WEBVTT NOTE Money and Prices 1 00:00:00.000 --> 00:00:02.360 A lot of nonsense has been written on many areas of economics. 2 00:00:02.360 --> 00:00:07.640 By far more nonsense has been written on the topic of money than any other area. 3 00:00:07.640 --> 00:00:14.320 Every guy with a pen and ink and or a typewriter feels that a boy should come out of the track on money, 4 00:00:14.320 --> 00:00:16.120 most of it pure junk. 5 00:00:16.120 --> 00:00:20.440 In most cases, the people who write on money, usually known as money cranks, 6 00:00:20.440 --> 00:00:24.760 in one way or the other come up with the conclusion that what's needed to solve all the problems of the world 7 00:00:24.760 --> 00:00:28.200 is for the government or somebody else to issue unlimited amounts of money. 8 00:00:28.200 --> 00:00:33.200 And when this happens, all problems will be solved, because everybody has money to be able to spend it. 9 00:00:33.200 --> 00:00:44.200 One of the problems is in order to refute the money crank, with precision, you have to take a position, finally, which is really the opposite, the polar opposite of money crankism, which most economists or other people don't go far enough to take. 10 00:00:44.200 --> 00:00:47.200 The definitions of money are usually also pretty weak. 11 00:00:47.200 --> 00:00:56.200 The worst example I know of is the Chamber of Commerce in the United States came out with a textbook on economics about 20 years ago, and a series of pamphlets and chapters. 12 00:00:56.200 --> 00:00:58.200 Money is whatever the government says it is. 13 00:01:26.200 --> 00:01:31.200 In the macro field, you're talking about supply and demand, individual action, prices, that sort of stuff. 14 00:01:31.200 --> 00:01:34.200 And suddenly you're in the macro field and you're talking about something completely different. 15 00:01:34.200 --> 00:01:37.200 You're talking about all sorts of equations and banks and so forth. 16 00:01:37.200 --> 00:01:42.200 And there's no relationship between the sort of fairly clear-cut supply and demand analysis on the one hand 17 00:01:42.200 --> 00:01:46.200 and the sort of all the stuff going on out there in the macro field on the other. 18 00:01:46.200 --> 00:01:49.200 We're going to tie it in. 19 00:01:49.200 --> 00:01:54.200 In order to really understand what money is all about, you can't start off with the current 1974. 20 00:01:54.200 --> 00:02:24.200 We go back now, not exactly to Crusoe, but Crusoe 20 years later, with half a dozen people, or so, in a little village, they're engaging in specialization, division of labor, all the things we've been talking about, and one guy's producing eggs, another guy's producing wheat, the third guy's making shoes, and so forth and so on, rudimentary specialization, division of labor, and each one exchanges the surplus of his product, or the surplus of other people's products, and everybody benefits from the exchange, and so forth and so on, you can even talk in terms of money. 21 00:02:24.200 --> 00:02:54.200 Money hasn't popped up yet. In other words, so far, the guy, the egg producer exchanges some of his eggs for somebody else's wheat, and the wheat producer does likewise in the other direction, and the egg producer exchanges some of his eggs for somebody for his pair of shoes, and so what you have then is what's known as barter, or direct exchange, in which everything exchanged between two people directly benefits each person. You get the eggs and you eat them, or you get the shoes and you wear them, and so forth. So every term in the equation, so to speak, is a directly useful product. 22 00:02:54.200 --> 00:03:01.200 So far money hasn't originated. In barter there are certain difficulties which pop up very quickly in the game. 23 00:03:01.200 --> 00:03:06.200 As soon as you get beyond Crusoe on Friday and get a few people in the village, you run into some problems 24 00:03:06.200 --> 00:03:09.200 in trying to work out a system of barter. 25 00:03:09.200 --> 00:03:15.200 Well, to apply to a modern context, I'm going out and trying to buy a newspaper. There's no money. 26 00:03:15.200 --> 00:03:21.200 So in order for me to buy a newspaper, I have to find a news dealer who wants, let's say, five minutes of quick economic instruction. 27 00:03:21.200 --> 00:03:27.200 And we bought this thing, we have a little go-round here, 30 seconds of economics on and off of the paper. 28 00:03:27.200 --> 00:03:32.200 Now obviously, it's going to be very, very difficult. I'm going to start with that pretty quickly. 29 00:03:32.200 --> 00:03:35.200 You have to find a grocer who wants some economic instruction, and so on and so on. 30 00:03:35.200 --> 00:03:39.200 Even in a primitive village, what if the shoemaker is allergic to eggs? He doesn't want any eggs. 31 00:03:39.200 --> 00:03:42.200 What's the egg dealer going to do if he wants a pair of shoes, or if he wants his shoes repaired? 32 00:03:42.200 --> 00:03:47.200 He's in trouble right away. So you start off in trouble from the very beginning, and you're not going to get too far. 33 00:03:47.200 --> 00:03:56.200 If you get too far, obviously you can't build up any kind of modern economic system that way, because for one thing, supposing you're a steel manufacturer, what are you going to do with your steel bars? 34 00:03:56.200 --> 00:04:04.200 You have to go around and find, if you want to exchange it for food, you have to get a steel bar and try to find a grocer like a steel bar. It's not too easy to contemplate either. 35 00:04:04.200 --> 00:04:15.200 You have the problem, what used to be known in the textbooks as the double coincidence of wants. In other words, you have a problem trying to find somebody who wants what you want and also has what you want to have. It's not that easy. 36 00:04:15.200 --> 00:04:18.200 Another problem with this is the problem of indivisibility. 37 00:04:18.200 --> 00:04:22.200 In other words, I've got a tractor, let's say, I want to sell the tractor. 38 00:04:22.200 --> 00:04:24.200 I want to sell it and exchange it for other things. 39 00:04:24.200 --> 00:04:26.200 I have 20 different things, let's say. 40 00:04:26.200 --> 00:04:28.200 I have to find a grocer who wants a whole tractor. 41 00:04:28.200 --> 00:04:30.200 I can't chop up the tractor into 20 parts. 42 00:04:30.200 --> 00:04:33.200 Once you start chopping up the tractor, it loses value. 43 00:04:33.200 --> 00:04:35.200 So you have the problem of indivisibility. 44 00:04:35.200 --> 00:04:37.200 Nobody wants a tractor. 45 00:04:37.200 --> 00:04:39.200 You can't chop up a tractor into five parts. 46 00:04:39.200 --> 00:04:44.200 You have problems with any large thing and trying to divide it into parts 47 00:04:44.200 --> 00:04:49.120 and use that for barter. There's also another problem which will be very severe in the world 48 00:04:49.120 --> 00:04:53.480 of barter. There's no way to really calculate if you're a business firm. There's no way 49 00:04:53.480 --> 00:04:55.980 to calculate what your income is and what your expenditures are. There's no way to 50 00:04:55.980 --> 00:04:59.560 calculate whether you're engaging in a profitable business, whether you're running a loss or 51 00:04:59.560 --> 00:05:03.920 a profit because you have to say, let's say I took in during the month the following 52 00:05:03.920 --> 00:05:08.720 things, 20 kegs of nails, 30 dozen eggs. You know, you list about 50 different things 53 00:05:08.720 --> 00:05:14.160 and you're paying out 20 kegs of this and five feet of lumber and there's no way 54 00:05:14.160 --> 00:05:18.040 There's no common denominator by which you can measure these things or estimate them. 55 00:05:18.040 --> 00:05:19.440 You don't know what the heck's going on. 56 00:05:19.440 --> 00:05:23.480 No accounting system can work under Boehm-Bawerk. 57 00:05:23.480 --> 00:05:24.480 One price for anything. 58 00:05:24.480 --> 00:05:28.240 If a former wants to know what the price of eggs is, you have to tell him, well, let's 59 00:05:28.240 --> 00:05:29.840 see, the price of eggs is as follows. 60 00:05:29.840 --> 00:05:33.720 One loaf of bread, two pounds of butter, one-tenth of a hat, and so forth and so on. 61 00:05:33.720 --> 00:05:37.040 It goes down a whole list of hundreds of thousands of different things. 62 00:05:37.040 --> 00:05:40.160 And so you never know what any price is until a complete state of confusion. 63 00:05:40.160 --> 00:05:44.160 So no real market of any size or any complexity can develop under barter. 64 00:05:44.160 --> 00:05:46.160 Okay, so you have this world of barter. 65 00:05:46.160 --> 00:05:51.160 It's a world of struggling to develop, but obviously getting nowhere fast. 66 00:05:51.160 --> 00:05:54.160 Let's go back to the egg dealer, and there's three guys in the village. 67 00:05:54.160 --> 00:05:57.160 There's a wheat farmer, an egg dealer, and a shoemaker. 68 00:05:57.160 --> 00:05:59.160 And the shoemaker happens to be allergic to eggs. 69 00:05:59.160 --> 00:06:02.160 The egg dealer's shoes are falling apart. 70 00:06:02.160 --> 00:06:04.160 The egg man gets a brilliant idea. 71 00:06:04.160 --> 00:06:07.160 He goes to the wheat farmer and finds out the wheat farmer's not allergic to eggs. 72 00:06:07.160 --> 00:06:12.160 He exchanges his eggs for the wheat, and he takes the wheat, and he doesn't want the wheat. 73 00:06:12.160 --> 00:06:15.160 See, this is the first time in the history of the world, so to speak, in this model, 74 00:06:15.160 --> 00:06:18.160 where the guy buys wheat not because he wants wheat, he might be allergic to bread. 75 00:06:18.160 --> 00:06:22.160 He's buying the wheat not because he wants it for himself or to eat it or whatever, 76 00:06:22.160 --> 00:06:27.160 but in order to exchange it for the shoes, because he knows that the shoemaker will buy wheat. 77 00:06:27.160 --> 00:06:31.160 So he had for the first time an indirect exchange, or an exchange with a medium. 78 00:06:31.160 --> 00:06:35.160 In other words, buying something not because you want it, as you do under a barter, 79 00:06:35.160 --> 00:06:37.160 The Theory of Money and Credit 80 00:07:05.160 --> 00:07:14.160 This is a case of indirect exchange as opposed to direct exchange, because what happens is that a certain product, in this case wheat, is now being demanded not just for itself, but also as a medium. 