 I'm really happy to be here today speaking to you because it wasn't at least to me It doesn't feel like that long ago that I was sitting in the very seats that you're in now I guess they may have replaced them in the past 12 years, but I was sitting in this room listening to somebody giving a lecture very much like mine I suspect it was probably Joe Salerno. I got to hear a lot of the same people you get to hear Naturally not myself, but I am very excited to give the lecture on money Because the reason I became an economist was because I'd rather study money than happening My wife doesn't like that joke, but it's painfully aware that it's not really a joke So first I want to talk a bit about kind of the social value that money provides to us and here I really want to make a point piggybacking on what Dr. Herbner was just talking about with the division of labor and say that money by easing trade by in some way helping to Eliminate right some of these barriers that exist to trade allows us to undertake a greater division of labor and thereby makes Makes us more productive and in fact value one another because after all I value not just as a person But also as a potential trade partner as we can make each other better off So in order to show this let's look through some of the alternatives All right, we have a monetary economy that we are very familiar with we have some sense of how that works What else could we do right one possibility again? Dr. Herbner mentioned was we could have a totally self-sufficient economy right where each of us relies upon our own production Right to produce everything that we need and want now here as others have said this would probably result in mass poverty and starvation I can think about my own case in some of the little free time I have I have a garden in my backyard and I try to grow various things Right, so I plant broccoli. I always miss time my broccoli so it dies We think it's too hot and it doesn't like that cauliflower is the same way Right, I plant tomatoes the tomatoes inevitably catch some kind of disease and die Right, I plant strawberries the strawberries do very very well and it ends up the ants watch the strawberries closer than I do And they eat all of my strawberries I think the one thing that I got out of my garden this year so far is I did get some good green beans But it ends up a quart of green beans is probably not a lot enough to let me survive over the course of this year All right, so my guess is that in this world of self-sufficiency. I would end up dying That's a good reason for us not to go down that path at least good enough for me Another possibility though would be to have a world of exchange right where each of us can in fact Specialize in the area where we are more efficient. We undertake a division of labor We get all the productivity gains of that But here we do run into a problem What's the problem? We call the double coincidence of wants which dr. Hulsman did hint at in his lecture earlier today And this is simply the fact that when I enter into this economy of barter that for me to get what I want I have to find someone who wants what I have so in a very simple example And I have here this nice pen it is definitely used you can see I've used it enough to wear off most of whatever Was on it to start with So maybe I have this pen and I'd like to get a pair of earrings to give my wife as a gift So How would this work? Well, we can imagine as I take my pen to market I'm going to meet four different types of people right some people Don't have earrings and also don't want a pen right these people are totally worthless to me We have we have nothing to provide each other right on there's another set of people who want a pen Right, but don't have earrings again. They're not of any interest to me I may be of interest to them But they don't have anything to offer me that I would like an exchange Now there are other people who have what I want that they have the earrings with them But they don't want this pen right so they're of interest to me, but I'm not of interest to them So it is only this fourth group right that has both earrings and also wants my pen that I can then trade with And so we have this difficulty of how do we find the people that both want what I have and have what I want It was a very challenging thing I would suggest that the fact that this is challenging is going to change the way we make decisions about How we use our time in production? I will in all likelihood not spend a lot of time writing treatisees on economics because I know that The number of people who want treatisees about economics is first relatively small and odds are they're not growing food All right, so I'm not gonna spend my time doing that and I'll find something else I'm not very good at not that I'm any good at writing treatisees about economics But I'll find something else that I'm probably even worse at right, but that I know people will probably actually want right so I might make rudimentary tools from wood from the tree that fell in my backyard that kind of thing because I know these Rudimentary tools might be useful to farmers so I can trade it to them and get food to allow me to survive So the choices we make regarding productivity really come down to our expectations about what we think other people are willing to accept in exchange So How does money change this? Well now first I want to actually define money right money in the words of Mises is just a commonly accepted medium of exchange By nature, this is a very somewhat vague definition right? What do we mean by commonly accepted? That's not exactly clear where we draw the line to do 80% of people have to accept it is 75 and off Do we need 90 95 or what? Unfortunately Mises also makes very clear. It doesn't really matter Anything we say about any medium of exchange right is going to apply to money and vice versa So in my face questions like is Bitcoin money I Suspect that in the United States as a whole the answer is probably basically no and that I Expect most people I walk up to if I offer to pay them Bitcoin for something They'll decide it's not worth it to have to download whatever app they need