 Well welcome to this this talk on money. In this talk and on the one that I'm delivering tomorrow on the theory of interest we'll take up the final two issues that were hanging from the discussion this morning on on the theory of price because you probably didn't notice this unless again you've gone through these arguments before and then you would you'd already be a trained economist and you would have noticed what I did in the lecture this morning was I just sort of assumed that it's possible for people to rank goods against money. Now in order to do that I'm presuming or assuming that there's a subjective value treatment that we can give to money or to put it the the way we did this morning there's a demand and supply analysis that we can give to money because money enters into every preference ordering when we're buying things and selling things so if we can't subjectively value money relative to the goods well then there wouldn't be any demand right or or there maybe be demand but there's no explanation of demand that we could that we could give in this sense so that that's a pretty big issue that we have to address and that's what we'll do in this talk and then in the talk tomorrow on the theory of interest we'll finish up talking about prices Dr. Klein already talked some about producer goods prices before a lunch we'll finish up by talking about the rate of interest which of course is a crucial regulator of intertemporal allocation and so so that will be the topic of my talk tomorrow. Okay we'll take four steps in this time together we'll talk first about the nature of money what is money what's its function how does it originate how does it differ from other goods how is it similar to other goods this kind of analysis then we'll talk then about the determination of the price of money and then finally the last comments I'll make are about the determination the causes of the production of money and when we talk about the production of money I mean at least initially I want to focus on the production of money within a market economy what if we had a market economy we had the entrepreneurial system of production for all goods including money what would that look like what would the production of money look like and then what's the production of money look like in our economy so we'll end on that note and that'll get us into the next lecture of the afternoon on banking. Okay so let's start with a topology of goods and this will help us get at the nature and and a function of money so when we when we divide up the different categories of goods the two big divisions starting are present goods and future goods and then and this is not by the way not an exhaustive list but it's sufficient for our purposes in this lecture and then the present goods can be subdivided here into consumer goods consumer goods then can be used by a person in action to directly satisfy an end and so that's why they're called present goods we have a good in our hand we have the the the stake wrap in our hand and we just act with it we just eat it and the end is attained then then the second category is media of exchange media of exchange are used to facilitate exchange the function of a media of a medium of exchange is to overcome the problems of barter and the basic problem of barter is sometimes when two people meet and they think you know I see the good each sees the good that the other person has they may each person may desire the other person's good but not have what that other person desires right and therefore no no mutually advantageous trade can take place but but a trade is sort of latently possible if one of the parties could find a third good that the other party would accept instead of his own in trade right and so that's that's the what a medium of exchange does it performs that function of secondarily indirectly trading allowing a person indirectly trade for good and overcoming the problems of barter now this is also a present good because money fulfills this function right now the moment you make the trade then the medium of exchange function is is is fulfilled so it's functionally a present good just like a consumer good is functionally a present good and then and then their future goods future goods went when they're acted with do not attain the end until the future point in time and these are producer goods so we act with our labor and then the and then we realize the end an hour later or five days later or whatever and so on and then we subdivide the future goods into original factors of production labor and land and then produced factors of production so these would be capital goods so let me just emphasize then that the way in which economists categorize these goods media media of exchange are neither consumer goods nor producer goods this is the point right they have a certain function and it's neither a consumptive function nor productive function however they are goods and that means that they they conform to all of the basic general laws of goods the laws of utility would apply and in particular for our purposes the laws of supply and demand the determination of the price of money through supply and demand would apply because money is a good that's traded so there should be supply and demand and and and there should be a market clearing price and it should be determined by the preferences people have to for money relative to goods just like we talked about other goods and then in a market economy the production of money should also be just like every other good it should also be as we say regulated by profit and loss just like dr. Klein was talking about again before before lunch entrepreneurs would perceive that certain expansions of production would be profitable if demand for money is increasing and ramp up production and we'll talk more about that again as we go as we go on but this is why we single out media of exchange from consumer goods and producer goods and it starts to get us at the nature of money what it what its function is and then second within within the big category of media of exchange we can subdivide the media of exchange into into sub types and that's where we get the money so money is the general medium of exchange by general we mean it is the most widely saleable good in the market