81 00:07:14.160 --> 00:07:27.160 This raises the demand curve for the product. Once something begins to be used in any society as a medium of exchange, it begins to snowball, because when somebody finds out, hey, they're using wheat as a medium of exchange in northwestern Brooklyn, 82 00:07:27.160 --> 00:07:36.160 In the mid-1980s, the idea was that people who were dealing with North Western Brooklyn would buy wheat and would have sort of confidence in the fact that you can get rid of the wheat because people in North Western Brooklyn are using it as a medium. 83 00:07:36.160 --> 00:07:41.160 This encourages people who are dealing with North Western Brooklyn to start buying wheat themselves, and it has a snowballing effect. 84 00:07:41.160 --> 00:07:55.160 The more people use it, the more people find out about other people using it, and very shortly, one or two commodities begin to spiral upward and begin to be used as a medium for all exchanges, virtually all exchanges in the society. 85 00:07:55.160 --> 00:07:58.960 When you get to that point, and you get to one commodity or two commodities which are 86 00:07:58.960 --> 00:08:03.960 being used as a medium for all exchanges, this is called a general medium of exchange, 87 00:08:03.960 --> 00:08:08.840 and this is the definition of money. Money is a commodity which is used or a thing which 88 00:08:08.840 --> 00:08:12.920 is being used as a general medium for exchanges. And once you have a situation where you have 89 00:08:12.920 --> 00:08:17.160 a general medium of exchange, when money has been established on the market, not because 90 00:08:17.160 --> 00:08:21.360 the government has come in and said, I think we'll make cowry shells money or I think we'll 91 00:08:21.360 --> 00:08:27.360 Money emerges on the market, and always has emerged on the market, as in this sort of process. 92 00:08:27.360 --> 00:08:31.360 In fact, the people on the market see that certain commodities are more marketable than others. 93 00:08:31.360 --> 00:08:35.360 They start using it as media. They find this expands their horizons enormously. 94 00:08:35.360 --> 00:08:41.360 Pretty soon you wind up in the market process with one or two commodities as a general medium of exchange. 95 00:08:41.360 --> 00:08:45.360 Once a commodity has been established as money, all sorts of goodies flow from it. 96 00:08:45.360 --> 00:08:48.360 Enormous economic benefits flow from this fact. 97 00:08:48.360 --> 00:08:56.360 Say, gold is established as money. Now you don't have to worry, if you're an economics professor, you don't have to worry about, let's see, what does that grocer want in exchange? 98 00:08:56.360 --> 00:09:01.360 You don't have to worry about that. Everybody wants money, and so all you have to do is to sell whatever you have, services for money. 99 00:09:01.360 --> 00:09:10.360 Instead of having a double coincidence of wants, all you need is one guy wanting one thing. All you need is somebody wanting eggs, or somebody wanting economics, education, or whatever. 100 00:09:10.360 --> 00:09:13.360 And money then becomes the other term for every exchange. 101 00:09:13.360 --> 00:09:43.360 Second of all, the result of this is that indivisibility is now wiped out. Indivisibility is no longer a problem. Since money is divisible itself, if you want to get rid of your tractor and exchange it for a couple of cows and so forth and so on, a whole bunch of other things, you can sell the tractor for the money commodity, take the money and divide it up into different small parts, exchange these parts for hi-fi sets, Wheaties and whatever. Since money is divisible and everybody wants it, everybody will take an exchange. There's no problem then with trying to figure out 102 00:09:43.360 --> 00:09:45.360 The Theory of Money and Credit 103 00:10:13.360 --> 00:10:19.360 The whole process of accounting, the whole process of figuring out whether you're making profits or suffering losses now becomes possible. 104 00:10:19.360 --> 00:10:26.360 As a result, money is an incomparable benefit to society. It's the most important single invention rather than fire and the rest of it. 105 00:10:26.360 --> 00:10:33.360 It came about, of course, not because one single person invented it, but because natural, unquote, market processes. 106 00:10:33.360 --> 00:10:38.360 No one person sat down and said, hey, I think we'll have something called money and establish it. 107 00:10:38.360 --> 00:10:42.360 Also, what happens is that this goes along with the ease of economic calculation. 108 00:10:42.360 --> 00:10:44.360 If you want to know what the price of eggs is, instead of having to say, 109 00:10:44.360 --> 00:10:47.360 let's see, the price of eggs is one loaf of bread or half a pound of butter, etc., etc., 110 00:10:47.360 --> 00:10:51.360 and go down in a list, there's only one price for everything, that's the money price. 111 00:10:51.360 --> 00:10:57.360 Whatever the ruling price is in money, so the price of loaf of bread is whatever, 75 cents, and that's it. 112 00:10:57.360 --> 00:11:02.360 Okay, so we see these enormous advantages and benefits from money, then the question arises, 113 00:11:02.360 --> 00:11:07.360 what good will be established in the market as money? What will usually emerge on the market as money? 114 00:11:07.360 --> 00:11:12.960 Usually it's the best money-able product, money-ish, when is that term good? 115 00:11:12.960 --> 00:11:17.200 A whole bunch of different types of commodities have been used as monies in the past. 116 00:11:17.200 --> 00:11:23.360 Soil, tobacco, cattle, southern colonies in America in the 17th century and 18th century. 117 00:11:23.360 --> 00:11:27.600 Tobacco is used as money, tobacco is a major product and business accounts are kept in 118 00:11:27.600 --> 00:11:30.640 terms of hogs heads of tobacco. 119 00:11:30.640 --> 00:11:35.280 One of probably the most single anthologized article in economics is a very excellent article 120 00:11:35.280 --> 00:11:40.800 by an English economist who happened to be in a German prisoner of war camp in World War II, and after the war he wrote an article called 121 00:11:40.800 --> 00:11:43.000 economics of a prisoner of war camp 122 00:11:43.000 --> 00:11:49.520 and he shows what happened there, of course it was a large community, the only supplies coming in were essentially care packages and things like that 123 00:11:49.520 --> 00:11:58.120 what happens is that money begins to emerge, A-money begins to emerge, obviously there was no cash in that sort of system, and the money that emerged in the POW camps were cigarettes 124 00:11:58.120 --> 00:12:02.320 and he began to have a situation where everything was priced in terms of cigarettes, a market developed 125 00:12:02.320 --> 00:12:06.320 British officer would post on the board periodically what the price of, you know, a can of anchovies, 126 00:12:06.320 --> 00:12:10.760 three packs, a can of so-and-so, one pack, etc., etc. Everything would have its price. 127 00:12:10.760 --> 00:12:14.880 The whole price system develops. A beautiful example of the market in action. Oh, some 128 00:12:14.880 --> 00:12:18.560 enterprising speculators would do it. They'd buy up something when the care package, let's 129 00:12:18.560 --> 00:12:21.680 say, would come the first of the month. So during the first week, prices would tend to 130 00:12:21.680 --> 00:12:25.680 be lower than the last week because supplies would be eaten up by the end of the month. 131 00:12:25.680 --> 00:12:29.520 So enterprising speculators would buy the stuff when it's cheap, say the can of anchovies 132 00:12:29.520 --> 00:12:33.600 of the Reserve, hold it off the market until the last week and then sell it, just taking 133 00:12:33.600 --> 00:12:37.880 advantage of the higher price, thereby smoothing out the price fluctuations and shifting the 134 00:12:37.880 --> 00:12:41.600 supply of the commodities, allocating to where the consumers are most needed, over the last 135 00:12:41.600 --> 00:12:42.600 week. 136 00:12:42.600 --> 00:12:43.600 So all these things began to emerge. 137 00:12:43.600 --> 00:12:47.240 And sure enough, another thing that emerged was also inflation, because sometimes more 138 00:12:47.240 --> 00:12:51.080 cigarettes would start pouring in and the prices would go up. 139 00:12:51.080 --> 00:12:55.360 And then, sure enough, wouldn't you know, they decided, finally, the British officers 140 00:12:55.360 --> 00:13:21.360 and finally, they just threw up their hands and they said the heck with it, the price controls won't work and they eliminated it, of course, the shortages immediately disappeared. 141 00:13:21.360 --> 00:13:28.360 That's a beautiful microcosmic example of the current situation, past, present and future, for that matter. 142 00:13:28.360 --> 00:13:33.360 Anyway, cigarettes were the best money around. They had, of course, in the absolute sense, some disadvantages. 143 00:13:33.360 --> 00:13:40.360 First place, they crumpled easily. You know, you sort of make the wrong move and the whole cigarettes, your money goes down the chute. 144 00:13:40.360 --> 00:13:44.360 So the cigarettes got stale, and stale cigarettes were discounted, and had a discount of fresh cigarettes. 145 00:13:44.360 --> 00:13:48.360 They weren't very durable, and so forth. And also, they existed in an abundant quantity. 146 00:13:48.360 --> 00:14:18.360 the best money they had. Over the centuries, if enough stuff is available, and so you don't have to make do with cigarettes or hogsheads or tobacco, two metals have emerged on the market over thousands of years, time-tested, have emerged on the market as the best monies, with all the great money-ish qualities needed, namely gold and silver. Gold, particularly since gold is scarcer than silver, gold is usually used for larger, 147 00:14:18.360 --> 00:14:21.360 Transactions and Silver or Smaller Transactions. 148 00:14:21.360 --> 00:14:24.360 The two can really continue side by side. 149 00:14:24.360 --> 00:14:28.360 Here the old money and banking textbooks used to have a great chapter dealing with the question, 150 00:14:28.360 --> 00:14:30.360 which of the commodities make the best money? 