 Okay, I have to remind myself don't say good morning, it's good afternoon, but good morning to people in Hawaii who are tuning in. I'm so glad to be here today to get to talk to you about money. My husband said he's tended every Mises University since 88. My first one was in 92 and I have not been to every single one since then. Sometimes I had babies and things like that but I've been to a lot of them and it's the best week of the whole entire year. Christmas is nothing compared to this. So anyway I'm so glad to be here with you and just excited for y'all to get to experience this. So we have the topic of money on our first day because for Austrian economics money is really a central theme. We have analysis is done in money prices. Calculation is only possible with money prices and we can even say as Dr. Rittenauer was talking, civilization can develop. We can have division of labor in exchange and it's going to be facilitated greatly by money money prices. So some of our great contributions have been the Austrian school have been in money. Carl Minger is great on the origins of money in 1892. 20 years later Mises had his first book. He expanded Minger's approach. They developed their regression theorem in theory of money and credit and then of course also we have Rothbard. What has government done to our money and others and my favorite I put on here is the mystery of banking. So if not for the Austrians we may still have the state theory of money where money is whatever the state says it is. It's just by their sovereign decree that this is going to be money. So that's why we need to talk about money on the first day at the beginning of the week here. So who needs money? Robinson Crusoe would have no need for money. He can't eat gold coins. There's no if he's on the island by himself there wouldn't be if you had gold coins or wouldn't be a shopping mall where he can go and spend the gold coins. He has really no need for money. Even when he meets Friday his friend on the island there's really no need for money. They can just exchange fish and berries based on subjective valuations of the fish and berries. But when society begins to expand beyond just a few families the stage is set for the emergence of money. Money can come about. So from Sean Rittenauer's lecture that just finished we learned that voluntary exchange occurs because both parties expect to benefit. Both parties expect to be better off and we have specialization in exchange. People are producing goods not just for their own consumption but also for exchange. We develop our best skill to become more proficient and more efficient. And so through that as Dr. Rittenauer explained we have higher standards of living as opposed to being self-sufficient when we can get things through exchange under being under self-sufficiency. Most of us we can imagine we would be nearly starving right if we had to produce everything we're going to consume. But when we have exchange direct exchange of goods for goods or what we call barter it's hardly better than remaining self-sufficient. There are a lot of problems with barter. There are two big ones that I want to talk about. Oh I did get it into the wrong slide. I'm sorry y'all. Limitations of barter I want to talk about is the indivisibilities of goods and the double coincidence of wants requirement. So we can imagine how difficult barter would be. We'll just have a little thought experiment like Barney. It's fun to use your imagination. We'll be pretending to impose a barter requirement in the world of Facebook marketplace. Have you all used Facebook marketplace and sold things in these kinds of communities. So I am into gardening. I enjoy gardening and I just recently created this huge flower bed so big that I immediately regretted my decision to do so. But anyway I was looking on Facebook marketplace for stuff to fill it. Okay I was looking on Facebook marketplace for stuff to fill my flower bed. What I had in mind when I went on Facebook marketplace I was looking for plants. Okay but then on Facebook marketplace I came across this yummy little treasure. This guy here dinosaur eating gnomes. So of course I had to have it. Of course I had to have it. So in this world if we have only barters allowed on Facebook marketplace in our imaginary world then the seller says the only thing that I want is I'm looking for a used Papa's on chair. Well I'm in luck. Good thing I have the used Papa's on chair. You can notice the seller there and underneath you might notice that it highly rated on marketplace seller. Just a little another feather macabre. Okay but what if okay so if this is we can agree we can say she has the great dinosaur gnome eating yard art and I have the used Papa's on chair the exchange can be done great. Okay but what if we have the case where the Papa's on chair is much more valuable than the much more valuable exchange than the yard art. Okay maybe even 10 times more valuable. Now what are we gonna do? Well we can I can take the chainsaw and I can cut up my Papa's on chair but then what have I done to the value of my Papa's on chair now my Papa's on chair is almost nearly nearly worthless because I've divided it up. So indivisibility of many goods is going to be a hindrance to trade under barter. Okay even when the goods are divisible though into smaller units it's very difficult for traders to find each other under barter because in barter a double coincidence of wants is required. I have to have what you want and you have to want what I have. Okay and I have to want what you have. Okay so if I have this used Papa's on chair to sell and you have this really great yard art how are we gonna get together if what I really wanted was a rose bush. Right