 Okay, I hope everybody's enjoying their first day of the best week of the year. I'm so happy to be back in Auburn at the Mesa Institute with all you fine people. So I get to talk about money, and it turns out money is a really important topic, not just for us in life that we want money in our wallet, but it's an important topic. It's crucial in Austrian economics and it's central and that's why we have it on the first day of the week, first day of the conference. In Austrian economics we say that analysis is done in money prices. Calculation, which we're going to be talking about tomorrow and later in the week, calculations only possible with money prices and really with money and extending beyond with what Professor Rittenauer said money and division of labor is really what allows civilization to develop. If not for the Austrians, we would still have the state theory of money. That money is what the sovereign state said it is and that's that the currency has value just because of the sovereign's decree. But in 1892 we had Minger's theory of money and told the story of how money originates, which I'll just be going through in a little bit. In 1912 Mises expanded on that in the regression theorem in his first book, The Theory of Money and Credit. Of course we have other great works on money. Of course what has government done to our money by Rothbard and my favorite is actually the mystery of banking. So money is an important topic that's for the Austrians. That's why we have it on our very first day. An important topic for us to get into so that we can then have the ground laid for what we're going to do the rest of the week. So by the end of the by the end of this week you'll be well versed in hopefully understanding why we're having this inflation that we're price inflation that we're experiencing now. You know it's not because of corporate greed which we're hearing about. It's not because of climate change. It's not even because of the Swifties. It's gonna be about something we'll understand why we'll understand why we're having while we're experiencing this price inflation now. Okay so let's talk about let's start with who needs money. We all raise our hand we all need money right. If we start with Robinson Crusoe alone on the island right he has no need for money. Robinson Crusoe he can't eat gold coins even if we had if he was you know living under a gold standard he would have no reason for having gold coins that's not gonna help him survive any better. There's no shopping mall on this island where he's by himself for him to go spend his gold coins. Even when he meets Friday somebody else who shows up where he discovers somebody else on the island they really have no need for money to trade their fish and berries because they can just do that on the basis of their subjective values for those goods. But when society expands beyond just a few families then the stage is set for the emergence of money. So remember voluntary exchange happens because the two parties expect to do what they expect to benefit. They expect to be better off from the exchange and from Professor Rittenauer's lecture these exchanges come from this need or want to exchange comes from this variety this big difference that we have an aptitude also and our skills and abilities and also even the locations where we are and from that natural fact comes comes this impetus for exchange and with specialization exchange the division of labor we each develop our best skill where we have our proficiency and each region developed its own particular resources and so we found that compared to producing only for our own consumption and remaining self-sufficient we found that we're much better off when we when we specialize we produce a limited number of goods in abundance compared to what we would consume we produce more than we'll consume to exchange it with others and we are much better off doing that getting most what we consume through exchange rather than self sufficiently living self sufficiently and nearly starving and probably going naked or close to naked right so we have a higher standard of living through specialization exchange but exchange for of goods for goods or what we call barter or direct exchange is hardly any better than remaining self-sufficient right that's really close to being self-sufficient because of the two basic problems of the two basic problems of barter some goods are indivisible it's very difficult to divide them up into smaller exchangeable units and then also the double coincidence of what wants requirements so this year in the spring or youngest some of you may have met Bonnie's a student here this week but this year Bonnie turned 16 and started driving so the mama taxi service after 26 years as close-up shop so I handed down my car to Bonnie and I went to buy myself a new car so here I am in my my new car pretty a little silver Atlas and it turns out cars are really pretty expensive it is shocking but let's imagine me we're talking about barter let's imagine me buying a car under conditions of barter what can I offer in exchange well I have specialized where hopefully I am proficient in economics lectures so I teach economics at Baylor University and not surprisingly I'm very popular and my classes are in high demand no pun intended my economics class are in high demand and my class stories have long waiting list to get in actually here's the the registrar has a picture these are students who are they were camped out waiting for a spot in in my class so naturally when I'm bartering with my economics lectures I have a lot to bring to the table right however as amazing as my lectures are what if the car is