151 00:14:30.360 --> 00:14:32.360 Which are the money-ish qualities? 152 00:14:32.360 --> 00:14:35.360 Of course, that's all about that now because there's no commodity money anymore. 153 00:14:35.360 --> 00:14:39.360 And the money which does exist has obviously so bad in relation to any money-ish qualities, 154 00:14:39.360 --> 00:14:41.360 it's best not to talk about it. 155 00:14:41.360 --> 00:14:47.360 In other words, paper and government fiat bank accounts are about the last thing the market would choose as money. 156 00:14:47.360 --> 00:14:50.360 One of the great money-ish qualities, well, first of all, it should be very marketable. 157 00:14:50.360 --> 00:14:54.360 It should be something in great demand before it even begins as money. 158 00:14:54.360 --> 00:14:57.360 And these things that you're picking in each society are usually in great demand. 159 00:14:57.360 --> 00:15:01.360 The cowry, shells, gold and silver has always been in great demand as an ornament. 160 00:15:01.360 --> 00:15:05.360 Start off with sort of a firm base in its original non-money form. 161 00:15:05.360 --> 00:15:06.360 Also, it should be divisible. 162 00:15:06.360 --> 00:15:10.360 It should be a commodity which you can chop up into small pieces and not lose the whole value. 163 00:15:10.360 --> 00:15:15.360 Gold and silver have two remarkable qualities as metals that you can take and slice into very small pieces 164 00:15:45.360 --> 00:15:50.960 It should be also durable. It should be able to sock it away on a mattress or something and pull it out 50 years later. 165 00:15:50.960 --> 00:15:56.760 So it should be very durable, which gold and silver are. Gold and silver also are divisible and have a high value per unit quantity. 166 00:15:56.760 --> 00:16:00.860 It also should be something that's easily recognizable and difficult to counterfeit. And gold is also that way. 167 00:16:00.860 --> 00:16:06.860 The average person can easily tell, at least he used to tell in the old gold days, be able to tell quite quickly whether it's really gold or not. 168 00:16:06.860 --> 00:16:10.660 You just bite it and you ring it on the table, etc. and drop it quickly. 169 00:16:10.660 --> 00:16:15.860 So, for all these reasons, gold and silver emerged from very early in the game as the best monies. 170 00:16:15.860 --> 00:16:19.460 And also, as we'll see later, one of the great qualities of gold and silver as the best monies, 171 00:16:19.460 --> 00:16:23.940 it has to be dug out of the ground. It's not subject to government turning on the printing presses. 172 00:16:23.940 --> 00:16:27.700 The market chooses gold and silver for these reasons. Free market economists tend to choose 173 00:16:27.700 --> 00:16:31.860 it for those, plus the fact that you can get them outside of government, you can be supplied outside 174 00:16:31.860 --> 00:16:36.820 of government, fiat, as an extra reason. And those are really the reasons why gold standard types 175 00:16:36.820 --> 00:16:50.820 Not only is this the model of the way money has originated as a free market money, Ludwig von Mises showed 60 years ago now that this is the only way that money can originate. 176 00:16:50.820 --> 00:17:00.820 Money cannot originate either by a social contract, everybody getting around in one big assembly and saying, hey, I think we need some money, and somebody saying, okay, let's use dingbats or whatever. 177 00:17:00.820 --> 00:17:17.820 This has been shown by Mises' so-called regression theorem, which solves a lot of very important theoretical problems that the Austrian school and marginal utility school faced at the turn of the century. 178 00:17:17.820 --> 00:17:28.820 Basically, the problem is this. You can see why the demand for anything, demand for eggs, demand for hula hoops or whatever, would be determined by the marginal utility that the consumers have for these things and their value scales. 179 00:17:28.820 --> 00:17:42.820 The point about money is, the peculiar thing about money, you're using money in exchange, you're buying money, so to speak, you're selling your goods and services for money, not because you want to use it directly, but because you want to exchange it for something else. 180 00:17:42.820 --> 00:17:53.820 So therefore, the demand for money itself, the very fact that you're demanding money on your value scale, in other words, you have a marginal utility for money, which has not been applied to monetary theory since either before Mises or since. 181 00:17:53.820 --> 00:17:58.300 The reason why you have a marginal utility for money is precisely because you have pre-existing 182 00:17:58.300 --> 00:17:59.820 prices in terms of money. 183 00:17:59.820 --> 00:18:01.700 Money has a pre-existing purchasing power. 184 00:18:01.700 --> 00:18:04.540 You have a problem with supposedly circular reasoning here. 185 00:18:04.540 --> 00:18:08.020 In other words, the problem for explaining the price of money, demand for money in terms 186 00:18:08.020 --> 00:18:11.700 of marginal utility, is that you can see you can have a marginal utility for eggs because 187 00:18:11.700 --> 00:18:13.940 you like to eat it, but you're not presuming a previous price. 188 00:18:13.940 --> 00:18:18.220 But when it comes to money, the very fact that you have a marginal utility for it presumes 189 00:18:18.220 --> 00:18:22.380 or assumes a preceding price for it, preceding price level, in quotes. 190 00:18:22.380 --> 00:18:25.740 So how do you get out of this, what used to be called the Austrian Circle? 191 00:18:25.740 --> 00:18:29.700 Mises is the one who solved this by saying as follows, yes it's true, there's a time 192 00:18:29.700 --> 00:18:33.260 element in the demand for money, which doesn't exist in the demand for other things. 193 00:18:33.260 --> 00:18:38.260 Say the marginal utility of money and day x is in some way a function of or dependent 194 00:18:38.260 --> 00:18:44.140 on the price level or the purchasing power of money and the day x minus 1, previous day. 195 00:18:44.140 --> 00:18:48.660 However, he said, if you push this back, keep pushing this back logically in time, you'll 196 00:18:48.660 --> 00:19:18.660 We finally arrive at the first day, the day when gold is first used as money, in a logical sense, previously had been only in barter, and you go back beyond that, the last day when gold was only used as barter, then you have a situation where gold is demanded only for its own sake, only for its ornament, whatever, and the marginal utility of gold at that point will have no time component at all, so the demand for gold the day before it's used as money is purely the consequence of the marginal utility of gold on that day, and afterwards, when you start using 197 00:19:18.660 --> 00:19:25.660 is a medium of exchange. Then there's this time component in it. Then you say, well, it's dependent on the fact that you have a previous price for it. 198 00:19:25.660 --> 00:19:33.660 Which means that no money can ever originate unless it originally was a non-monetary use. 199 00:19:33.660 --> 00:19:40.660 In other words, you have to have a starting point where it was used or as valuable and had a price on the market, which was a non-monetary price. 200 00:19:40.660 --> 00:19:47.660 Ergo, all monies have to emerge as originally a useful non-monetary commodity by gold or silver. 201 00:19:47.660 --> 00:19:51.860 For the, you know, you can kick gold and silver out of this, the thing can still function as money afterward. 202 00:19:51.860 --> 00:19:54.220 Keep on indefinitely on momentum. 203 00:19:54.220 --> 00:19:57.560 But as far as originating money, you have to begin with a non-monetary 204 00:19:57.560 --> 00:20:02.380 useful commodity. Okay, we have gold and silver established, we say it has to be established on the market. 205 00:20:02.380 --> 00:20:07.380 What's the currency unit? What unit do you keep the account in? You're talking about income and expenditure. 206 00:20:07.380 --> 00:20:08.780 Well, metals are always 207 00:20:08.780 --> 00:20:10.540 exchanged in terms of weight, 208 00:20:10.540 --> 00:20:11.780 units of weight. 209 00:20:11.780 --> 00:20:14.180 You're talking about tons of iron or 210 00:20:14.180 --> 00:20:16.180 pounds of copper or whatever. 211 00:20:16.180 --> 00:20:21.180 Therefore, the monetary unit will be a unit of weight of gold or silver. 212 00:20:21.180 --> 00:20:27.180 Let's say if you take gold as the money, in that case the gold gram or the gold ounce will be the monetary unit. 213 00:20:27.180 --> 00:20:33.180 Then economic calculations, income expenditure, prices, all these will take place in terms of the gold gram or the gold ounce. 214 00:20:33.180 --> 00:20:37.180 The unit of weight of gold becomes the currency unit. 215 00:20:37.180 --> 00:20:44.180 Once again, there's no example in history where any monetary unit has emerged except as originally a unit of weight of gold or silver or some other commodity. 216 00:20:44.180 --> 00:20:50.180 The dollar, for example, began as a, I think, 16th century Bavaria, somewhere around that area. 217 00:20:50.180 --> 00:20:56.180 It was the Count of Joachim's Tall. During those days, the noblemen often issued their own coins. 218 00:20:56.180 --> 00:21:04.180 The Count of Joachim's Tall issued a coin, which had the name of the Count of Schlick, Count Schlick of Joachim's Tall. 219 00:21:04.180 --> 00:21:10.180 They issued these coins, which circulated all through Europe because they were pretty and they lasted a long time and looked good. 220 00:21:10.180 --> 00:21:14.180 The first time it looked good, it was called the Joachim's Tollers, or Schlichten Tollers. 221 00:21:14.180 --> 00:21:16.180 I think an ounce weight of silver. 222 00:21:16.180 --> 00:21:19.180 It became a famous coin, the Schlichten and the Joachim's Tollers. 223 00:21:19.180 --> 00:21:21.180 And pretty soon, as people do, they abbreviate. 224 00:21:21.180 --> 00:21:25.180 And if you lopped off the Schlichten and the Joachim, it was just called Tollers. 225 00:21:25.180 --> 00:21:28.180 It becomes transmogrified into dollars later on. 226 00:21:28.180 --> 00:21:32.180 And the pound sterling, the British currency unit, of course, originally meant that. 227 00:21:32.180 --> 00:21:35.180 It meant a pound of silver. That's what it was. 228 00:21:35.180 --> 00:21:37.180 A pound sterling was a pound of silver. 