 Good afternoon. It's it's a pleasure for me to be here. I like to say when I when they first asked me to come here I said oh, it's such a short time ago that I was sitting where you are Then I did the math this year, and I realized it's 13 years ago For me it feels like a short time. It's amazing how much shorter 13 years is when you're my age versus yours But that's okay, and I'm especially excited to give this particular lecture Because I like to say I became an economist because I decided I'd rather study money than have any My wife doesn't laugh at that joke. It's too close to true So before we really get into anything too substantial, we do need to answer a very simple question Right, that's what is money right? What is this lecture even supposed to be about right? So I brought here a Nice visual right there here is it's a dollar bill You can see it has many very important features is made out of some Combination of paper and cloth I believe to get a little bit more durability. It has this kind of greenish ink on it Naturally, there's the portrait here of the Mona Lisa. I mean George Washington I was looking at his face today. He has the same expression and I wonder if there was some kind of plagiarism going on But anyway, so this is money right? But then I had a couple other things in my wallet that I was pulling things out today Here this it's it's a three barber bucks For my barber barber fill it says this is fabulous fills barber beauty shop This note is legal tender only at fabulous fills apparently. I didn't know you could do that, but It looks remarkably similar. Okay. The back is a little bit more blank, but it's definitely greener paper I don't think there's much cloth content Barber fill is certainly better looking right then George Washington, right Yet somehow right we would say this is money right this is not but then I found another one You can tell that I'm economist When your barber gives you all this is three dollars off your next haircut you don't use it You should say oh I can use this in class. It's great All right, and then I got this right here, right? This is apparently it's a one-dillion Dillers note I got this from the Mount Olive Pickle Company. It's located in I think North Carolina if I recall It's from the delinquent Bank of Delirium. It says this certificate is a dilly, but not tender at all to the lawman issued by the state of confusion First many of you in the crowd may Believe that a lot of the things on here should say what it says here for example The certificate is good for nothing is printed at the very top Well, you know that isn't actually true right even if right we acknowledge that there is a certain amount of instability here We'll get to that. I'm gonna give me 45 minutes We still recognize that this is money right and these things are not right so why Well, let's simply the definition of money The money is the commonly accepted medium of exchange or to the general medium of exchange So we recognize that this dollar however much we may like it or dislike it if I take it and I take it to say Barbara Phil right he will in fact accept this as partial payment for my haircut now He won't cut my entire head of hair for this dollar Do maybe like a quarter of it? That's if he feels good about me that day But he's willing to accept this and not only is he willing to accept this but I can take to the grocery store And I can buy a pack of gum or I can take it to Starbucks and get what a fifth of a coffee or something like that This is generally accepted by the majority of vendors that I'd run across at least here in the United States Whereas this one there's exactly one vendor that will accept this right this one There are exactly zero vendors that will accept this as far as I'm aware. I've not tried downstairs. Maybe they'll take it I don't know I suspect not right, so it is that general acceptance right that makes one of these things money and the others not now Those that are philosophically inclined should start to feel kind of nervous because he said okay well medium of exchange We'll get into exactly what that means. It's fairly precise, but generally accepted right generally is itself a Problematic word if you're trying to define the thing. What do we know general? Do we need 60% acceptance is that generally accepted do we need 85%? What about 53% right? Well, where's the line for generally? Take a deep breath Get over it. This is something there's going to be a certain amount of vagueness right in this definition And this is something that means is himself who tried to be very very precise as much as possible Frankly admitted in human action. He says here's the definition Sure, it's kind of vague, but you know that it doesn't matter because anything we say about money is going to be true It turns out for any medium of exchange at all whether it is generally accepted or not But we just think of money as being that one that is generally accepted So we know we have some sense then who Vegas it may be of what money is So why would we bother right having lectures about money? Why is it socially important now here? I think is really the key if you're going to take one thing away from this lecture This is what I want you to take away from it and that is that I believe that money It's not just that I believe it. You don't take that away. Take away the fact right that money right binds a society together By easing trade Dr. Herbner just gave a wonderful lecture about the importance of the division of labor in increasing the material productivity of Society in fact it gives us a material reason to care about being around and having relationships with other people It's not just because I happen to like hanging out with people watching TV It's because I am in fact materially better off and wealthier Because I'm interacting with other people even if I don't interact with them on a social level Even if I don't like them on a social level I am better off interacting with them in the economy because we can each Specialize according to the division of labor in that area in which we are most productive making all of us better off But right for us to be able to do this we need to be able to trade with each other After all I like to believe that my comparative advantage that is the thing that I'm relatively least bad at would be giving economics lectures It turns out that you cannot eat on the basis of giving yourself economics lectures All right You need to be able to trade this with somebody who will in fact provide you with the food All right, so in order to highlight why is it that money is so important so essential? I'm going to do kind of I guess the typical