more valuable what if the car is even twice as valuable in exchange as my economics lectures what is the Waco Volkswagen dealer going to do can he just sell me half a car if we think about the indivisible of goods can you sell me half a car and if so which half would I want do I want the front half there the front do I want the front half maybe I want maybe just so I can get around maybe I want the driver side and not the passenger side or what if the half of the car is the half without the engine and then we just run on Peter Power so that could work right so then I could say okay here's my course in here's my course and money and they give me this car so trading goods that are not easily divisible is going to be a hindrance to trade under barter but even when goods are divisible into smaller units though it's very difficult for two exchangers to find each other right sometimes because this double coincidence of wants requirement that I have to have what you want I'm sorry yeah I have to have what you want and you have to have what I want at the same time in the same place where we can exchange so for example if I have some really incredibly passionate and eloquent economics lectures right so people are hanging on my every word and the Volkswagen dealer has this really beautiful mom mobile right that I think I just really want that how are we going to get together if the Volkswagen dealer isn't interested in learning economics but wants to learn Taekwondo then we have we the exchange doesn't take place I can't teach Taekwondo but don't mess with me okay so the survival of my for the survival of my economics professor colleagues I am glad that we don't live under barter anymore because I worry about us trying to eke out an existence based on just trading our economics lectures okay so one more problem of barter besides the indivisibility of goods and the double coincidence of wants requirement is the number of prices if every good trades against every other good they're gonna have to have a price for my economics lectures or for the or the Volkswagen Atlas in every other good right so for every good would have an array of prices not just one money price but an array of prices in a barter economy with only 1000 goods there would be almost half a million prices okay for a sense of scale looked it up average Walmart carries over 120,000 good so a number imagine the number of prices that we would need without without money so Mises pointed out that as division of labor expands more and more and it gets finer and finer money becomes even more necessary so it's clear that any sort of developed economy is really going to be impossible under direct exchange or barter so under indirect exchange we have indirect exchange you sell your good not specifically for the good that you need not the good that you're going for right you sell it for another good that you can then in turn exchange it for the good that you want and at first this seems like gosh you're just adding extra clunky steps in there you're making this harder money instead of easier right why can't I just trade my economics lectures for the car right why can't I do that well it turns out this is really not more difficult it's simpler it simplifies everything and it actually allows us to go beyond self-sufficiency that we were close to being stuck close to being stuck with self-sufficiency before before indirect exchange so under barter we go back to trading goods for goods we can imagine that goods would have different degrees of saleability right some goods are easier to sell to sell in the market than than others and the more saleable a good the more easily its owner can find somebody exchange with in the market we can it's easier for them to find somebody will make an exchange for them at some price okay so someone who's selling rice taking rice to the market to exchange in barter they're going to have an easier time finding trading partners then I would if I'm taking my pool vacuum to the market and I'm looking for somebody who needs a pool vacuum just for my own show just for my own reference for later on to win an argument do people know what a pool vacuum is by show of hands okay Peter okay do you see that all right Peter said they're not gonna know what that is okay so anyway if with a pool vacuum I'll have a more difficult time finding trading partners but of course even that is not impossible especially if I'm willing to discount my pool vacuum I'm willing to accept a much lower price in exchange than what I may have been hoping for but clearly a pool vacuum is less saleable than say rice the person with rice will have an easier time that finding trader partners so owners of the relatively less saleable goods like my pool vacuum I will exchange my pool vacuum and other people have less saleable goods will trade those not only for the goods that they directly want to consume but for almost any other good that I don't directly value but I will accept it as long as it's more saleable more acceptable in the market than the good that I'm gonna give up so over time Minger argued the most saleable goods were desired by more and more traders because of this advantage because it allows them to go and buy almost anything in the market okay so the demand for the very saleable good changes so it's not only demanded for its use value but it's also demanded for its value in exchange for its exchange value so that good becomes then a medium of exchange where people are going and saying I will take this good it's not the good that I want it's not the good I'm going to accomplish my purposes it's not the good I want but it's going to allow me to then turn