 I want to say, first, this is actually a very important year for me, because it was 15 years ago. I'm tempted to say just 15 years ago, but that shows my age. But I was a student here at Mises University, sitting here in this very room, listening to actually a lot of the same professors you're listening to. At that time, I know there was a very promising young professor by the name of Robert Murphy, who I think was introduced right around that year on the faculty. So you see a lot of these people are still around. Pretty much anybody older than Bob Murphy was here as well. So it's great honor to join the faculty and to be here standing on this side of the podium rather than on the side you're on. It's also great honor for me to give this particular lecture. I love giving the lecture on money, because in large part, I decided to become an economist, because I decided I'd rather study money than have any. Yeah. My wife doesn't like that joke very much. Strikes a little too close to home. But the reality is that more seriously, I guess, I find money to be an extremely important topic. Because I believe that we, as humans, are best when we can relate to each other peacefully. And for us to relate to each other peacefully, what does that take? It takes first, we have to understand the benefits of peaceful relationships between people. And that's largely what Dr. Darba was talking about in her previous lecture, that we can benefit from interacting in this peaceful manner, trading with each other. But a second thing that it takes is us having relatively low costs of relating to each other peacefully. And that's where I think money really comes in and plays an important role in enabling trade to happen, and therefore making it more obvious and easier for us to get the benefits of relating to each other peacefully. So I think if we want to have a peaceful world, which is a goal that I think is worth striving for, we need to understand the role that money plays in that. And money is kind of odd as a topic, and that it's horribly misunderstood. And there are reasons for that. When I look at this money that I have here, I managed to leave my wallet in the room when I left this morning. So the only money I have is in Bobway dollars. It's not immediately obvious why this thing should be useful. It turns out this one isn't particularly useful right now. But why anything that looks like this? Why is this useful? Things like cars, those are fairly obviously useful. We should have those around. So we end up with people that begin to deny that there's any benefit at all for us to having a monetary economy. I have people like the Zeitgeist movement or the Venus project, declaring that we can just rely on technology to produce all the stuff that we need. And we'll just live great. We don't need money and profit or getting in the way, creating all these negative motives. I would suggest this comes from a fundamental misunderstanding of the role that money plays because it's actually not so obvious. So in order to understand that, let's first consider the alternatives. So we know what the monetary economy looks like. That's the one we live in. What else could we do? We could have a society where we just don't trade at all. So no trade whatsoever. So what we would call an autarkic society. Each of us just producing for our own consumption. So what does that look like? Well, I would submit that there are two possibilities. One possibility would be Star Trek. If you watch Star Trek, the next generation, for example, you have these replicators. It's just a hole in the wall, right? You walk up to it. T. Earl Grey, hot. And you discover that in the future, French people have British accents. But you can also get T. Earl Grey hot. Just materializes. I guess we do some kind of nuclear physics with the oxygen, nitrogen, and the atmosphere. And bam, there's T. Wow, that sounds great. It also sounds like not at all the world we live in, nothing close to what we live in. Even 3D printing, I don't know that I would want to drink 3D printed T. This does not sound possible. So I think much more likely we'd end up with is a world full of poverty. Because the reality is that most of us just do not have the capability to produce the things that we need to consume ourselves. My favorite example here, and those who have heard this lecture before, know what's coming, is my garden update, right? One thing I like to do because I have some free time is I like to grow a garden in my backyard. It's not very big, right? But we just plant a few things and see what happens, is the idea. So I have a little strawberry patch, right? My strawberry patch. This year, we had a pretty good crop of strawberries. I think we got at least 12. None of them make it into the house because I have three children, right? So I take my six-year-old and four-year-old out to the backyard to play so they're not making more of a mess in the house. Oh, there's a strawberry. Son, it's not ready yet. It's only slightly pink. Oh, well. So I got to taste, I believe, half a strawberry this year. Then we also have another little patch where I'm growing cherry tomatoes. I have two cherry tomatoes that actually survived. Although I don't have any, those are the plants. We don't actually have cherry tomatoes yet. It's too early. I'm from Northern Ohio. Our planting season is just barely long enough that at the end of the season, I will get a cherry tomato or two off of these plants. That's it, right? We planted some radishes. Radishes have the great benefit. They grow pretty fast, right? But they have the detriment that I'm a terrible gardener and I grew them too close together, right? So I think we've gotten a total of a half-dozen radishes that are actually edible, right? We grew some peas or we got about a pot of peas. This is great. Now, I'm particularly proud this year, though, of two things, right? One, I have three apple trees in the backyard. They've finally matured to the point that I'm probably going to get a total of six apples off of them, assuming the