to make their wallet and all of that Just pay me in cash On the other hand I suspected in this room Bitcoin would probably qualify as money as I would guess that most of us here are already set up for receiving Bitcoin So we'd be perfectly happy right taking these types of things in exchange And so is it money or not? It's it's kind of vague fortunately. It doesn't matter that it's kind of vague So why did I spend all that time on it? Well, okay? Well, let's let's move on Okay, so then how do we get to this medium of exchange? But so let's imagine right here. I am again All right, I am producing right these various Wooden tools in my backyard. I'm hoping to take them right to exchange for things that I would like to eat I like to eat meat. All right, so I'm hoping to exchange these tools for some kind of meat I but it ends up either when I get there to market the first person I meet Are they they are not actually offering meat in exchange what they have is wheat I'm not particularly interested in wheat My wife loves bread, but I don't particularly care for it that much But I may decide that in fact it might be worthwhile right for me to accept wheat After all even though I don't have any use for it I know lots of people do because there are lots of people that really like bread and eat bread Right, so I may get this bright idea of yes I will take your wheat so I'll exchange right these wooden tools that I have in exchange for your wheat With the hope that I can then take that wheat and later exchange it for something that I want like meat And so we then have for this entrepreneurial person that decides that they're willing to trade Not just for something that they want but for something they expect other people will want more than the thing They had to start with And so this is how we get the rise of a medium of exchange medium of exchange just being an item that I'm willing to accept That I don't plan to use directly. I'm going to just use it in exchange to get the thing that I actually want So what then happens if I start doing this? We'd expect that as we are social creatures interacting in markets people notice that now there's someone else out there That's willing to take wheat Others might get then get the bright idea Well in that case it might make sense for me to also accept wheat even if I am on a paleo diet And would never eat anything with wheat in it it might make sense for me to go out and accept wheat because I know It's easy to get rid of after all all the wheat eaters will take it And so will Engelhardt and so perhaps these other people have also noticed So we end up seeing the rise of a medium of exchange and the spread of a medium of exchange throughout a trade network as it becomes More popular in fact it ends up a medium of exchange is very much like things like Facebook or language And that it becomes more useful the more that people use it. I imagine being the first person on Facebook Not particularly useful or the first person to develop a word in a language That's not particularly useful until someone else uses it But as other people use it it then becomes more useful and we see more more at a more adoption of that particular thing In this case the medium of exchange as more people accept wheat wheat becomes more acceptable With the result being that it spreads throughout the economy and becomes a commonly accepted medium of exchange What we would call money So let's then look at what exactly does a medium of exchange or specifically money do in an economy? What functions does it perform? First obviously money serves as a medium of exchange and in so it allows exchange to be easier We're thinking back to my example about the pen and the earrings Now there are two sets of people that might be interesting to me right after all right now There are those people that don't have what I want and also don't want what I have again They're they're not going to be worthwhile to me, but then there are those people right that want what I have But don't have what I want But what they do have is money I'm willing to accept money because I know money is easy to get rid of right So I'm very happy to sell my pen for a sufficient amount of money if I think I can use that money to buy earrings later on Right so this is a group of people that I would not have been willing to trade with before that now I can trade with and now once I get money now I can go out and find somebody that has what I want that has those earrings even if they didn't want a pen to Start with because they want money Right so we've just done is create this double coincidence of wants that is the likelihood that you have what I want Well, I have what you want has just increased substantially right two more groups that I can now trade with of those original four Since in effect, everyone wants money and everyone has money at least to some degree Right so as a medium of exchange We know that money then eases transactions and thereby allows us to start taking more risks with the things that we would Want to produce right after all I don't have to find a lot of people that want my economic treatise just have to find a handful that are willing to pay Enough if they pay me in money, then I can go buy the meat that I would like Another function of money is to serve as a unit of account not going to go into a lot of detail here I'm going to allow a professor professor Salerno to talk about this with economic calculation But one thing that money allows us to do is to calculate profit and loss and to thereby evaluate whether we've made good decisions in production Another use of money is that it is a store of value that is over time I can just hold on to money and it's basically going to stay the same thing This makes it very different from things like say gallons of milk would generally not make very good money Keep a gallon of milk for a couple months. It's not the same gallon of milk. Trust me It's not the same gallon of milk right on the other hand. There are some things that store very well We'll get to one of them in a minute things like gold and silver right store very well So that may in fact serve this store value of purpose very very