around and get the good that I do want so this choice of a good or goods as medium exchange is a gradual self-reinforcing process as more people accept it the commodity then becomes even more marketable even more saleable I've heard Bob Murphy make the point that he doesn't know or that we don't know how long this adoption of this most saleable good how long that process takes but he said it might happen fairly quickly just because the people exchanging are going to very quickly at recognize its obvious benefits of taking a more saleable good okay so what makes a good be more likely to become that medium of exchange well if it's easily divisible it's not like the car it's not like the the mom mobile if it's easily develop divisible into smaller units without losing value when you break it into smaller pieces if it's durable over of over long periods of time what exchanging hands and it's not breaking down if it's easily transportable right so that means it has to be for very small units has to have a high value high value to weight ratio so we're not lugging you know pieces of iron to market so also it's fungible one unit of money is basically equivalent to any other unit of money and if it scares eventually one or two commodities or once they are used as the generally accepted key words generally accepted medium of exchange that is an almost all exchanges then those goods are called money okay so historically we've had lots of different commodities that have served as money I've got some pictures here some beads some shells even some nails but through the centuries the one that has been chosen most often has been gold and silver and these have displaced other commodities and have served as generally accepted medium of exchange or money so Austrians because we talk about superiority of gold serving as medium of exchange we get criticized and made fun of and called gold bugs and we like gold because it's shiny and pretty really it's we like it because it is the the commodity that's been chosen by the market more often than any other but Austrians we'd be happy just as happy with some other commodity if it worked as well as gold even if it wasn't shiny and pretty okay so Carl Minger point out it's not necessary or even really conceivable for money to be established by some authoritarian decree or by some explicit contract among the people in fact there's really no historical record of that ever taking place the more plausible explanation the one that makes sense and that we can easily say yeah that that that would work that makes sense is that money originates spontaneously because the immediate and obvious benefit of using the more marketable good as a medium exchange that benefit is recognized by the parties involved and so then it becomes adopted and becomes money it's hard to imagine anybody conceiving of the idea of money without experiencing it experiencing it in that way right if you're sitting around in a barter economy and you haven't experienced that how's money gonna the idea of money gonna come into your to your mind so Minger said here's a quote he says hence it's also clear that nothing may have been so favorable to the genesis of a medium of exchange as the acceptance on the part of the most discerning and capable economic subjects for their own economic gain and over a considerable period of time of eminently saleable goods in preference to all others that's from the origins of money so money is unlikely to have originated any other way because embedded in the demand for money is the knowledge of the past prices what did this good what did this commodity trade for under barter what was kind of its value in exchange before it became a generally accepted medium of exchange unlike consumption goods money has to have pre-existing prices right and on that then we can have the grounds to base our demand for to base our demand for money on so Mises explained this in this regression theorem that that can only happen by beginning with a subjectively valued useful commodity under barter and then adding to it the demand for the medium of exchange to the to the demand for use so we have now this commodity has demand for use and the medium of exchange demand component as well so we have we had gold we said has been the one that's been chosen most often in the market and then we had paper so how did this how this happen will paper compared to gold does not have as much value in exchange right so people wouldn't be willing to surrender you know I have worked and labored and built this made this machine and now I'm going to give it to you for paper doesn't make sense so people were unwilling to surrender their goods for paper but so how do we go from paying with commodity money like gold coins to paying with paper well gold is heavy right it's heavier than paper and dangerous to carry around somebody can come and knock in the head and take your gold but people started storing their gold in gold warehouses and when you put your gold in the warehouse you would get a receipt for your for your paper claim for your gold that stored there and then to make purchases you could either go go to the gold warehouse and withdraw some of your gold to go make your purchases or for your convenience you could instead just sign over your paper claim to the gold and so eventually more and more people did that and the paper claims to the gold deposits in the the commodity money in the warehouses became generally accepted medium of exchange okay so what are the benefits of money so elimination of the disadvantages of money of course all the problems of barter are gone we don't have to worry about indivisibilities or double