bugs haven't eaten them during this week. I don't spray them. Again, I have kids and they're in the backyard by the apple trees. My wife won't let me spray them. So maybe six apples, maybe, right? Although the best thing this year are raspberries. The raspberries that I did not plant, I did not know they were there when we bought the house. They just kind of came up at the corner of the house and we've gotten pints and pints right off of this. Again, none of them making it into the house because, again, I have a four-year-old and six-year-old and they've decided that the best use for some of my tools is to be used as a shield to protect them from the thorns on the raspberry bushes so they can pick all the raspberries. Fortunately, though, I let the raspberry bushes grow tall so I can get some of them. I reach a little bit further in because I don't mind the prickles quite so much as my sons do and I'm a little bit taller than they are so I have had a few. This sounds pretty good. It's not bad for a garden. It's the kind of thing that I can grow in suburban Ohio. But how long could my family survive based on six radishes, a couple of cherry tomatoes that we'll get in a while, six apples, oh, what else? A handful of peas and a bunch of raspberries. Even a bunch of raspberries didn't make it into the house. We're talking about a very small quantity of food. Now, naturally, some people may say, well, Professor, if you just learn more about how to garden, you might be able to survive, maybe. But the great benefit to the monetary economy is that I don't have to. I can use this as just a hobby, a kind of a fun thing that I can do while I'm out watching my kids play in the yard. That's it. The monetary economy has allowed me to specialize in something else. So I don't have to worry about whether I can grow all my own food. And you might note, if I did have to grow all my own food, I picked horrible, horrible foods to grow because almost nothing I grow would actually keep into winter, and Ohio has winter. Those six radishes aren't gonna last very long. Anyway, so what I would likely have, I suggest, if we relied on autarky, is what we have had throughout most of human history, even though we didn't have autarky through a lot of it. And that's widespread poverty. People barely surviving. And that's even with a little bit of the division of labor. So I actually suggest that the grand majority of humans that are alive today would probably die if we decided, even given the technology we have today, we just decided no more trade. That by itself would kill a great many of us, including at least five people. I know of all of whom live in my house. So that being the case, you can see where I certainly see a benefit to us having an economy where we actually trade with each other. I would prefer survival to not surviving. So there is another alternative. We don't have to rely purely on self-sufficiency. We could potentially just try trading goods for goods. So we have this barter kind of system. That's possibility. The barter turns out runs into two significant issues. The first is what we call it, the problem of the double coincidence of wants. Now double coincidence of wants is something you always have to have for a trade to occur. What that means is that double coincidence of wants. Okay, let's break it down. Double two, so we have two people here. Coincidence, now this is not just, oh, it's a coincidence, it's coinciding. So coinciding of what, of wants. So this means you have two people, or wants coincide, that is, I want what you have, you want what I have. So for example, perhaps you've been growing pears, well I've been growing apples. I decide I actually like pears better than apples, but I'm better at growing apples. So I take some of my apples, I offer them to you for pears, you say yes, this is great, I like apples, and make some apple pie or something like that. We trade, because I want the pears you have, you want the apples I have. This sounds pretty good. But then we start thinking about other possible trades that could happen. Because we know that in reality, I do not make my living as a farmer, or is running this very, very small three-tree apple orchard in my backyard, rather I make my living as an economist. I teach economics, that's really what they pay me to do. So if I want to survive as an economist, what do I have to do? Well I have to find a farmer that wants economics lessons. Now I used to suggest that there is no such person based on my experience, but one of the great benefits of YouTube is that lots of people can watch this lecture, including farmers who want lessons in economics. So I actually got an email this past spring, here I'm willing to give this advertisement. If you happen to be in Maine, Orchard Ridge Farms sent me an email and the subject was farmers who want lessons in economics. All right, so I don't think I'm going to be making it up to Maine any time soon, but if you happen to, there might be a possibility there, okay. All right, so there may be farmers out there that want economics lessons, but it turns out none of them happen to be in Northeast Ohio where I live. I'm really waiting for that next email, because I'm actually hoping for it at this point. But the point being, it's very difficult for us to find this kind of matching if we're going to be so specialized as we are in our modern economy, where I can actually make a living teaching economics. It's incredible, this is even possible, because it's not something that is obviously useful. Almost as obviously useful as this. But we have gotten to the point where people can develop these preferences for these very odd things. People can say, yeah, I want to spend a week in Auburn, Alabama in July learning about economics. This sounds great. We can develop these preferences and we can pursue them. It's not amazing. And you can also find people like me that can specialize in providing this as well. It's just a great thing. And I suspect in a barter system, it would be an extremely risky thing for me to try