229 00:21:37.180 --> 00:21:41.180 Gold is a heck of a lot less than a pound of silver. 230 00:21:41.180 --> 00:21:45.180 So currency, you know, is originally a weight of gold and silver. 231 00:21:45.180 --> 00:21:49.180 One of the first pieces of evil, which was injected into the monetary system, 232 00:21:49.180 --> 00:21:52.180 was beginning to use names instead of weights, sort of a special name. 233 00:21:52.180 --> 00:21:54.180 Once that happened, that was the beginning of the end. 234 00:21:54.180 --> 00:21:58.180 The first step on the slippery slope down on current to accelerated runaway inflation 235 00:21:58.180 --> 00:22:01.180 was the first time that the king, instead of talking about gold lamps, 236 00:22:01.180 --> 00:22:04.180 why don't you talk about the, if the king's name is Edward, why don't you talk about the Edward? 237 00:22:04.180 --> 00:22:06.180 It's classier than talking about the gold lamps. 238 00:22:06.180 --> 00:22:13.180 You define the Edward as being one gold ounce. You have an Edward coin instead of a gold ounce coin, and you begin the slippage of the tradition. 239 00:22:13.180 --> 00:22:18.180 During the late 19th century, when most nations were on the gold standard, there were several international monetary conferences. 240 00:22:18.180 --> 00:22:24.180 These are not like the current international monetary conferences where people sit around trying to figure out how to inflate more and how to shaft the public. 241 00:22:24.180 --> 00:22:33.180 Those were real international monetary conferences. The idea was, why can't we take all these names that have popped up, all of which were defined in terms of units of weight of gold, and why don't we put them on one scale first? 242 00:22:33.180 --> 00:22:36.180 Let's scale first. Most of them were sort of multiples of each other. 243 00:22:36.180 --> 00:22:39.180 The pound sterling was almost $5, so it was a little bit less. 244 00:22:39.180 --> 00:22:42.180 Why don't we make it $5, change it a little bit, and then we can proceed on, 245 00:22:42.180 --> 00:22:45.180 the next step after making each one a multiple of the other, 246 00:22:45.180 --> 00:22:48.180 to abolish the dollar and pound altogether, just make them weights of gold. 247 00:22:48.180 --> 00:22:51.180 We'll have one world, gold unit. 248 00:22:51.180 --> 00:22:54.180 And that was the objective of most of these guys in the late 19th century. 249 00:22:54.180 --> 00:22:57.180 They were all laissez-faire liberals, they were all hard money types. 250 00:22:57.180 --> 00:23:00.180 They founded on the whole silver question, very esoteric. 251 00:23:00.180 --> 00:23:10.180 The point is the relationship between gold and silver and whether it should be fixed or not, founded on that and these questions, by the time that got straightened out, the world was off the gold standard altogether and it was the end of that. 252 00:23:10.180 --> 00:23:24.180 So the first step was naming the thing a name instead of a weight. The dollar later became, when the United States was founded, the dollar was defined as approximately one-twentyth of a gold ounce. It was also fixed in terms of silver, which is unfortunate. It's now approximately one-forty-second of a gold ounce. 253 00:23:24.180 --> 00:23:28.180 But even now, it's the official definition of a dollar is one forty second of a gold land. That's what a dollar is. 254 00:23:28.180 --> 00:23:33.180 A dollar is not just a dollar, not just a piece of paper printed by the government. 255 00:23:33.180 --> 00:23:36.180 It's supposed to be, at least officially, it's supposed to be one forty second of a gold land. 256 00:23:36.180 --> 00:23:40.180 How did this change? Very early in the game, the government, the kings and so forth, 257 00:23:40.180 --> 00:23:43.180 established themselves as the guardian of the nation's weights and measures. 258 00:23:43.180 --> 00:23:47.180 Of course, the big thing, you have to have a government to make sure that the yard is always a yard. 259 00:23:47.180 --> 00:23:50.180 You have the metric yard or whatever it is somewhere under a glass. 260 00:23:50.180 --> 00:24:07.180 The government is supposed to be the august guardian of this, and always make sure that you never change and juggle these standards, otherwise the whole economic system would be irrevocably messed up. 261 00:24:07.180 --> 00:24:12.180 As part of this guardianship of weights and measures is also guarding the weight, gold, and silver. 262 00:24:12.180 --> 00:24:16.180 First, the first place is to nobody's real interest, really, to juggle the yards and feet. 263 00:24:16.180 --> 00:24:21.180 The government issued a decree saying, okay, from now on, a yard is no longer 3 feet, it's 2 and a half feet. 264 00:24:21.180 --> 00:24:23.180 A foot is no longer 12 inches, it's now 11. 265 00:24:23.180 --> 00:24:27.180 It's obviously pretty absurd, you have to be pretty kooky, even for the government to do something like that. 266 00:24:27.180 --> 00:24:29.180 So nobody's really managed to do this. 267 00:24:29.180 --> 00:24:33.180 So you have the fixed foot in the fixed yard, and it's there forevermore, the meter and so forth. 268 00:24:33.180 --> 00:24:35.180 But, in the case of money, you don't have this question. 269 00:24:35.180 --> 00:24:40.180 In the case of money, you have the economic vested interest of the compulsory monopoly guardian of the purity of the money 270 00:24:40.180 --> 00:24:43.180 to start juggling the definition, first the government started, 271 00:24:43.180 --> 00:24:46.480 by establishing a compulsory monopoly of the mint, the mint function. 272 00:24:46.480 --> 00:24:49.380 Usually gold, for example, is changed by weight. 273 00:24:49.380 --> 00:24:51.380 You have a pound of gold, an ounce of gold, etc. 274 00:24:51.380 --> 00:24:55.480 Then after a while, we discover that certain forms, certain shapes of gold are inconvenient. 275 00:24:55.480 --> 00:24:56.480 For example, gold dust. 276 00:24:56.480 --> 00:24:59.980 There used to be back in the old California gold strike days, people walked around in gold dust. 277 00:24:59.980 --> 00:25:01.980 You remember the western movies? 278 00:25:01.980 --> 00:25:08.580 The old prospector comes in with a bag of gold dust and plumps it down and exchanges it for the general store, and they weigh it. 279 00:25:08.580 --> 00:25:10.380 And you can do that, but it's kind of inconvenient. 280 00:25:10.380 --> 00:25:12.180 First of all, the gold dust begins to evaporate. 281 00:25:12.180 --> 00:25:16.180 And then you walk around in a cloud of gold dust and your money is disappearing very rapidly. 282 00:25:16.180 --> 00:25:18.180 So you want to have a sort of a hard form. 283 00:25:18.180 --> 00:25:22.180 Over the centuries, the two most convenient forms are bullion, or bars, and coins. 284 00:25:22.180 --> 00:25:24.180 The coins for smaller transactions. 285 00:25:24.180 --> 00:25:28.180 When you transform a bullion into a coin, there's a certain amount of cost involved in it. 286 00:25:28.180 --> 00:25:31.180 Usually a coin will then be at a premium in relation to the bullion. 287 00:25:31.180 --> 00:25:33.180 The king saw a good thing here. 288 00:25:33.180 --> 00:25:38.180 The king very early established the view that a compulsory monopoly of the mint 289 00:25:38.180 --> 00:25:40.180 was essential to the sovereignty of the king. 290 00:25:40.180 --> 00:26:10.180 that if you don't do this and the king and state is no longer sovereign and somehow the state is weakened irrevocably by this by giving up the mint monopoly by this philosophy of sovereignty they established the view that only the government should be able to mint coins by doing this of course the not only giving a profitable business in the hands of the government seem more than that means you can keep out anybody else from getting in there and therefore you can proceed on debasing the coins and juggling the standards nobody can do anything about it the basement comes in very early the first form of inflation early forms of inflation before these marbles 291 00:26:10.180 --> 00:26:17.180 One of the most marvelous inventions of paper money and bank credit, pre-1700, let's say, of inflation, would be the basement of a coin. 292 00:26:17.180 --> 00:26:21.180 Usually it works something like this. A new king is crowned, and he looks around and he says, 293 00:26:21.180 --> 00:26:26.180 hey, there's a lot of coins here which are my father's picture on it, we really need your coins with my picture on it. 294 00:26:26.180 --> 00:26:30.180 Besides, the old coins are getting dirty and kind of shabby, they're getting worn. 295 00:26:30.180 --> 00:26:38.180 Why don't you all come down to the Royal Mint and we'll, for a nominal fee, we'll exchange it for you, we'll give you nice new shiny coins. 296 00:26:38.180 --> 00:26:41.540 Everybody troops in and usually make a compulsory to hasten the process. 297 00:26:41.540 --> 00:26:47.220 Say you have the Edward. Let's say the Edward is defined as a unit of weight of 2 ounces of gold. 298 00:26:47.220 --> 00:26:51.460 Come in with your 2 ounce coin. You get the 2 Edwards back. You have your 2 Edwards. 299 00:26:51.460 --> 00:26:55.300 That's terrific. You're not really losing anything at all. Except there's one slight hitch here. 300 00:26:55.300 --> 00:27:00.500 Instead of the Edward being 2 ounces apiece, the Edward is now an ounce and a half. It's been redefined. 301 00:27:00.500 --> 00:27:04.740 In other words, the unit of weight has been lowered. You're getting a much lighter weight coin back. 302 00:27:04.740 --> 00:27:07.740 If you have a two ounce coin, you redefine the Edward as one and a half ounce. 303 00:27:07.740 --> 00:27:10.740 What happens to the other half ounce? Well, obviously, you know what happens to the other half ounce. 304 00:27:10.740 --> 00:27:15.740 The king keeps it. Takes all these half ounces of gold and mints his own coins and spends it. 305 00:27:15.740 --> 00:27:19.740 He spends it. The public is in great shape. They've got the same number of Edwards back. 306 00:27:19.740 --> 00:27:24.740 The king is in even better shape. He has Edwards that he didn't have before at all. 307 00:27:24.740 --> 00:27:27.740 As we'll see, what happens as a result of all this is he has an inflation. 