 So the big point that I want to make in today's lecture is really kind of following up on what Dr. Herbner was just talking about, the division of labor and it being integral to having a social order. And I just want to make the point that money is an important part of allowing the division of labor to happen and to work very smoothly. So it gives us a system where we can actually exchange and do so relatively easily. So it actually makes sense to do it. Now to make this case, I'm going to start by considering various ways that we could try to design our economy using design in a loose sense. So three different designs for an economy. One possibility is to have the type of economy we do have. We have monetary exchanges. So the grand majority of exchanges is I go, I sell something, I say it's sort of my labor, I sell to the university. They then give me, on a good day, they give me some kind of piece of paper with a number on it. I'm more likely they make some kind of transfer into an account and this number appears. And I've gotten money. And then I take some of that money and I pay my landlord, I pay for groceries, these kinds of things. So money is integral to the exchange that's happening. Now another possibility, though, would be to take money out of that equation and to try to exchange directly for everything. So if I wanted to, say, get food, I would go and I'd give some kind of economics lecture to a farmer and they would, I'm sure, be enthralled with the lecture and hand me copious amounts of food so that I could survive to give another one to someone else, the shoemakers, that I could then wear shoes as I'm walking around from one tradesman to another. So that is a possibility. We could try to arrange around this system of direct exchange. Or a third possibility would be that we just eliminate exchange entirely and try to operate self-sufficiently. So I could say, well, I'm not going to associate with other people, I don't really want to trade with them. So I'm just going to try to live on my own. Let's work out in reverse order, what are the consequences? Under each of these systems. So if we try for self-sufficiency, this world where there's no exchange, I'd suggest there are two possible ways this could work. One would be, I think, is the real possibility, given our current state of technology, and that is that a grand majority of us would starve, including myself. I know this because my wife, or my father-in-law is a farmer, so my wife has this need to try to grow things in our yard. So we've planted some strawberry plants. I believe we tried to plant four of them, two of them died. From the other two, we managed to get a total of two strawberries. The other two strawberries we found the ants beat us to, and we didn't want to eat ants. So I'm reasonably confident that if it were really up to me to just support myself, I would live a few weeks unless my father-in-law really feels bad for me and sends me free apples. So the system of self-sufficiency we can see, many of us would have problems even surviving. I don't know about you, but I would prefer a system that I can survive in. So it would steer me away from self-sufficiency. Although I think there's another way this could work. It would require a big change in our technology. I was actually very glad to hear Dr. Herbner mention Star Trek as it will feature prominently in my lecture, oddly enough. I'm going to blame my wife for that too. Not that she got me into Star Trek, I have been since I was a kid, but my wife is a fiction writer and that makes me very aware of things fiction and then being an economist, I think about how they relate to economics. So the system of self-sufficiency, how could we get it to work? But in reality, it probably wouldn't. We'd have mass starvation, nobody would like it. But we can look to fiction, in particular Star Trek and see how we might possibly have people survive. And what we would need, I believe is what they call a replicator in Star Trek. It's a little hole in the wall, you walk over to it, you tell it what you want and it somehow, I don't know real science, but it somehow manages to reorganize the molecules and atoms that are sitting there in the hole into whatever you want. So if I want a cup of tea, I walk over, I say tea, Earl Grey, hot, and somehow through the magic of physics and chemistry, it creates this cup of Earl Grey tea and it's hot and it's just the right temperature. So I think we would need a machine like that that would allow me to be self-sufficient without dying. I'd have to have a hole in the wall that I could go to and just demand whatever I want and it would immediately produce it. And a fact that we're doing there is it's not quite, but coming very close to eliminating action. We're now in a world where any ends I have, the means are made immediately available to me. So in effect, we're looking at a world that we can think of as being post-scarcity. We know this is not the real world we live in and we know even in that world, there is still scarcity. Somehow it ends up they run into problems, they run out of things. I don't know how that happens, but they occasionally run out of things and they have to get them some way because apparently the replicator can't do it. So if we have this world without trade, self-sufficiency, on the one hand we could starve, on the other hand we could invent a replicator and all many of us to survive, but it appears even in the world of Star Trek, a fictional universe, this doesn't work perfectly, which is kind of bizarre. So let's go step back then, think about this world of direct exchange or what we would typically call barter, where I take things I have and I trade them directly for the things that I would like to have. Well here I'm going to illustrate the problem once again from Star Trek. There was an episode of Deep Space Nine. Deep Space Nine was generally considered to be either the best or the worst of the series coming out of the 1990s. Yeah, it tells you a lot about my childhood. I can do that. Anyway, so it was either the best or the worst series, but it had an amazing episode where they had come under attack from somebody and it had damaged some of the machinery on the, there's a star base there. So they needed this specific part they needed. Now I can, without losing anything, just call it a widget, I firmly believe that whatever they called all their parts in the spaceships were actually just totally made up. I think they called it a gravity stabilizer here, so you get some sense of what it would be. Yet in that episode, you don't see people floating around very much. So we needed a gravity stabilizer and for some reason the hole in the wall can't provide it. So one of the characters set it upon himself to go and try to get this device that they needed. And what he had to do, because we're in a world without money, is apparently typically the replicator works well enough, we're in a world without money so he had to go find somebody who had this particular part and he found out, wow, okay, they have this part. We need good, they're not gonna just give it to us, though, they need this other part that apparently they can't replicate. So he had to go to somebody else and okay, they have this part that this other person needed and they need something else that they can't replicate. We don't have that either. So he had to go through, I believe it ended up being a line of four exchanges to get this to work. So he finally got to, I believe the last one was somebody that just wanted a picture