to specialize in economics lessons. So what would I do instead? I'd find something else where I could be more secure in knowing that people probably want it. I might actually plant some more apple trees in my backyard, try to weed the strawberry bed a little bit better, that kind of thing, because people need food. At worst, I eat it myself or watch my sons eat it. So we'd have to simplify. We start thinking about the basic things that people want and would be willing to trade for. Because this double coincidence of wants is something that I have to be able to get from going to exchange. So I need to be very confident that the people that I'm going to exchange with are going to want what I have. So that'll change the things that I produce to have what they want. Turns out the monetary system solves this problem. Because everybody wants money. I want money. If you don't want your money, I'm willing to solve that problem for you. Well, everybody would like to have some more money. Now, whether we're willing to do what it takes to get it is another question. Well, we don't have to negotiate about the form of payment. I'm happy to accept dollars. I'll happily accept dollars for anything that I happen to provide for you. That's fine, as long as we negotiate the correct number of dollars, that's it. We don't have to worry about the form of payment at this point. The monetary system helps to solve that. Another way that we can put this is that the monetary system decreases the transaction cost, or the search cost. A lot of the cost involved with trade over the Miranda Barter system is finding that person who wants the thing you have and also happens to have the thing you want. That's a very time-consuming process if we're outside of an extremely simple economy. So if we want to have a developed economy like we do have and want to have it actually work, having some kind of common medium of exchange that basically everyone wants is going to help to solve this problem. A second issue that can arise potentially in a Barter system is the problem of divisibility. There are a number of goods that kind of have a natural unit, and if you try to go below that unit, you fundamentally change the nature of a good. So for example, I like to say two halves of a goat are not the same as one goat. There's a fundamental difference right between the two, which then creates an issue if I happen to be a goat herder and I want to get things. So I want to get some flour or something like that. I'm gonna end up with a lot of flour for that goat in all likelihood, unless I can divide that goat in half at which point the whole lost a substantial amount of value. Two halves of a goat are substantially different than the whole goat. So this divisibility issue that can arise, which if we have the right form of money, we can get around. So let's turn then, I think we're kind of maybe getting a sense of the types of things that money is going to help us with. So let's be more precise. First, defining what money is. Dr. Robot already did this, may as well repeat it, that is money is the commonly accepted or generally accepted medium of exchange. There's nothing inherent about this thing that would or would not make it money. Similarly, if it was a US dollar, there's nothing inherent about it that makes it money is the fact that it is generally accepted in exchange as a medium of exchange. Now what do we mean by a medium of exchange? Medium, what is medium? Well, my six-year-old understands what medium is. Medium is between things. There's hot, cold, and medium. Medium is in between. So medium of exchange, what is it? Well, it stands between two sides of the exchange. So on the one hand, I'm providing economics lessons. On the other hand, what I'd really like to have is shelter and food. But I don't trade these directly for one another. I do not offer economics lessons directly for food, for housing, these kinds of things. Rather, I offer my labor providing these economics lessons in exchange for money. Money then stands in between, or is it between the two sides of the exchange, and then I go out and spend the money to pay my mortgage to buy food and what have you. So it's a medium of exchange, stands between the two sides of this exchange. The original beginning and the final end. So we understand now that money is potentially useful. It helps us to avoid the poverty of autarky and also the limits that we would face under a barter system. But it's one thing to recognize that something is useful, and another thing to describe how it can actually happen. So we can recognize that elevators are useful, but that's different than understanding how you can build one. So how is it that money would arise? Even if we understand that it is a useful thing, how does money arise in the economy? Well, it all starts with somebody having the stroke of brilliance, right? So we go all the way back, we imagine a barter economy, things are relatively simple, right? And somebody decides that they're providing, say shoes or something like that, right? And they would really like to get a horse for transportation, right? The problem is that they can't find, right, somebody that raises horses that also wants shoes at the moment. All right, so what do they do? So, well, I don't particularly want bread, for example, I'm gluten intolerant. People are very aware of this in a very primitive economy. We know gluten intolerance, I'm sure. So, I'm gluten intolerant, I can't eat the bread, it seems to make me sick or something like that, but on the other hand, I know lots of people like bread. All right, so they have this brilliant idea that it might be worthwhile for them to go out, exchange their shoes for bread, and then to take that bread and see if they can find somebody who raises horses that also wants bread. They expect this will be a little bit easier because more people want bread than shoes, not at any particular point in time, right? At that point, a medium of exchange has been born, right? As they have now decided that there's some good in