economist trick Well think about counterfactuals right so what are the alternatives this is kind of the obsessive question that economists ask What are the alternatives? So if we didn't have a monetary system, what could we do instead? Well one option would be to have a system where we just don't trade at all right the system of autarky or Self-sufficiency Now I suspect the system of autark your self-sufficiency could follow one of two possible paths depending upon our technological level And I suspect that one of these paths is in fact impossible, but let's go with the more possible first I suspect that a world where each of us is trying to be entirely Self-sufficient would result in mass poverty and in fact starvation and then billions of people would likely die Nobody laughs at that This is not a joke right you think about this a little bit you recognize this is obviously true All right in fact I know this for my own life right one thing that I don't always engage in the division of labor Maybe as much as I should right because there are some things you just kind of enjoy doing right? So you do kind of as hobbies even if you're not very good at them one of those is that I have a garden So those who've heard my lecture here before know that you kind of get a yearly garden update from me here So my garden this year We decided we're going to specialize a little bit more than we had in previous years because we found out that if you Grow things that you don't eat and have no good way to distribute them to other people It's totally pointless right so we decided we have one bed is strawberries But strawberries do very well it turns out you don't have to be a great gardener where I live to grow strawberries Well, they grow very well on their own right we get enough rain that I don't have to water them Right they just appear and I don't get to eat any of them because I have a four-year-old material boy We got in the backyard and they eat all the strawberries Okay, so in part. I'd starve because I like my children. I'd let them eat first But then I look at my other garden which takes a lot more work Which I do not give to it Even if I tried I don't think it would do very well so that year that one this year We decided to specialize in three crops right one of those was peas that appeased it very well I think we got at least two side dishes out of our peas We also decided well, we really like cauliflower like cauliflower. It's it's fairly healthy dish right so we're gonna try to Grow this it's also something you can plant very early in the season right so you can get some idea of how it's gonna go They didn't do no Now if I had to rely on my cauliflower crop, I would in fact have starved by now this year Came up and then just nothing happened just nothing happened at all I'm no good at drawing cauliflower turns out and then we also have tomatoes are not quite to the point where they'd be ripe Although I suspect that is another thing where I would starve them. My boys would be perfectly fine They're very fond of picking the green tomatoes and trying to eat them And they spit them out and we're probably not actually going to get me to get to the point where they're red and actually able to be eaten Now if I extend this out right now some people I have occasionally I make bad decisions I look at the comments on YouTube for my lectures and a couple years ago There's somebody all right somebody needs to teach this person right how to farm and they could be self-sufficient Yeah, I just don't have any evidence of that All the evidence I have suggests exactly the opposite right And maybe maybe right maybe so or maybe it is just a lack of knowledge or lack of my willingness to put the time into it But the great thing about the market system is that I don't have to have that knowledge And I don't have to devote that time to it But I can do things that I'm relatively better at and let someone else grow my food and that is in fact Exactly what we do right so I suspect right even if let's say even if I managed to get the knowledge and managed But for the time I would still consider myself to be substantially poorer Because while I enjoy kind of him puttering around the garden pulling weed here and there I don't think that I would enjoy doing it ten hours a day to make sure I had enough food to last of the year But I do enjoy giving economics lectures right so even though it is something that I've managed to fool people to pay me into Doing right I also enjoy it right so it's a great thing I am in fact made wealthier maybe not in a material sense right from the fact that I'm allowed right and able Right to make a job out of what I make a job out of right I am better off in terms of my own subjective well-being and I suspect that this is true for most people But many people even if they could right manage to survive eke outs right some kind of survival on their own They would really find that a miserable existence right they would consider themselves to be very poor right in terms of their own well-being Relative to what they can do in a system where we have the division of labor where we can specialize in those things We're relatively better at And so I suspect that is the most likely thing if we devoted ourselves right to a system of self-sufficiency We would see mass poverty and I don't think any of us want to go there. I know I certainly do not now There is another possibility if you've heard me speak before I actually got some criticism of my Lecture I think was last year because I didn't talk about Star Trek enough Because I had in previous years and they were very excited right so it's back Okay, so The other possibility is maybe we have a society where we're so technologically well off But we might be considered post scarcity right that is anything I want I can walk up to a hole in the wall in Star Trek. They call these things replicators So I walk up to the home while I say tea a whole gray hot right and right there somehow it Reformulates all the molecules there in the atmosphere into Earl gray tea that is hot which I personally would not drink I don't care for tea, but I could ask it for something else that I want right so this point I don't really have to worry about producing things right it's anything. I want is just freely available to me from this hole in the wall And so that'd be kind of nice. I suspect technologically we're very far from this point And I suspect we'd also probably never reach this point because even in Star Trek and we will get to this actually This leads right into the next point. Let's do it even in Star Trek. There are problems with this Now I suspect the problem is