well I'm a fourth traditional use of the value of money or of money It would be to serve as a standard of deferred payment Which is just to say that debts are given and repaid in money This is just another form of the medium of exchange. It's just instead of happening at that point of exchange It's happening over time Right, so I give you money now in exchange for the promise that you'll pay me back with more money later So taking these functions in hand we can think about traits that would make a good money First since money is used in trade it should naturally be portable It should be something we can easily take with us right it might be that say I don't know wheelbarrows full of dirt They're generally not a very good money that they don't have a lot of value for the amount of bulk It's very difficult to buy things with wheelbarrows full of dirt. That's so we would generally shy away from such money That's we want something portable that that is it has a high value for the amount of weight involved and also for the size involved We'd also want something that is divisible Now there's reasonable anthropological evidence that one of the early monies was cattle People would use like goats and sheep and oxen and what have you and would think of this in terms of money But we did move away from that and I think there's a good reason for that And that is that two halves of a goat are fundamentally different from one goat It's not the same thing anymore All right Now there are other things you can divide very easily and put back together very easily that may serve therefore has a better money a Third things we would like our money to be fungible That is that one unit of money is basically equivalent to any to any other unit of money All right, so this is why we despite the fact that they are very valuable Things like diamonds tend not to act very much as in a monetary way Because each diamond is somewhat unique. I am told I don't have a very good eye for them But I am assured that each diamond is somewhat unique They are somewhat different from one another which makes it very difficult to use them as a form of money Naturally, we should also have this money be scarce But it should have some kind of natural scarcity with it that is connected to portability and having a high value Finally, it should be something that has a broad base demand That is lots of people should want this money Obviously if I'm using it in exchange and I want to increase the possibility of exchanges happening I need to have some kind of good that lots of people are willing to accept So we have all these traits that would make money good Now over time we've seen that the market has decided that Gold and silver in particular as I mentioned before serve very well in this function When left to its own devices markets have almost universally chosen gold and silver these precious metals to serve as money I shouldn't be shocking right? They're naturally scarce after all being naturally scarce means then that they have a high value It ends up that many people find them beautiful. My wife assures me that silver jewelry is wonderful I got very lucky with the woman. I married that she likes silver more than gold But she shares me it's a this beautiful thing It's nice to just own and have it around and put on your fingers around your neck and what have you I said it is something that is very valuable and at the same time we know it's very scarce It's easily divisible or you can actually literally cut a coin up into eight different pieces We can call them pieces of eight and then later on you can melt it back down put it all together And you've lost virtually nothing in the process right for a particular quality of gold coin It doesn't particularly matter right which gold coin you're looking at if it's the same quality of the same weight It's totally interchangeable perfectly fungible And actually the broad-based demand we can imagine that agrarian societies gold probably didn't have a broad-based demand to start with But it achieved it over time After all all we need is somebody to realize that gold stores a lot better than wheat rats are less likely to eat it All right, so maybe what I should do is get rid of all this wheat that I'm storing and get something That's a little bit more durable something like gold or silver Which it ends up is also easier to transport as it's much smaller and holds a lot of value in that small piece All right So as this happens we then see people switching over right start acquiring gold and the the breadth of demand for gold It starts to increase as more important people recognize this does make perfect sense So spreading them through the trade network just like the original money in this in our example wheat did We see the demand for gold spreading through until gold is then used as money So here we can I'm see not just how money arises But how we can switch from one money to another one as some entrepreneur discovers that some other good has better Traits as money and just begins using it This by itself starts to make it more acceptable to other people to use this money And as a result more people do and we see the spread Now this does lead to the natural question How then do we end up where we are today where we're not using gold and silver as money instead? Most of us are using paper currency Well, that's another story. I'm not going to go too much into it except to say that for reasons we'll get to Government finds getting involved in money very tempting It ends up there are good reasons you might want to be the producer of money And it ends up governments inevitably get involved with the production of money and in our case historically They have taken paper money and gold money which did exist side by side in effect Where the goal where the gold was claimed to by the paper, right? So you had gold certificates so they bring $20 and 67 cents worth of um bit these bills and that's equivalent to one ounce of gold Just take your neighborhood bank and they'll give you an ounce of gold coin So we had these tied together where you could then just carry the paper which is lighter It ends up than gold. There are good reasons