this example, bread, that they're not directly trading for, they're not directly trading that away, that's not the thing they originated with, they're simply using it as a medium of exchange, standing between the two sides, the ultimate beginning and the ultimate end of the exchange for this person. So, someone has this stroke of brilliance and suddenly decides that they're willing to take bread in fact basically all the time because they find out it's very easy for them to get rid of bread. They figured this out, and they've reasoned their way through it. What does that do then? Well, now this person is someone that previously was not interested in bread, they couldn't eat it, but now is willing to accept it anyway. So bread just became more acceptable, which makes it all the more likely, all the more likely someone else is going to notice. I don't want bread myself, but lots of people do. In fact, one more person than before wants bread. Maybe I should start accepting it. So this idea of using this good and actually specifically this good, as the meat of exchange begins to spread right through the economy, making the good more and more acceptable, more and more likely to be noticed that it's acceptable until it finally becomes generally acceptable. And we would call it money at that point. Now, you may notice there is a certain vagueness, generally acceptable. At what point is that? Is it 75% of the economy? 80% of the economy? 82.4% of the economy? Take a deep breath. We're not going to define that. It's just, it's something where there's going to be natural vagueness to this. It's commonly accepted. Is there a reasonable expectation if you have this good and you offer it to someone? They're not going to say, no, I don't want that good at all. Is that a reasonable expectation is really the question. So that's how money would expect to arise. Somebody has this entrepreneurial insight. They can take a good they don't want because they can get rid of it fairly easily. And this insight spreads throughout the economy. This then gives us the idea of where money demand comes from. People demand money. That is, we want to hold money because we can get rid of it easily. We know that others will accept it. It turns out this is an extremely important insight that Mises Slater pointed out in what he was called the regression theorem. So the question is, how do we explain the demand for money? If we believe that money is, this generally accepted medium of exchange, why do people want it? Well, they want it because it's accepted as a medium of exchange. I have a demand for money because it has value in exchange. But how do we determine the value of something in exchange? Okay, I think back to Dr. Herbner. You have the supply and the demand for this particular good, the interactions between the buyers and the sellers of this good, then arise market prices. The value in exchange. So you have to have a demand for the good for it to have a value in exchange. But for money, the demand for that good came from the fact that it has a value in exchange. So you have circular reasoning. This has been dubbed the Austrian circle. Well, Mises broke the Austrian circle because he said, no, we forget that time is a thing. Time actually exists. The reason that I am willing to accept dollars today is that I observed that they had a value yesterday. Well, the value yesterday is not based on the demand today. It's based on the demand yesterday. Okay, so we go back then. So the demand yesterday, where did that come from? The fact that we observed that it had a value the previous day. So two days ago, there was a value attached to money. We observed that, that then created a demand for money the next day, which is yesterday from today's point. So we can reason back through time. Now, at first we say, okay, so it's not quite circular once we add the time dimension, but it doesn't seem to help that much because we're just reasoning back one day to the previous. Value today because of demand today, demand today because of value yesterday, because of demand yesterday, because of value the day before, okay, where does this end? Well, ultimately it ends with that story we just told. That one person in the world of barter where we're exchanging goods because they have some kind of direct use value. Bread is actually useful, flour is actually useful, shoes are useful. We're exchanging goods for goods because I actually want specifically the good that you provide. We have that last day of barter where we already have a value in exchange for the good that eventually becomes money. So this value did not come from nowhere. It came from the fact that there is actually a value attached to that good in use. Now, we use this as an important insight because it tells us that we cannot start with something like this. Where some arbitrary person starts printing numbers on paper and declares that we should start exchanging with these things. Because as market participants we have no idea how to interpret this. Okay, so this is 10 trillion Zimbabwe dollars. What is, is that a pair of shoes that I should be able to get for that? Is that 15, I don't know, 15 quarts of strawberries, I don't know. We don't have any context for that. So it has to be something that already has a pre-established value in trade in the exchange of, in barter exchange, right? So that being the case, it tells us that originally money has to have been some kind of commodity. Something that had some direct use that people wanted it. Now we know over time, we have worked to this point where you can notice the Zimbabwe dollars are actually far more beautiful than American. It's not obvious what the direct use value is of this. How we got there, we'll get there. So it turns out, if we look historically, there's this process of money switching. It turns out the first thing that the market chooses as a money is not necessarily the best thing. That first entrepreneur that has an idea is not necessarily the person with the best idea. Fast ideas and good ideas are not always