that it turns out if you take out all conflict and all scarcity Fiction becomes exceptionally boring All right, right because I'm married to a fiction writer All right, so she's written more books than I have so look her up instead of me She likes to write fantasy and science fiction and I and I share right this type of if you can't tell I already mentioned Star Trek I share that passion and what this is all about really when you think about fiction This is a different lecture that I need to stop going into but here it is Right, right. It's really about human action. It's human action in kind of this speculative world Right, so we make some assumptions about the world around us But ultimately it's about people trying to fulfill their ends using the means available at their disposal Right, so I really like to appeal to fiction because they're doing the kinds of thought experiments But we as economists also do right and are often adding to it You have some elements that perhaps make them more exciting right so What's another option right self-sufficiency post-scarcity or at least not close to that at this point I suspect we never will be but even in the world of Star Trek One of my favorite episodes It's a great documentary about economics. I was from Another thing you should feel bad for my wife because she has to watch all this stuff with me You find out when you watch stuff with me everything is a documentary about economics And I just told you why right like any movie a documentary about economics some are clearer than others But anyway, so this one very clear documentary about economics was an episode of Star Trek deep space nine Generally not considered to be one of the best Star Trek's out there But this episode was great because it turns out even in the world of Star Trek the replicator can't do everything Again, I suspect it's because actually having scarcity does in fact help storytelling Right, so there was one episode where there's some kind of thing that had broken on the space station I Think that they just been in a battle or something like that. I don't remember the exact context I'm sure someone's coming on YouTube right now can provide exactly what the title of this episode is You know the one I'm talking about okay. All right, so So what is happening? All right, so we have this part that broke is like a graviton Stabilizer or something like that what the part was it really doesn't really matter I know something that was complicated enough or they didn't have the energy or something along those lines We couldn't just replicate another one, right, so We're going to have to get one somehow The problem is that we're in the middle of this war so these things are not being readily made available All right So this one character a character named Nog who is a Ferengi the Ferengi We were originally designed to be kind of this villain Designed around Yankee traders tells you kind of the view of the people who ran Star Trek at the time But they later became much more I guess sympathetic in a sense always slightly sinister right then not necessarily so bad So Nog was kind of this Based around this Yankee trader society He was familiar with the idea of having to trade to get what you want rather than just talking to a hole in the wall All right, so you said no you need to trust the great material continuum right the guides resources right to where they need to be used Now there are lots of problems with this image of the market. It kind of takes humanity out of it But I guess in this case takes Ferengi out of it as well All right, we need to keep that in there But his idea was fair enough right though We need to do is take this the resources that we have that we don't necessarily have any immediate use for and Find right those resources that we do have an immediate use for we need to engage in trade right So he went looking for who might possibly have this part right and he found right this one ship Oh, yes, we have an extra graviton stabilizer But we needs a phase inductor or something like that right some part of the weapon system that we had the rope You also for some reason right there unable to walk to the hole in the wall and ask them for okay? Well, we don't have that right so that he went through a number of steps So finally he found somebody or what they wanted they wanted a picture Behind right the desk of the captain of the space station. So okay, I can arrange that It's packs up the captain's desk and sends it off. All right captain happened to be away Gets the picture taken right then that person gives them the part that somebody else needs Because the part somebody else needs and so on we arrange this whole line of trades to finally end up with what we want Another example again because I'm that kind of person several years ago I played this game online you can tell I'm really good at allocating my time effectively Yeah, so I was playing this game called runescape Hey, there we go. All right. Yeah Okay, I'm gonna confess I found out about this game here when I was a fellow at the Institute Because I was walking through and like one of the people is working They didn't have anything to do and they were on one of the computers downstairs or planes that's really interesting What is that? I kind of look over shoulder and then immediately go back to my dorm room that night There I am playing runescape. Oh, there's this one mission in it that is set up very much like this episode of Star Trek Deep Space 9 We go. Okay. We need this one very specialized thing. It's only available this other part of the map And you end up having to walk I think you arrange something like 12 trades over the course of this to get what you want Now, why am I telling all of these stories? I Suspect these if we lived in this system of barter where we had no money, but we were in fact still trading We would end up having to do this kind of thing Right, that is if I decide that in fact, I'm horrible at growing my own food But I'm reasonably okay at giving economics lectures I have to find a farmer that wants an economics lecture that is willing to provide me with food. I suspect such a farmer does not exist My father-in-law is a farmer. He has never asked me to give him an economics lecture. I sure I'm I will not charge him and In fact offers me free apples to not give him economics lectures So I guess that's an alternative method that I have at my disposal Right now that these people don't exist, right? So instead I have to find out. What do these farmers want? Right and trace down till I finally find somebody that wants an economics lecture that will provide me with something So I can go through these 