Germany, you get almost

exactly the same number. Here's the

problem today. Germany today is really

relatively unchanged. And France isn't

210% of GDP. It's 322%

of GDP. So you launch a single currency

backed by the highquality credit assets

of a German banking system which is

lending to a very undergeeared

society. You end up today where 31% of

all of that money is lent to the world's

second most highly geared major economy

which is France. You'll all know that

Japan is is number one at 380% of GDP.

But French debt per head is

significantly higher than Japan.

So I'm not going to labor the point on

France. Uh you can watch a video here

recorded about 18 months ago about the

euro and France. Uh but the euro is not

backed by the same highquality assets it

was backed by. uh not that long ago. Uh

maybe we can come back to that at the

end, but I think one of the ways to deal

with that is the way that Europe

eventually dealt with both Greece and

Cyprus.

I happen to know because I've just

checked it that the total debt of of

Cyprus when capital controls were

imposed. So the IMF, the Troa was the

IMF uh ECB and the European Commission

to solve the debt problem of Greece and

the debt problem of of Cypress. They

imposed exchange controls. If they were

going to put a huge amount of public

money in, they didn't want all that

private money sneaking away and getting

out.

The peak level for Greece's total debt

in US dollar terms is 550 billion US,

which was June, I think it's June 2015.

Today, France's debt is 10.5 trillion

US.

Within France, 53% of all government

debt is owned by foreigners. 70% of all

bank debt is owned by foreigners and 60%

of all non-financial corporate debt is

owned by foreigners. These are the

securities, not the bank debt and the

securities. So foreigners have got this

huge role in lending to France. So this

is not a French problem. This is a

global problem. And if and it is a big

if because nobody believes me. But if

they have to use the same techniques to

stabilize France that they used to

stabilize Greece and Cyprus, there's a

stop on capital flows out of France.

And based on the data, net international

investment position data, foreigners

have lent France 2.7 trillion US.

Capital controls are one of the things

that comes along when you're inflating

away debt or going to war.

Now one other thing is money can be and

is created often by the private sector.

I've mentioned these banks in Scotland.

Uh the bank Royal Bank of Scotland gets

a monopoly 1696 for 21 years and then

anybody can open a bank. So any of us

can simply get gold, put it behind the

counter and start issuing banknotes

called free banking and it's up to the

market whether it accepts those

banknotes or not. And that is a system

Scotland used for a long time and really

very volatile but pretty successful.

Very few examples of people not getting

paid back on their bank notes. Uh but

the private sector created created a lot

of money. Most spectacularly a bank from

uh about I think it was 1768 to 1771

there was a bank called the air bank.

That's a r.

It's a town in Scotland. Within 3 years

it created 30% of all the bank notes in

Scotland. So guess what happened next?

Nobody lost any money on the bank notes.

That bank was backed by the biggest land

owners in Scotland. And the biggest land

owners in Scotland made good on every

single note. For some of them, it meant

selling their estates. For some of them,

it meant mortgaging their estates. But

the bank note stood good despite the

bankruptcy of the bank. So, another

example of credit backing the note.

That's why everybody took the notes

because they knew the credit effectively

of the shareholders was good. that was

an unlimited uh liability uh

institution. So we can still create

money in that way. You'll know that in

pre-revolutionary America there were

forms of money in the form of tobacco

and beaver pelts were used as money.

Prisoners of war use cigarettes. There

is a really good piece piece of

research. You'll find it on the internet

by a prisoner of war in a German camp

looking at inflation when Red Cross

parcels arrive with more cigarettes.

And you could link pricing to the

arrival of cigarettes which were an

effective currency. Uh cigarettes became

a currency. Uh in 1966 in Ireland the

banks closed for nearly 3 months. There

were no ATMs. This is before ATMs. None

of the banks were open. So what happened

is checks became money. Once again Boris

wrote a check to me. I endorsed it to

you. The checks circulated. Maybe 30

people endorsed on the back of it.

Mainly cleared through pubs. Pubs are

the place in Ireland where everybody

knows everybody else. Once again, I

could look down the names of everybody

who'd endorsed that check, see that they

were all good. When when the strike

ends, in goes the check, and it starts

bouncing around, and finally it clears

at the end. People are very, very good

uh at creating money. I've got another

example here. This is what we would call

a 2 pence coin. This is made of copper.