behind the captain's desk or something like that. So, oh, I have access to that. So he secretly shipped off the desk so we have the picture to be taken and just hoped that it got back in time. And so he had to set up this very complicated system of trying to get what we want based on what we have because it's not necessarily gonna be the case that the person who has what I want wants what I have. I remember 10 years ago, Walter Block said this very well. He says, if I'm a chicken having pickle water, I need to find a pickle having chicken water. And that's very hard to find. I need to find somebody that has exactly what I want and also wants exactly what I have for this kind of system to work. And that sensibly is going to be very difficult, especially for people like me where more or less the best skill I have, and I don't claim to be very good at it, is giving economics lectures. Remarkably, few people want economics lectures. I think this room is an exception. The normal classroom I'm in, people are there. Not because they really wanna be there, but because they have to check off something so that they can head toward their major and just kind of roadblock in their way. There's a very limited market for what I have to offer. So could I then, in this world of barter, find someone who's wanting to grow food and exchange for economics lectures and who's willing to provide shoes and exchange for economics lectures and so on and so forth. It's gonna be odds or slim. So once again, because I prefer survival and I'd actually prefer to thrive, but I prefer survival so I don't really like this barter system. I'd prefer to have a different kind of system. And that's what the monetary system does for us. So now that we've finally made it through something like 10 minutes of lecture, let's actually talk about what money is. I think money you can define as being a green piece of paper. No, no, not at all. But I also think it's problematic to say that money is some kind of gold-colored coin. You can tell how much I make because I don't have one to hold up. You can imagine it here. No, it's not that either. Instead what makes money money is that it's a generally accepted medium of exchange. That it is something that I'm willing to accept precisely because other people are willing to accept it in exchange. So it allows for these indirect exchanges to happen. So I don't have to give economics lectures to my landlord, sometimes it's tempting. I don't have to give economics lectures to my landlord for them to let me live in my house. Instead I go about this exchange indirectly. I give economics lectures to those students who want to major and therefore want to take my class indirectly. I take money from them through the university. I then take that money and I hand it to my landlord in exchange for where I'm living. So this money doesn't actually serve any immediately useful purpose for me. It's simply a go-between, a medium between what I have to offer. I then offer that, get this medium of exchange and then offer this medium of exchange to get what I actually want to have. So money is a commonly accepted medium of exchange. So now we can face the question, we understand that at least I would prefer a system that is based on, at least includes this kind of medium of exchange, this money that makes things possible that would not be possible without having a monetary system. So we understand that I'd want it but there's no question of how to derise. It seems kind of odd to imagine we all get together at some primitive point in society and say, well, it'd be kind of nice if we had a money. So let's just pick something. Pick shells or something like that. I would submit that's not the way it happened. Instead, I think it's much more accurate to tell the story from a much more individualistic perspective. So you can imagine what is the world like under Barter? And I've already tried to convince you, life is hard, but you have to find, it's very difficult, you have this difficult task of finding that people have exactly what you want and are willing to take exactly what you have. So then you start asking yourself, how can I make this easier? Well, one of the possibilities is to change what I have. Maybe what I should be willing to do is to accept things, not because I want them in themselves, but because I know that odds are good, somebody else is going to want it. So maybe it might be the case that being Paleolithic, I'm on the Paleo diet, I don't believe in eating wheat. But maybe lots of people around me like wheat. It might make perfect sense for me to go ahead and start accepting it then. So sure I have my, in this case, probably not economics lectures at the time, but I have something else to offer. So I offer whatever I happen to have, say I'm raising cattle. So I offer cattle and I'm perfectly willing to accept wheat, not because I'm gonna use it, but because I know my neighbor is going to use it and they probably have something that I'd like to have. So you can see individually, now I have a use for something that I didn't have a use for before. I don't plan to consume it. I don't necessarily plan to use it because I have all these, I don't grain feed my beef. They go out and they graze. So I don't have an immediate use for it for consumption. I don't have an immediate use for it for the production process that I go under. But I do have a use for it in exchange. So something that was not useful before now is useful to me. Then I can think about how this can start to spread throughout society. And we can imagine, all we really need is one creative person to first think of this and then lots of copycats to realize that this works reasonably well. And what would the copycats do? Well, sensibly, it makes sense to try to do exactly the same process. What is something that lots of people are willing to take that maybe I don't want in itself but that I can take because I know I can get rid of it easily to get what I want. And they're probably going to reach the same conclusion. After all, now that this person who is the original creator of the idea of using this medium of exchange, now that they've done it, we already know that, say, wheat is a very popular good. Lots of people want it, it's easy to get rid of. And now because this person decided they want it now precisely so they can get rid of it, it's just become a little bit more popular. So we can imagine now a network of various people that trade with each other. And this medium of exchange spread it from one person to another. So I know lots of people I've traded with are willing to accept wheat, maybe not all of them, but lots of them are. That makes me willing to accept wheat. Then the people that trade with me that maybe not have been willing to accept wheat before say, well, if I have wheat, I can always pass it off on Englehart and get some cattle. So now they become willing to accept wheat and it spreads throughout the network as we realize that it's becoming ever and ever more popular, ever and ever more easy to get rid of. And that helps to explain to some degree why is it that I am willing to take these silly green pieces of paper. It's not because I like the silly green piece of paper, although it is very useful in demonstrations like this that might in fact be its highest value. It's depending on how things go and you get to the end of the lecture and start to wonder. So it might be the highest lecture for me just to wave it in front of you. But at the same time, I'm willing to accept it in vast quantities, far