WEBVTT NOTE The Origin and Nature of Money 1 00:00:00.000 --> 00:00:07.720 I want to talk about the nature and origin of money and I also want to convey to you 2 00:00:07.720 --> 00:00:16.800 a little bit an impression about the style of reasoning that the Austrian School of Economics 3 00:00:16.800 --> 00:00:20.800 displays. 4 00:00:20.800 --> 00:00:31.520 In economics we usually distinguish between two types of goods, consumer goods and producer 5 00:00:31.520 --> 00:00:41.680 goods. Consumer goods are directly serviceable goods and producer goods are indirectly serviceable 6 00:00:41.680 --> 00:00:52.800 And a third category of goods that is introduced in economics is money, which is defined as 7 00:00:52.800 --> 00:01:02.200 a medium of exchange. And I want, in the first step, to try to derive, so to speak, how this 8 00:01:02.200 --> 00:01:09.760 third type of goods, a medium of exchange, comes into existence, in which ways a medium 9 00:01:09.760 --> 00:01:15.800 The medium of exchange is fundamentally different from consumer goods on the one hand and producer 10 00:01:15.800 --> 00:01:22.800 goods on the other hand. The first step then, let me simply explain why it is that there 11 00:01:24.200 --> 00:01:31.200 is exchange because without exchange obviously no such thing as a medium of exchange would 12 00:01:31.200 --> 00:01:38.200 come into existence. In order to understand why there is exchange, one should engage in 13 00:01:39.760 --> 00:02:09.760 A little thought experiment. Assume for a second that all individuals, which we refer to in economics as labor, and all nature-given resources, which we refer to in economics as land, would be perfectly identical to each other, such that every person would be a perfect clone of everybody else, and all the nature surrounding each individual would be also 14 00:02:09.760 --> 00:02:31.760 Now, in this case, what would occur would be that every person would now, with the nature given resources, produce exactly the same quantities of exactly the same goods in exactly the same quality and would then consume them in exactly the same pattern. 15 00:02:31.760 --> 00:02:49.760 Obviously, if this were the case, there would be no conceivable reason why people would ever want to engage in any exchange at all, because what would be the purpose of exchanging perfectly identical oranges for perfectly identical oranges? 16 00:02:49.760 --> 00:03:13.760 We reach then indirectly the result that the idea of exchange only comes into existence insofar as either individuals are different from each other, or land, the nature given resources are different, or land and labor is different. 17 00:03:13.760 --> 00:03:31.160 A very important insight that identical individuals, the ideal of egalitarians, would actually eliminate the very idea of division of labor. 18 00:03:31.160 --> 00:03:39.160 Division of labor comes only into the minds of people insofar as differences exist. 19 00:03:39.160 --> 00:03:45.420 Now, even if differences between people or land exist, it does not necessarily follow 20 00:03:45.420 --> 00:03:52.420 that people will then engage in exchange. Then the idea becomes conceivable, but it 21 00:03:52.420 --> 00:03:59.500 would still be possible that people would decide we remain in self-sufficient isolation 22 00:03:59.500 --> 00:04:06.500 and produce everything we need for ourselves without ever bothering to exchange anything 23 00:04:06.500 --> 00:04:13.760 against Goods Produced by Other Individuals. So why is it then that people do not remain 24 00:04:13.760 --> 00:04:21.760 in self-sufficient isolation? Sociologists and psychologists frequently explain this fact 25 00:04:21.760 --> 00:04:29.860 by pointing out that man doesn't like to be alone and he loves his brothers and sisters 26 00:04:29.860 --> 00:04:36.260 and because of that they engage in exchange. However, it is always better if one can explain 27 00:04:36.260 --> 00:04:42.860 explain a phenomenon with using less rather than more assumptions and in fact one needs 28 00:04:42.860 --> 00:04:51.860 far less in terms of assumptions in order to explain why people do not remain in self-sufficient 29 00:04:51.860 --> 00:04:57.540 isolation. We can actually assume that all people would hate each other and do not want 30 00:04:57.540 --> 00:05:05.140 to associate with anybody else and still explain that division of labor arises. The reason 31 00:05:05.140 --> 00:05:10.940 The reason for that