to maybe use this paper if it is redeemable for gold But as soon as that happened and the gold started to get isolated in banks now We created the possibility of breaking the tie between the two and that is exactly what we know historically happened I'm here within the United States that tie was broken in the 1930s Then we broke that tie with the rest of the world the tie between the dollar and gold in the 1970s So now we have this paper money But nonetheless that paper money has this connection with gold right which then provided the foundation for its value We can also imagine the introduction of new money by governments I Don't know exactly what's going to happen. I'll let dr. Baggis talk about Europe more But it's imaginable that say a country might decide that it's shut It's going to shut down all of its bank for some all banks for some period of time Decides it doesn't want to use the euro anymore. All right, so it just declares to people Oh, remember all those euro you had or we're going to call them drachma now And we can print as many as we like of them. This is something we could imagine governments trying to do With more or less success we may see All right, so we have some idea then what is the social value of money? It allows us to exchange more it opens up the possibility of trading with more people But what about the specific value of money? What is it that makes a dollar worth a dollar a euro worth a euro again worth a yen? Now here we need to kind of get into That if what exactly is the price of money, right? Once we can establish that money has a price our task on this point is going to be very very easy We already talked about supply and demand and the determination of prices, right? So how do we think about the price of money after all with most goods? We say well the price is just you know, this t-shirt is ten dollars is the price I pay ten dollars I can get a t-shirt or if I'm selling t-shirts I can sell the t-shirt and somebody gives me ten dollars Well, it ends up we can do exactly the same thing with money. We say well if I sell this money What can I get an exchange? All right, so if I'm giving up this money to get other things what are the other things I can get now? One complication is that in a monetary economy virtually every good we know is traded for money So when we think about the price of t-shirts we think in a monetary term, right? We can't really do that with money. We sell the dollar for a dollar doesn't tell us anything at all Instead money is traded for everything So we need to list out what are all the possibilities that I could get for this dollar All right, so the purchasing power of a dollar might be one-tenth of a t-shirt might be one two hundred thousandth of a particular house It might be one-tenth of an hour of labor of a particular type in a particular job But so when we think in this way we can really call this right what's the purchasing power of money? What is it that money can buy? And that is how we're going to think of it So now just take out anywhere we said price before stick in purchasing power of money in supply and demand works Which is just a marvelous thing and a great insight from Mises. We don't need a totally different theory to explain the value of money We have supply and demand it explains the value of things in exchange All we need to do is give a name to the value of money the purchasing power of money and we're there All right, so as with any good we've increased the supply of money We would expect its value in exchange that is its purchasing power to decrease on the other hand if the supply of money Decreased somehow I would then end up with a greater value for each unit of the good Right a greater value for each dollar for each euro or what have you if the demand for money increases Would expect its value to increase in exchange if the if the demand for money decreases would expect its value to decrease in Exchange just as in any other good the demand increases the value increases demand decreases the value decreases So in many ways money is pretty much just like everything else in terms of determining its specific value But there is an exception If we really get down right to the individual level and think about the demand for money We realize money is somewhat different than other goods for most goods So I think again of this pen The process that I go through is first I recognize that this pen has some specific objective use we all recognize Right that is that I can write with it and this is something that I may value All right, and then I attach to this a subjective value in the way that dr. Holtzman described earlier All right, so I decide what am I willing to give up in order to get this pen now We can think in terms of apples we can think in terms of money. Let's just think in terms of money because that's what we normally do So I then determine subjectively what is this thing worth? Right as we have everyone doing this those that are supplying month those that are supplying pens those that are demanding pens Right, we have the interaction of supply and demand then determining the objective exchange value Or we'd call the price of the pen And so it all starts or we have some specific use for the good This then turns into the subjective value we place on the good in that use which then turns into the demand for and supply of that good Which then gives us the price? Money is a little bit different Because the reason that I want money is that I can buy things with it Right, I don't expect to use the thing directly Right, so I don't say oh, I like these dollars because I can put them on my wall But we may eventually get to the point that that is the way I should wallpaper things But that's not the reason that I value money I value money because I know other people value money Which puts us in a nasty circle, right? Because how do I know other people value money? Well, I've seen that money has purchasing power So the demand for money like demand for anything else. I determines the price of money or the purchasing power of money But the purchasing power of money has to be there for me to have any demand for money to start with Right, so