the same thing. So when we look historically, what we know is that fairly early on, it seems like cattle was used as money. And you can see a reasonable, there's a reasonable justification for this. One of the things you need to do with money is transport it to wherever you're going to be doing exchanges. Cattle has this great property that it has legs. So as long as you can keep them moving the right direction, which is a bit of work, keep them moving the right direction, you can get your cattle to market. So that's kind of a nice thing. But it turns out cattle has serious problems, especially the divisibility problem. Three quarters of a cow is obviously not the same as a whole cow, nor are four quarters of a cow the same as a whole cow. We can't really divide the thing. These are really big, bulky things. It limits the types of transactions, the size of transactions we want to do. So over time, we learn that cattle may not be the best money. So somebody else says, well, everybody else is using cattle, so I'll use cattle, but I think I'd also maybe like to use grain. Grain has kind of this nice property that it's not that hard to transport. You can put it into sacks and what have you. Put the sacks onto a cart, have the cattle take the cart. That's nice. You can maybe direct that a little bit more easily. And it's also much more divisible. So I can take this sack of grain, I can divide it up into very small amounts. And I can thereby do much smaller transactions. So we know, based on the evidence we have, there was this transition that went on. People moving from cattle to using grain instead. Now, once one person has this insight that they would rather use grain, other people start to catch on. So we see this switching. Moving from cattle, which we still have, obviously, we still use it in its direct use, but it falls out of monetary use as people begin to adopt grain instead. Now over time, we move away from grain right toward the precious metals, things like silver and gold. There's one problem we have with grain is that it stores reasonably well. But it doesn't store nearly as well as things like gold and silver. Gold and silver will make it between market days without any problem at all. Even if that market day happens to be once a year, not a problem if I have gold and silver. With grain, there are rats, there's rot that can cause problems. So we start moving away because I need to make it between market days. We also find out that metals have this nice property that are extremely valuable even in small quantities. So I don't have to have an entire load of, an entire cart load of grain. Not just a few coins is going to do. This makes it much easier for me to travel. It makes it perhaps much more secure as I can hide coins in my pocket. For example, I have not today. I left them all in my room. We all make mistakes. They're relatively easy to hide. That cart of grain, not so easy to hide. So it makes it more likely I might actually make it to the market. We'll get hijacked on the way. So we find that they're nice properties to things like precious metals. And that is where we've seen the market move. Whenever the market is left to choose what the money is going to be, we've tended to see a move toward things like precious metals. Turns out precious metals also have a number of other great properties. They're extremely valuable for their size and weight. That's nice. That makes them very portable. It also turns out they're very fungible. That is to say one unit is basically the same as any other. So as long as you control for quality, it doesn't matter whether I have this ounce of gold or that ounce of gold. I'm gonna just put the two together, not a big deal. This is not true for cattle. Any two cows can be remarkably different from one another, depending on things like age, size, and so on. Two ounces of gold, basically the same. So that's kind of nice. It also has mentioned durability as being a nice property. It's also very easy to divide and then undivided, which I don't think is an actual word, but I think you might get my meaning. So I can actually take a silver or gold coin, cut it up into eight pieces, and then mold those pieces back together without really losing much in the process. So it's very easy to divide. If I want to do a small exchange and if I want to do a large exchange, put those pieces back together without any problems. As this makes, it turns out, metals are very good money. So is there anything else we can do to perhaps improve on that? Well, it turns out we did see a move away from just these physical monetary metals, using those metals directly, to the rise of what we call money substitutes, which is something Dr. Herbner is going to talk more about in his lecture on fractional reserve banking, but I want to introduce the idea here. So the idea of a money substitute is that rather than trading you the coin itself, I trade you some claim to this coin. So for example, there might be somebody who'd specialize in providing a very secure place for me to store my gold coins, because I don't want people breaking into my house, taking all of my gold and silver. So I put it someplace more secure, where they have guards and what have you, perhaps safes and so on. They'll keep this safe, and then they issue me a certificate saying you have claim to however much gold you happen to put in. Well, then what I could do, as long as people trust the certificate, as long as the certificate is as good as the gold that is supposed to be backing it, people can just accept that. And it turns out these certificates have some very nice properties. They in fact have an even higher value to weight ratio, because they're as good as the gold, but paper is lighter than the gold itself. Also turns out a huge benefit is that they're quieter. Now, if you don't understand why being quiet is a benefit, you don't have children. But more seriously, when I'm on my way to market, I might try to keep my gold coins from banging against each other. This is hard to do, but I'm not so worried