the most widely used media of exchange I might also as an aside oh we'll talk more about this as we go but to say that money also provides the unit of economic calculation whereas whereas other media of exchange do not so that too is an important distinction and then within the within the concept of money these are the three I've listed the three sort of common historical forms of money and the first is commodity money this is where a physical tangible good is used as the item of the general medium of exchange silver coins is the primary example in history is the most widely used commodity money in in all of history obviously the pertsing power of money that is the price of commodity money depends upon the price of the commodity that's used in other purposes if it is indeed used in other purposes so if silver is used commercially or you know an industry or something of the sort then the pertsing power of money would be related to that use as well because if it were higher in one use and lower in another as we talked about this morning there there'd be a movement right we people would reallocate and shift toward the higher value to use and so the percing power of money would you know fall in that case if it were higher to begin with so there so that has to be accounted for and thinking about commodity money then there's credit money credit money is when a money substitute comes into existence which I'll talk about in just a second in definition and then the redemption claim for the money substitute is broken and yet sometime later a promise is made by the issuer of the money substitute that the redemption claim will be restored and in the interim between the promise and the actual restoration the percing power of this this credit money can be affected it can increase if people believe in the promise and it could decrease if the people don't believe in the promise so it depends upon this promise the great example in American economic economic history are the US notes issued by the the Lincoln administration to help fund the Civil War sometimes called green back issue and then in 1875 Congress put past the resumption act and the resumption act said four years from now in 1879 we're gonna we're gonna restore or make the US notes redeemable for gold and so there's a four-year period where it was just a promise who were redeemable is just a promise but to the extent that people believe the promise the the price of the notes the percing power the notes went up relative to gold toward the date at which resumption would continue and then there's fiat money this is the one we're most familiar with right in our own time and place and fiat money is a money substitute that comes into existence that way and then the redemption promise is broken so no redemption it's first a redemption then no redemption and there's no promise to restore and so obviously fiat money's percing power depends neither on a on the promise of restoration of redemption nor on the commodity value you know some commodity value what it depends upon of course are the legal privileges that the state gives to fiat money or to the issuer of fiat money that that cause it in fact to come into existence initially as a money substitute right maintained in existence as a as a type of money the best example we have recently of this of course is the euro so the euro came into existence and precisely this way it was first a redemption claim for the different currencies of the emu countries and then there and then you know in different time frames after that the redemption claims were broken one by one various countries and and yet the the legal privileges for the euro and the legal disabilities against competing money were in place by the state and then we have fiat money right so these are the categories and then we get to money substitutes money substitutes are claims for money that can be redeemed on demand at par and there are two there are two types here also their money certificates a money certificate is a money substitute for which there's a 100% reserve of money the famous example in history are the Amsterdam banks of the 1600s the bank notes that they issued for over a hundred years were were 100% reserve what we'll talk more in this toward the end about how can you run a business if you if you have a hundred percent reserve banking okay well so we'll talk about that but at this point we just want to categorize right obviously you could do it because they're the Amsterdam banks of the 1600s you did it so and then the other category is what Mises like to call fiduciary media and fiduciary media or where we have money substitutes but the reserve of money against which the money substitute can be redeemed is fractional there's only a fraction of actual money for redemption and of course this is what all our checking accounts are today by the way even even in the case of even in our situation like we have it today where their excess reserves in the banks these excess reserves are almost exclusively in the form of checking accounts that banks have at the Fed and so if you go down to your bank and you want to cash out your checking accounts that you that's no good right that's not a redemption fund for for you for us the customers this is just an accounting device that makes the banks liquid on paper so they are still fractional reserve in the practical sense right of for the customers they're still fractional reserve okay so so obviously then the the big distinction the reason we make this distinction between the two economically is because if we have money certificates the issue the money certificate will not change the money stock the bank will simply issue the money certificate and the whole gold is reserve and if they're holding the gold is reserved it's not being used as a medium of exchange being used as a reserve on the other hand the issue of fiduciary media if it's just fractional reserve then a bank can just issue checking account balances without holding a reserve but then they can affect the total money stock right they can increase it or it could be decreased and so obviously the implication of this is that part of the volatility of the purchasing power of money comes from fractional reserve banking it's more volatile on on this point anyway and