is that as long as it is a case that people prefer more goods over 32 00:05:10.940 --> 00:05:16.780 less goods, as long as people have purely selfish motives, they do not need to have 33 00:05:16.780 --> 00:05:21.820 more, they might have more motives than purely selfish ones, but as long as they have purely 34 00:05:21.820 --> 00:05:28.820 selfish motives, the division of labor can be explained because engaging in division 35 00:05:28.820 --> 00:05:37.180 Engaging in division of labor, producing something for markets for other people and exchanging 36 00:05:37.180 --> 00:05:44.900 goods produced by others for goods produced by oneself, increases the standard of living 37 00:05:44.900 --> 00:05:50.780 of everyone engaging in participation of labor. There are two advantages that are usually 38 00:05:50.780 --> 00:05:55.700 mentioned when it comes to division of labor. The first one is the so-called absolute advantage 39 00:05:55.700 --> 00:05:59.860 Advantage of Division of Labor that refers to the situation that one person might be 40 00:05:59.860 --> 00:06:04.780 good at producing one thing and another person might be good at producing something else 41 00:06:04.780 --> 00:06:10.600 and then obviously it makes sense to specialize in those things which you are good and exchange 42 00:06:10.600 --> 00:06:13.220 goods afterwards. 43 00:06:13.220 --> 00:06:18.160 And the second reason is the so-called comparative advantage of division of labor that comes 44 00:06:18.160 --> 00:06:26.680 comes into play if worst case scenario exists, that is one person is all around more efficient 45 00:06:26.680 --> 00:06:32.240 and another person is all around less efficient, but even under those conditions the vision 46 00:06:32.240 --> 00:06:38.960 of labor is mutually beneficial if the most efficient, the more efficient person concentrates 47 00:06:38.960 --> 00:06:46.640 all of his efforts doing those things in which his advantage is relatively greater and the 48 00:06:46.640 --> 00:06:52.840 The person who is all around less efficient concentrates his efforts on those things in 49 00:06:52.840 --> 00:07:02.280 which his relatively lower efficiency is comparatively smaller. If they do this then again both individuals 50 00:07:02.280 --> 00:07:10.280 will be better off. So now we have entered so to speak a stage of an exchange economy 51 00:07:10.280 --> 00:07:16.440 and this exchange economy also referred to as a barter economy. People exchange consumer 52 00:07:16.440 --> 00:07:23.440 Money has not yet arrived on the scene. What is necessary in order for money to develop is that another condition must be fulfilled. In order to explain this condition, one can engage in a little thought experiment. 53 00:07:46.440 --> 00:07:52.440 Assume for a second that we would all have perfect certainty with respect to the future. 54 00:07:52.440 --> 00:08:02.440 That is to say, we know precisely what we want in the future, how much we want of it, what we would be willing to pay for it. 55 00:08:02.440 --> 00:08:13.440 And the same is true for you. You know exactly what you want, what I want, how much I want of it, when I want it, how I want it and all the rest of it. 56 00:08:13.440 --> 00:08:17.440 No uncertainty whatsoever with respect to the future. 57 00:08:17.440 --> 00:08:23.440 Now if this were the case, then we would forever remain in a barter economy. 58 00:08:23.440 --> 00:08:30.440 That is to say, then all exchanges would be just exchanges between consumer goods and producer goods. 59 00:08:30.440 --> 00:08:32.440 There would never be any disappointment. 60 00:08:32.440 --> 00:08:37.440 Anybody who has ever produced for markets will be perfectly able to find the buyers 61 00:08:37.440 --> 00:08:42.440 exactly at the time when he wants to find them, at the place where he wants to find them 62 00:08:42.440 --> 00:08:49.440 The Theory of Money and Credit 63 00:09:12.440 --> 00:09:22.440 The problem arises in a barter economy without the use of money and that is that people in such an economy obviously produce for two different reasons. 64 00:09:22.440 --> 00:09:29.440 They produce on the one hand for the reason just to produce something for themselves which they themselves want to use. 65 00:09:29.440 --> 00:09:33.440 And on the other hand they produce of course for the market. 66 00:09:33.440 --> 00:09:41.440 That is to say they produce for other people with the expectation that they will be able to trade their goods against goods produced by others. 