about two pieces of paper rubbing against each other. That's not going to alert anybody that wants to rob me along the highway, that I'm carrying money. You can hear the jingle of gold and silver coins. So there's actually a great security advantage if we have these certificates. You also have the nice benefit that you can do very large transactions with certificates. Just write a large number on there because I put a large amount in the bank as long as people trust it. This is going to work and it was going to undertake very large transactions very easily. Also very small transactions. We could in fact write a number on here that's extremely small. This is one one hundredth of an ounce of gold. Now you probably would not be able to exchange the certificate by itself for the gold, but you get a hundred of these certificates and you can get that ounce. That allows them for more divisibility so we can both scale down and scale up through the use of money certificates. This is very nice. So there are all kinds of benefits to providing and using these money substitutes. So how we got then from there to here, which I'll allow Dr. Herbner to tell part of this story, is that government got involved and broke the link between the certificates that are supposed to be backed by the physical currency, the metal right there and the metal itself. Over time we saw that development happen. So I'm not going to go into great detail on what happened there, but that is how it is that we can actually have paper money that does have value, or recognize value in exchange, because it was originally tied to gold, which does actually have direct use values. My wife assures me that gold does have direct use values. One of notation is important. We also know it has been historically very important religiously. Lots of religions attach significance to the precious metals, specifically gold and silver. So we have something that did have commodity value. Money was based on that. Then we had this paper that was attached to it, break the link, people are used to the paper. So we continue to use that. So we have some idea where we started, how we got to where we are. Now if we had that market economy, how does money production work? Because this is one of the things that I think we as people that would advocate having an actually market based money tend to get slammed on a lot. Oh well, how is it even possible that the market could potentially produce money? We produce shoes and we do okay. In our market based system, we all seem to eat fairly well. Why can't we handle money? Let's get into the details of how money production would work. So let's suppose that people decide that we want to hold more money. For whatever reason. Perhaps we're feeling very uncertain about the future and I know that money is a generally accepted means of exchange, it's going to keep my possibilities open in the future so I'd like to hold more of that and I'm willing to give up some consumption right now in order to hold more money. So what happens? Naturally, if this is a widespread phenomenon, there's an increase in the demand for money. Which means people are holding onto money for longer, we're not spending it quite so easily and we're more eager to provide, say our labor to sell off various goods that we have and so on in order to get that money. If we flip that around, what does that mean for the demand of supply for goods? People are supplying goods to try to get the money in exchange and the demand for goods has been pushed down as we're trying to hold on to our money rather than spend it. So we see a general drop in prices for most goods as people are wanting to hold money instead. The flip side of this is that money is now much more valuable. I can buy more goods with any particular ounce of gold or ounce of silver than I could before as in money terms prices have dropped. This is nice. Now what does this mean for production though? So if I'm a producer of money, I've just seen that all of my costs of producing, say gold coins have fallen. I can get labor more cheaply, for example. I can get the presses more cheaply in order to mint these coins and so on. Okay, that means it's going to be more profitable for me to go out and produce more of whatever the money happens to be. So in response to this increase in demand, we'd expect entrepreneurs to recognize this profit opportunity and then to seize it. Are they going to start producing more of what people want? And this is the way we expect most goods are going to work in terms of production. People want more of the good, that drives up the value of that good relative to other goods. People see this profit opportunity, produce more of that good and seize it. So we'd expect money to operate exactly the same way and to do so very naturally just based on the entrepreneurial insights that money producers would have. As they notice that people want the good they're producing and want it in a way that makes it more profitable for them to produce it. And so in some ways money is special. In other ways, money is not at all special. In production, money acts like anything else if we are based on a market economy. Now this is very different from the economy in which we live now. We don't have this market-based money. Instead, we have money that is controlled by central banks. So the fiat money, how will this production happen? It's a matter of policy. It's really up to nowadays Jerome Powell and his friends at the Federal Reserve decide how many dollars are we going to produce? In this case, they're trying to use the number of dollars to manipulate what interest rates are, but they're making ultimately the decision. How many dollars are we going to produce and let out there into the economy through the banking system? It's not obvious that they're going to respond to money demand increasing or decreasing by producing more or less money. Maybe they will, maybe they won't. It's not so obvious that they have the incentive to any of the case. Now, when we talk about these changes then in money