12 trades to finally get the food that I need to survive This is a huge pain. It's a huge pain. We give a very specific name Doctor how to mention this before we need to have reverse Preferences that is that you have what I want and I have what you want Or as Walter Block likes to say if I'm a chicken having pickle want or I find a chicken having we don't know I never get that right. Okay, if I'm a chicken having pickle want or I have to find a pickle having chicken Want or I think that's right and something like that right and just to make the point Right. I need to find somebody who has what I want and wants what I have right so that we can then make that exchange And in a complex society where we're producing millions and millions of different goods The reality is we are producing millions of different goods in our economy, right? This becomes extremely difficult in fact so difficult I suggest that a society based on barter would not be able to become as complex as what we have I Very much doubt there would be economics professors in an economy based on barter I just don't think it would be possible Because the market is so so small for this Thing if we have a society that's relatively simple for the most part I'm gonna have to do something else. I'm gonna have to try to grow broccoli Right, which is not a good thing for anybody involved, right? So Right so in the system based on barter. I suspect right. We would not have this wealthy complex economy We have who'd have to be much simpler. We would be made significantly worse off Right precisely because of the difficulty of getting us right to have these reverse preferences another name for that Or it would be the problem of having a double coincidence of wants right that is your want and my want right coincide in such a way I want what you have you want what I have Feel like I've already said that right. It's an important concept. So what does money do for us then? As opposed to a system of self-sufficiency, right money doesn't make any sense if we have a self-sufficient economy Right, I don't in fact print off a bunch of Engelhardt dollars in my basement so I can roll around in them First that wouldn't be money. Nobody's going to take them from me, right? And it doesn't provide any direct pleasure in itself, right? Even if I were to take these and roll around in them, it wouldn't provide any direct pleasure for me I am not Scrooge McDuck right that likes to swim around in my piles of gold Which there are physical problems with that if you become a few and wealthy enough to have that vault don't dive in head first Please please Please okay, also send me some it will make it slightly safer Anyway So what was I talking about? Yes double coincidence of wants. So that's the problem for us to be able to arrange this trade I have to want what you have you have to want what I have Money comes in and solves this problem for us not by removing it We still have to have the double coincidence of wants. I have to want what you have you have to want what I have But in a monetary system where there is some kind of generally accepted medium of exchange We can trust right that each of us has money and each of us wants money So we no longer have to figure out well, how am I going to pay for this right? It's gonna be in money It's just a matter of quantity then that we have to debate right so Then the question is just how many dollars are you willing to accept how many dollars would I be willing to accept? Is that acceptable or not? We don't have to debate about whether we should use Whatever right whether we should use I don't loaves of bread or whether we should use shoes right in order to make this exchange happen Right money right allows us to achieve the double coincidence of wants much more easily precisely because everyone is willing to accept money basically All right So that is where a medium of exchange comes in and is very useful because it increases the likelihood For us having this double coincidence of wants at least in terms of the qualitative features of the thing that we are trading Quantity may be a problem. That could always be a problem. Yeah now. Let's go a little bit further I'm looking at my notes and I realize I'm through like four lines of my first of two pages. So I should probably move All right, so money then Mises lays out in his theory of money and credit a great book I would not recommend it be the first Mises you read though But he doesn't he lays out he says money right presupposes behind it a system of the division of labor With private property that is we need to have a system where we're actually going to have trade occurring But you need to have private property for us to have trade If I don't own things and you don't own things We can't possibly trade in a system of division of labor as well That is where we are improving our productivity where there is a reason right for me to have this excess stuff That I want to get rid of and give to you and vice versa, but we need to have this in the background right for us to actually have money Okay, so How do then does money arise now here? Okay, I'm gonna see it's Tom Woods in the room. I don't think so. Oh good. Okay, cuz I'm gonna pick on him a little bit Right, so last night. I always try to avoid disagreeing right with the people who were faculty when I was a student here Right, so he said you know money arises on its own. This is not actually true Right, right. We can you can just observe say out in the wilderness of I don't know pick the middle of Nevada or something Or some place that isn't a very spark is very very sparsely populated perhaps not populated at all We don't see right dollar bills popping up You don't see money arising right because money doesn't arise on its own rather Money arises out of the market process right people Interacting in the market create money now I don't think that Tom Woods would disagree with me on that he was making a different point Which is true that is that we don't need the government to produce money the market will produce it for us Right, so but how right? What is the process by which this happens right? Do we all get together and say you know I think it would be kind of nice We print it up these slightly green shades of paper With very elaborate print printing on them and then we just started trading these things back and forth Right we use that right so everybody should just be willing to accept these it'll make life easier I don't suspect that argument would get very far after all you know Doesn't taste good. It's not it's not going to satisfy it Surprisingly doesn't taste that bad now when I'm It's just no taste it turns