so now trade is not gonna take place if we don't have this double coincidence of wants. Hitting a little bit closer to home for a lot of us in this room. Think of an economics professor to eat the economics professor has to find someone who wants a chef who wants to prepare a meal and exchange for economics lectures. This is we're gonna all be pretty hungry and in fact y'all I cannot believe that I was able to get this but I have an actual photo that I can share with you today of some of our Mises you faculty here this week but this was when they were living under a barter economy. Here they are there's Salerno Gordon and Klein and they were they were pretty hungry so anyway so another problem under barter is because every good trades against every other good and barter for just trading goods for goods then each good has a whole array of prices in a barter economy with only a thousand goods there would be 499,500 prices so if we just imagine a Walmart I look this up Walmart a typical Walmart store carries over 120,000 goods 120,000 goods so an outrageous number of prices would be required for each good to be denominated in the prices of every other good without money so Mises said money becomes more necessary as division of labor increases and wants to become more refined as we're looking for things that are you know as the division of labor expands and increases and goes forward and we're looking for a particular kind of light bulb right we're looking for the kind of light bulb that goes in the microwave you don't even think about that light bulb you just when it's on when the microwave is going the lights on we're looking for one of those it's gonna be even more important to have it's gonna be even more important to have money okay so under from looking at just these examples we can see how without money under barter we're not going to have a very developed advanced economy it's just not going to be possible under direct exchange or barter but under indirect exchange you sell your good or your labor or some service you sell that not for the good that you want directly but you sell it for another good that you can then in turn go and trade it for something that you do want so at first you think gosh this just seems like this is an adding an extra step this is making it kind of clunky why don't if I want a rose bush why don't I just take my papa's on chair and go get some rose bushes I've now to take my papa's on chair and get something else and then go trade that for the rose bush it seems like it's clumsy but this is actually a very huge step for just the development of civilization that we can have money I mean when we have money that'll allow us to facilitate these exchanges more easily so under barter you can imagine how are we gonna get from barter to money we can imagine there is a degree of salibility of goods goods have a different degree of salibility some of them are more salable than others in terms of being able to find trading partners for these for the goods that you have the more salable good the more easily it's gonna be for you as the owner of that good to find a buyer for it at the particular price so somebody selling potatoes is probably gonna have an easier time finding buyers than I will with my papa's on chair I'll have a more difficult time finding trading partners of course it's not impossible because I could always just be willing to accept a much lower price right I could get except something much lower in value than what I think my papa's on chair is so the owners of the goods like me with a papa's on chair and other less salable goods we would begin to exchange our products for the goods that's not exactly what we're looking for it's not what we're wanting but we will accept another good as long as the good we're accepting is more salable than the one we gave up then now we're closer and closer to getting the goods that we do want minger argued that over time the most salable goods would be desired more and more by traders because of this advantage it gives them in getting the goods that they do want okay the demand for this very salable good the demand for this very salable good changes then so it's not only demanded for its use value you know these goods that become that eventually become money they had some use value but now the demand for it changes it's not just the value in use but also the value that it has in exchange because of its very salable nature so the choice of a good or goods as a medium of exchange is a gradual self-reinforcing process and as more people accept the more salable good the commodity then becomes even more marketable okay so what makes a good what makes a good more likely to become a medium of exchange well first of all from the Papa's on chair we know that we want it to be easily divisible into smaller units without losing value okay we also want it to be durable where it lasts and holds up over long periods of time without breaking down while it changes hands frequently we want it to be easily transportable we want to have a high value to weight ratio so this is why we wouldn't expect to have you know iron or something like that as money also fungible we want it to be where one unit of money is just the same as are basically equivalent as any other unit we also want it to be scarce so eventually one or two commodities are used as a generally accepted medium of exchange and that is generally accepted by that of course generally accepted there is some room for interpretation but by that what we mean is that in almost all exchanges or the overwhelming majority most exchanges this medium of exchange is used then we'll say it's this good or this commodity is money okay so historically we have