then finally their auxiliary media of exchange and auxiliary media of exchange are media of exchange you know they're used to facilitate the exchange by overcoming the problems of barter but they're not used generally so they're just used let's say locally in a town or they're used just among this community of people like cryptocurrencies right maybe used as a medium exchange just among a certain group of people or the town scripts that are used in Vermont towns and Bernie Sanders territory they have these local scripts and you know well but they're just used in the town right these are auxiliary media of exchange and for most purposes they're they're not that important for us to analyze because they're not money and they're not and they're not a money substitute they're not really part of the total money stock that we're interested first and foremost in examining okay now let's talk about the the origin and development of money and here the basic the basic point we want to emphasize is that here on the top of the slide is that the origin and development of money conform to the logic of action you know there's we could give a completely plausible justifiable valid logical argument about the origin and development of money and it goes it goes like this suppose we have traders initially in a barter arrangement there's no money by the way in real history there was you know money doesn't grow in trees there was no money it's not a thing that you know you extract from nature but money is in its function as a medium of exchange so unless you have exchange there's no purpose in having money so as the human race begins you know there's there's no money and so trade must have initially been barter but as we seen if people are trading in barter that undoubtedly some of them will come up with a problem of barter they'll be stymied in their trade even though even though each one of them is desirous of the other person's good the other person's not right and so you've got this impasse so traders then so sometime in history traders recognize this they engaged in a in an entrepreneurial innovation to make an indirect trade and that now we have a medium of exchange now once there's a medium of exchange then just like in any entrepreneurial innovation there can be imitation or you know a new person discovering this innovation and they may be using all sorts of different things as a medium of exchange however the next step in logic is that certain commodities actually perform the function of a medium of exchange better objectively better than others if they're more durable if they're easily divisible if they're portable if they have useful weight a value to weight ratios and so on then then they're just superior in their performance as a medium of exchange to other things that aren't and so for example cattle was once used as a medium of exchange it's not very good right cattle can die they can get sick they're hard to you know they're they're obstinate and hard to drive places and so on be better to carry gold coin in your pocket but people could see this right they can engage in trade and they can see that certain things are more suited and so they'll they'll begin to gravitate toward just those few things that are are better objectively at performing the medium of exchange function and once they get to that point if you just have a few things that are being used gold silver copper and so on then the logic is that you still have trade traders still sometimes have to trade monies in order to make their trades and they can cut that step out just by agreement there's no reason whatsoever to engage in that they can just agree to to trade in the same money and not different monies and then they eliminate that step and then they're in a better position with respect to their making trades with respect to economic calculation because now they can calculate everything in one money instead of you know calculating dollars and euros and yen and right and so on so you can see how the logic of this would play out in a kind of straightforward way and I mentioned already that there isn't we can never settle this question by historical research we just we can never penetrate right through the myths of history to find out you know the stories of the origin of different monies it's just we could always we could there always be a lost case right it would have been the first case that that followed just this logic of action and not you know some other kind of claim about this however I will point out that it is the case just in a logical sense that while this why this explanation is logically consistent it is not a logically consistent or complete explanation to argue that money occurred by decree of someone or by convention and the reason for this is as we've already sort of noted the reason for this is that the only way in which something can be first used as a medium of exchange if it's already a traded commodity because it has to be something you can trade again right that's the whole point you have to pick something that's already being traded first the origin must come that way and in no other way you can't just decree something of course you could decree that something being traded is the money that but you see the decreeing then doesn't add anything to the argument right that that's just kind of a incidental historical fact it doesn't add anything to the logic if you don't have if you're if you're decreeing that I don't know space dust is is money well you know it's never gonna be money you can't make it by decree or if we have a you know if all the lefties take over and they have a vote and and they and they vote space dust as money or something right no no that won't work so so this is the point and then if this is the case then it seems it seems highly likely that all of these steps that we talked about were undertaken by private entrepreneurs and not government officials we don't think as a kind of general rule the government officials are more astute in you know doing in you know innovating and doing things that are valuable to people than entrepreneurs right we do we just don't that that's not very plausible to assume and we can also see then the same thing the same kind of logic applied to the development of money so money would