supply, it can be very tempting for us to just in some sense look at the end result. So is it valuable for us to have more money around when we're talking about paper money like this? Well, the typical answer would say, well, not really, because if we double the amount of money supply, what would we expect to happen? Prices are basically going to double. Prices basically double and we have twice as much money. I'm no better off. I buy the same stuff as before. I have twice as much money. My income is twice as high, but everything costs twice as much. So it doesn't seem like there's any benefit whatsoever to increasing or decreasing the money supply. But what if we get down to the individual level? Is there a benefit if I was allowed to just start producing dollars? Would there be a benefit to me of printing off billions of dollars in my garage? I suspect the answer is yes. Because that increase in prices is not immediate. It's not even. I can print off this billion dollars if it all goes into my pocket. I'm going to be substantially better off. My mortgage will get paid off. I'm going to be able to buy all the strawberries my kids want to eat, almost. I will get a substantial benefit and I can go out and I can buy stuff before prices have increased. This is what we would call a canteone effect. That is that we recognize that money comes into the economy at a specific point and then it spreads out from there, which in turn changes the relative prices of goods. So those that get the money first are the first ones to spend it. They can actually benefit. The things that they spend the money on will find increases in prices. That means that people that sell those goods will also benefit as the good that they sell just increased in price before most goods in the economy. So they would also get a benefit. Meanwhile, the poor person at the end of the line, that's the last one to get that money, watches the prices of everything else, increase, well the amount of money they have does not. So they are made poor. So while we know that we look at the total amount of wealth, having more money is not beneficial, but creating that money is beneficial for the one doing the creating. And it's to the detriment then of those at the end of the line. So when we look at, say, how money enters our economy, who is it that gets the money first? See, well the Federal Reserve creates it. A lot of that money ends up nowadays going to the federal government. They lend it to them so they can spend it. So they could potentially benefit from money creation as well as the banking system. Also is the first in line to get this money. And then the people that would borrow this money from the banking system. So people that are taking out mortgages to buy houses, people that are taking out student loans, people that are paid by people that are taking out student loans. I actually like increases in money from a personal career standpoint. A lot of my students have loans. So these are the people that will be at the front of the line. And you look in any major city. Look at the skyscrapers. How many of them are banks? Generally at least one. I've been to a lot of medium-sized cities and there's always a bank. Banks' name at the top of one of these skyscrapers, often more than one. If it's not a bank, it might be an insurance company or somebody else very closely connected with the financial system. So we can see a lot of that wealth is being created by this redistribution of how money is entering our economy. Now I wanna then, before we have to close, deal with where things go really, really wrong. There's a reason that I brought my Zimbabwe dollars. I was not planning to spend these in the bookstore. Kind of wonder what I'd get if I did, but anyway. So what about when things go really, really wrong? So it turns out that when we have a fiat system where we no longer have to worry about the fact that our paper money is backed by some kind of metal that might have to redeem the paper money for, that changes the calculus of money production and its profitability. I just looked up, as I was preparing this lecture, the cost of producing various American currency. It turns out a $1 bill costs 5.6 cents to produce. Which means you're looking at a profit margin of about 94%, between 94 and 95% profit margin every time you print a dollar bill. A $10 bill costs 11 cents to produce. 99.8% is that, no, no, my math is wrong. I'm an Austrian. 98% okay, so like a 98% profit margin. I'm really thinking about repurposing my printer. $20 bills, I thought this was fascinating, okay. 11 cents for a $10 bill, 10.8 cents for a $20 bill. The fact that $10 bills are still being printed proves that we do not have profit maximization going on in our monetary production. So 10.8 cents for a $20 bill. What does that mean? That means it's going to continue to be profitable to produce these $20 bills till they lose something like what? 90-something percent of their value, right. Wow, so what can happen? Actually I have $180 trillion up here. But we know, in the extreme case, what happens? Now historically, we know that hyperinflation, or this case where we have this enormous increase in prices driven by an enormous increase in the money supply, and like anything else, right, on production money's not that different with supply and demand, money's not that different. Increase the supply a lot, you're gonna lose a lot of the value for anything, right. Also true for money, right. So what happens? We often find that governments are into trouble over their finances, right. They want to spend a lot, because spending is very popular, right. People love welfare programs, because it makes them feel good, right. People love, at least in the US, we love getting involved in wars for some reason. I don't know exactly why, it makes us feel patriotic or something, right. So we love getting involved in these extremely expensive things, right. The problem is that if we fund them by taxes, right. Taxes are outrageously unpopular. Nobody wants to be the person paying the