these examples of other things that have served as money through history beads wheat shells nails but through the centuries we've seen throughout history two commodities gold and silver have displaced most headaches displaced these other commodities and have been the generally accepted medium of exchange hey some critics will make fun of us and criticize their critics they criticize us for this Austrians for this they say oh you're just a bunch of gold bugs and they make fun of us like they think we just like it because it's shiny and it's pretty and we have some kind of obsession like this guy this guy here says I love gold I like to taste the smell to feel of it okay no that's really not it at all gold just happens to be the commodity that the market has chosen most often and we'd be just as happy with some other commodity if the market had chosen that instead Carl Minger pointed out it's not necessary even conceivable for money to be established by some authoritarian decree or even by some explicit contract among the citizens in fact there's no historical record of money ever arising in that way it just cannot be found in history the more plausible explanation is that money originates spontaneously because there is an immediate and obvious benefit to those who are trading under barter to reckon they recognize I am better off if I'll accept this more saleable good and so it's more plausible that money has come to be in that way so it's hard to imagine anybody really conceiving of money to have some king say oh we've got people running around trying to find traders under barter and I think it would be better if we had money I mean it's not really conceivable that somebody would come up with that absent really experiencing themselves so Minger quotes that he says hence it's also clear that nothing may have been so favorable to the genesis or the origin of a medium of exchange as the acceptance on the part of the most discerning and capable capable economic subjects for their own economic gain and over a considerable period of time of imminently saleable goods and preference to all others okay money is unlikely to originate in any other way because also another reason because embedded in the demand for money is the knowledge of the past prices that this good was it was in exchange for barter right and we had an idea of what it would exchange for then so now as it becomes money we already have this knowledge of the past prices so unlike consumption goods there must be this pre-existing price for us to be able to have some ground to base our demand for it Mises regression theorem explains that can only happen by beginning with a subjectively useful commodity under barter then we add this demand this other dimension of the demand to it for the medium of exchange and we have of course the previous demand just for the use value of it okay so how do we transition from gold being a medium of exchange to having paper money now well paper doesn't have very much intrinsic value right all the time when we're cleaning up our house we see or we get go to the mailbox we're just throwing away paper like it's nothing right so paper doesn't have intrinsic value and people wouldn't we wouldn't expect people to be willing to surrender real goods that we have worked or to get or even our labor we wouldn't be willing to trade that for paper also you've probably noticed that gold is heavier than paper right and it's dangerous to carry it around you get hitting the head somebody takes your gold it's gone right so people would put their gold into secure warehouses and they would get when you leave your gold there you would get a paper claim for it so you have this paper claim that I have this many ounces of gold stored in XYZ warehouse okay so then to make a purchase I could either take my receipt my paper claim down to the warehouse and get the gold and move it to the seller of whatever good it is I want to buy or for my convenience and let's face it I'm a little bit lazy for my convenience I would rather just take my paper claim to the seller and say here I'm just gonna sign my name over pay to the order of John Doe you know Sandy Klein here's my signature and now you have a paper claim and now you can get my gold and go use that to for your purchases okay but eventually the paper claims because people found that it was safe and secure and easy for them to leave the gold in the warehouse then the paper claims became used as a medium of exchange okay so now that's how we've gone from barter to commodity money now to paper currency and we're this far in the lecture and some of you are thinking she hasn't mentioned cryptocurrency yet didn't not didn't know Salvador just say that people can pay their taxes and Bitcoin why is she talking about that okay yes you're right cryptocurrency is being used with a lot more frequency now and that's very encouraging that's very exciting but we still can't say that it fits the definition of money right it's not a generally accepted medium of exchange yet although we are definitely moving more and more in the direction of of it becoming that and I see people shifting in comfortably in their chairs like oh I can't wait to get this woman after her lecture I'm happy to talk happy to talk about it after but for this purpose we're gonna say it's still it's still not a generally accepted medium of exchange okay all right so let's talk about the benefits of money now we're out of barter and we have money so the problems of barter are gone we don't have to worry about indivisibilities and we don't have to worry about double coincidence of wants we also have we have a reduction the number of prices every good is now priced in one thing in the money