beyond these $20 bills. If you want to give me more than 20, I'll happily take it off your hands. Not because I like having them around, but because I know I can get rid of them to get things that I actually want. So this is how money will arise. You have some creative person that realizes it makes sense to take something that I don't immediately want, that I can use then as a medium of exchange, that I can trade to get what I want. So that's really the first and I would say the primary function of money is that it's a medium of exchange. It helps us to trade in order to get what we want and at the same time provide what we have without having as the chicken having pickle water to find the pickle having chicken water. All I have to do is find somebody that I need to get this word right. Somebody who wants that pickle, give them the pickle, they give me money, I take the money and I get the chicken from someone else. It allows that separation to take place. So medium of exchange allows that to happen and I would suggest that in that, it allows the division of labor to be much, much easier. I can start in a sense taking risks, doing things that maybe only very few people want done and I can specialize in those. As long as I'm reasonably confident a few people want done, a few people want economics lectures, I can make enough money to go out and to buy the things I want even if nobody in the room is willing to provide me with a place to live in, if nobody in the room can grow food any better than I. So it allows for this specialization to take place and enables it to some degree. Now there are other functions of money that arise because we're so used to using it as a medium of exchange. I find often when I try to allow it at the beginning, well let's imagine a system without money. It's extremely difficult to do it and it's so ingrained in our psyche. It's something that we're surrounded by all the time and we're used to thinking in terms of money. And because of that, that changes other parts of our behavior. For example, when I think about say my accounts, I don't think, well okay, my income, well that was from however many hours of teaching this week, I don't write that in my checkbook. No, I write my income sensibly as the number of dollars that I was paid to do whatever I did. And when I think about my expenses, I don't think, well okay, I had a shirt come in and a certain amount of time that I get to live in my house as I rent and the like. No, I write down how much money I left. So money serves as a unit of account. Now a lot of the time when you hear somebody give this type of lecture and say a money in banking course, they'd very quickly go through and say, well medium of exchange, we've established that being important. Unit of account, oh yeah, we keep accounts in dollars and then they move on. I'm very bad at moving on if you can't tell. So I'm not gonna move on yet. We don't wanna underestimate the importance of this, that we actually keep accounts in dollars. Because that is something that enables economic calculation, which I'm not going to go into great detail on, save that for Dr. Salerno's going to talk about that. But this unit of account function of money is very important in allowing us to have an advanced economy where we have this amazing capital structure that Dr. Garrison is gonna talk about in the next lecture. So it does all tie together and money stands between a lot of it. Another thing that money does is it serves as a store of value. Just as proof of that, I honestly don't remember when I got this $20 bill. I have no idea. Yet I'm keeping it in my pocket. So what am I really doing? I'm taking the value of $20. It may not be the same values when I first put it there. Like I said, I don't know when that happened. But it is storing a certain amount of value for me. This allows me to have some separation between when I receive the money and when I spend it. If it maintains its value, at least to some degree over time. Also on the basis of that type of thing, tends to be that we use it as a standard of deferred payment. So I may be able to buy now, pay later. And when I pay back, I don't necessarily, at least typically, I don't typically hand back the thing that I bought. I pay for it in money later on. So the standard of deferred payment is another function of money. So with these functions there, we know that money does serve these functions in our economy. What kind of traits would we want money to have? That's a natural question. Why is it that when the market is left to itself, it has chosen gold and silver? But why did that happen? Or what is it that's special about that that's different from something like wheat? Well, let's reason through it. Well, one thing that I'd want money to be is durable. After all, I don't know how long this $20 bill has been there. Anything that I put in my pocket, and I don't know when I'm going to spend it, I wanna make sure it's still there in roughly the same shape it was when I put it in my pocket. This is why I would say that milk, for example, makes a terrible money. It's horrible to try to store milk in your pocket for the first point, but even if you do, it tends to change fundamentally within a couple weeks at most. Okay, so milk is not a good money. It's not durable enough. We want something that will actually maintain itself so that it can be used at different points in time, received at one point, and then gotten rid of at another point. We also want something that's portable, where I can transport a relatively high value relatively easily. So, this is where something like dirt, well, it's very durable. It's not particularly portable in small quantities. We're not going to get much value for that. So you want something you can very easily move from one location to another. Now, that typically would mean that it needs to have a very high value for its weight and for its bulk. So it should be relatively small and relatively light for the amount of value you're getting in the thing. So, helium balloons, while they may be good in terms of weight, they're not very good in terms of bulk. They tend to be huge for you to get lots of value. Things like dirt, it's horrible on both. Okay, so we want something to be durable. It's something that is portable. We'd also like it to be divisible. After all, we know that sometimes I'm going to want to buy something that has a different type of value. It might be a very low value or a high value. The low value of things, I need some kind of visibility for my money. Now, this is where something like, say, my cattle, would tend not to make very good money because two halves of a goat are fundamentally different from one whole goat. Right, so cattle tends not to make a great money for that reason. It's remarkably difficult to divide and then put back together. Now, this is something I haven't talked about. Gold, yeah, except just mentioning it, precious metals are remarkable in that they're remarkably easy to divide and then put back together. You can actually literally cut a gold coin in half, get it to the right temperature, put it in the right mold, and you have exactly what you started with. So it's remarkably easy to divide and then undivided. I don't think that's a real word, but there it is. Another thing we'd like is for money to be fungible. That is, for the various units of money to all be basically identical to one another. That way it doesn't matter, say, which $20 bill I hand you. One of them is not significantly more valuable than another. In