taxes, right. So we love taxing the 1% because 99% of us aren't in it. That's it, right. So taxes are outrageously unpopular if we're going to actually try to raise the money that we need in order to fund these enormously expensive programs. So what are the other options? Well, we can borrow, and that can work for a while, as long as people trust you might pay them back. In the US, we've been relatively fortunate that people seem to trust we're going to pay them back and we have a good history of that. But eventually you'll run out of that, right. People begin to realize that you're in fact never running a surplus. They're continuously having to borrow more and more and more to fund these programs. These are apparently not self-funding, right. This is not a profitable way for me to invest for the future. So eventually borrowing runs out. Then what do you do? Well, you take control of money production. So you have the central bank, right. Produce a lot of money that you can go out and spend. This is brilliant, right. Because you're not having to tax anybody, you're not relying on people trusting you to pay them back, right. So let's produce a lot of money to fund all these programs we want to fund. Of course, as we do this, the supply of money went up and it has lost some value. Now we can break down hyperinflation into three stages. It's in the first stage. We have this increase in money supply. Historically, this has been generally to fund government deficits. Governments, you know, not bringing up in taxes so we just print the difference. So if an increase in the money supply that would tend to drive down the value of money. But there's a second thing that tends to happen in this first phase. That is that people notice, right. The value of money is dropping. Flip side of that, right. Is that the prices of most goods are increasing. As we notice this, I think this is kind of weird. But we know the way prices work. Typically, what goes up must come down, right. So, all right, today gas is really expensive. I'm gonna hold off for tomorrow. It'll probably come back down a few cents, right. So we see people try to cut back on their spending, flip side of this. They're holding on to their money for longer. So an increase in the supply of money. At the same time, there's a somewhat offsetting increase in the demand for money. So money doesn't lose value really quickly in that first stage. There's a little bit of demand for it. But eventually people realize this is a continuous thing, right. That money is losing value, perhaps slowly, but it's continuously losing value over time. That means it doesn't actually make sense, right. For them to hold onto their money and wait for prices to drop back down to normal. Rather, I want to spend the money now before prices rise even more as I know they will do in the future. So then in the second stage, we still have these deficits we have to fund, right. More supply of money is coming out there into the economy. But now people don't believe the money is going to regain the lost value. They believe it's going to continue to lose value and perhaps do so faster. As a result, people begin to divest themselves of their monetary holdings. So demand for money falls. The demand for something falls while the supply is increasing, right. That's a real strong reason for it to lose value relatively quickly. And that is exactly what happens in the second stage. We see a rapid decrease in the value of money. Flip side of that. Huge increases in prices for most goods. Then we enter the third stage. The third stage is where people realize that money is losing its value so, so quickly. It's just not worth holding at all, right. We have the flight to real values. This is sometimes called, right. So I'm willing now to get rid of money just to get anything else, right. Because by itself, right. This is actually a very beautiful piece of paper. But I don't know that I'd want to spend 10 trillion dollars for it, right. Right, so I want to get rid of it. I'd rather have another toaster. I guess I'm actually the toaster that I have might break or something. I'd rather have another pair of shoes because I run through shoes really fast. I might, I'd rather have more toys for my kids because sure, they don't have enough toys already. So we just want to get rid of the money as fast as we possibly can. And as that is happening, we have basically the demand for money has fallen virtually to zero. People don't want to hold it at all, right. At which point it basically loses all of its value and it can, it stops being able to function as a medium of exchange. People are unwilling to take it anymore. That's the point where we've destroyed the monetary system, right. And we have thereby lost all the benefits that it has provided, right. So just a few takeaways now that I see that I'm out of time. First, remember the big point, right. And that is that money is easing trade between people. It's making it easier for us to do exchange. Therefore easier for us to interact with each other in a peaceable way, right. Money does not require government. In fact, it has to arise on the market for it to have any value in exchange whatsoever. And then finally, the government mismanagement of money can completely destroy it. And thereby lose us a great deal of benefit. A couple of books that I'll recommend. One, if you want to read more about this. The Mystery of Banking by Murray Rothbard is very good. It's very easy to understand. I've used that as a textbook before. Also, The Theory of Money and Credit by Mises is very good, but I will say Mises is a challenging read, right. So if you want to read The Theory of Money and Credit, I highly recommend reading it with a study guide. There's a study guide written by a very brilliant economist. You know, it wasn't me. I mean, I can use the qualifier. Robert Murphy wrote that study guide, right. So I highly recommend reading it alongside that. Or it's very easy to get some basic stuff that he does, they're wrong. Well, thank you very much. Thank you.