we end up with this horrible circle, which logicians do not like as someone who considers himself more of a pure economist I don't care that much about about logic But you know, I'm sure there are people that are very concerned about this circle, right? Well, so how do we solve it? Now this is one of Mises's great insights And he says if we think about it, right, let's think back to the way we think about the origin of money And instead of reasoning forward right from barter into having a monetary economy Let's reason backward right from money back to barter Right, so let me say okay and go hard. You say that you want money because you see that money has a purchasing power What's really happening right is that you have a demand for money today and the demand for money today will help to determine the purchasing power of money today Right, but the demand for money today is not based on the purchasing power of money today It's based on what you saw the previous day That is I saw in the past that money had value and therefore I decided yes, I am willing to accept money now Okay, so it's not really a circle once we add the time dimension Instead my demand for money today is determined by the purchasing power of money yesterday Which then makes me form expectations that give me the demand for money today. All right, so we can step back Tied to the microphone, so I can't actually step back. So I'll move the timeline forward. All right, so yesterday All right, yesterday We had that demand for money determine the purchasing power of money But the demand for money yesterday was determined from the fact that I saw a purchasing power of money the day before yesterday Shift the timeline We can do this again and again and again and I have to do it a long long time because we've been using money a long time But where does this stop right? So now we've taken what looks like a circle We've changed it into this infinite regress going backward all the way to the big bang It seems but it doesn't right and that's the brilliance of mesas. He says it doesn't go back to the big bang It doesn't go back infinitely. It stops right there on that last day of barter Which tells us something about how money had to have originated right Money had to have had some kind of value in exchange before it was used as money Right, that is as we can think about the wheat example All right, the reason I was willing to accept wheat was because I knew wheat was valuable in exchange I was valuable in exchange the previous day not because people were using this money But because people bake bread right so that is in fact What we call the regression theorem that is we can regress the value of money back through time To win that money had to have been tied to some sort of useful commodity That did have some direct use that people valued This then suggests that it's going to be very difficult for us to say as a government Just print up a bunch of money right drop that out of a helicopter and tell people to start using this thing Like that's not going to work right people have absolutely no basis for determining how much of this they should ask in any exchange How much they should be willing To give up in any exchange, but there's no basis whatsoever for that with the result being there's no basis for a demand for money under this circumstance And as a result, we're going to see this utterly fail Okay, now let's finally turn to changes in the money supply On the first point I want to make is that there is no specifically optimal supply of money This is something that is news To many monetary theorists nowadays or you see lots of papers published, but what is the optimal money supply? Well, if you really think about it, there isn't any specific optimal money supply. Well, and here's why Money as money is a third type of good Now there are some goods we'd call consumer goods, which we can apply directly to our needs Right, so when I eat that steak that is directly satisfying my hunger It is a consumer good right the more steak we have the better because lots of people like steak and I like lots of steak Right, so the more steak we have the better up to some degree as long as it's a good the more the better And so consumer goods increasing the production of those things increasing the supply is beneficial Producer goods these are goods that are not directly useful, but nonetheless can be transformed into something that is directly useful Right, so here I think about that raw steak I'm probably going to rub many people the wrong way. I like my steak. Well done. I like to forget that it was ever an animal Right, so I like my steak. Well done. The raw steak is not going to cut it for me Right, we have to transform it through a process of cooking into something that I'm actually willing to consume Right, so it's a producer good. It's something that we then have to go through some steps of transformation But we can unequivocably say that more raw steaks are better Some of you may just eat them that way other people like me say it's a producer good Let's do some more process of transformation. It still makes me better off The more stuff that I have to do stuff with right the more stuff I end up with in the end If you give me lots of raw steaks or I can have a bigger barbecue I can eat more actually cooked steaks at the end of the day It's a producer goods the more the better right as long as it's something that is actually good Where I have a use for more of it right the more the better Money is different though It ends up any quantity of money is technically going to work now in order to prove this Let's imagine right two different economies operating side by side One of these economies is filled with clones of people from the other economy Presumably this happens sometime in the far future All right, so we have these two different economies operating side by side Each of the people is basically identical The only difference is that in one economy they have twice as much money as in the other economy Well, what is going to happen? I would suggest that it's sensible to believe that prices are just going to be twice as high In the economy with twice as much money, right? So