effect, identical, at least as far as we're concerned. This is where something like if we start thinking about, say, diamonds or precious gems. When you go along to other things, these feel pretty good, right? They're very durable. They are certainly portable. You can get lots of value in a very small space. It's not very light. Divisible, we start to have problems. Fungibility, we have serious problems because one diamond is not the same as any other diamond. My wife assures me of this when we got engaged. Diamonds are not all identical, right? Okay. And so things like diamonds, it's tempting because of their value to think that they might be good money, but they're not. They're not divisible, they're not fungible. Another thing that we need is for there to be a broad-based demand. Now, one point that I'd make here is that a broad-based demand is something that can grow over time. It doesn't necessarily have to be the case for gold to become money that everybody wants gold to start with. It can be just particularly popular for perhaps a small reason. Perhaps we like it for decoration as typically the case nowadays, right? I'm wearing gold, my wife is wearing gold, lots of people wear gold. All we need is a big enough base for it to make sense for people to take it. And then it becomes more popular. Even if I don't want to wear gold, it might make sense to take it so that I can give it to someone else who would like to wear it. So all of these help aid in this medium of exchange function. It's durable, it's portable, it's divisible, it's fungible, it has a broad-based demand. Now, when we think about these, it's rather obvious that things like gold coins would actually match all of these traits. Take a gold coin, it's remarkably durable. I could actually take it, I can bury it in my backyard as some people are in the habit of doing. I could forget about it. Somebody can dig it up hundreds of years later and it looks almost identical to what I put it there. It's remarkably durable, far more so than say this paper money that I have with me. I don't believe that these tend to last more than a few weeks if they're actually being used. We have to regularly collect them and burn them and print new ones. Even if we're not printing new ones to increase the money supply, we have to replace them. We also have obvious portability. Gold is extremely valuable in very small quantities. Like I said, I can't even hold up a one ounce gold coin because I haven't found it worthwhile to buy one. They're that valuable to me. I do have one ounce of silver that I got right after I left Mises University 10 years ago. I thought, I should probably get some kind of precious metal, but I'm in college. Nine dollars for an ounce of silver, that sounds good. So I did. So even silver, right? Relatively light. I was shocked when I picked it up how light this ounce is. It's remarkably portable. Okay, so we get lots of value in a very small space, very light. Naturally divisible already mentioned before, we can cut it in half. We can cut it in eighths. As occasionally as happened, pieces of eight. We can cut it up, and then if we want to, we can mold it all back together. All we need is the right temperature. And something that we can develop a broad-based demand, especially given how good gold is from these other trades. Now, I will take a moment here to talk just a little bit. And it's electron money. Given the audience, I should say something about Bitcoin. To admit my ignorance, when I came last year, somebody said, so why do you think of Bitcoin? And I said, what's Bitcoin? So you probably know more than I do. But I can reason through these different trades and say, well, does Bitcoin match it? In terms of durability, it's hard to imagine something more durable. In terms of portability, once again, amazingly portable. Divisibility, I forget how many decimal places it is out to now. I feel like it's something like 12 or 14. Remarkable divisibility, far more than a dollar. Is it something that has a broad-based demand? Then I start questioning. Well, okay, in this room, sure I could probably have virtually any exchange for Bitcoin, probably. When I go outside this room, it becomes more difficult. But we have to remember, broad-based demand is something that can be built over time. So the question, I guess in my mind, is just, will it be built? And to some degree, will the authorities that be allow it to be built? That's a question that I can't answer. I prefer studying rational action rather than government action, which tends not to be. Okay, so we can't think about Bitcoin in these terms. So it turns out okay, at least along the ones that are somewhat inherent. So let's move on now to talking, rather than about money itself. Let's talk about the value of money. Now we know that money is valuable because it aids us in this process of exchange, but that doesn't give us a very precise definition of exactly what is its value in those exchanges. How valuable is money when I go to buy something? Well, it determines whether that money is extremely valuable so I don't need very much money to buy something, or that money isn't very valuable at all, so I might need say trillions of Zimbabwe dollars to buy something. Now here, I think one of Mises's great insights was to say the value of money in exchange is determined just like the value of anything else. It's a matter of supply and demand. There are people out there that are supplying money that are trying to get rid of the money they have or that are producing money. There are people out there that are demanding money that would like to acquire more of it, and there are exchanges that happen between these people and that determines what the value of that money is. It has interaction between members on the market. Now one thing that does make it more complicated is when we're used to thinking about supply and demand, we're used to determining what prices are. And for most goods, we think of the prices just being a single thing. Let's say a T-shirt might have a price of $10 and that's all we really say. It's very difficult then to try to turn this around for money and say, well, the value of money is at the 10th of a T-shirt? In a sense, yes, but it could be lots of other things as well. It could also be a half dozen eggs. It could also be what they call a burger at McDonald's. It could also be a number of other things that this dollar could possibly buy. So understanding what we could call the purchasing power of money, it requires a little bit more abstraction than, say, the price of a T-shirt, which we can't actually say very precisely and numerically. But at the same time, we can still get a sense of how it would move and how it would tend to change based on the supply and the demand for money. So what would tend to happen? Well, we have a certain supply of money, a certain amount that's available. There's a certain demand for money. That is, people want to hold money. Then what determines its value? Well, it's this equilibration process. So it's very possible, maybe, say a new supply of money comes onto the market. I'd say in the world of the gold standard, we discover a new relatively easy to get to source of gold. So more gold flows onto the market. Well, what happens? And now we end up with a situation where the supply of money outstrips the demand. We have more money than we possibly want to use. And as a result, people are trying to get rid of it. But as we try to get rid of money, it starts to lose its value. Okay, I don't really want as much money