So, in the Napoleonic Wars, Britain

doesn't have a lot of silver and gold.

It's fighting a war. Uh but prior to

that, people were making these coins.

Private sector UK was making these coins

because there weren't enough around.

They were making their own copper coins

and they circulated freely cuz they're

called token coins. And a token coin is

not this particular one, but the other

ones said on them, you can redeem it for

silver.

But they were issued by a mine, mainly

issued by a mine in Wales, but everybody

knew the guy who owned the mine was very

wealthy. So they didn't mind accepting a

piece of fairly worthless copper or like

half value copper because they knew he

was good for the money. So there is a

private sector institution with good

credit able to issue money. This one is

actually issued officially printed by a

guy called Matthew Bolton um Bolton and

Watt under the opices of the of the

British government. So we have got lots

of history of the private sector

creating money when the government isn't

very good at it or where there is no

government such as in in prisoner of war

camps. In in Ireland we have something

called gun money created by James II

during the Williamite wars. James

invaded Ireland to try and get the crown

of uh the United Kingdom back or Great

Britain back didn't have a lot of money.

So he issued money which would be

redeemable after he conquered the

country.

So there would be a date on it and it

would say you will be paid back by next

February because by next February I'm

going to rule the whole country and I'm

going to I think you probably know what

happens when with that. But that's

another form of token money but it's not

token money that you can bring in and

get silver for tomorrow morning. It's a

promise to pay in the future after the

country has been conquered. So we must

never underestimate the ability of the

private sector to generate money. So

that's I think a brief run through money

and peace.

But then it helps you kind of understand

how we create money in war as well. So

this is how we fund the war and

depending on how you fund it, you can

have radically different outcomes. So

tax

is the obvious way to do it. So if we go

back to say the first world war, you

find that a country like the United

Kingdom relied quite heavily on tax.

Germany relied quite heavily on

printing. Now as it happened, Germany

lost the war anyway, but it already

printed much more. And you understand

having listened to this and you know

anyway intuitively that if you got to

print you're going to get uh an

inflation problem. So you can tax, you

can borrow. The United Kingdom borrowed

extensively. And there is an argument by

Neil Ferguson and others that the secret

of the United Kingdom in winning a

series of wars through the 19th century

was actually its ability to borrow. its

ability to borrow from the British

public very large scale and they trusted

the United Kingdom government to pay

them back which actually was a was a

trust well worth uh betting in during

the 19th century and a disastrous bet

during the 20th century. So you can

borrow, you can print, uh, which we've

discussed, and you can plunder, you can

simply take the wealth of the nation

you're going to invade. You can say,

"Look, as I mentioned with the gun

money, we'll pay you back after we've

taken all the wealth from this country."

And how a country going to war chooses

between these has a radically different

impact on well certainly on financial

assets, which is something I know all of

you are interested in depending on which

of these that you you decide.

So, I thought I'd go through some of the

more peculiar ones that we've had coming

out of out of war. I mentioned this one.

Uh, if you run out of silver and you run

out of gold and you don't simply can't

import any because there's a war coming

over, but you have copper mines, you

make that. That's 2 p. So, in the old

system to have one pound, you need 120

of those in your pocket.

So, you can see why apart from warfare,

it probably wasn't a very practical uh

thing to do. This is known as the

cartwheel penny cuz our or two p two two

pennies cuz it's one of the biggest ones

uh uh out there.

This one uh which I just bought in

Belfast in a in a market

is Japanese military money. So another

way of doing this is after you've

invaded a country is you confiscate or

at least you try to confiscate all the

money. It's not difficult to get the

bank deposits because you walk into the

bank with a rifle and you go and see the

manager. That's not difficult to do

that. However, uh this is from the uh

what we now call Indonesia, Dutch East

Indies. And when the Japanese, they did

do that exactly to the banks and they

eventually demanded that you hand in all

your gilders. This is a Japanese gilder.

You don't expect to see Japan and gilder

together. Uh there's Japanese rupees and

the Japanese would put these in and try

and uh try and uh get these passing off

and get the hard currency back. It's

illegal to use the hard currency.

Doesn't stop people using it. doesn't

certainly doesn't stop people hoarding

it. Uh but illegal under military

dictatorship has implications larger

than a fight. So you can be quite

successful at putting this stuff uh into

circulation and eventually of course it

ends up worthless. My friend who's from

Malaysia, his father remembers taking

these round at the end of the war as a

small boy in Malaysia who also had them.