308 00:27:27.740 --> 00:27:31.740 More Edwards are on the market in relation to whatever goods and services are available. 309 00:27:31.740 --> 00:27:34.740 The price of everything else goes up. 310 00:27:34.740 --> 00:27:36.740 So that was the earliest, the classic form of inflation. 311 00:27:36.740 --> 00:27:39.740 Before paper money was invented, before bank credit was invented, 312 00:27:39.740 --> 00:27:40.740 was coin clipping or debasement. 313 00:27:40.740 --> 00:27:43.740 Obviously when private people clip coins, this is very bad. 314 00:27:43.740 --> 00:27:46.740 The maximum punishment of a law is to send it upon their head, 315 00:27:46.740 --> 00:27:50.740 because that means you're taking the guy's coin, you're taking the guy's two ounces, 316 00:27:50.740 --> 00:27:53.740 you're shaving off a tenth of an ounce or something, 317 00:27:53.740 --> 00:27:55.740 and then you collect the shavings together and you make your own coin. 318 00:27:55.740 --> 00:27:57.740 It's obviously immoral and evil, but when the government does it, 319 00:27:57.740 --> 00:28:01.740 When the government does it, it's part of an essential part of an attribute of sovereignty and therefore good. 320 00:28:01.740 --> 00:28:04.740 Getting back to coin clipping. We'll get back to coin clipping, of course. 321 00:28:04.740 --> 00:28:08.740 We now have the gold ounce, let's say, established as the currency unit. 322 00:28:08.740 --> 00:28:12.740 And all coins are in terms of gold ounces or gold grams. 323 00:28:12.740 --> 00:28:18.740 This means that every coin or every currency unit is automatically fixed in relation to every other one. 324 00:28:18.740 --> 00:28:23.740 We have a big controversy now among economists about fixed exchange rates versus fluctuating exchange rates. 325 00:28:23.740 --> 00:28:27.740 The point is, there's no such thing as fluctuating exchange rate, because there ain't no exchange rate. 326 00:28:27.740 --> 00:28:34.740 Let me put it this way, if you're exchanging a pound of something for a certain number of ounces of the same thing, 327 00:28:34.740 --> 00:28:39.740 you'll naturally exchange one pound of it for 16 ounces of it, because that's what a pound is, a pound of 16 ounces. 328 00:28:39.740 --> 00:28:45.740 Then if you have one coin, let's say if Boston is putting out the Adams coins, which are weighed two ounces, 329 00:28:45.740 --> 00:28:48.740 and Texas are putting out Houston's, which weigh one ounce, 330 00:28:48.740 --> 00:28:52.740 then two Houston's will always exchange for one Adams, because it's two to one, that's what the ounces are. 331 00:28:52.740 --> 00:29:01.740 The so-called exchange rate is simply fixed by the weight of a coin. There's no need for anybody to fix it. It will automatically be just two for one. 332 00:29:01.740 --> 00:29:07.740 Those economists who claim the fixed exchange rate is somehow coercive or somehow statist, misconceive the whole point. 333 00:29:07.740 --> 00:29:14.740 The whole point is that it's not coercive to have the fact that the two things are always going to exchange for 16 ounces for one pound. 334 00:29:14.740 --> 00:29:21.740 If, for example, there are two monies in the world, if some countries are on gold and some countries are on silver and some are a mixture of both, which can easily happen, 335 00:29:21.740 --> 00:29:36.740 In a truly free market situation, only one fluctuating exchange rate is between gold and silver. 336 00:29:36.740 --> 00:29:44.740 Everything else, within gold or within silver, exchange rates are automatically fixed by the respective weight of the currency units. 337 00:29:44.740 --> 00:29:49.740 Of course, if each person in the world put out his own money, for example, obviously it's not going to be money. 338 00:29:49.740 --> 00:29:57.740 I issue five Rothbards, period, I just issue tickets saying five Rothbards, and everybody here has issues also, their own tickets, their own name on it. 339 00:29:57.740 --> 00:30:03.740 There'll be fluctuating exchange rates, I guess, with each one of them. Five Rothbards might exchange for one somebody else's around here. 340 00:30:03.740 --> 00:30:10.740 But, of course, the point is, nobody's gonna take any of this stuff, fuck it. It's gonna be scrap paper very quickly. 341 00:30:10.740 --> 00:30:13.740 It was not an inherently useful commodity to begin with. 342 00:30:13.740 --> 00:30:27.740 There are some anarchists, the Spooner and Tucker variety, who believe that once there are no government restrictions on the money supply, everybody will be able to print their own money and it will be near-vana, because the money supply will no longer be artificially restricted by the government. 343 00:30:27.740 --> 00:30:35.740 And of course, if everybody were allowed to print their own money, everybody could print their own, you know, I print my two million Roth bars immediately, and that's it. 344 00:30:35.740 --> 00:30:39.740 I mean, it would be a waste of paper, nobody would take it, and it would be the end of their personal paper money. 345 00:30:39.740 --> 00:30:43.740 The gold and silver right quickly emerge as the monies in that kind of society. 346 00:30:43.740 --> 00:30:48.740 And there'd be no panacea, although it'd be a lot better than there is now in the economic system. 347 00:30:48.740 --> 00:30:51.740 This is what has been called, by the way, parallel standards. 348 00:30:51.740 --> 00:30:54.740 When you have a situation where you have gold and silver both functioning as independent monies 349 00:30:54.740 --> 00:30:57.740 without a government fixed rate between them. 350 00:30:57.740 --> 00:31:01.740 And it has happened all during the Middle Ages and the early modern period. 351 00:31:01.740 --> 00:31:03.740 Gold and silver would fluctuate. 352 00:31:03.740 --> 00:31:07.740 And so, for example, in the Italian city-states, in Florence, in Venice, et cetera, 353 00:31:07.740 --> 00:31:36.740 Gold, Silver, Relationship, Purchasing Power, Ever since Keynes wrote the General Theory in 1936, the concept of purchasing power has been completely distorted. 354 00:31:36.740 --> 00:31:40.740 In the Keynesian system, purchasing power means the total number of dollars, let's say. 355 00:31:40.740 --> 00:31:42.740 If there are two million dollars out, that's the purchasing power. 356 00:31:42.740 --> 00:31:44.740 If there are 20 billion out, that's the purchasing power. 357 00:31:44.740 --> 00:31:46.740 This is not the original concept. 358 00:31:46.740 --> 00:31:50.740 Purchasing power, let's go back, for example, to the price of eggs. 359 00:31:50.740 --> 00:31:53.740 Under Boyer, what's the purchasing power of a dozen eggs? 360 00:31:53.740 --> 00:31:55.740 Well, it's the same thing as the price of a dozen eggs. 361 00:31:55.740 --> 00:31:58.740 The same thing. The price is the purchasing power of the thing. 362 00:31:58.740 --> 00:32:02.740 In other words, the price of something is whatever the thing can buy in exchange. 363 00:32:02.740 --> 00:32:05.740 If the price of an egg is, let's say, the price of a dozen eggs is a dollar, 364 00:32:05.740 --> 00:32:12.740 This means that a dozen eggs can command an exchange, an exchange for one dollar. That's the purchasing power of a dozen eggs. 365 00:32:12.740 --> 00:32:17.740 Under Boehr, every commodity has a whole array of different purchasing powers. 366 00:32:17.740 --> 00:32:21.740 Or we can say this purchasing power is a whole array of possible alternatives. 367 00:32:21.740 --> 00:32:25.740 Under Boehr, let's say a dozen eggs could exchange for the following. 368 00:32:25.740 --> 00:32:33.740 Either a pound of butter, or one-tenth of a hat, or two boxes of Wheaties, or etc., etc., all the way down unless hundreds and hundreds of different items. 369 00:32:33.740 --> 00:32:39.740 When money is established, you limit all this stuff, and you just have one price for the money price. 370 00:32:39.740 --> 00:32:44.740 So the money system, the purchasing power of a dozen eggs is its price, its money price, let's say, a dollar. 371 00:32:44.740 --> 00:32:50.740 That's the price of money. Well, the price of money, or the purchasing power of money, which is the same thing here, 372 00:32:50.740 --> 00:32:53.740 is an array of all the different goods that can be bought from money. 373 00:32:53.740 --> 00:32:56.740 When money has been established, let's say if gold has been established as money, 374 00:32:56.740 --> 00:32:59.740 all the other things have a money price, one single price. 375 00:32:59.740 --> 00:33:14.740 The gold standard establishes money. All the other things have a money price. One single price. In other words, Hi-Fi set got one price, eggs has got one price, so forth and so on, except money itself, except gold itself. Gold is still in a state of border in relationship to everything else. 376 00:33:14.740 --> 00:33:22.740 So when we talk in terms of the price of gold, the price of an ounce of gold will be a similar array as we've seen in butter. 377 00:33:22.740 --> 00:33:30.740 In other words, the price of an ounce of gold is either 10 pounds of butter or one-tenth of a Hi-Fi set or etc. etc. 378 00:33:30.740 --> 00:33:37.740 You go through this whole array of alternatives. That is the purchasing power of an ounce of gold or a currency unit of gold. 379 00:33:37.740 --> 00:33:43.740 So in other words, the purchasing power of the dollar, the purchasing power of an ounce of gold is the same thing as the price of gold 380 00:33:43.740 --> 00:34:03.740 The concept of price level can be used sometimes as a shorthand, but it's really a fallacious concept, because it sort of implies that there's one level, one thing, which can be easily expressed as an average. 381 00:34:03.740 --> 00:34:11.740 But it's not really an average, it's an array of specific different prices and different commodities, which this dollar or this gold ounce can exchange for. 382 00:34:11.740 --> 00:34:18.740 The relationship between these commodities do change over time, it's not just one average price level which you can then juggle. 383 00:34:18.740 --> 00:34:24.740 The purchasing power of the dollar will be this array, which is the same thing as the price of the dollar. 