coincidence of wants also there's going to be a reduction in the number of prices for each good right instead of going to from each good having a wide array of prices now each good has one money price so we've already seen that without money there could not really be real specialization and therefore no advancement of the economy above a primitive level but with money we can get this elaborate structure of production can be formed with land labor and services and capital goods all receiving payment in in money at each stage of production so we have this this cooperation of these in the elaborate structure of production can now be established so also only if money can we have can we have rational economic calculation right where businessmen can now do compare revenues and costs in the same terms right so now we can tell is this are we earning a profit or a loss when the costs and revenues are denominated in the same terms so also with money people can compare the market worth of each good to two other goods this can be done this can be done easily where if we have a gaming desktop computer so my son has one of these I don't I had to look at my notes to even get the word right a gaming desktop computer if that costs about an ounce of gold and a new stripped down basic probably used for to escape costs 20 ounces of gold then we can see that escape is going to be worth what how many gaming computers about 20 right so so it's easy to make these comparisons now of value when they're all done it with one in one one commodity money okay so most physical goods are sold in terms of weight so tons pounds grams ounces and the size of the unit really doesn't matter because they can all be converted from one unit into another so one pound is going to be 16 ounces right one ounce is 28.35 grams so if gold is the chosen commodity money the size of the unit that we use for the currency really does not matter and we'll see that many different units have been chosen so I can sell something for one ounce of gold in the US or 28.35 grams in France and these are the same price right because those are the same weight just measured in different units and this seems like duh how obvious why is she going on and on about this move on well it's because people forget this they forget this simple truth and because of that it creates a lot of confusion and so people think of the money as being some abstract units of something even when we did have a gold standard people thought in terms like this they were like well in America the money is dollars and in France it's Frank's before the euro and in Germany it was Mark's and so they're thinking in terms like in terms of that however all of those monies were tied to gold all of them were tied to gold but people thought of them as sovereign and independent monies and they're thinking of the names and not that these are tied to some unit some weight of gold so before before government fiat money the various names were just simply defined units of weight of the commodity gold so before 1933 people would say that the price of gold was fixed at $20 per ounce that's really while that's true but it's really kind of a misleading way to say that the correct way of looking at me to say that the dollar is the name given for 120th of an ounce of gold that's really a more straightforward and honest way of putting it okay so but because of this misunderstanding the monies being named different of the monies just being names for defined units of weight of gold it was misleading to talk about exchange rates it's unclear what does all this mean but it's really pretty simple so the pound sterling we were told exchanges for five dollars okay five dollars is one pound but the dollar at that time was defined as one twentieth of a gold ounce right and the pound sterling at that time was one fourth of a gold ounce and so we've got one twentieth of a gold ounce exchanging for I mean sorry one fourth of a gold ounce is exchanging exchanging for five twentieth of a gold ounce so one twentieth sorry five twentieth equals one fourth so it's really it was really simple but misunderstanding this or forgetting that these were tied to gold is what may made it more difficult and more confusing okay so what about the specific value of money what exactly is the price of money so we can get to that but think starting with something else say my laptop if I take my laptop to the market and I'm going to sell my used laptop how much money would it command in the market okay so my example is a hundred dollars it's probably closer to like 15 but anyway a hundred dollars so the purchasing power of my laptop my laptop then is going to go and buy one hundred dollars if we think about it that way so I could say that one dollar then is going to buy one percent or one one hundredth of my laptop and it's the same thing with money if I sell my money then what can I get for it in exchange what can I get for my money in exchange the laptop when I went and sold my laptop to buy money my laptop was only exchanging against money but money trades against everything else money trades against everything else we need to list all the possibilities that one dollar trades for right so a dollar buys one one hundredth of my laptop a dollar buys one pack of gum apparently not anymore it's not even gum is not you can't get a pack of gum for a dollar anymore it buys one thirty thousandth of apparently because I've used recently been in the car market a really crappy used car but so money has this array of prices so we think of what is the purchasing power of money it's this whole array or quantities of other goods and services that the money commands in