instead of one dollar bills we trade two dollar bills And it's basically the same thing as is happening next door, right with prices just being half as much All right, so then producing more money doesn't really do much to help us In itself is not useful That is any particular quantity is not useful any amount of money is going to work Right as long as it can serve in this medium of exchange capacity now In reality, there's some exception to this right now if we're talking about fiat money What I just said is perfectly true right printing out more paper by itself is not really going to help anybody except for those few people That are actually wallpapering their walls using this as a consumer good at this point Nobody as far as I know in the united states is doing this except with pennies it ends up pennies make very good a very cheap flooring It's true. It's true check online their pictures and We're actually tempted to do that with some of our countertops it ends up anyway, right? So fiat money for the most part, right? It's just being used as money having more of it is not beneficial except for those people making countertops out of pennies Now there's an exception for commodity money. So what if we're using golden silver? Now having more golden silver coins in itself may not be useful But having more golden silver is after all golden silver isn't just used for coins We can also use gold and say jewelry also things that I'd be more interested in like electronic applications and the like Lots of gold used there right silver can be used In a lot of different capacities as well not just as coinage, right? So increasing the production of commodity monies may actually be valuable Not because we use it as money, but because it has other uses right that are in fact valuable the more we have So So we talked about these two economies, right? So the one economy Has half as much money as the other one the other one has twice as much as the first Now maybe tempting to say then that increasing the quantity of money say doubling it wouldn't really do anything We need to resist that temptation Right as Mises says we may you know line up these two examples But it's one thing to say that this is kind of the way we can imagine things working Another to say we can move from point a to point b that is we can double the quantity of money Without creating any kinds of disturbances along the way, right? So the first model right the one that kind of suggests we can just drop money into the economy with no real effects whatsoever Sometimes called the angel Gabriel model Right, so imagine the angel angel Gabriel blows his horn and immediately Every dollar turns into two whether it's whatever form that dollar happened to take whether it be in my wallet Which I left in my hotel room whether it be in my bank account or what have you right? We can also call this model the helicopter model which Ben Bernanke is very Famous for I guess he says we can imagine right we could fly around the economy drop money out of the Helicopter and we do it roughly in proportion with where money already is It's I guess you're dropping less money on the poor counties more money on the wealthy counties keeping everything in proportion And then we're just going to see prices rise But this isn't quite realistic um at the very least I Apparently the angel Gabriel for forgot me or helicopter ben forgot my house when he was dropping money out Right doesn't appear to be the way the things are actually working instead right money enters the economy at a specific place at a specific point in time As a result of this right it ends up that there may be benefits to increasing the to increasing the quantity of money For the person increasing the quantity of money right so now let's imagine Unlike the economy which we have let's say the monetary system There's counterfeiting involved in some significant way Right so somebody may be creating in their basement right billions of dollars. They're just printing off hundred dollar bills or something like that Can we really say that they're not made better off by doing this? Well that that feels like we're going too far It's one thing to say that society's whole is not better off Or we don't have more consumer and producer goods But if I now have a bunch of hundred dollar bills that I didn't have before And nobody else has a bunch of extra hundred dollar bills. I'm certainly made better off I now have more capacity to go out and buy stuff than other people would have just a day before Right so that then um creates a great benefit right for the money producer Right I as the counterfeiter in my basement. I'm not actually a counterfeiter for any treasury people watching I always run out of ink so I'm not a very good counterfeiter All right, so I don't actually counterfeit But if I were we can see would be enormously beneficial for me to be the one producing the money After all I can go out and I can spend that money Before prices have much room to change right after all it's a process by which people recognize the demand for goods is increased Add to that the fact that now I have relatively more money than everyone else So even if all the prices increased a little bit to adjust for The fact that I now have more money I still have more money relative to everyone else. That's still beneficial to me All right, so we end up with what we call canteen effects right there Right the person that first creates originates that money Benefits significantly as they then get to spend that money before it has lost much value Then this money ripples out right to the next kind of ring around that person right where I'm buying all these things from people around me Each of them gets a bunch of new money before prices have increased very much They would also benefit right it then goes to the ring where they're spending their money They also get a bunch of new money before prices have increased too much. They've started to go up a bit Before prices have increased too much. They do get some of this new money a significant share of it So they are also made better off Meanwhile, there are people way down at the end of the line Right that maybe