out On the other hand we know that money also carries lots of germs So if I'm not around to give my lectures the last half the week, you know what happened Okay, all right. All right. This isn't directly useful right? I guess I could maybe put some paste on it put it on my wall right that kind of thing But I'd rather paint my walls than wallpaper them and it's not particularly pretty wallpaper either So it's not directly useful. So why would people accept this and even if they did right? Why would they accept it any specific quantity right? Why should I say that one of these right is worth however much versus two these are questions we need to face Right, so how then does money actually arise we can't leap right to having these bills Well, mrs. Suggest and here he's building very much on the work of Carl Menger But the way that money arises is that when we have a system of barter Somebody realizes that it might make sense right for them to accept something that they don't have a direct use for But that most people do That is it may be perfectly possible Maybe I find right as a relatively Unprimitive person that I can't eat things based on grain right because we have this undiagnosed celiac or something like that Right, so it makes me ill So I try to avoid eating grain if at all possible But at the same time I know right that most of society does in fact Right use this grain to make bread and and then eats it So it might make sense right for me to accept grain Not because I plan to use it, but because I know other people will take it right That's the idea of a medium of exchange It's something that I accept right not because I have any direct use for it But rather it serves as a medium right that is in between right two things Right, so take it as a medium and I give it away right to somebody else in exchange for something I actually want all right So somebody has this idea that it makes sense to accept something they don't actually have any direct use for And then trade that to somebody else Because they know this good is very marketable That is it is a good where there's a wide a very broad demand for it It's relatively easy to get rid of if I don't have any use for it Right, so this then means that what we must have when we first start out with money We can't start with something like this that is basically useless right on its own It has to be something that has right some use that people will recognize in society That is it has to be what we would call a commodity money Where it is some commodity that does actually have some direct use that most people would recognize But added then to this use right people start saying well I'm willing to accept it precisely because I can give it away to someone else to get what I actually want And as this happens right we've now added to the direct use value this indirect use value or this monetary use value And as that happens what happens is we have what we call a network effect Right, so we have this network of people right the trade with each other Right, some of them are willing to accept grain because they bake bread Some people are willing to accept grain now because they know they can give it to the people that are willing they want to make bread And as grain becomes more and more acceptable and it in fact becomes more and more acceptable to any individual The more people that want grain now I can sell not now I can give my grain not just right to those people That want to bake bread directly but to those people that want to give the grain to somebody else Now it becomes all the more desirable for me to accept grain again, even if I'm not going to use it Like many things these network effects are not limited to money And they're all over the place right it's anything that is more useful the more people there are that use it Right telephones are this way right the first telephone if you only produce one it's not very useful It's why you produce it in a pair the first time And as we have more and more telephones they become exponentially more and more useful Even some things we may not expect right to be To have these network effects seem to I think of pokemon go for example Making confessions as well my plan was okay, you know, I I'm so bad with my time. I really am I'm going to stay away from this one But it turns out my wife is not As even as good with her time as I am so she decided to go go for this looks like fun to her And then my boys decided it also looks like fun. They're four and two right and they're oh, yeah Let's play pokemon together And it turns out that when my wife takes her phone and hands it to my four-year-old The two-year-old gets very upset that he doesn't have to have a phone to play pokemon go on This is a network effect at work So install pokemon go and now and I'm out there walking around auburn in 90 degree weather trying to find poke stops Right so I can get enough um poke balls to catch whatever happens to be near here That's a network effect right and we know that we've we see this network effect at work Not just because and now we're finding out we can possibly trade pokemon. Oh big announcement if you haven't heard that yet. It's coming Network effects But we already see this just from the social aspect right my wife and I went to one of the neighborhood parks because Again, this is the kind of thing we are doing now It was packed It was packed with people we had gotten here before because there's a playground my kids like to play on And it was normally fairly empty We had to drive around the parking lot a couple times looking for a space right is just packed with people Or there's this social element right social elements tend to bring with them network effects Right if it's something you like to do together network effects tend to be very big language is another one right So I've been spending some time trying to learn Esperanto Because I don't actually understand network effects If you've never heard of Esperanto, there's a reason it turns out I think there are at least 2000 of us that have tried to learn some Esperanto at some point in our lives Not a useful language compared to english or spanish or Take any other language you've actually heard of But there's network effects there too and network effects with money the more people there are that accept dollar bills Or that accept grain or that accept gold coins the more acceptable these things become and they tend to spread therefore throughout society And so this is how money would tend to arise Now at this point Mises would point out then We really understand that the function of money the primary function is to facilitate Right the business of the market