Bucket loads of them and nobody would

take them. So these on the whole this

one slightly different but a lot of them

finished up completely worthless. But

that's because Japan uh lost that

particular war. Now my favorite one

is this one which looks brand new,

doesn't it? And there's a reason for

that because it is brand new. This is

called the Maror.

And I'm looking for the date. I think

it's 1782.

Anyway, I can't find a date, but I'm

going to tell you it's 1782. So, how did

I just go to the mint in Vienna and buy

a coin with 1782 on it? This is probably

the most amazing story in the history of

currency because this taler, which I'm

sure you all know, it's another one of

those 1 oz silver coins. when Mari TZ

was on the throne was widely accepted in

the Horn of Africa,

uh Ethiopia

Aiden, and the Gulf.

And it still is

now, not as widely as it used to be. But

once again, I had another friend whose

father served with the British military

in Aiden in the 1950s and these were

circulating freely in the Horn of Africa

because the people of the Horn of Africa

decided this was good money

and everything that came after that

maybe wasn't so good. And they're still

minted in Vienna today. Uh I was in I

give a lecture in Vienna early this

year. I bought five of these. I was in a

pub with some academics. So, I bought

the beer and I put on the table I put a

€50 note and I put one of these beside

it. And I said to the barman, "Which

would you prefer?"

And he said, "I'll take the coin."

And I said, "Well, why would you take

the coin?" Cuz you really don't know how

much it's worth, do you? What if I told

you it was €26 and it was €26 when I

bought it? He said, "I'll still take the

coin."

So I can tell you that marritorial has

been circulating since the mid- 18th

century and continues to circulate today

in Vienna. But the reason for talking

about this was because of warfare. So

what role does this play in warfare?

This silver coin because this coin was

not just produced in Vienna during the

Second World War. It was also produced

by the British and the Italians. Because

if you were trying to pay people in the

Horn of Africa and the British were

trying to pay people to fight the

Italians and the Italians were trying to

pay pay people to fight the British, you

had to have the currency. So they made

these uh and of course they had to make

them silver because the people of the

Horn of Africa are not stupid.

So everybody started making these silver

coins because that's what would pass for

money in the Horn of Africa 1780. So

that 1780 is when she died. That was the

last one that was made. So, uh, long

after she's gone, they're still, uh,

moving around the planet, and they're

mainly worn as, uh, jewelry. So, more a

store of value and a means of

transaction. But in a turbulent world,

you can actually wear your wealth around

your neck. And a lot of those ladies in

the Horn of Africa getting a lot richer

in the last 3 months.

Some more wartime currency.

So this, as you may or may not see from

the back of the room, is a Bank of

England 50, but this didn't come from

the Bank of England. This came from Lake

Tip Tiplets. Triplets, I get the

pronunciation correct. Comes from a lake

near Saltsburg. So what is toplets? What

is a 50 note doing in a lake in Austria?

Well, this was forged by the Germans

uh at various concentration camps from

their poor inmates. Lots of Jewish

inmates were forced because lots of

Jewish people were very good at

engraving, forced to make these notes.

And initially the plan was when Germany

invaded the United Kingdom, it would

drop these from airplanes and destroy

the monetary standard of the United

Kingdom. Now, the Germans knew a lot

about printing money and destroying

because

they're they're they're concocting this

plan in 1940. In 1923, they'd done that

to their own currency. So, they started

producing is obviously they never did

invade the United Kingdom, but they

still managed to pass quite a few of

these off. Where did they go? Well,

mainly neutral countries, including

Switzerland. Now, it wasn't often that a

Swiss bank was fooled by one of these,

but there were Swiss banks who did take

these. Uh, not many here, but actually

it was more like Portugal, Spain,

Turkey. The Nazis would pay spies in

particular. They they pay them with the

fake money. The fake money didn't really

find its way to the United Kingdom until

after the war when the British army

discovered them and started sending them

home, forcing the Bank of England to

recall their banknotes. Possibly, no one

knows for sure that 10% of the entire

money supply of United Kingdom may have

been in the form of forg banknotes. Who

knows? So many of them were at the

bottom of the lake that perhaps we'll

never know. Now, there's a famous spy in

Turkey called Cicero. It's a Turkish man

spied for the Nazis. They paid him in

these. And only after the war, when he

went to redeem them, did he find out

they were fake.