as I have, so I'm going to go out and I'm going to try to spend it. As I try to spend it, that looks remarkably like the demand for other goods increasing. Because that's, in fact, exactly what's happening. I'm going out, I'm spending my money on other goods. You can't just generically spend money. It's being spent on something. So the prices of these other goods that I'm going out and buying are going up. And while that's happening, my money is losing value. The price of the t-shirt goes from $10 to $20. The value of my money has gone from potentially a 10th of a t-shirt to potentially a 20th of a t-shirt per dollar. So it's the supply and demand. Or it could be somehow, say, there's a ship going across the Atlantic, carrying tons upon tons of gold, and it sinks, and we decide it's not really worthwhile to go after it, and it's very, very deep. So we have a big decrease in the supply of money. And now we have a shortage of money. People would like to have more money than they actually do have. So we go out and we try to acquire money. Well, the way we try to acquire money is that we provide things to the market. So I might go out and I try to work more hours, or I start selling off the, it's rather shameful. I just moved, I just moved two months ago. I've still not unpacked everything. Last I counted, I had 150 boxes that I've not unpacked in the last two months. Maybe I could sell some of that to acquire money. But as we go out and try to sell some of this stuff, what happens? I don't know the prices of all these various things that I'm trying to sell will tend to fall. Well, all that really means is that the value of the money has started to increase. So the money that I had before, well, before I didn't think it was enough, now it's gaining value and suddenly it feels like it's more substantial because it's purchasing power is. Okay, so supply and demand interact in order to give us what the purchasing power of money is, though we have to understand that in a somewhat abstract way. Now I can go a little bit deeper into the demand for money. So we know that there's a demand for money that we'd like to hold money. But the demand for money has been somewhat troubling to economists over time. This is not necessarily immediately clear what happens. So okay, I want money and in its monetary function I want it because I know it has value. I can go out and I can give it away to other people. No, give me things I want. And so I want money because it is valuable. The demand for money exists because money is valuable. But at the same time from what I just argued, my desire to hold money, my demand for money is part of what determines its value. So it seems like I'm reasoning in a circle. Money is valuable, why? Because I have a demand for money. Well, why do I have a demand for money? Well, because it's valuable. So I could just cut out the middle man and say money is valuable because it is. It's horribly unsatisfying to anyone who wants to explain something. We want to actually have some kind of cause and effect. We don't just make the statement and claim it. Okay, so what's going on? This is another great insight from Mises that has been called the regression theorem where what Mises says is no, it's not a circle at all. Claiming that it's a circle is for getting a very important point of human action and that is human action happens in time. Once you add time to the equation, the circle vanishes. So how do we add time to the equation? Well, we know that money's value today is determined in part by the demand for money today. People want money right now and that determines am I trying to sell things to acquire more money? Am I trying to buy things to get rid of the money that I have? And that demand right now determines the exchange value right now. Where did that demand come from though? Well, it really comes from the fact that I believe that money is going to have value in the future. Okay, so this expectation that money is going to have value in the future. Well, where did that expectation come from? Mises claims that that expectation came from what I observed in the past. So when I think about, say yesterday, I know that money had a certain value. And I can reasonably expect that money's going to maintain something close to that value. So I reason backward. So money today comes from the demand for money, the exchange value of that money today comes from the demand for money today. But the demand for money today really came from the fact that money had an exchange value yesterday. Of course that in turn came from the demand for money yesterday, which came from the fact that it had an exchange value the day before yesterday. And we could keep going and this would be an extremely long lecture. So I'm going to stop. We get the idea. We're regressed through time. But this isn't necessarily any better. After all, it's just an infinite regress. So eventually it had to have started somewhere. All right, okay. So when, when did it start? Well, we should already know the answer. It started back the day before that clever person said, maybe I should take wheat not because I want it but because someone else does. After all, wheat had a value the day before that, before it was ever money because it was actually useful. It had some inherent use that could be used for bread and we could eat it, that kind of thing. And so we have to trace money, the value of money back to what we could call the last day of barter and that's the ending point. So it all starts that last day of barter then through the origins of money we can derive how through these network effects that arises and there's this continuity to the process as the observation of value originally in whatever the monetary commodity happens to be as a commodity itself, it was useful. We can observe that value and we add to it a monetary value over time. So we can't actually break first the circle by adding time and secondly, we can break this infinite regression all the way back to before the beginning of time because it's infinite go all the way back to that last day of barter and then it stops. It is actually a logical process that has a starting point and ends up right today where we are. So we can use the regression theorem then to get at money's demand in a way that is not circular in a way that is not an infinite regress. All right. I want to talk a little bit more about I guess in a sense when things can go wrong. So we'll talk about changes in the supply of money. Now the first point up that's how I feel about changes in the money supply too. The first point we want to make is that there really isn't any optimal supply of money. If we ask the question, well, how much money should exist? The only answer I can come up with that makes any sense to me is, well, more for me. That's it. It's not necessarily obvious that we need to have a certain number of zeros on our bills or a certain number of zeros not on our bills. It's not immediately obvious that we need to have a certain amount of gold for it to be able to serve the monetary function or we can change the size of our gold coins, say, cut them into smaller pieces. This is something that's possible. So there isn't any specific optimal money supply. So any discussion about trying, oh, what exactly is the optimal money supply? It's going to end up misleading us. What's going into happening? So regardless what the money supply is, if it were higher than it is right now, we would just expect its purchasing power to be less. So we could buy basically the same set of