develop along certain lines like a you know we get modern coins that I mentioned already silver coins well actually silver coins are fairly ancient but we get you know modern kinds of innovations these are all just financial innovations and do we think again that government officials are making these innovations or entrepreneurs yeah we're not denying the government officials could impose certain changes on people but would they be the like socially beneficial the most beneficial and we would think not right of course they can impose fee up paper money on us right so that's not the issue the issue is you know it's sort of the logic of these developments within the context of the market efficiency that we talked about this morning okay so now let me let me move on to this question of economic money and economic calculation to make some brief remarks about this Dr. Klein mentioned this in his talk that economic calculation while we usually think of it in the narrow context of entrepreneurs it's actually a much broader concept that we can we can apply it much more broadly to our analysis than just that and to do so we might define economic calculation the way I have on the slide here it's using money prices in decisions about participating in the social economy so we mentioned this this morning every one of us has a personal economy we were all acting with the things that we own under our control and of course we're interacting with other people because we want to integrate our personal economy into the social economy we want to integrate right and have a social nexus because we know because we could see right away that it's more beneficial for us to enter this nexus than to stay out of it for all sorts of reasons right so anytime we do that though we need to use economic calculation if we want to efficiently integrate into the division of labor with our activity if we want to buy goods that other people have produced we need to know their prices otherwise we can't do this efficiently and that's what money that's what economic calculation via money provides since money is used in exchange of all the goods that are tradable in the market all tradable goods at prices and so every time we participate in the market every time we buy something like you go you buy a new pair of shoes for $200 you know just through your own experience in buying things in in this world what $200 will buy in terms of other goods because you know the prices of other goods but if you didn't know the prices of other goods you couldn't calculate that and you couldn't know whether it was better to spend the $200 on the shoes or on something else right you couldn't you wouldn't be able to integrate efficiently so economic calculation is what we use as consumers to integrate our consumption activity through trade as opposed to self-sufficient consumption we do this also as producers so we all own our labor services we take jobs well how do we know how do we know which job offered to take we'll get different compensation packages and they'll have different benefits and they'll be in different places with a different structure of prices you know for apartments and food and of course we couldn't we couldn't efficiently then integrate our production into the division of labor without knowing the prices of things we have to know the prices of things in Cincinnati before we take a job there otherwise we don't know what our real our actual wealth is that we're accumulating by taking a job there for $100,000 let's say income as opposed to a job in in Dodge City, Kansas for $100,000 or $50,000 or whatever it is right so we're so we're constantly doing this this is a crucial for all of us in integrating ourselves into the division of labor and then of course it's especially important for for entrepreneurs as Dr. Klein already explained because entrepreneurs are concerned not just with the with the doing this kind of calculation that we're talking about they're interested in the monetary result of their business they're interested in the monetary profit or loss that can be accruing to them as income in their business where that's not a consideration when we're just buying things or or even selling our labor services okay so now let's go on to the to the main task this is the the price of money and the argument is again that the price of money can be explained in the same way the price of any good can there's some nuances and differences but the basic structure of explanation is exactly the same so as we talked about this morning again there would just be people with reverse preferences with respect to to a good right and then they they engage in exchange and when they engage in exchange and a market clearing price emerges for the good but you'll notice that we could just do this whole analysis in reverse we could we could talk about one person the person who is selling the good is demanding the money the person who is demanding the good is supplying the money right so you could see that in some analytical sense these are just two sides of the same coin when we think about the purchasing power of money what what set of goods will a given amount of money by what's what what the purchasing power is commanded by a given amount of money that's the price of money right the exchange value of money and the price of goods which is denominated in money so so right really so so really at the very beginning we shouldn't be too troubled by this however just to just to make it a little bit clearer the pedagogy that's typically used and I think it's wisely applied is what I'm what I'm talking about here on this slide instead of talking about supply and demand because that gets a little a little hard to follow sometimes with all the reverses that can occur we talk instead about the total stock of a good and the total demand to own it instead of just the demand to acquire a good through exchange so let's say just to take a different example let's say we wanted to explain the price of houses in Auburn we could do this to supply and demand we say here's the market near the people selling number of houses and here people demanding a number of houses and then the price would adjust in order to make sure that all the traders could make their trades and we get a market clearing