never see this new money That maybe only see it after it has been spent time and time again Right and as a result they are made poor After all they've been watching prices go up go up go up as the amount of money they have has basically stayed the same Right they have not benefited at all from this Increase in money in fact they're made worse as now they can't afford as much as they used to so Sure the increase in the money supply doesn't benefit society as a whole But it sure benefits whoever's producing the money So is it any wonder then that the powers that be tend to take it upon themselves Right to take on this you know this great responsibility of increasing and managing the money supply It shouldn't be a shock at all. We can imagine in our economy, right? Who is the first producer? Well, you know in the in the u.s. It's a federal reserve Where's the next stop? Well, it's the banking system into a large degree nowadays the federal government Where's the next stop and on on down we go all right those of us that um do things like take out mortgages I decided to move myself further up in the line recently so take out a mortgage my house. Yeah That's beneficial to me because now I've put myself third in line instead of wherever I was before Right, so we end up redistributing things right toward wherever that money was produced at the harm of all of those that are further away from money production Okay, the last point that I'd like to discuss Is about hyperinflation I like to say there are two ways if you ever decide you want to destroy an economy Um, there are two ways to do it right one way is to adopt soviet style central planning All right, so adopt soviet style central planning and this is this creates a nice slow death for the economy Right because we know that central planners are not any good at managing economies, right? They're terrible at it for various reasons I'll let dr. Salerno talk about that in more detail. I'm later on All right, so over time we have these inefficiencies that build up and people Gradually get poorer and poorer capital is destroyed and we end up just destroying the economy over time Now if you like me, I'm very impatient about these kinds of things if I want to destroy an economy I want to do it fast, right In that case you use hyperinflation, right? So you increase the money supply to a great great degree to the point where money is basically worthless now Hyperinflation though is not an immediate thing There's a process involved because we know right from what we've said before that expectations play a significant role So what generally happens let's imagine now We have a very stable monetary economy where prices are basically stable over time Or we could imagine something like the united states nowadays We know that prices rise on average something like three percent a year between two and three percent a little bit lower than that recently But it's fairly low, right? It's not this rapid increase in prices for the most part All right, so then what happens if we increase the money supply In such a way that the money demand in a sense doesn't keep up with it Well naturally we're going to see a big decrease in the purchasing power of money because lots of prices are going to rise But how do people react to that in terms of their expectations? Well, I think much of the time if I'm watching the price of something and I see the price blip up right my immediate reaction is to say well It's just a blip, right and you can tell the microphone loves my peas. Yeah It's just a blip, right All right, so prices are going to come back down What does that then do all right if I expect prices are going to fall in the future Flip that around that means that I expect my money is going to be more valuable in the future Right like with anything if I think it's going to be more valuable in the future I want to hold more of it All right, so this increase in the money supply does lead to some increase in prices But at the same time right as people watch this happen They increase their demand for money as they really think it's a temporary thing Prices are going to come back down to a more reasonable more normal level And so what we'd expect to see is a very small drop in the purchasing power of money at first But it ends up that typically Certainly in cases of hyperinflation right governments don't stop there right they keep increasing the money supply Which means people keep observing day after day these increases in the in prices or these decreases in the purchasing power of money Now assuming that people are not total idiots, which I think is a fair assumption One that politicians often ignore People eventually notice saying Prices are not they didn't just blip up and then come back down right They've blipped up and continue to blip up and blip up and blip up and blip up and so on we go Prices are continuing to rise right Maybe I need to start thinking that prices are not going to fall. They're going to keep rising Which means my money over time is not going to become more valuable as prices come down to reasonable levels It's going to become less valuable as prices keep rising over time Well, then like with any asset if I expect it's going to lose value over time I don't want to hold so much of it right so the demand for money would expect to fall So now what's happening in this stage right now we are at the point where supply of money is still increasing It's been increasing the whole time, but expectations have flipped So now people no longer expect prices to fall back to normal they expect them to rise Demand for money is falling Increase the supply of a good decrease the demand for the good the value of the good is going to fall rapidly And that's exactly what we see in the second stage We see an increase in the rate of increasing in prices or the decrease in the purchasing power of money And so prices start rising very very rapidly. So people are going out buying whatever they want buying it as quickly as they possibly can Then we hit stage three right stage three is the point where people recognize that money is now no longer a reliable store of value Right that in fact the best thing