unit there's one price for each good we've also seen that without money there could be no specialization and so no advancement of the economy above a primitive level but with money we can have this elaborate structure of production can be established where land labor capital goods all of these inputs are now cooperating to advance production at in at each stage of production they're receiving payment and money okay also with money we can have rational economic calculation now businesses can tell they can perform the calculation am I earning a profit am I earning a loss on this because revenues and costs are both done in the same terms okay also without money with money people can compare the values of different goods so if you have a 24 inch iMac it costs one ounce of gold ounce of gold is now about $1,800 a new Nissan Leaf would cost about 21 ounces of gold so we can make this comparison and we can say that a leaf is worth about 21 of the iMacs okay most physical golds are sold in terms of weight like tons pounds grams ounces and the size of the unit that we choose or that is chosen for the currency ultimately makes no difference at all right because all units of weight are convertible into each other when we go to the doctor we stand on the scale and there's this really huge number and I'm freaking out then they tell me oh well that was not in pounds and I'm like thank God so anyway they there are other units of measurement and they can be easily converted one into another right so it really doesn't matter if we choose a pound which is 16 ounces and then or if we choose grams one ounce is 28.35 grams it really doesn't matter because they can be converted to converted easily so I can sell something for one ounce of gold in the US or I can sell it for 28.35 grams of gold in France it's identical same thing so this all seems obvious when we're saying it now you're looking at this you're saying okay she's kind of belaboring the point move on but people all the time forget this really simple truth and because of that there's a lot of confusion because people tend to think of the money as some abstract units of something right but even when we're on the gold standard people would think of money in terms like this and say American money was dollars and French money was Frank's and German money was Marx etc everybody had their own name for their currency but all of those were tied to gold they were names that were just given for some weight of gold because people got used to thinking of the currency as the name as a dollar or the mark or the Frank instead of some weight of a commodity it was easy then for countries to break that tie and just go off the gold standard so before it before the government had before government's fiat money the various names given for their currencies were just names for some defined weight of gold on the gold standard before 1933 people would say that the price of gold was they said this way fixed at $20 per ounce the correct way of looking at it would be to say the dollar was the name given for one twentieth of an ounce of gold that is a more clear straightforward way of thinking of it but because people were totally missing that that the monies were just named for units of weight it was misleading to talk about exchange rates and the dollar did not really or the pound sterling did not really change exchange for five ounce five dollar sorry the pound sterling did not really exchange for five dollars the dollar at that time was defined as one twentieth of a gold ounce and the pound sterling at that time was one fourth of a gold ounce therefore it was really one fourth of an ounce of gold exchanging for five twentieth of an ounce of gold and you remember reducing fractions stay in school learn your fractions so there's really one pound and five dollars is one fourth of an ounce versus five twentieth of an ounce okay so what about the specific value of money what exactly is the price of money what can money command in the market well let's start with something other than money let's think about my laptop so I have a used laptop and it wasn't the greatest to begin with but anyway my laptop if I took this to the market to Facebook marketplace and tried to sell it I could maybe get I imagine maybe a hundred fifty dollars for my so-so laptop so then we would say the purchasing power of my laptop is a hundred fifty dollars right hundred fifty dollars is what my laptop can command in money in the market or I could say that one dollar buys how much of my laptop one dollar buys one one hundred and fiftieth of my laptop so it's the same thing with money if I sell money what could I get in exchange well the laptop just traded for money but money trades for everything else so we need the till we need to list the possibilities of all things that a dollar trades for a dollar could be one fiftieth of my laptop it could be one pack of gum it could be one thirty thousandth of a car right so we have the purchasing power of money then it's this whole array of the quantities of all the other goods and services it commands in exchange the purchasing power of the dollar we think of it as being the inverse of the reciprocal of the overall price level of the level of prices we have for all the goods so what happens then if the overall price level in the economy doubles what happens to purchasing power of money then purchasing power of money then is cut in half when the prices have all doubled so the purchasing power of money can be thought of as the price of money where that price or value is determined by supply and demand just like supply and demand determines our value in exchange for other goods in the market so if any good if there is a increase in