situation or we could analyze it in the in this way we could say there's a total stock of housing in Grove City we just go around and we count that number of houses within the city limits at a given moment in time of course that stock of housing is fixed it could increase through production over time it could decrease through consumption right hopefully it won't be antifa consumption but just regular maintenance consumption right and then so that would be the total stock and then we can superimpose on this or think about the total stock with respect to our subjective values as the desire that people have to own the stock not to trade it necessarily but just to possess it and then of course if we think of it this way we could see then that there some people already own some of the stock and at the given price that's ruling in the market right now they they continue to hold on to their stock they're not interested in selling they're keeping it because the subjective value of keeping this keeping it is greater than the money they could get we call that reservation demand for the good and then there are other people who who do wish to buy houses right so there's some people from the outside that wish to buy houses and there are all sorts of different reasons they might have for this they might want to live in Auburn they might be flipping the house as an investment they might be buying the house so you know provide living quarters for their for their children going to Auburn right so and so forth all the subjective valuations that you could imagine and they want to acquire houses and we call that the number of them that are doing that we call exchange demand that phenomenon is exchange demand and so the price adjusts so that the total stock and the total demand are equal just like the demand and the supply are equal when the total demand total stock are equal then the supply and demand are equal right you just think through the logic of it and if the price are real high let's say the price of houses and grocery excuse me in Auburn was five million dollars then the quantity demand would be a greatly reduced right the exchange demand would vanish and there be an excess stock of houses just like there'd be an excess supply if we look at it that way right everyone would want to sell and no one would want to buy and you know you couldn't command the price of five million dollars oh maybe for one or two houses but not like a normal price right so so so hopefully you see that these are just parallel analytical approaches if you think of it that way okay so let's apply this to money we can price it directly to money we have the total stock of money in society this is the money proper and the money substitutes added together right and so now we can apply this notion directly to our own economy right with the fiat paper money that's the currency that reserve notes and then the money substitutes checking account balances or checkable accounts of all kinds right or other redemption claims and so on and we just add all that up that's the total stock of money and then the total demand for money is the again the is the desire is the amount desired by people to hold in their overall stock of goods they want they want to possess it not exchange it they want to hold it see so it's a different conception right and then again we get this balance right now this begs the question why do people want to hold money we said money's the medium of exchange we said its only function is to buy things why are people holding it and the end and by the way we're not just saying this as a kind of abstraction right we're all holding money all of us are actually holding money all the money that does exist in the economy is actually being held by people right now you know we have cash on our person we've got to check and count balances are positive and so on and so why are we doing this well the basic answer to this is that possessing money allows us better than possessing any other good allows us to deal with the uncertainty of the future it allows us to adapt to contingent circumstances that we didn't predict and so this is the basic reason for holding money there may be others but this is kind of the fundamental reason by the way those you've studied red some Austrian economics and studied a little bit know this this is why Ludwig von Mises stresses this dealing with the uncertainty of the future because as he points out in the ERE immediately wrote to any economy there would be no money holding no one would need to hold money you could arrange all your your cash inflows and outflows your payments and so on you could time them all by cashing out investments and you know managing your your consumption expenditures and so on and there wouldn't be any need to hold money at all so this is a again the point of when we reduce the problem back down to preferences which is what we always do in an Austrian treatment okay so the purchasing power of money then must be at the at the point that clears the market again let me stress one nuance here since each of us is engaged in our own personal economy when we integrate into the social economy there's no reason to think that any of us care about the purchasing power of money for goods that we're not buying what we care about is the purchasing power of money for goods that we're either buying or anticipating buying there's only a limited set of goods that we're in or each one of us is interested in and the other things you know are just incidental facts of of social life you know and you know I don't care about machine tool prices or you know what what it might be right land prices in the tundra of Alaska you know it just doesn't I'm not interested in that doesn't I well I may be interested in intellectual sense but I don't care about it for my action right I only care about the prices that I'm of goods that I'm engaged with and so the purchasing power of money is is personal there's not one purchasing power of money there's a there's a whole array is for as many as there are persons of the purchasing power of money that's an unusual thing about money right okay so this is how we would we diagram this you're interested in thinking about that and get you can see in the diagram diagrams helpful as an expository device