they can do with money is get rid of it as soon as they possibly can And they don't necessarily care whether they get something they actually want to use in exchange We call this the flight to real values Or you're just trying to get something that's actually real and may hold on to some kind of value You definitely don't want to hold on to the money any longer than you have to And this often leads to really strange things happening in the economy I've heard stories. I believe it was about Ecuador When Ecuador went through a very serious hyperinflation several years ago Um It changed the way that the economy ran right so the people were paid twice a day Right I see you paid at your lunch hour and then people would run out with their paychecks Would buy whatever they could happen to buy within that hour So they didn't have to hold on to the money to the end of the day Because by the end of the day prices would have risen and that paycheck would have been worth less Right you get paid again at the end of the day You run out you buy whatever you can before the stores close because you don't want to hold on to that money overnight Because overnight prices are going to go up again and you're going to lose value in that money But so we end up with this flight to real real values the monetary system gets destroyed people stop using money I have here one of the more recent cases I've got very severe I don't have any american money with me, but I do have my zimbabwe dollars Yeah, um, I have here 180 trillion dollars I paid 15 american dollars for them on ebay a few years ago. Um, I suspect they'd be worth less now And that also included these sleeves right which Suggest a certain amount of irrationality because you kind of want the thing inside the sleeve to be more valuable than the sleeve But I don't think that's the case here Right, so how does this happen right? How does this happen that we have 180 trillion dollars that I can buy for 15 american dollars? They're virtually worthless while it ends up zeros are very cheap Right And this is true, right? I looked up before I came to give this lecture I looked it up this morning just to make sure that I wasn't just making things up It ends up it costs roughly five cents. It's just slightly less than that Um, it's I think 4.9 cents on average to print a dollar bill to print an american dollar bill Right, so that means basically on every single dollar bill that gets printed. There's a 95 right margin on that, right? So Yeah, the production of money it ends up is a very profitable thing Right, they have a ten dollar bill doesn't cost 50 cents. It doesn't cost 10 times as much It costs about twice as much. There are additional security features in it, right? So it's basically 10 or 11 cents if you're going to print a ten dollar bill $100 bill it ends up cost about 12 cents, right? Yeah, okay, so it doesn't cost 10 times as much to make that as to make the ten dollar bill Zeroes are cheap, right? It's very easy for us to add zeros to the money. And if we just keep doing that, right? We've seen where it leads, right? We can end up with 180 trillion dollars that are effectively worthless That as far as I know the only market for these would be people like me that want something they can show in a lecture about money It's no longer useful as money. I certainly would not try to buy something right using these Zimbabwe dollars All right, so then how can we recover from that? What then do we do if we face the situation right where we have destroyed the economy where we have taken that benefit that I mentioned at the beginning, right? Money binding society together by easing trade We've just taken money out of the picture trade becomes very difficult society disintegrates. How do we get around that? How do we prevent that from happening? That's obviously not desirable One thing we've seen historically and what it seems that economies will actually do We saw this in Zimbabwe. We saw it in Ecuador You adopt a different money But we live in an economy where there are multiple monies out there, right? So okay ours Zimbabwe dollars are worthless Well, let's use the american dollar. It's fairly trustworthy. Let's use the euro. It's reasonably trustworthy. Let's use the south african rand It's nearby and fairly trustworthy as well All right, so people they don't it ends up river back to barter necessarily They look for another thing that can function as money and then they adopt that Now this should naturally make us very cautious about anyone who suggests that we should Try to combine all of our efforts as a world economy, right? We should try to integrate our systems more by having just one single world fiat currency Fortunately, I have not heard these recommendations very much recently. Those seem to have faded But what would that mean, right? If we do have this world fiat currency We know that sometimes central banks make mistakes, right? Sometimes they do add too many zeros and they end up making the money worthless In our current economy, we can deal with that, right? We can adopt the dollar We can adopt something that is more stable in an economy where this is in fact the only thing that is available to us as a money What do we do? Well, I think we're stuck right going back to right the origin of money River to barter we find something that can possibly be used as money It will gradually be adopted by everyone Has money, right? It's for reasons like this that I think we should be somewhat supportive Of things like bitcoin, right bitcoin. Well, even if it isn't particularly widely adopted now It's actually shockingly widely adopted given what it is What can it do though? All right in the event that we have hyperinflation. It is standing there. It is ready to take over Right, right. There are already expectations about what it's worth, right? We already have some sense of it. It in effect is acting like the dollar did in Zimbabwe or the american dollar did in Zimbabwe Right so allowing for this diversity of different monies to exist Under the system we have I think may be a very good idea and a protection right for all of those benefits the money provides Okay, thank you very much