supply if there's an increase in supply of the money then the value in exchange is going to fall if there is a decrease in supply then we would expect that the value in exchange would rise as it becomes more scarce so if a demand if the demand for money decreases then its value in exchange falls and so when I say demand for money some of you may think what I would never have a decrease in demand for my I would never have a decrease in my demand for money right I always want more money more money right but by demand for money we don't mean how much money would be willing to receive as a gift we're talking about the amount of money we wish to hold in cash balances so keep that in mind when we go to this example later on about when we're increasing the money supply okay so what is the optimal supply of the optimal supply of money we always hear about the Federal Reserve increasing or tightening the money supply what should the money supply be what should the money supply be should we have more money in circulation or should we have less is there an optimal amount does the optimal amount ever change Rothbard point out this is a silly question what is the optimal amount of money to have because he says nobody's asking what's the optimal amount of money what is the optimal amount of pizzas to have in the economy what's the right number of pairs of tennis shoes to have if we were talking about consumer goods like pizzas like tennis shoes like the yard art of the Papa's on chair and increase in those kinds of consumer goods or even producer goods which are used up and worn out as we are consuming and using them in production though if we had an increase in those that would make us better off we would have some benefit to society for having more of those because more wants are being met we have more of our needs being met with we have an increase in production and consumption goods okay money is different though it's a medium of exchange money is not used up money is not destroyed it's just transferred from one cash balance it's transferred from one cash balance to another so that's why any amount of money any amount of money or money supply is going to be just as good as any other in performing this medium of exchange function right the purchasing power of money is just going to adjust the purchasing power of money is going to just permit all the exchanges to incur every exchange that people desire to make can be facilitated with any amount of money that we have a money supply of $20 billion is going to be able to finance the same number of transactions as $200 billion with the smaller money supply the price level will just be lower with the higher money supply a larger money supply the price level will just be higher okay so here's this example I wanted us to remember about our demand for money so we can see the effects of an increase in the money supply when we look at the Angel Gabriel model okay in this model we have a benevolent but really economically ignorant spirit Angel decides Angel Gabriel decides he wants to benefit all mankind by descending to earth one night and magically doubling everybody's cash balances while they sleep so we're sitting there thinking now we like this Gabriel this is a good guy but let's think about this what's happens when everybody wakes up the next day so everybody wakes up we finally have excess cash balances that's more than we demand to hold in cash balances at the prevailing current price level and so we rush out and spend our surplus okay what does that do well there's an increase in demand for goods what happens when there's an increase in demand for the goods the prices will the prices will rise when there's an increase in demand for goods and so we'll see that the increase in this in our cash balances has just ended up increasing the price level so society was no better off no additional human wants were satisfied because the supplies of all consumer and producer goods were not changed just our cash balances were changed right and so resources remain fixed we just now have doubled the money to pay for it at the double prices so no additional needs have been met so even though the angel doubled the number of monetary units that we had the real money supply that is what that money supply can actually buy money supply divided by the price level that's remained unchanged right we doubled the money that we had we've also doubled the prices and so the purchasing power that money's been cut in half but if we look a little bit more closely at what the angel did we see that some people actually did benefit at the expense of some other people even though we all had the same proportional increase our cash balance is all doubled we still see that some benefit at the expense of others so the early birds the people I call the freaks they woke up early and they rushed out these impulsive weirdos rushed out and they spent all their money before the prices rose right so they had double the money and they rolled by at yesterday's prices right so they really gained in real income but what about the rest of us who slept in a little bit we slept in or maybe we got this extra money we thought let's really think about what's the best thing to do with our money this extra money that we found we find that us we actually lost out because we're making our purchases after the prices have risen so our real purchasing power has has fallen so the increase in money supply did not benefit society as a whole but the early spenders the early spenders benefited at the expense of the late spenders so from that we can see every money supply is equally optimal every amount of money is equally optimal to a large a smaller one is just as optimal as a larger