just to see that if the person power of money were higher that is that the prices were goods were lower and the person power was higher then the demand the quantity demand to hold money would be reduced right because I'm holding a certain amount of money to command a certain purchasing power to deal with uncertainty but prices are things that are lower I don't need to hold as much money so the quantity demand would be reduced but the total stock of money is always what it is which means I'm not just you know burning my money right if I think I have too much of it I'm holding too much of it I just take it and spend it on goods I invest it or whatever and then this pushes the prices of goods up which pushes the person power of money down right so that's that's the dynamic that's going on here and then a similar thing if purchasing power of money is too low okay now let me get to I want to mention this because this is a very famous theory and you probably heard heard about it if you studied again some monetary theory of the Austrian view and this is Mises is famous regression theorem so what once this theory had been out you know laid out and explained there was an objection that was raised in the literature to it and the objection was called the Austrian circle and hopefully you can figure out what that means right away in other words the Austrians were accused of the logical fallacy of the vicious circle of begging the question you're just assuming in your premise the conclusion now why is this so and it's so because of the stress that Mises placed on the nature of the of the money as a general medium of change the only function of money is or the I should say the primary the root function of money is as a medium of exchange so as he puts it in theory of money and credit the objective use value of money is the purchasing power of money the objective use value of money is just what goods can I buy with it what set of goods can I buy with this money well if that's the case then again this seems to be reasoning in a circle right you're just assuming the purchasing power of money in order to subjectively value how much of it to hold and then you're saying that determines demand total demand and then that determines the purchasing power of money by the way the objective use value of any other good does not depend upon its price right you see you see that the distinction here I don't need to know the price of you know the the wrap that we ate at lunch in order to assess its objective use value it has nutrition and taste and so on and so forth but the only objective use value money has is in purchasing things is purchasing power so this is a problem and so Mises Mises the solution to this was to point out that no no no this objection requires one to think about this problem as timeless and the and the actual situation is not timeless in fact all we need to know about the purchasing power of money the objective use value of money is what it has been in the recent past then today we can we can subjectively value it right I just need to know what it has been then today I can subjectively value it and then I can have that demand for it and then the purchasing power of money emerges right so that's the solution to the vicious circle but another objection then was made to this right and the objection is now you've just traded one logical fallacy for another you've traded the vicious circle for infinite regress which is also a logical fallacy right you can't regress the the cause and effect structure back infinitely then you haven't explained anything fundamentally you have to have a stopping point right and that's where Mises then comes up with the regression theorem this is the proper he's saying the starting point for this explanation is the objective use value of gold or whatever it was silver whatever it was on the last day of barter then that that market price of gold depended just upon its commodity use right and then that was enough though for somebody to use it as a medium of exchange to value it in exchange and not just in use and then it can just go forward right to the logic and just work forward from there so there's a very famous solution to this problem that I just wanted to quickly rehearse okay so now I'm gonna skip over a couple of those so we get to the end here on production of money and this this will be a segue into the next lecture on banking since the money stock remember is money plus money substitutes so let me quickly just rehearse again the general principle we didn't really talk about this yet the general principle of regulation in the goods production in the market again dr. Klein spoke some about this so let's say we have a situation where the demand for one good goes up which means of course the demand for other goods have to go down right so people are shifting their demands from one thing to another then is the demand for the one good that's going up hits the market the price of that good will rise and this means the price spread between output prices and input prices will grow it'll be net more net income accruing to it so entrepreneurs will try to ramp up production and they do this by buying more inputs so they take the additional revenue that they're earning from selling the good at a higher price and they buy more inputs this increases factor prices and then the factor prices again would generate profit for the production of those factors and so on and so forth this ripples out through all the stages of production but on the on the downside where demand is going down there's there's the opposite phenomena right or the symmetric phenomena demand goes down then it's not as profitable entrepreneurs shrink back their reduced demand for the factors of production there reduces their profit and it all shrinks back right now this isn't to say that it's a one for one movement quite the contrary the social nexus is exceedingly complex and so there's going to be movement across all sorts of different intermediate the places in the economy so to speak but this is what happens this is efficient or economizing with respect to the changing the shifting demands in the economy the point here is if we have commodity money it's no different it's absolutely no different commodity money production just