exchange so the purchase of power of the dollar is the inverse or the reciprocal of the overall price level so if all the prices double the general price level doubles what happens to purchasing power of money is it's cut in half now a dollar instead of buying one one hundredth of my laptop it buys one two hundredth of my of my laptop so purchasing power of money can be thought of as the price of money where the price just like with other goods is determined by supply and demand and just like with supply of demand I mean just supply of demand for other goods excuse me if there's an increase in supply if there's increase in supply of this good then it loses value declines in value in exchange if there's a decrease in supply then its exchange value rises there's increase in demand for money it's value exchange rises if there's a decrease in demand for money it's value in exchange falls so we should note here demand for money when we're using it in this way demand for money it's not just how much money you want right mean to say I would never say I didn't want any more money but the demand for money in this case is worth referring to as the amount you wish to hold in cash balances okay so what is the optimal supply of money was the optimal supply of money we always hear the Federal Reserve they're increasing the money supplier they're gonna tighten the money supply what should the money supply be is there an optimal amount does that optimal amount ever change okay Rothbard points out this is really a silly question nobody is asking what's the optimal amount of tennis shoes what's the optimal amount of pizzas nobody is nobody's asking that for the optimal amount of any other good the reason why is there's an increase in consumer and producer goods that are going to be used up and worn out when we have an increase in those those make us better off right because more human wants are satisfied by these by these extra consumer goods and producer goods but money is different as a medium of exchange money is not used up and worn out it's transferred from one person's cash balance to another's cash balance so that's why any money supply any amount of money is just as good as any other in performing the minimum of exchange function the purchasing power of money will always adjust to permit all the exchanges to occur that people desire to make a money supply of 20 billion is able to finance the exact same number of transactions as a money supply of 200 billion okay with a smaller money supply the price level would be lower but the higher my supply price level would be higher we can see the effects of an increase in money supply with the story of the angel Gabriel and the story of benevolent but economically ignorant spirit descends to earth and wants to benefit mankind and decides the best way to do this by magically working some voodoo and doubling everybody's cash balances overnight while we sleep okay when we wake up every person finds that we have excess cash balances we have more money in our bank account than our demand for demand for holding cash balances and at the prevailing price level we rush out and we go and spend and buy more consumer and producer goods with this extra cash balances okay the result is there's an increase in demand for these goods and services and what happens when there's increase in demand for goods the price those goods will rise and so the price level rises and it turns out society will be no better off from the angel Gabriel's doubling of all cash balances because no additional human wants were satisfied with the same number of goods and services same number of productive resources those have remained fixed technology didn't improve so we're no better off no additional needs have been met so despite the doubling of the number of monetary units the real money supply which is the amount of money divided by the price level that's remained unchanged because they both they both doubled price level I'm sorry the purchasing power of money has just been cut in half okay if you look a little bit more closely at what the angel did then we can see that actually the people who spent the money early they were benefited at the expense of the people who spent it later even though all people receive the same proportional increase in their cash balances so the early birds or I call my freaks they wake up early and they rush out right and they go and they they spend their money before the prices have risen okay so they get out there and so they have gained in real income but those who slept late or waited a few days because we are showing prudence and wisdom in our spending choices we waited a few days before we went to spend the money we then spend after the prices have risen and our cash balances have decreased dramatically in purchasing power so increase in money supply did not benefit mankind or society as a whole but the early spenders are benefited at the expense of the late spenders so since every money supply is equally optimal and a larger money supplies no more beneficial to society than a smaller money supply nobody including economists and the central bakers and anybody else nobody needs to be concerned with what the optimal money supply is because the price level will adjust so that every money supply will finance all the transactions that we want to make okay so I want to talk a little bit about supply of gold in the counterfeiting process under the gold standard under the gold standard the one and only way to increase the money supply is to dig more gold out of the ground right so mining and mining is a costly activity and it takes scarce resources to do it so the money supply under a gold