goods, but we'd have to hand over more money for each good. Or we could have a much smaller money supply which we'd expect its purchasing power to be much higher. If we don't have as much of the thing, it tends to be more valuable. So as a result, I can buy the same stuff, but I do it with much more valuable money so I don't have to hand over as much money to buy the thing. So there isn't any optimal money supply. The level of prices or the purchasing power of money will adjust to whatever the money supply happens to be. Now in this way, money is different from other types of goods. It's not like a producer's good or a consumer's good. A consumer's good is something like nice blue dress shirts. I can unequivocally say that if we produce more of them that is actually good for society. We can clothe more people and I can go longer before I have to do laundry which is always nice. So if we have more shirts, that's actually a good thing. And the same is true of any consumer's good. Once again, we can make debates about McDonald's food. At the very least, we could possibly make people better off. The same is true of producer's goods. The things we use to make things. So having more cotton is actually a good thing. Having more gold, it ends up, I guess where things start to get tricky is actually a good thing. Because gold is not just useful as a coin that we can use in exchange. It's also useful for things like jewelry. It's also useful, it ends up in a lot of electronics components. So while on the one hand, it's true there's no optimal money supply. At the same time, if we're in a world where we're using a commodity as money, say something like gold, it does actually make sense to produce more gold because it has all these non-monetary uses for things like decoration or electronics and what have you. So while producer's good, including the monetary commodity, it ends up. The more of it, the better. The more we can produce. Same goes for consumer's goods. That's not true for the monetary good as money. So just putting, say, more gold toward a monetary use is not necessarily helpful. So let's draw a little bit more into this commodity money distinction of what makes it different. It's again from this paper bill. And that's really what I just said. It makes sense to keep mining gold even if we don't need it as coins because it has other uses. The same is not true of these paper bills. And these paper bills, and I've mentioned before that they do actually wear out somewhat quickly. But really that's not necessarily a problem because we can get by with less money, just as we can get by with more. So what then would be the effect of knowing that it doesn't make us any richer to have more money or less money? What then is the effect if we start creating more money? We know that we live in a world where that is happening. What happens? Well, there are two ways of thinking of it. The first and simplest and least correct way would be the Angel Gabriel model or sometimes called the helicopter model. Where we imagine, let's do the Angel Gabriel first and then we can imagine Ben Bernanke in a helicopter. So the Angel Gabriel is this very magnanimous supernatural being, I'm with the power to work some miracles. And unfortunately it's not an all knowing being, it doesn't quite understand this idea that there's not an optimal money supply. So the Angel Gabriel is overcome with a need to be charitable to humanity and decides it's just going to double the supply of money overnight. So we all go to bed one night and wake up the next morning. And exactly how the Angel Gabriel does it, I don't know. Maybe my 20 turns into a 40. At first I'm very confused. If I want to avoid that, the Angel Gabriel doesn't do that. Just puts another 20 in the wallet. Okay, that's a bit nicer. So I find a second 20 and we know it's always exciting to find a 20 where you didn't think you had one. So I find a second 20, that's nice. And then I open up my bank account and wow, I'm not going to reveal how little is in there. Both dollars, it's like they had children. Oh, oops, okay. So oh, it's twice as much as it was before. This is great. So let's go out. I can have a free spending spray. The problem is so can everyone else. So we all go out and immediately the demand for all these various goods we'd like to buy increases. It jumps. And as goods are flying off store shelves, the managers start to realize that this is going to be a problem come about noon. So you increase their prices. After all, we know naturally increasing prices makes consumers unhappy. I'd be very, very happy if I drove by a gas station and they were giving away free gasoline. I'd be very, very unhappy if they didn't have any. So it actually makes sense. Let's ration less, let's increase the price to make sure when people come to our store they can actually find what they want. So we very quickly find this doubling of the money supply really just leads to roughly, they're probably not an exact, but roughly a doubling of prices. So in effect, prices are going to absorb all this extra money. We're not made any better off. And same would happen if say Ben Bernanke once again being overcome as he often is. He has these charitable impulses all the time to increase the money supply. And he realizes, well maybe I shouldn't just put it all into the banking system. Maybe I should spread it out. So he hops in this helicopter which flies at super white speed across the country. Dropping dollars or maybe 20s so they're actually worth something at first. And drops all these 20s on everybody's houses. And we all run out once we realize it's happening. And thank Ben. And then we curse him when we get to the store and prices are higher. And so neither of these help society at all. We have the same set of stuff. So why would we bother doing it? Why do we bother increasing the money supply? Well now let's get to a somewhat more realistic explanation that doesn't require angels that are misinformed about economics. I truly believe angels are very informed about economics. And that doesn't require super speeding helicopters dropping money in just the right amount to double the money supply or what have you. I firmly believe that Ben Bernanke probably can't fly a helicopter. So let's make more reasonable assumptions. Let's say that when the money supply increases like it actually increases. And that is that it enters through particular points in the economy and then over time filters out to other parts of the economy. So what happens then? Well let's make the heroic okay this is not a reasonable assumption. Let's say that Ben Bernanke decides he's going to create an extra $85 billion a month. That's not a heroic assumption you know that's happening. But he decides he had it to me. Is anybody made better off by me getting an extra $85 billion a month? I assure you the answer is yes. I'm made better off. Because I can go out and I can buy things. And then it's really just my demand that's pushing up prices. They don't rise very fast at first. So I get lots of benefits. I decide to stop renting my house. I buy a much nicer one than the one I'm living in. I pay cash for it which is unheard of. I buy another house and another one. I create my own housing bubble. Because I'm not very creative so I do the same thing over and over. No but I can actually acquire a lot of things I couldn't acquire if I didn't have that new money given to me. But at the same time I'm not making other people better off. There are after all the other people that do have to pay the higher