by acting as this common medium of exchange right that everybody accepts That's the primary function But we add to this and it does adopt other functions as well Here i'm borrowing words that I first learned from um dr. Howden actually a couple years ago Media let's see what is it money is a matter of functions for A medium a measure a standard a store I like rhyming so So there we go. I'm going to do those but not in that order right so the medium of exchange We've already talked about helping to ease these transactions by making the double coincidence of wants more likely Secondly a standard of deferred payment that would be the standard in that list Now here Mises makes a very important point and the standard of deferred payment is really just a way of saying that Money is the medium of exchange for credit transactions That is where we by now pay later that type of thing you learn certainly more about that later on in the week Money is also a store of value that is it transmits value through time and space which Makes me think about dr. Who and i'm going to have to fight that urge because time okay So transmits value through time and space that is I can hold on to this dollar bill It will be the same physical dollar bill next year May not buy quite as much right, but it will transmit some of that value that it has today right into the next year In a way that is very different from many other goods that are not quite so durable I would suggest that say This dollar bill is a substantially better store of value than say if I took I don't know a little baggie of milk and stuck it in my pocket for the next year Not the same milk right it fundamentally changes over the course of that year in a way that this does not All right, so it's a store of value not the only one right, but it is a store of value Now one point that I would make here is that the store ability of a good tends to make it more marketable After all then I then I know that I don't have to get rid of the thing right away I can hold on to it for a while right So one of the reasons I've mentioned grain is that it's something that appears in fairly primitive economies that stores fairly well But as long as you keep it fairly dry it can last a very long time Right, so it ends up grain was one of the fairly early forms that money took All right, so store ability tends to make these goods more marketable And therefore it shouldn't be a surprise that it's these storeable goods that tend to arise early on as money Okay, money also serves at this measure. I prefer the term unit of account Or that is that we express the objective exchange value of goods that is the price of goods in money That is it's that makes it useful then for economic calculation, which you've heard hinted at a couple times already I know I will hint at it another time and let dr. Salerno talk about it I believe tomorrow morning right economic calculation very very important if we want to have a complex economy That's really what I'm basing my argument when I say I don't think we'd have as complex an economy without money It's because without money. We can't do economic calculation We need economic calculation if we're going to have this complex Capital structure, which dr. Garrison is going to talk about at three o'clock. I believe right and if we're going to have this Complex economy we're all trading in these really weird very specific things right I think about something like very specific chips that have very specific functions inside of a smartphone that kind of thing I can't imagine a primitive economy based on barter coming up with this You need to have this complex structure of production for that to occur Right, so we need a unit of account in order right for us to be able to do economic calculation to decide right which Lines we should go down which lines we should not Right so money has these other secondary functions, which are still very important We can then also think about what are the traits that would make a money a good money That would make they say commodity serve as a good money Now based on everything we've done so far thinking about these various uses We should be able to conclude that first money needs to be portable That is it should be easily transported from one place to another After all if I can't take my money to market with me, it's not going to be very useful Money should also be divisible. I suggest it's divisibility when we look at some of the research It suggests that cattle was a very early form of money We switched fairly quickly to grain because two halves of a cow are fundamentally different from a whole cow It's not the same thing right on the other hand you can take say a cup of grain something like that divided into two half cups of grain Putting back together makes no difference right you can divide and you also can recombine in a way that you cannot with say animals It needs to be fungible fungible Just meaning that one unit is basically the same as any other unit of the good Right, this is generally true with most grain it turns out right as long as you have a particular quality and type of grain It doesn't matter which particular grain you have Another needs to be relatively scarce that it is something that would therefore have some economic value would be an economic good Right, so air makes a terrible money Despite the fact there's a broad-based demand for it being the last thing we need So we need something broad-based demand relatively scarce So it will actually have some value right fungible various units can be interchanged without a problem divisibility and also portability all of these will help aid the function of money as a medium of exchange Now as we've watched over time in the market, we can see this transition As we move from say cattle, which aren't a reasonable okay reasonably. Okay money. It's fairly mobile It turns out not necessarily easy to direct, but it's fairly mobile. It'll walk there itself Just have to get it to go the right place We've moved from there to something like grain move from there toward precious metals things like gold and silver Which one seems to depend on geography? All right, so Why would we make these transitions? Well as with anything else in the market when a better good comes along and we find out it fulfills a function Right, we start switching over to the better good that fulfills that function Right, so grain it turns out for very good reason. It is better than cattle to serve as a form of money It turns out golden silver are even better After all grain it will eventually rot Right, you do also have the possibility that it's going to get wet which makes the rot happen