standard is really determined by the profitability of mining right the profitability of gold mining profitability of gold mining revenues minus costs that's going to be affected by the price level by the cost of mining gold if these costs fall the cost of mining gold fall then mining becomes more profitable and we'll see more of it happening when the price level rises then gold mining is less profitable and production will decline or may even disappear altogether so the price level in there when the price level rises the price of the resources I already said that price when the price level rises then we'll see that gold mining is less profitable okay so we should point out that an increase in commodity money when we're digging more gold out of the ground that does benefit society right because not all of it necessarily has to become gold coins in the money supply but it can have consumption value so it can go into productive uses or jewelry and also apparently it's used in electronics so you can get it by buying it or mining it or you could also counterfeit it right you could also get gold that would be fraudulently getting it by counterfeiting it so I want us to look at the effects of counterfeiting so we can better understand the inflation process so let's say some bad guys or girls equal opportunities some bad guys I'm including girls in that but anyways the bad guys they get together and they decide to mint some counterfeit gold coins and they're actually made of brass but these fake coins fake gold coins that they make are to the naked eye they're not it's not easily distinguishable they go undetected when the bad guys spend them when the counterfeiters spend the money okay so they spend these fakes they go out and they spend these fakes and they increase the money supply and in doing so they're increasing demands for the goods that they buy right so they go and buy more because they have this extra cash now this fake cash so that increases the the price level and decreases the purchasing power of money okay so this is just like the Angel Gabriel story except there's one crucial distinction remember Angel Gabriel increased everybody's cash balances but the with the counterfeiters this new fake money it's going to enter the economy at a specific point right so that money enters the economy where the counterfeiters go and buy goods so whatever the bad guys are buying use your imagination they spend the money there and then where they bought their money where they bought those people now have more cash balances and they spend it and spend it and it gets re-spent throughout the economy and as it goes then there will be increased demand at these as it ripples out and so increased demand for those goods and the price level gradually rises so the result is the demand for local goods bought by the bad guys increases first and then increases those prices then it gets re-spent and spread until eventually all prices are all prices are affected okay so the counterfeiters and those that they buy from they get the money early in the process and they benefit at the expense of those who get it much later or not at all so the people who the people who are late in the process if we think of say what the one we always hear of the widow on the fixed income right so if we think of the widows on fixed income they're going to be worse off because they saw this so they see this increase that may supply not at all they're on the same income but at a higher price level they're the same income with lower lower purchasing power so they are made worse off so it's not the and unvaccinated who are killing grandma it's really the stained counterfeiters so them get them okay so leave the rest of us alone so counterfeiting is really a subtle method of fraudulently gaining at the expense of the rest of society through this and inflation process it's a transfer it's a transfer from those who get the money late to those who get to spend the new money first we can see this through the through the example of the of the counterfeiters okay so last thing we would not expect money to be paper paper we said has a low value in exchange it's also very easy it's very inexpensive to to produce right just turn on the printing press especially now it doesn't even have to be printed it can just be some keystroke so just how long it takes me to do like that so it's very easy to produce but paper very cheap and easy to produce probably why it's chosen also we would not expect money to be national okay now we're back to the double coincidence of wants requirement at the border I go up to Canada or to Mexico and I got to have different money before I can buy anything there or I have to find somebody who wants who wants dollars for their goods we would not expect money to be under the control of any entity why would it need to be that when any supply of money will adjust in value to enable us to make any trend all the transactions that we want to make so if we would not expect money to be paper or national or under the control of any entity why is it that we see it that way now well we're going to hear a lot more about this this week but it's just as we saw the counterfeiters issuing currency is a way to transfer wealth to the issuer right and so it turns out a monopoly in some geographic region if you can be the one who gets to be the though if you can be the one who gets to decide how much money we're going to have in circulation that is a very valuable tool to have and that's a monopoly that the state has found is what works for them it's a very powerful desirable tool so we'll hear more about a lot more about that this week so thank you very much