67 00:09:41.440 --> 00:09:59.440 But if there is no certainty, then it can obviously occur that people who produced for market exchange encounter situations where they want to get rid of the product that they have produced because they have no personal use for it and want something else for it. 68 00:09:59.440 --> 00:10:09.440 But the situation might arise that the person who has what I want does not want what I have. 69 00:10:09.440 --> 00:10:26.440 And in this case, obviously an exchange cannot take place. An exchange can only take place in barter if two conditions are met at the same time. That is to say, I must have what you want and you must have what I want. 70 00:10:26.440 --> 00:10:32.440 If that is not the case, this is called a double coincidence of ones, if this is not the case, an exchange is impossible. 71 00:10:32.440 --> 00:11:01.440 So, now here we are in a situation where I have produced something for which I have no personal use, and I like to get the things that you have produced, and you also have produced for the market, you also have no personal use for the things that you offer, but you don't want the things that I have, whereas I want the things that you have. What do we do in such a situation? 72 00:11:02.440 --> 00:11:17.440 Now in such a situation where a direct exchange is impossible, people can still improve their own situation if they succeed doing the following. 73 00:11:17.440 --> 00:11:28.680 If I succeed in surrendering a good that has a relatively lower degree of marketability 74 00:11:28.680 --> 00:11:36.160 and acquire a good from you that has a relatively higher degree of marketability. 75 00:11:36.160 --> 00:11:38.380 Let me explain that briefly. 76 00:11:38.380 --> 00:11:43.420 The degree of marketability of a good is simply the observation that some goods are frequently 77 00:11:43.420 --> 00:11:50.420 Based on this observation now, if I have produced a good that has a relatively low degree of marketability, you have produced a good that has a relatively high degree of marketability, even though, let's say, I have a relatively low degree of marketability, 78 00:12:13.420 --> 00:12:43.420 I do not personally like apples, assuming that apples are the goods that have a high degree of marketability, even if I personally do not like apples, I would still gain an advantage if I succeed in surrendering my less marketable goods against your apples being more marketable goods, because I can then take these apples, which I do not want to consume as apples, I can then 79 00:12:43.420 --> 00:12:50.920 Then take these apples and resell the apples more easily because they are highly marketable 80 00:12:50.920 --> 00:12:57.260 and acquire then in turn those things that I really desire. 81 00:12:57.260 --> 00:13:05.440 That is to say, I demand goods on account of their high degree of marketability, not 82 00:13:05.440 --> 00:13:11.560 because I want to use them as consumer or producer goods, but I demand them as a medium 83 00:13:11.560 --> 00:13:18.560 of Exchange with the purpose of using these goods for resale purposes and acquire those 84 00:13:19.200 --> 00:13:26.200 things that I really want to have in return. Now, let's say apples are this good that has 85 00:13:29.680 --> 00:13:35.920 a high degree of marketability that a single person initially demands for the purpose of 86 00:13:35.920 --> 00:13:42.920 reselling them. Then the degree of marketability of apples would obviously increase still more 87 00:13:45.280 --> 00:13:52.280 because now apples are used in a group of individuals for two reasons. First for the 88 00:13:53.080 --> 00:13:59.600 reason of eating apples and secondly for the reason of using them for resale purposes. 89 00:13:59.600 --> 00:14:05.840 That is the marketability of apples increases. Accordingly the likelihood that other people 90 00:14:05.840 --> 00:14:11.200 who are also stuck in the same situation where they have produced for markets but cannot 91 00:14:11.200 --> 00:14:16.200 get rid of their goods and get those things that they really want that other people in 92 00:14:16.200 --> 00:14:22.720 the same predicament will do exactly the same thing that I have done. That is to say they 93 00:14:22.720 --> 00:14:29.720 will also be willing to surrender their goods against apples and do the same thing that 94 00:14:29.720 --> 00:14:45.720 We do the same thing that I did using these apples as a medium of exchange for resale purposes and over a shorter or longer period of time we will then have what is called a common medium of exchange. 