means you have a minting company that has a little factory with minting equipment and there if they're vertically integrated they're mining the gold or silver or they're buying the gold and silver from a mining companies and then they're minting the coins and then and then they're covering their costs right they're paying they're paying out their costs and they're and they're minting the coins and if the sum of what they meant is exceeds their costs they've made profit they made that income the only difference between that production process and any other is if an auto company is producing automobiles and covering their costs with revenues they get their revenues just by selling the cars whereas the the money producing entrepreneur gets the money just by producing it but he's constrained right he's constrained in his production by profit and loss so the more the more his production increases the more his cost rise in the in the industry right the cost rise so it becomes more expensive to buy a gold mine it becomes more expensive to buy equipment come you have to hire more workers and you have to bid up wages and so on and so forth and then the then the profit margins get squeezed and then they quit expanding this is the way production works in any good in the market economy it's no different with commodity money then a similar thing then is true about money certificate production if the Amsterdam banks are producing bank notes well there's a cost involved right they have to have resources and labor and that to be a printing press somewhere to print the notes and so on and so forth and then and then they charge their customers a fee for printing the note and then the fees cover the costs and if demand for the for the bank notes goes up because they're more convenient and whatever and more customers want them demand goes up then the price will rise and the revenue will increase and then the answer and banks will try to ramp up production to get this profit right they want to earn it and then you know if it's industry-wide then the they'll bid up the prices of inputs and as this process goes on then the then the profit margin is reduced again so that no more expansion is profitable and it stops and and all the while the resources are coming out of other places where the relative demand is lower as we as we already mentioned so this is what we mean when we talk about economizing money production and then let me let me mention at the end here on banking this point about credit the credit supply being economized what banks do and since they're 100% reserve of course they just charge fees for checking accounts or bank notes whatever the money substitute is but they still intermediate credit now there's their middlemen in the credit markets they borrow money from savers and then they pool it and they investigate credit worthy investable projects and they lend the money to investors and just like any middleman just like Walmart they buy wholesale and sell retail and the reason why they can get this price spread is because they're performing a function a useful function that can't be performed by the by the wholesalers right so you and I is savers don't want to perform the function of winnowing out who do it invest with right we're gonna leave that to a specialist in the division of labor well but if they're gonna do that they're gonna be paid right because it's valuable for us to have this done for us and so that's where the interest rate spread comes from so now again let's suppose market conditions change let's suppose people want to save more well if they want to save more then the wholesale interest rate will be pushed down you increase the supply of anything and its price will be lower right the wholesale interest rate the interest rate which the banks can borrow will be pushed down then in a bigger interest rate spread will exist so because they're more there's more greater pool of saving the banks can can borrow more even at lower interest rates and they'll turn right around and begin to lend that but as they increase the look of the supply of retail credit the retail interest rate will fall and then they'll stop doing this when the interest rate spread normalizes again so all they're doing in other words is performing the function of of allocating the the saving that we're engaged in and again we'll talk more about why that's economizing tomorrow but the saving that we're voluntarily supplying to them I'll end on this note we don't have time to cover this but I think Dr. Newman will mention this at least in the next talk in the unhampered this is the what means is called the unhampered market economy if we have a hampered market economy with fiat paper money and fiduciary media then hopefully you can see right away that the production of those two things cannot be regulated by profit and loss you cannot regulate the production of fiat paper money by saying let's produce all the fiat paper money that's profitable because you can start producing a hundred dollar bills then when when you produce so much money that the price of producing a hundred dollar bill goes above a hundred dollars you produce a thousand dollar bills then ten thousand dollar bills and a million dollar bills and then zimbabwe right right you just if you take that as the rule you'll destroy the money the similar thing happens with fiduciary media because of the costs involved for a for a bank to issue fiduciary media is the cost of putting accounting entries into people's checking accounts they're just creating checking account balances for people and they're extending loans to do this to them well that doesn't cost hardly anything and yet they're going to get interest on the loan right they'll get some loan payments and some interest on the loan so that's profitable but if a bank made every possible loan that it could make to everyone you know who would pay a couple interest payments they'll they'll destroy the bank right in insolvency and so they can't they can't adopt the rule of the market let's produce everything that's profitable and let's avoid producing where the loss is that would be that would be destruction in the system and so we have to have as an alternative we have to have monetary policy all right thank you for your kind attention