384 00:34:24.740 --> 00:34:31.740 We haven't come yet to what economic forces determine the purchasing power of money or the purchasing power of the dollar at any time. 385 00:34:31.740 --> 00:34:34.740 First of all, all prices on the market tend to be uniform. 386 00:34:34.740 --> 00:34:39.740 In other words, if the price of Wheaties is 50 cents in one store and 60 cents in another store, 387 00:34:39.740 --> 00:34:45.740 unless other forces come in, in other words, unless one store can charge more with their services or better, 388 00:34:45.740 --> 00:34:48.740 they allow credit or they deliver at night or something like that, 389 00:34:48.740 --> 00:34:52.740 barring all that, the prices of each product will tend to be the same, 390 00:34:52.740 --> 00:34:56.740 because if the price of Wheaties is 50 cents in one store and 60 cents next door, 391 00:34:56.740 --> 00:34:58.740 very few people will buy the 60 cent Wheaties. 392 00:34:58.740 --> 00:35:01.740 The price might go up in the 50 cent store and down in the 60 cent store, 393 00:35:01.740 --> 00:35:05.740 A $0.50 story might have a resolution of a thing of $0.52 or something like that. 394 00:35:05.740 --> 00:35:11.740 In other words, it will reach equilibrium with the uniform price for any given good or service. 395 00:35:11.740 --> 00:35:17.740 The same thing will be true with the purchasing power of the dollar, the purchasing power of gold, or the gold ounce. 396 00:35:17.740 --> 00:35:22.740 The purchasing power of the gold ounce will tend to be the same throughout its trading area. 397 00:35:22.740 --> 00:35:27.740 If the world was its trading area, then the purchasing power of the gold ounce will tend to be the same throughout the world. 398 00:35:27.740 --> 00:35:32.780 or the Uniform is usually called price levels, even more so than in the case of specific 399 00:35:32.780 --> 00:35:36.940 products because specific products are usually produced in one place and then transported 400 00:35:36.940 --> 00:35:38.860 somewhere and then consumed in the other place. 401 00:35:38.860 --> 00:35:43.020 For example, the price of wheat in Kansas will not be the same as the price of wheat 402 00:35:43.020 --> 00:35:47.680 in New York because you have to transport the wheat from Kansas to New York. 403 00:35:47.680 --> 00:35:51.460 The price of wheat in New York will tend to equal the price of wheat in Kansas plus the 404 00:35:51.460 --> 00:35:54.940 transportation cost to carry the wheat from Kansas to New York. 405 00:35:54.940 --> 00:36:09.940 In the case of money, however, the transportation cost really doesn't enter into the picture because once the gold is produced and circulating throughout the world, since it's durable, it sort of zips around, so to speak, and the problem with transportation costs is not really in question. 406 00:36:09.940 --> 00:36:16.940 So, the price levels then will tend to be the same while the purchasing power of the gold amounts will tend to be the same throughout the world. 407 00:36:16.940 --> 00:36:22.940 If, for example, the purchasing power of gold, let's say, is higher in France than it is in England, 408 00:36:22.940 --> 00:36:26.940 then gold will tend to be shipped from England to France, 409 00:36:26.940 --> 00:36:29.940 which will tend to lower purchasing powers in the two countries. 410 00:36:29.940 --> 00:36:36.940 In terms of price levels, if the price level in terms of gold is higher in France than it is in England, 411 00:36:36.940 --> 00:36:39.940 then people start spending money in England. 412 00:36:39.940 --> 00:36:43.940 They take their gold and go to England for it, buy stuff in England and not in France, 413 00:36:43.940 --> 00:36:49.380 in France. This will tend to lower French prices, raise English prices until the price 414 00:36:49.380 --> 00:36:54.580 levels or the arrays of prices are equilibrated. So the purchasing power of the gold will tend 415 00:36:54.580 --> 00:36:59.140 to flow like everything else where you can make most money at it or most income at it. 416 00:36:59.140 --> 00:37:03.260 Gold will tend to flow from those areas where it has the lowest purchasing power to the 417 00:37:03.260 --> 00:37:07.340 areas where it has the highest purchasing power. And this will tend to equilibrate. 418 00:37:07.340 --> 00:37:11.460 What determines the purchasing power of gold? Essentially, the supply of money and the demand 419 00:37:11.460 --> 00:37:19.460 In other words, we're going to apply the same analysis, really, to the price of money, or the price of the gold ounce, as we do to the price of anything else. 420 00:37:19.460 --> 00:37:26.460 And here, this is the difference from the ordinary macroeconomics, where suddenly you're thrown into a peculiar world. We're talking about velocities and all that stuff. 421 00:37:26.460 --> 00:37:31.460 And supply and demand drops out of the picture altogether. Supply and demand really is still in the picture. 422 00:37:31.460 --> 00:37:39.460 First, let's talk about the supply of money. Before we even get to the very complex stuff, such as banking and things like that, which we'll get to later on, 423 00:37:39.460 --> 00:37:45.460 What is the supply of money exactly? Let's assume it's just gold coins and gold bullion. 424 00:37:45.460 --> 00:37:52.460 First place, the supply curve of money, if we put the supply curve on the board, it's best to think of not as this forward sloping one, but as the vertical one. 425 00:37:52.460 --> 00:37:58.460 The stock of money at any given moment or any given time. First place, money is very durable, gold is very durable. 426 00:37:58.460 --> 00:38:05.460 The annual production of gold is small in relation to the stock which has been accumulated for hundreds and hundreds of years. 427 00:38:05.460 --> 00:38:18.460 There's no real division of labor and gold as there isn't everything else. You don't have somebody producing the raw material and somebody else producing the steel and somebody producing the car, etc. You have everybody owning money and then shifting it around. 428 00:38:18.460 --> 00:38:27.460 So it's best to think of supply of money as a vertical line. A demand for money is a demand to hold it. A demand to buy it and hold it. 429 00:38:27.460 --> 00:38:33.460 The first thing to look at about the supply of money is that everybody at any given time owns some money. 430 00:38:33.460 --> 00:38:36.460 In other words, there's no supply of money which isn't owned by somebody. 431 00:38:36.460 --> 00:38:39.460 There's no money floating around in the empyrean somewhere. 432 00:38:39.460 --> 00:38:42.460 All money is in somebody's cash balance. 433 00:38:42.460 --> 00:38:44.460 This brings us to the concept of cash balance. 434 00:38:44.460 --> 00:38:48.460 Cash balance is the amount of money, the stock of money, that any given person has at any given moment. 435 00:38:48.460 --> 00:38:54.460 You have some money in your wallet, you have some in your mattress, some in the safe deposit box, some under the floorboards. 436 00:38:54.460 --> 00:38:57.460 The Individual Supply of Money 437 00:38:57.460 --> 00:39:02.460 Each individual has his own stock of money, which we can call small m. 438 00:39:02.460 --> 00:39:11.460 The total supply of money in the society will be the aggregate of all the individual stocks of money, individual supplies, which will be big M. 439 00:39:11.460 --> 00:39:15.460 Big M is the usual symbol for the quantity of money or supply of money. 440 00:39:15.460 --> 00:39:19.460 It will simply be the sum of all the small m's. 441 00:39:19.460 --> 00:39:22.460 This ties in immediately with the macro money analysis. 442 00:39:22.460 --> 00:39:24.460 Supply and Demand 443 00:39:52.460 --> 00:39:57.460 Money is always sitting somewhere. In other words, it's always in somebody's cash balance. 444 00:39:57.460 --> 00:40:03.460 What happens during an exchange, any exchange that takes place, using money as one of the terms of the exchange, 445 00:40:03.460 --> 00:40:11.460 is simply that you're transferring part of your cash balance to somebody else's cash balance and getting something else in exchange for it. 446 00:40:11.460 --> 00:40:16.460 So the money is circulated, or rather cash balances are transferred from one person to another. 447 00:40:16.460 --> 00:40:46.460 to another, but exciting, that individual point of transfer, the money is investing in somebody's cash balance, so for example, if I buy a newspaper for 15 cents, my ownership of the cash is 15 cents, my cash balance at that point is drawn down by 15 cents, and the news dealer's cash balance is increased by 15 cents, and we have at that moment of transfer, we've shifted ownership of a certain part of my cash balance, we have this whole cash balance approach then, and we're dealing with the money supply and with the determination 448 00:40:46.460 --> 00:40:49.460 of the so-called price level of the purchasing power. 449 00:40:49.460 --> 00:40:52.460 Then we have demand for cash balances. 450 00:40:52.460 --> 00:40:54.460 Why should anybody demand a cash balance? 451 00:40:54.460 --> 00:40:57.460 Well, first of all, he has to get money in order to buy it, 452 00:40:57.460 --> 00:41:00.460 in order to use it for something else, in order to spend it. 453 00:41:00.460 --> 00:41:03.460 So the usual process is you produce a good or a service, 454 00:41:03.460 --> 00:41:05.460 you sell it, you get money, you get a cash balance, 455 00:41:05.460 --> 00:41:08.460 you hold on to it for a short while or a long while or whatever, 456 00:41:08.460 --> 00:41:10.460 you spend some of it on other goods. 457 00:41:10.460 --> 00:41:13.460 The demand for a cash balance is how much you want to keep, 458 00:41:13.460 --> 00:41:15.460 how much you want to sacrifice for it 459 00:41:15.460 --> 00:41:19.620 How much do you want to sell in terms of goods and services for cash balance? 460 00:41:19.620 --> 00:41:22.140 How much do you want to hold on to it? 461 00:41:22.140 --> 00:41:26.180 You have the same kind of demand and supply curve, except now in vertical terms, 462 00:41:26.180 --> 00:41:29.860 that we had when we talked about the supply curve at any given moment was vertical. 