faster The same is not true. However for golden silver right golden silver You can take it you can throw it into the ocean for hundreds of years pull it back up It's exactly the same gold. It makes no difference. It's very very durable. It stays the same not only that But golden silver are remarkably divisible in fact We have um the Spanish system was built around this idea of pieces of eight Which was literally taking gold coins cutting them up into eighths Right, which then if you wanted to you could melt down put back together. No problem Easily divisible easily recombinable without any kind of problem at all Again controlling for quality certainly fungible very scarce Golden silver precious metals. They're called precious for a reason. That is there isn't a whole lot of them around All right, so very very good monies gold and silver appear to arise on the market Alongside we call money substitutes That is that people would do not always carry around with them gold coins or silver coins We had perhaps Things that looked suspiciously similar to this right that served as a claim on that coin It turns out that if you're carrying a lot of golden silver coins around in your pockets It makes a lot of noise And it turns out that at least good thieves can hear right You can carry a lot of these around in your pocket Makes very little noise. So there's a security advantage to this Not to mention this is in fact lighter right than a coin Now I guess that's not true for a dollar's worth of gold. You can barely see a dollar's worth of gold nowadays All right, but it could potentially be lighter depending on how many zeros we add to this thing Talk about zeros in a second all right, so Point being having these money substitutes was something that was useful and they tended to circulate alongside of monies But this ended up creating a problem now dr. Herbner is going to go into more detail on this when he talks about fractional reserve banking Well, we start to see right these paper certificates take on a life of their own And through various interventions that I will let i'm dr. Herbner talk about We end up transitioning away from a golden silver based money to a paper based money Now the way this happened it was in no way natural It was not a part of the market process But we moved away from having these golden silver coins to exclusively right using this paper money that I cannot in fact Go to say a warehouse and say I'd like to exchange this for the gold that backs it I can't do that at this point In fact, it was the force of government that led to that transition first in the 1930s right fdr Said no more monetary use of no more monetary gold is allowed to be held within the united states If you have actual physical gold that has some kind of monetary form to it bars coins, etc Turn them in we will hand you This paper stuff in exchange, right You have a wedding ring. That's fine. You can keep that but not much more Okay, then we have uh in the 1970s right on president nixon right making that final break From right these dollars which were still acclaimed to gold Officially though only foreigners could actually make good on that because americans weren't allowed to hold the gold Right. Well, we were too nervous. There are lots of these paper bills floating around outside of our borders We didn't actually have enough gold in our vaults to back them all And it wasn't just making us nervous in the states. It was making people nervous abroad as well France in particular was very very nervous about the dollars they were holding and kind of wanted the gold back. So President nixon said oh by the way These actually aren't good as gold anymore, right? They they have a life of their own and they continue on down to this day Right, so the way that this paper money acquired its value and its use as a common medium of exchange was because it was tied Right originally right to the gold that backed it And we can actually see this kind of thing happen when we have designs for new currency arise When we look at say the history of the euro and the way that it was introduced It was really introduced on the basis of previously existing fiat currencies in europe Right for us to have some sense of what it was worth right We needed to tie it to something that already had a value in the minds of people Which then brings up the question of the specific value of money Right, so we know that this is a dollar. We have some rough idea of what it's worth Now we've talked about the social value of money that this makes us more productive by using trade But why is a dollar worth a dollar in exchange? Now here to understand the value of money We first need to kind of think about how we talk about that Right the value of a t-shirt is something like ten dollars say Right the value of a dollar is a dollar is not nearly as useful Right, so we should think of the value of money in terms of the purchasing power That is what can this dollar get you in exchange I think I gave a few examples right a part of a haircut or a part of a coffee Right Maybe even a whole candy bar some places right that kind of thing the various things the money could buy Now once we make that leap I don't actually have to do anything To say what determines the value of money supply and demand There we go, right like with any any economic good Right the greater the supply right the lower the value of the good is going to go That is our money is going to buy less the greater the supply of money there is Right we would often call this price inflation right generally prices are going to go up Right as prices go up my money can't buy quite so much And also the demand for money would have an impact as well if people decide that they don't want to hold on to money anymore Or at least hold on to money in this form It's going to lose value Exactly as if the demand for horse-drawn carriages falls right horse-drawn carriages are going to lose value Right so it is exactly the same supply and demand That determine the value of money as anything else Now there there is an issue here though the Mises deals with That is when we think about money's demand it is slightly different But meaningfully different right from the demand for other goods because for most goods Right the way that things work is that we know that this good is useful for fulfilling some sort of need Right so right now my mouth is feeling pretty dry. Okay There's an objective use value in this water. I can satiate my thirst or at least help a little bit Because of that objective use value, I then subjectively recognize this value And decide that having a bottle of water is in fact something that I'm