>> So what did he do? He s sued the German

government.

>> Okay.

The Nazis have long gone, but he tried

to sue the German government, saying,

"You promised to pay me all this money

for spying. I spied. You paid me with

this. I want." And Needless to say, he

didn't win that legal case. But he

actually took many, many years of

petitioning to try to get Germany to pay

back. What is the point of all of this?

It said that the first casualty of war

is the truth. That can't be true anymore

because there is no truth anymore

anyway.

I mean, you telling me that we're only

going to start lying when the first

bullet flies. We started lying years in

advance of that. This is this is not a

good thing. The first casualty of war is

price stability, and it's the monetary

standard. And whether that means leaving

a gold standard, getting your banks to

lend more money to the government, uh

creating fake notes, the first casualty

of war today will be price stability.

So, if that is uh where we're headed, uh

you can bet on higher inflation. And I

can't think of a war where that didn't

happen.

The demand for commodities alone in

warfare is so high that it tends to send

inflation up.

So it's not just the the currency of the

loser that goes to zero. The currency of

the victor can go to zero. So

particularly America, the continental

currency, uh eventually redeemed at 1

cent on the dollar

because they didn't have the wherewithal

to make good on it. So, you can actually

win a war and still lose lots of money.

Uh, which reminds me of that great line

in Catch 22 where the young enthusiastic

bombardier is talking to an old Italian

explaining why he's fighting to win the

war and the old Italian asked, "Well,

why don't you lose a war? Cuz that way

you get to default on all your debts.

You really don't want to win a war. You

would do it the Italian way. Make sure

you lose wars and wipe out all your

liabilities."

So, uh, undermining the circulating

medium is one way of doing it. I make a

note here that the British were doing

this in 1776. They had a ship lying off

America that was printing these

continentals. So, it's not a new thing

to think that you can uh do that.

So, what am I going to finish on? I'm

going to finish on

who controls the money supply. Well,

today we think it's the central banks by

controlling the commercial banks. But

that can change in peace time. I argue

it changed during CO. It will certainly

change during wartime. The first

casualty of war will be the money supply

and price stability.

And then who wins the war? Well, who

wins the war is not just about who can

put the most military equipment or

personnel in the field. It has been

historically who can borrow the most

money. And it would help if you started

with a low debt to GDP ratio

as opposed to a high debt to GDP ratio.

If that is the direction of travel. So

none of that is me forecasting war. I

hasten to add, but that last page will

show you the debt to GDP ratio of

America. This is the whole of America,

government plus household sector plus

private sector going back to the Second

World War. And what you will see is we

are at an all-time high

and well above where we were during

World War II. And America has got one of

the lowest levels of debt to GDP in the

world. It's only 250% of GDP. Most

countries are higher than 250% of GDP.

Uh I've mentioned France at 322, Japan

at 380, but other countries like Canada,

Australia, Switzerland has actually now

got a very high level as well,

particularly in the household sector for

reasons that you all understand. Uh if

we flip this the other way around and

say look at thing called the private

sector debt service ratio. So this is a

a stock debt relative to a accountancy

flow GDP. If we look at a flow against a

flow. So the flow against the flow is

you look at the entire private sector

income of Switzerland and you look at

the percentage of Switzerland's entire

private sector income needed to service

debt. So that's uh interest expense and

a little bit of amortization. It's at

21%. It's never been like this before in

in in Swiss history. There's just never

been this level of gearing in the

private sector. Now we all know the

government has got quite a low level of

gearing but the Swiss private sector has

got a very high level of gearing. So

wherever we're going, we're going there

with very high debt. So in the long run,

not the short run, but in the long run,

you can bet on higher inflation because

it really is the only way that we can

cope with this. And I would say you can

bet on it in Switzerland, which is the

controversial bit that this is not your

father's Switzerland.

The debt levels are much much higher in

the private sector. The government has

this one great big bank it has to look

after. Uh, and I think despite the

amount of money pouring into

Switzerland, despite the upward pressure

on the exchange rate, I'm not so sure

that the Swiss Frank will have the role

going forward that it has in the past

because of the debt in the private

sector.