463 00:41:29.860 --> 00:41:31.860 You have the price on the y-axis. 464 00:41:31.860 --> 00:41:36.180 You have the quantity purchased or held on the x-axis. 465 00:41:36.180 --> 00:41:39.420 Supply and money would be a vertical line, which we call M. 466 00:41:39.420 --> 00:41:43.220 Then we have the demand for money, which I maintain is going to be falling. 467 00:41:43.220 --> 00:41:52.220 What's the price of money on the y-axis? The price of money on the y-axis is the same thing as the purchasing power of the money unit. 468 00:41:52.220 --> 00:41:57.220 Purchasing power of the gold ounce, whatever you want to call it, or the inverse of the so-called price level. 469 00:41:57.220 --> 00:42:03.220 It's easier to think in terms of price levels. It's one over the price level of everything else. 470 00:42:03.220 --> 00:42:11.220 Because we've already defined the purchasing power of the gold ounce, say, as being the inverse of the price level of everything else in terms of gold ounces. 471 00:42:11.220 --> 00:42:20.220 This is then the analog. The price of money is the same thing as the inverse, or one over the price of all other goods and services. 472 00:42:20.220 --> 00:42:24.220 Why does the man curve for cash balances falling in this situation? 473 00:42:24.220 --> 00:42:31.220 Well, you keep a certain amount of money, just simply the amount of money you keep in your wallet as you emerge in your day's activities. 474 00:42:31.220 --> 00:42:34.220 You want to keep a certain amount of money in your wallet for various reasons. 475 00:42:34.220 --> 00:42:37.220 First place, you don't really know how much you're going to need for spending. 476 00:42:37.220 --> 00:42:43.220 Emergency money, you might get hit by a truck, it might be raining, you might want to buy an umbrella or something. 477 00:42:43.220 --> 00:42:48.220 In other words, you want to keep a certain inventory for emergencies or for uncertainty or whatever. 478 00:42:48.220 --> 00:42:52.220 If the price level is higher, supposedly the prices double tomorrow. 479 00:42:52.220 --> 00:42:57.220 Prices of everything double. Angel Gabriel has descended and doubled all prices. 480 00:42:57.220 --> 00:43:00.220 You don't need Angel Gabriel anymore for that, I'm afraid. 481 00:43:00.220 --> 00:43:05.220 Your lunches will cost twice as much and the emergency if you get hit by a truck, all these things will cost about twice as much. 482 00:43:35.220 --> 00:43:40.420 If you don't have money to buy lunch, all these things require a higher cash balance, if prices are higher. 483 00:43:40.420 --> 00:43:47.420 Conversely, if prices were low, if Andrew Gabriel finally did something good once for change and cut all prices in half by magic, 484 00:43:47.420 --> 00:43:54.420 then you could do the same amount of work that your cash balance does for you now could be accomplished with half the amount of money you have before. 485 00:43:54.420 --> 00:44:02.420 So in other words, if the price of money were higher, or prices in general were lower, i.e., then you would need much less in your cash balance. 486 00:44:02.420 --> 00:44:07.420 If you link these two or more points together, what you get is a falling demand curve for cash balances. 487 00:44:07.420 --> 00:44:14.420 In other words, there's an inverse relationship between the quantity demanded to keep your cash balance and the price of money. 488 00:44:14.420 --> 00:44:19.420 Okay, now we have the demand for money which is falling, we have a vertical supply line of money, 489 00:44:19.420 --> 00:44:25.420 and I will now contend that the price of money is determined by the intersection point at any time, 490 00:44:25.420 --> 00:44:29.420 the day-to-day equilibrium will be the intersection point of the demand for money, 491 00:44:29.420 --> 00:44:33.420 Money, the Manor for Cash Balances and the Supply of Cash Balances, that the intersection 492 00:44:33.420 --> 00:44:37.220 will determine what the price of money tends to be at any given moment, what the price 493 00:44:37.220 --> 00:44:39.540 level, in other words, tends to be. 494 00:44:39.540 --> 00:44:44.780 You see the analogy is perfect between this and the price and demand of supply and price 495 00:44:44.780 --> 00:44:46.260 for individual products. 496 00:44:46.260 --> 00:44:51.580 Supposing we're up here, supposing the price of money is higher than the equilibrium, it's 497 00:44:51.580 --> 00:44:54.220 up here, in other words, the price level is lower. 498 00:44:54.220 --> 00:44:59.260 At this low price level, we have a situation where the existing supply of money remains 499 00:44:59.260 --> 00:45:03.180 the same, you can't change the fine money, that's given in any time. There's the amount 500 00:45:03.180 --> 00:45:07.980 of gold that we're hanging around. At that low price level, people don't want the money 501 00:45:07.980 --> 00:45:11.900 in their cash balance. Prices are low, and let's say there's two billion dollars worth 502 00:45:11.900 --> 00:45:17.140 of gold around, people only need 1.8 billion in their cash balances, the rest of it, spend 503 00:45:17.140 --> 00:45:22.220 the other 200 million. As they spend the other 200 million, the demand curve goes up, price 504 00:45:22.220 --> 00:45:26.300 goes up, the price level is so low that the gold and silver that you've got, I'd say 505 00:45:26.300 --> 00:45:33.300 The point is, you see, you're trying to get rid of your money, in a sense, you're trying to get rid of your cash balance. 506 00:45:33.300 --> 00:45:38.300 In the aggregate, you can't get rid of cash balances. You're stuck, like a hump, so to speak, humping your back. 507 00:45:38.300 --> 00:45:43.300 The society as a whole is stuck with existing cash balances. The total supply of money remains fixed. 508 00:45:43.300 --> 00:45:46.300 Unless you take the gold and throw it in the river, which I don't think anybody's going to do. 509 00:45:46.300 --> 00:45:53.300 So what happens is, as you're desperately trying to get rid of your cash balances, in the aggregate you can't do it. 510 00:45:53.300 --> 00:46:01.300 The aggregate, you can't do it, but what happens is, is prices rise, prices of goods and services rise as you spend money faster, you get more down your cash balances, the demand curve goes up. 511 00:46:01.300 --> 00:46:07.300 As this happens, as the price level increases, the gap disappears. 512 00:46:07.300 --> 00:46:15.300 Gold no longer burns a hole in their pocket because prices are now high enough so it doesn't, it just meets their, the aggregate desire to hold cash balances. 513 00:46:15.300 --> 00:46:20.700 Conversely, looking at it the other way, if the price of money is too low, 514 00:46:20.700 --> 00:46:24.100 if, in other words, the price level is higher than equilibrium, 515 00:46:24.100 --> 00:46:29.300 then you have this kind of situation. You still have the $2 billion worth of gold, but now 516 00:46:29.300 --> 00:46:33.100 prices are so darn high that you want more cash balance than you've got. 517 00:46:33.100 --> 00:46:35.700 Rather than burning a hole in your pocket and you haven't got enough money. 518 00:46:35.700 --> 00:46:38.800 This is a shortage of cash balances. 519 00:46:38.800 --> 00:46:42.600 If everybody feels a shortage of money, not in the sense of, of course, everybody wants more income, 520 00:46:42.600 --> 00:46:47.600 In the sense that if you want more cash balances than you have available, because prices are so high, 521 00:46:47.600 --> 00:46:52.600 people try to get, desperately get more cash balances. How do they do it? 522 00:46:52.600 --> 00:46:57.600 The amount of the cash balance is fixed in the aggregates. The amount of gold can't be increased magically or anything. 523 00:46:57.600 --> 00:47:02.600 You're given the same amount of gold. What you're trying to do is you spend less money on goods and services. 524 00:47:02.600 --> 00:47:07.600 You hold on to more of your income and keep it in your cash balance in order to increase your cash balances. 525 00:47:07.600 --> 00:47:16.600 As people restrict their spending, prices fall, and as prices fall, the shortage of cash balances no longer appears. 526 00:47:16.600 --> 00:47:22.600 By this action, the public is able to lower prices until they don't want any more cash balance. 527 00:47:22.600 --> 00:47:30.600 So in other words, if the price of money is higher than equilibrium, in other words, if the price level is lower than the equilibrium level, 528 00:47:30.600 --> 00:47:36.600 the gold will be burning a hole in people's pockets, and as they spend it, they're trying to get rid of cash balance, they can't get rid of it in the aggregate. 529 00:47:36.600 --> 00:47:41.800 What happens is that this action raises prices until they're satisfied with what they've got. 530 00:47:41.800 --> 00:47:49.600 Similarly, or conversely, if the price level is higher than the equilibrium, they'll hold on to more of their money to try to increase their cash balances. 531 00:47:49.600 --> 00:47:53.600 The result is the prices will fall until they've satisfied what they've got. 532 00:47:53.600 --> 00:48:02.200 There's a tradition in economics theory to sneer and deprecate people who want to increase their cash balances, the so-called hoarders. 533 00:48:02.200 --> 00:48:07.000 Hoarding is when somebody else, then yourself, wants to increase the supply of cash. 534 00:48:07.000 --> 00:48:11.500 It's supposed to be a terrible, evil thing, cause of depressions and all sorts of other nonsense. 535 00:48:11.500 --> 00:48:15.600 Actually, all it's doing is, if people are holding on to more of their cash balances, 536 00:48:15.600 --> 00:48:20.700 the demand for money increases, then since the supply of money has remained the same, 537 00:48:20.700 --> 00:48:27.300 you can't do anything about that, then what's simply going to happen is that the price level will fall until people are happier. 538 00:48:27.300 --> 00:48:29.700 In other words, in real terms and quotes, 539 00:48:29.700 --> 00:48:33.500 Correcting for price changes, you're increasing the real cash balance. 