one it has no a larger money supply increase the main supply does not benefit society so nobody including economists including people at the Fed nobody needs to be concerned with what the optimal amount of money supply is and be you know ringing their hands over should we increase it or not should we increase the money supply should we contract the money supply okay so under the gold standard the only way to increase the money supply is a dig more gold out of the ground right if you want to have more money and gold is money then we have to get out of ground well that is a costly activity that requires scarce resources time labor tools to be going and digging the gold out of the ground so the amount of gold mining that's done is actually going to be determined by profitability of mining right the profitability of mining of course is affected by the cost of mining okay so if those costs fall then the production of new gold or mining more gold would increase if the cost increase the cost of mining increase in production would be cut back or maybe disappear completely one factor that affects the cost of production is the price level right so the price level rises the prices of resources used in mining gold those are also going to be affected so if the prices of resources use in mining gold increase then production of gold decline so that's going to be the opposite case when the price level when the price level falls so an increase in commodity money like gold or silver is going to affect the money supply but also work and therefore the price level but we also have this other benefit because there's a commodity money this gold can be an increase in gold could be beneficial to society because it can be used in consumption and production uses we can have jewelry we can have electronics made out of it so okay so that's gold so you can get you can get gold by buying it or you can mine it another way you could get it fraudulently is by counterfeiting okay in counterfeiting it's going that looking at counterfeiting is going to give us some insights into the inflation process okay so let's say there are some bad guys who get together and they counterfeit some gold coins and the gold coins are actually made of brass but these fake gold coins they just pass them off as dollars in the marketplace and they go undetected when they spend them so they spend these fakes in the market and they increase the money supply and increase the demand for goods and so it's increasing the price level and decreasing the purchasing power of money not just for the fakes but for also the rest of us the good guys are our money okay so this is just like the angel Gabriel model but can you pitch point out one crucial distinction it's not that angel Gabriel came down or it's not that we all counterfeited and made our fake gold coins right it's that the bad guys did this and so the money is injected and enters the economy at a specific point right so so the gold their fake or the brass coins they enter a specific point and they spread and the fakes get spent and re-spent so the result is the demand for these local goods where the bad guys were the demand for those goods increase first and therefore those prices rise and then it spreads as those fake coins are spent and re-spent throughout the economy until really all prices are affected so the counterfeiters and those they buy from first and the ones who get the money early in the process they benefit at the expense of the ones who get it much later or not at all so think about the people who are on fixed incomes and they never see they never see more money coming into their account they are worse off they have the same income as before but they now have the higher prices so counterfeiting is really a subtle method of fraudulently gaining at the expense of the rest of society through the inflation process okay so last thing I'll say is we would not expect money to be paper right we would not expect money to be paper because paper does not have any intrinsic value we throw it out all the time we would not expect money to be national because then we're really back to at the border if you live safe each state has its own money we're in Auburn we're really close to state line in Georgia if every state had their own money we're back to double coincidence of wants at the state line right I want to buy something in Georgia but I've got Alabama money I need somebody who's selling stuff wants Alabama money so also wouldn't expect it to be under the control of any particular entity because it doesn't need to be we just talked about how any supply of money any amount of money is just as good because as any other we don't need to be controlling it and you know fine tuning the the amount of money in circulation because any amount of money is just going to the price level will adjust so that we can have all transactions facilitated with the amount of money that we have so why then do we have a national paper money under the control of a central bank well it's as we saw with the example of the counterfeiters with the example of the counterfeiters issuing currency transfers wealth to the one who's issuing it right if I come up with some way to trick you into accepting you know the sandy dollars then and they're just fake worthless things then I'm I'm gaining right so there's a transfer of wealth to the one who issues the issues the currency so monopoly in the provision of money it's really the most valuable tool for the state to have and that's what we see that's what we see today so you're going to learn more this week about central banking as well as as well as fractional reserve banking the Federal Reserve next with Patrick Newman so thank you very much