prices that I'm creating before they have any new money to spend. They're actually made worse off. Those dollars that they were earning at whatever their rather honest jobs happen to be that didn't increase immediately. But the prices they have to pay for various goods including say the gasoline that I have to buy to drive to all my new houses. That's uncomfortable. It makes them worse off. They can't buy as much as they could before. So we get this redistribution that happens from those that would receive the money later to those that received the money first. So we create this new money. We put it at some point in the economy wherever that point is, it's made better off. Now it's reasonable to guess because prices are not rising immediately to adjust. Those that receive the money say second. They're probably made better off too but maybe not as much better off as they got it first. Those that receive it third are made a little bit better off. Those that receive it fourth maybe are better off, maybe. We get down to those that receive it last. They're certainly worse off. They've been having to pay higher prices this whole time and finally they gotta raise it's going to be enough to let them get by. So we get this massive redistribution effect. It's certainly good for those that get the money first. Now I don't want to draw too many conclusions from this but we can look at our economy and say how is it structured? Where does the new money enter first? We know it enters through credit markets. And in credit markets it gets picked up by borrowers especially really big borrowers. In the US the biggest borrower for the past 12 years probably has been the government. If you take out this very short span of like three years in the late 90s you can go all the way back to the 70s. The US government has been running virtually continuous deficits since that time. So the government's a big borrower and is likely going to be one of the first receivers of this money. Okay. Who's going to be the last receiver? Now maybe not me but it might be people that are living on say fixed incomes. Okay or perhaps people that are living off of investments that they've made that are paying say a relatively fixed amount of interest over time. They might actually never get the new money at all. That would be made permanently worse off. So we can see how the redistribution will happen. I would suggest that it's no accident that in the grand majority of cities you look for the largest buildings and they have names like Chase on them. I know this is certainly true. I live very close to Akron and Akron I believe there are three. It's not a very big city. There are like three skyscrapers that really stand out. One is Chase. One is First Merit also a bank. And the last one is First Energy but it's okay. These my dad works for them. Okay. Okay. So we can see. We can see how this would work. Okay. And so it's not surprising at all. You may end up benefiting from this. All right. Now let's talk about how things can go really, really wrong. After all it might be, I do have a confession. I have lots of confessions. You've been hearing them this whole time. I have another confession. That is my great grandfather was the president of a bank. It was a small bank in his defense. All right. So I do feel, but I feel a certain sympathy for bankers, right? So maybe I don't mind the bankers are made better off. Now I do think we should still be worried about the increase in the money supply happening through the credit market. As Dr. Garrison later, we'll talk about Austrian business cycle theory and flesh out why. Now what I would say though, is that I am worried just in general about massive increases in the money supply that can happen when we have a system like we do. When we have a system of this fiat paper money, or we know that it's extremely easy to increase the money supply here. I believe last time I checked, it cost something like seven or 10 cents to print a bill. If you add up all of the labor time that goes into it, it's not very much. The paper or cloth hybrid that is making this thing, or the ink that goes on it, it's seven or 10 cents. Remarkably cheap to create a lot more of these. It's very different from gold. It's very hard to get more gold. Digging holes in the ground that have been very, very deep in the managing to actually get stuff out of there. It's not easy. So it's remarkably easy for us to create more of these. We could. It's even easier when most money doesn't even exist in this paper form anymore. I won't even tell you how many times I've accidentally added zeros to things on my computer. You multiply things by 10 remarkably easily. So when most of our money is electronic or paper with nothing back in it, it's remarkably easy to increase the money supply. And that can create rather serious problems. That's that problem that we call hyperinflation. Let's talk just a little bit about when things go really, really wrong with the monetary system. Rothbard divides hyperinflation into three stages. In the first stage, there's an increase in the money supply. This is sensible, an increase in the money supply. And this would tend to push down the value of money, push down its purchasing power. Now Rothbard suggests that in that first stage, the way that we're going to react in our expectations is interesting. And that as we're watching, okay, we're seeing the various prices we pay tick up. We don't immediately think that this is going to be a normal thing. Instead, if we're used to seeing money having a relatively constant value, we'll say, well, okay, there's something weird going on. Eventually these prices are going to fall back down. And that's going to end up actually increasing my demand for money at that point in time. I'll just hold on to my money until it's worked more again. It's a sensible thing to do. And as a result, prices don't actually change that much. While there is a small uptick in prices, our tendency to try to avoid paying those higher prices keeps it from rising too much. So the purchasing power of money can't actually hold on in this first stage without too much problem. In the second stage, though, things get worse. Now we've observed year after year, quarter after quarter, month after month, prices keep going up. They're rising and rising and rising. The money supply is still increasing to make that happen. So we have an increase in the money supply again in stage two. But now I start having doubts. I know prices are not going to return to normal. There's a new normal and that normal is rising prices. And I don't really want to hold on to this money if I know it's not going to buy very much come tomorrow or maybe next month or maybe next year. I'm not going to hold on to it. I'm going to try to spend it a little bit faster. So in the second stage, rather than our demand for money increasing, it ends up decreasing. So we have two things going on now in the second stage, neither of which are good for the purchasing power of money. At the first, we have an increase in the supply. We know that's going to tend to push down the purchasing power of money, make it less valuable, push up the prices we pay for various things. The second thing that's happening is that we're starting to think that this is normal, the prices are going to keep rising, so our demand for money falls. That in itself is also going to lead towards trying to get rid of money, pushing prices up all the faster. So stage one, not that bad. Stage two, getting a little bit worse, prices are rising faster