540 00:48:33.500 --> 00:48:39.900 It certainly seems to me that if it's legitimate to want more hula hoops, or less hula hoops, or want more eggs, or less eggs, or whatever, 541 00:48:39.900 --> 00:48:43.300 if it's legitimate to save more and invest more, or save less and invest less, 542 00:48:43.300 --> 00:48:47.200 it's certainly just as legitimate to want to increase your cash balance proportions, 543 00:48:47.200 --> 00:48:50.800 and to have that satisfied by prices falling. 544 00:48:50.800 --> 00:48:54.200 People, for one reason or another, want more cash balances than they've got. 545 00:48:54.200 --> 00:48:59.200 This will be satisfied by this cash balance will go up, prices will fall, 546 00:48:59.200 --> 00:49:03.680 Price of money will go up, this will satisfy the desire for increased cash balances. 547 00:49:03.680 --> 00:49:07.280 The price level then is determined at any given time by the 548 00:49:07.280 --> 00:49:12.440 vertical supply line on the falling demand curve. What then changes it? Well, two things can change. 549 00:49:12.440 --> 00:49:14.440 Price levels, of course, change all the time. 550 00:49:14.440 --> 00:49:16.680 The price of money changes all the time. 551 00:49:16.680 --> 00:49:20.720 What then changes it? Two factors and two only. Either 552 00:49:20.720 --> 00:49:24.560 because the supply of money changes or because the demand for money changes. 553 00:49:24.560 --> 00:49:28.640 We were talking just now about the demand for money going up. People want more cash balance for 554 00:49:28.640 --> 00:49:32.900 For whatever reason, even if they might be more miserly than before, whatever, if the 555 00:49:32.900 --> 00:49:37.720 management money goes up then, the man curve will shift to the right, it means that the 556 00:49:37.720 --> 00:49:43.420 old intersection point, with of course a fixed vertical supply line, means that the old intersection 557 00:49:43.420 --> 00:49:48.340 point, now see before they were satisfied, before it was a market clearing purchasing 558 00:49:48.340 --> 00:49:49.340 power level. 559 00:49:49.340 --> 00:49:54.680 But now, because people want more cash balances for whatever reason, so their marginal utility 560 00:49:54.680 --> 00:49:55.680 Money is going up. 561 00:49:55.680 --> 00:49:59.680 So now, in this new situation, because of these new value scales on the part of the 562 00:49:59.680 --> 00:50:04.880 people, now we have a shortage of cash balances, something emerged. 563 00:50:04.880 --> 00:50:09.480 So now we are not satisfied, people want more cash balances, people then spend less money, 564 00:50:09.480 --> 00:50:10.480 restrict their purchases. 565 00:50:10.480 --> 00:50:16.280 As they do that, the price of everything falls, and as the price falls, we reach to the new 566 00:50:16.280 --> 00:50:20.320 equilibrium point, the new market clearing point, which is now higher, because the demand 567 00:50:20.320 --> 00:50:22.120 curve for money has gone up. 568 00:50:22.120 --> 00:50:27.460 At a new, higher equilibrium point, it means that the price of money is now higher, prices 569 00:50:27.460 --> 00:50:32.160 in general are lower, and people now have achieved their desire to have higher proportion 570 00:50:32.160 --> 00:50:36.680 of cash balances by the fact that prices have fallen because of their action. 571 00:50:36.680 --> 00:50:40.800 Conversely, people's demand for cash balances falls, for whatever reason. 572 00:50:40.800 --> 00:50:45.940 Demand curve for cash balances falls, and then the exact opposite happens. 573 00:50:45.940 --> 00:50:51.600 This means that the old equilibrium point, you now have all of a sudden the gold is burning 574 00:50:51.600 --> 00:50:56.560 Money burning a hole in their pocket, trying to get rid of it, we wind up again at a new 575 00:50:56.560 --> 00:51:01.160 equilibrium point where there's no longer money burning a hole in anybody's pocket. 576 00:51:01.160 --> 00:51:04.960 The proportion of cash balances to everything else has fallen. 577 00:51:04.960 --> 00:51:08.560 So now we have a situation where we have the same aggregate supply of money but it's doing 578 00:51:08.560 --> 00:51:13.440 less money work, less cash balance work because prices in general have gone up and people 579 00:51:13.440 --> 00:51:17.560 have achieved their goal of arriving at a lower proportion of cash balances. 580 00:51:17.560 --> 00:51:28.560 If the demand for money goes up, then prices in general will fall, in other words, the price of money will increase, so the price level will fall. 581 00:51:28.560 --> 00:51:38.560 Conversely, if the demand for money goes down, people want less in their cash balances, this will lead to the price level going up. 582 00:51:38.560 --> 00:51:50.560 Now, usually, demand for money, this is really, of course, an empirical statement. We're now going down from the apodictic absolute truth to a more sort of a relative empirical kind of statement. 583 00:51:50.560 --> 00:51:57.560 Usually, people's demand for money doesn't change very much. It's influenced by a lot of institutional factors. 584 00:51:57.560 --> 00:52:01.560 For example, it's influenced by the frequency at which people get paid. 585 00:52:01.560 --> 00:52:08.120 A simple thing like that can very strongly affect the desire, how much you want to hold 586 00:52:08.120 --> 00:52:09.120 your cash balances. 587 00:52:09.120 --> 00:52:14.000 Supposing two people have the same income, say they have an income of $12,000 a year, 588 00:52:14.000 --> 00:52:19.280 A and B both have an income of $12,000, but the difference is that A is paid once a month, 589 00:52:19.280 --> 00:52:25.320 so A gets a check of $1,000 the first of each month, say, and B, however, gets paid twice 590 00:52:25.320 --> 00:52:26.320 a year. 591 00:52:26.320 --> 00:52:30.080 I used to be in that position way back, I was in the position of getting paid twice 592 00:52:30.080 --> 00:52:31.080 a year. 593 00:52:31.080 --> 00:53:01.080 Foundation, General Foundation Grant, and believing me it was pretty rough, because you know my total pay, the total annual pay was comparable to other people's, but if you're on a precise allocator of your expenditures, you spend the last month of every half, sort of in perpetual hawk, cutting checks and whatever, until like, a little banana comes in on July the 1st, so supposing that Mr. B gets paid twice a year, so he gets $6,000, 594 00:53:01.080 --> 00:53:04.080 January 1st and another $6,000 in life first. 595 00:53:04.080 --> 00:53:06.080 Their total income is the same. 596 00:53:06.080 --> 00:53:08.080 If you simply look at the income over the years, $12,000. 597 00:53:08.080 --> 00:53:12.080 However, let's look at their different average cash balance. 598 00:53:12.080 --> 00:53:15.080 Let's assume that neither of these two guys save anything. 599 00:53:15.080 --> 00:53:18.080 Let's assume also that each one spends at a smoothly uniform rate, 600 00:53:18.080 --> 00:53:21.080 a certain amount, proportional, fractional amount per day, 601 00:53:21.080 --> 00:53:25.080 which of course is unrealistic, and it gives the idea here. 602 00:53:25.080 --> 00:53:27.080 A starts off the first month with $1,000. 603 00:53:27.080 --> 00:53:29.080 By the end of the month, he's got zero, 604 00:53:29.080 --> 00:53:32.080 Just ready to expire before he gets his new $1,000 check. 605 00:53:32.080 --> 00:53:39.080 His cash balance on January the 1st will be $1,000. His cash balance on the last day of the month will be $0. 606 00:53:39.080 --> 00:53:43.080 So therefore his average cash balance for the month will be $500. 607 00:53:43.080 --> 00:53:50.080 And the same way with the rest of the month, each month, the month out of the yearly period, he's also got a $500 cash balance. 608 00:53:50.080 --> 00:53:55.080 So the average cash balance Mr. B gets paid once a month is $500. 609 00:53:55.080 --> 00:53:58.080 This is the average amount that he keeps in his wallet or whatever. 610 00:53:58.080 --> 00:54:05.080 The other hand, look at poor B here. He starts off at $6,000 in his banking account. He winds up with zero. 611 00:54:05.080 --> 00:54:09.080 And so for each half year, he's got an average cash balance of $3,000. 612 00:54:09.080 --> 00:54:13.080 So he's got an average cash balance for the year of $3,000. 613 00:54:13.080 --> 00:54:20.080 Poor B is really in bad shape because he has to keep an average cash balance of six times the amount of Mr. A. 614 00:54:20.080 --> 00:54:26.080 So what happens, for example, if frequency at which people are paid institutionally shifts, 615 00:54:26.080 --> 00:54:32.080 If something suddenly shifts, which is what happens sometimes. It usually remains the same for a long time when something happens. 616 00:54:32.080 --> 00:54:40.080 If people, for example, shift from wage payment to salary payment, I think wage workers tend to get paid once a week, and salary workers get paid once a month. 617 00:54:40.080 --> 00:54:45.080 In that situation, supposing they shift, everybody shifts from blue collar, or their status suddenly shifts. 618 00:54:45.080 --> 00:54:51.080 Everybody is dubbed the white collar workers. You're really a big shot now, Jim. You're really a white collar type. 619 00:54:51.080 --> 00:54:54.440 And to honor this change in status, instead of paying it once a week, I'll now pay it 620 00:54:54.440 --> 00:54:55.440 once a month. 621 00:54:55.440 --> 00:54:59.600 In that situation, his demand for cash balances goes way up. 622 00:54:59.600 --> 00:55:04.120 He's got to kink a lot more, and so if there's a general shift from weekly payment to monthly 623 00:55:04.120 --> 00:55:08.200 payment, the demand curve for cash balances will go up. 624 00:55:08.200 --> 00:55:10.600 I guess it would be a good way of licking inflation, in a way. 625 00:55:10.600 --> 00:55:13.200 Price level will then tend to fall. 626 00:55:13.200 --> 00:55:14.200 Pay people less often. 627 00:55:14.200 --> 00:55:18.440 In other words, you pay people the same amount, but you pay them less often, and everybody 628 00:55:18.440 --> 00:55:20.640 has to keep a higher cash balance. 629 00:55:20.640 --> 00:55:24.680 So there are things of that sort, there are institutional matters of that sort, plus there 630 00:55:24.680 --> 00:55:31.280 are value scales, but it turns out that, again, empirically, one of the big reasons for shifts 631 00:55:31.280 --> 00:55:34.160 in demand for money is what's going to happen to the price level of money.