willing to do I'd in fact be willing to give money right to get bottles of water This then leads to right the supply of and demand for Bottles of water leading then to the objective exchange value or the price Now money is a little bit different because we started by saying that money as money right this dollar bill It does not have an objective Use value it is not directly useful at this point yet. We do know that it does have value in exchange I can use it to buy other stuff. So how does this work? right well Now here's the problem Right the reason I want this is that it has value in exchange Right so it has this objective exchange value. I can use this to buy other things objectively Right therefore I decide that I want money. That's the subjective value that I attach to it And because of that subjective value I we can therefore derive demand and supply And that leads to an objective exchange value This feels like circular reasoning because it is Or appears to be right right so that was the problem Right that mises faced was how do we right? How do we make this work right without getting into this circular reasoning which basically boils down to saying that money has value because money has value Right that doesn't tell us anything. We're supposed to explain value as economists And so he gives us what is famously called the regression theorem Now i'm not going to go into great detail on this except to say we've actually already uncovered the regression theorem to some degree Because here's why After all right the reason that I am willing to accept this dollar right now Is that I have in the past observed right that it had value in exchange Oh Added the time element right and now we've broken the circle right so So I had the so I saw this dollar had value yesterday that makes me value it today I'm willing to accept it as a means of payment or as a medium of exchange And my value that I attached to today subjectively then helps to determine what is its value in exchange today right so across time The objective exchange value today is based on my subjective value today Which was based on the objective value yesterday What I previously observed Of course, then we just have to go back a step right I can't go back the step because microphone So objective exchange value yesterday was determined then by the subjective value yesterday, which was determined by The objective value the day before yesterday I don't feel like we've improved things right? We're just kind of going to go back and forth back down turtles all the way down. Don't we have a problem there Right well no, we don't right and that is what the origin of money tells us when we understand the origin of money We don't trace this all the way back turtles all the way down to infinity Right we trace it back to the time when we were actually using a commodity that did actually have direct use value Where people wanted the thing because it was directly useful Right so there was a true beginning at the end I'll keep that there's a true beginning at the end of this line of reasoning There was a true beginning in time that then led to the value that money has today So I'm going to talk a little bit in the time remaining which is very very short I think 30 seconds about changes in the money supply Now one of the big points that I'm going to emphasize here is that Austrians take a slightly different view of this than you see in the mainstream Right and the mainstream we'll often see Something like the angel Gabriel a helicopter model right something along the lines of saying well We increase the money supply say we double it just to make the math easy Well, all that really does is double prices and wages right so not really a big problem Right, okay numbers all look bigger, but so what this doesn't make any difference But as an Austrian we understand when we move away from this aggregate level down to the individual level Money does not in fact drop out of a helicopter evenly across the entire economy It enters at specific points now People that really take this angel Gabriel Helicopter kind of view that money just kind of drops evenly across the economy have no way of Understanding why counterfeiting would be attractive Right, why would you counterfeit if that's all that's happening? You print out a bunch of money then prices all rise in proportion You're not in fact any better off except you are better off because your amount of money has increased faster than prices have Right, right, so that is in fact That's going to have consequences you are made better off as a counterfeiter Because you are printing money at such a rate and it is acquiring to you Right, so you can actually get more stuff As a whole we don't have more stuff. We're not more wealthy as a society, but you individually are more wealthy Now if we start understanding this what things this way we can understand the argument That increases in the money supply in our system Lead to greater inequality, which certain people are concerned about right So let's trace out right how does money work and get into our economy now in our economy a fiat based system Right money first comes in at the point of the Federal Reserve right who's in charge of effectively printing it Physically they don't print it whatever right. They create the money. They get it first Who do they hand it to right well they hand it to banks There's good research showing that if you want to look at inequality specifically between CEO pay And kind of the average worker pay. Do you know where the gap is largest? It's in the financial system I'm not shocked right It in fact makes sense given the structure of the system right this money goes first right to the finance So the realm of finance also we know one of the biggest borrowers of money that would therefore receive it fairly early on Would be the government So where does money go first right it goes into right the hands right of the government the hands of wall street And then over time of course it does trickle through the rest of the economy as they do spend this money Right, but who gets the greatest benefit those that get it before it has lost its value Those that those who get the greatest proportion of it as well right before it has lost its value as well Right, so if we really want to understand why is it that wall street is so wealthy Why is it that it seems like the government manages to find Funds to hire more people all the time in the middle of recessions. They hire more people Well, who's first in line when we're creating more money? Shouldn't be a shock Okay, all right, so I think I will have to close there unfortunately Oh, well So thank you very much