 Our goal in this lesson is to describe the one lesson that emerges from studying thousands of years of monetary history. To do so, I'd like to explain why economists have forgotten history so that these lessons are no longer open to them. In the late 19th century, there was a battle of methodologies where the historical and qualitative method, which is natural to economics, was embattled by a new emerging method based on so-called scientific methodology, which wanted economics to be quantitative and mathematical and empirical and data-based. For various reasons too complex to go into here, the scientific methodology won out and economists have forgotten history so these lessons are no longer available in modern economics textbooks. In economists no longer study history, the question of how we extract lessons from history is also no longer available. So the issue is that it is not easy to extract lessons from history because history consists of unique sets of events which never replicate. So one has to analyze those events in a more abstract and theoretical way in order to derive lessons which can possibly be applied to future eras. The important lesson which arises from studying history is that theories are bound to their particular historical eras. Each theory emerges in a particular historical context and it cannot be understood outside of that context. And some lessons require analysis of a long stretch of history to understand and the quality quantity pendulum is one of these lessons. Here's this lessons about the nature of money which are not available in textbooks. The money is based on social and political and financial institutions which create trust and consensus on the value of money in the public. And this aspect of money is not available in textbooks. High quality of money is one which has high level of confidence and social trust. And one way to do that is to use actual gold coins which for psychological reasons inspire trust. But this solution suffers from many difficulties and the difficulties have been visible throughout the centuries. Critical problem with gold is that it's not matched to the needs of a monetary economy. In a monetary economy in order to produce something you need to purchase inputs, hire labor and do a number of things which require laying out money first. The production takes place later and then you sell your goods to get money. So without money the production process cannot get started. This means that if there's not enough money in the economy then the production active productive activity will suffer. At the same time if there's too much money then inflation will result. Now the quantity of gold cannot be controlled by the government and so it does fluctuate in both those direction and causes both of these kinds of harm to the economy leading to the instability of the value of money which is quite harmful to the economy. These preliminaries out of the way we can now turn to explain the quality quantity pendulum. A high quality money brings a lot of benefits to the economy and therefore efforts are made by society to create this high quality money. The simplest way to do so is to use gold but this may not be available in sufficient quantities and even when it is available, foreign trade may lead to its export leading to low amounts of gold within the economy and recession in the domestic economy. So throughout history people have attempted to find ways to expand the money stock beyond the supply of gold which is available. One of the standard ways to do so is to use token currencies where you take gold and you mint it, put government stamps on it. That has a lot of advantages because minted coins guarantee the quality and quantity of gold and make it easy to use for the public. The government also can control the supply of money by minting less or more according to the needs of the economy. And also if there is insufficient gold then the government can use what is called debasement that is the token gold in the coin represents the value of much more gold. And it can be exchanged for that gold at government treasuries. So the currency is a token for the actual value. It is the actual value of the coin is less than the value of the gold that it represents. The high quality money is created by the society then the pendulum starts to operate. The high quality money can be preserved by keeping strict controls on the stock of money. But once the confidence and trust in the mechanisms of money creation has been created then the benefits of creating more money are just irresistible because this confidence is not shaken by a modest amount of excess money creation. And so the temptations amount and excess money is created until it reaches a critical point at which the trust or the confidence built up painstakingly over a long period of time gets shattered and the quality of money is destroyed by the attempt to increase the quality of the quantity of money. Excessive money leads to loss of confidence and leads to instability in the value of money inflation occurs and this causes suffering to all of the society because the money is used by everyone and instability in the value causes harm to everyone. So then the effort begins to start to build a high quality money once again. And so this is the pendulum. Two lessons that we learned from this analysis of the broad sweep of history lessons is that this quantity quality pendulum is only desirable over centuries in any local period, 10, 20, 30 years, one of the two positions makes a lot of sense. We have a high quality money, then the advantages from expanding the money stock are so immediately obvious to everyone that it's the position of the one who wants to control the quality of money becomes untenable and everybody sees the benefits of expanding money. And so this becomes the both the theory and the practice at the same time when the money is low quality than the advantages of creating a high quality money and restricting and narrowing the keeping the control tight on the money is also obvious to all because everyone is suffering from the harms of low quality of money. So again, there becomes very strong and insistent and dogmatic insistence on the necessity of high quality of money. So in any local period of time, 10, 20, 30 years, one of the two theories seems dominant and there's highly convicted, highly convinced views from both parties. But over the longer stretch of time over the centuries, one sees both of these sides as only one of the two ends of the pendulum. The idea that becomes clear from this analysis over the centuries is that the economic equilibrium is an illusion, it can only be found in textbooks and it has no relation to reality. As Minsky put it, equilibrium itself is destabilizing. Once you have a high quality confidential money, the mechanisms to disturb this high quality by printing more money are inexorably put into motion and this cannot be prevented. So the money itself destabilizes itself. The lesson is that the psychosocial aspects, the social consensus is central to understanding money and this is completely missing from the textbooks. So throughout history, you find events, critical events which change the level of public confidence. Most recently, the euro was suffering from a lot of problems and uncertainty and stability until Mario Draghi, head of European Central Bank, announced that we will do whatever it takes to stabilize and preserve and protect the euro. And immediately after his announcement, the euro's value of the euro became stable and the markets became calm. About money from history is that these lessons are not available in modern textbooks because textbooks economists have forgotten history and therefore cannot learn the lessons from history and therefore I doomed to repeat them.