until it is perfectly possible to mentor stage three. Stage three is something that, if I were inclined to graph things and I'm not, if I had graphed it before, I'd say, oh, here's the demand curve. Oh, here it's going down in stage two rather than up. In stage three, you can't graph it anymore because it vanishes. By stage three, what happens is that people are realizing prices are going up really, really, really fast. I don't want to hold money at all anymore. If somehow, by some kind of accident, or through some means, I end up with money in my pocket, I immediately go out and try to get rid of it. The demand for money has effectively become nil. At this point, we would call that a flight to real values. We're trying to just get rid of money, get anything else that might possibly hold onto its value from one minute to the next. Now, it sounds kind of extreme to say that coming from the United States. We know prices don't increase in the U.S. Ah, okay, that's not true. We know that in fact, since 1913, over the past 100 years, what was penny candy in 1913, you don't have to pay a quarter or four. Okay, prices go up, but that's 100 years. Okay, they don't go very fast. So we're not flying to real values for the most part in our country. If we have observed it happen in other countries. So Germany saw that happen. Flight to real values, where the money became effectively worthless. More recently, we've seen that happen in Zimbabwe. Yeah, I really, this is one of those things where economists are just terrible people. Because there's a certain degree to which I am actually, as Tom Woods said, I'm kind of wishing for bad things to happen. Because they provide great classroom demonstrations. It's like, oh, we know hyperinflation happens because Zimbabwe. I don't feel bad about Zimbabwe. That's not true. We know it's absolutely horrible. It's absolutely horrible for this to happen. And how horrible it was, I managed to pick up, I believe I have 180 trillion Zimbabwe dollars in my office. Yeah, I'm a trillionaire. It cost me, at the time, I believe it was $15 on eBay. And that included these really neat plastic sleeves. Which I'm sure the majority of my $15 went toward paying for the plastic sleeves. Because the money was virtually worthless. Nobody wanted it anymore. The best thing they could do with it was stick it in a plastic sleeve and send it off to the US where some dope economics professor's gonna buy it for classroom demonstrations. And that's its highest value to use because I could actually buy it for $15. That's amazing. And it's horrible. Because what happens? Imagine now, what happened in whatever economy you happen to be thinking about. If money became absolutely worthless. Well, okay, I may not cry too much of my $20 bill being worthless. I may not cry too much about the three or four dollars in my checking account being worthless. There's not very much of them. But what it really means is that I now have a serious problem. Because the monetary system has just melted down around me. And we established at the beginning of the lecture how I would do in a system that is not monetary. I can try for self-sufficiency and have to split these two strawberries between my wife, my son, and me. Which I assure you, my 17 month old son, first I love him so I'll give him strawberries. But even if I didn't, he's faster than I am. And he loves strawberries. So that's not gonna be good for me. We could resort to barter, where I have to more or less give up giving economics lectures unless some of you happen to be growing food. Let me know, just in case. So I have to pick something else that I'm not very good at. It's not good for me, and it's not good for any economy that experiences this hyperinflation. So what then do we do? I guess I would note here, if you really do want to destroy an economy, the fast way is hyperinflation. The slow way is central planning. Let Dr. Slarnow talk more about that. Hyperinflation utterly can destroy an economy. And do it remarkably fast. So what then happens? Well, we could resort to self-sufficiency or barter, but to a certain degree we're lucky in that we live in a world where there is more than one money. And we actually have seen this happen, for example, in Zimbabwe. The people in Zimbabwe give up on the Zimbabwe dollar. It doesn't make sense to take it anymore. You get rid of it as soon as you can. But the US dollar, the euro, perhaps gold, I think these things are okay. It seemed to maintain their value reasonably well at least compared to the Zimbabwe dollar we just gave up. So we can, not without hitches, we can switch over to these other monies that are next door. We can switch over to the American dollar, the euro. All right, so that can limit the disruption. Now, we can then imagine how I would feel about, say, something like a worldwide paper money. If that hyperinflates, and it very well may, what do we have to recourse to? I may as well just hop in a lake because I will survive probably roughly as long in that lake and being unable to swim very well as I will in a world of self-sufficiency or barter. So having a world where we have more than one money actually can help us if we have hyperinflation happen. But naturally it's better if it doesn't. So just kind of sum up what are the points I wanna make. On the first point that I hope I've made is that money is really essential if we want to have a prosperous society where we can really take full advantage of the division of labor. If we wanna have a society in which not only the farmers can survive, but I can survive too. I very much prefer that society. I hope I've convinced you that money is something that can arise naturally through a market process. It didn't require anybody declaring, either as a group or individually, that we were going to use something as money. All it takes is a clever enough person and enough copycats and we start getting money arise naturally through individual action. And I also hope to convince you that the world that we live in now where the government is the one manipulating this money is a very dangerous one. After all, we can produce this thing for seven cents. I would suggest it's not that cheap to add a zero and another zero and another zero. The reason I can suggest that is because, not because I know anything about printing, because we've seen it happen. We have seen when he's meltdown time and time again. So the world we live in is a dangerous one. So is there any hope? Well, I do actually believe, I think Mises has a number of wonderful points and one point that I very much believe is that in the end, there is no unpopular government. Every government is restrained by the beliefs of the people, eventually. So my hope is that I can spread the word here and that you can also spread the word that if we're going to have a monetary system that is going to be able to survive, we need to encourage, one thing, alternatives to this. Alternatives that might last. I would suggest gold was a wonderful system that worked reasonably well. It makes sense that it would work well. In fact, it makes so much sense that even Karl Marx realized that money by nature is gold and silver. Gold and silver are remarkably good at serving as money. Yeah, Marx gets something right. We should take notice. So we should encourage these alternatives. Perhaps things like gold and silver, perhaps things like Bitcoin. And so it's really all that I wanted to make sure. We know, go out, spread the word. I will accept any free Bitcoins you want to give me. Okay. Okay.