95 00:14:45.720 --> 00:14:56.720 That is, all people will begin to use the same type of commodity for the same type of purpose to facilitate exchange. 96 00:14:56.720 --> 00:15:06.720 We have then overcome the problem of double coincidence of once being necessary in order to engage in exchange. 97 00:15:06.720 --> 00:15:10.720 We can then exchange whenever we want to exchange. 98 00:15:10.720 --> 00:15:15.720 Now this medium of exchange is called a money. 99 00:15:15.720 --> 00:15:37.720 Now, as I explained it, obviously all sorts of commodities that were initially traded in barter can be selected as a medium of exchange and historically all sorts of goods have in fact been selected as a medium of exchange. 100 00:15:37.720 --> 00:15:57.720 From a point of economic theory we can only say with certainty that whatever the thing is that is being chosen as a medium of exchange must have originally been a commodity traded in barter. 101 00:15:57.720 --> 00:16:08.720 It is not possible, for instance, that one can begin with a paper money. That is to say, with a piece of worthless paper. 102 00:16:08.720 --> 00:16:16.720 Imagine I would have a piece of worthless paper and I want to acquire products from you, 103 00:16:16.720 --> 00:16:30.120 and I would just write on my piece of paper $10 and would offer it to you for valuable oranges or whatever it is. 104 00:16:30.120 --> 00:16:38.120 Obviously you would not accept it even if I would raise my offer and add another zero to it, you would still refuse the deal. 105 00:16:38.120 --> 00:16:46.320 It must be a valuable commodity and we can say from the point of view of economic theory also 106 00:16:46.320 --> 00:16:52.940 that there are certain characteristics that contribute to the likelihood that a specific 107 00:16:52.940 --> 00:17:05.940 commodity might be chosen as money. Such characteristics are obviously scarcity, it must be scarce. Secondly, 108 00:17:05.940 --> 00:17:12.900 it must be something that is divisible in order to allow me to make small and big purchases. 109 00:17:12.900 --> 00:17:21.780 It must be something that is portable, that must be easy to carry around, and it must 110 00:17:21.780 --> 00:17:29.020 have a relatively high value per unit weight. Lead, for instance, would not be a likely 111 00:17:29.020 --> 00:17:36.220 candidate to be chosen as money. And it must obviously also be to a certain extent a durable 112 00:17:36.220 --> 00:17:43.220 Now, once in a given region a generally used medium of exchange has come into existence, and again, for purely selfish reasons, so to speak, we can also explain why there will be a tendency in the market towards a one-word exchange. 113 00:18:06.220 --> 00:18:11.220 World Commodity Money arising in the market. 114 00:18:11.220 --> 00:18:19.180 For the same reason that we have one commodity being picked within a region to serve as a 115 00:18:19.180 --> 00:18:26.980 medium of exchange, once various regions begin to trade with each other, and again they begin 116 00:18:26.980 --> 00:18:31.940 to trade with each other for the same reason that particular individuals begin to trade 117 00:18:31.940 --> 00:18:37.080 with each other for purely selfish reasons, because all regions participating in division 118 00:18:37.080 --> 00:18:41.540 of labor will be better off. That is, once different regions begin to trade with each 119 00:18:41.540 --> 00:18:48.300 other, we have initially different types of money in existence and are still in a situation 120 00:18:48.300 --> 00:18:55.660 of partial barter. That is to say, if I want to buy something in a different region, I 121 00:18:55.660 --> 00:19:03.660 I can only do so if I first exchange my money for the money being used in that different region 122 00:19:03.660 --> 00:19:10.660 and then I can go about and purchase my products. So this is still tedious. 123 00:19:10.660 --> 00:19:18.660 The tendency will then be that one type of money will tend to out-compete the other type of money 124 00:19:18.660 --> 00:19:24.740 with the ultimate result that as the world market expands and encompasses in fact the 125 00:19:24.740 --> 00:19:31.740 entire world, gradually parallel to this, there will also a world commodity money developing. 126 00:19:34.620 --> 00:19:41.740 And this of course has been historically the gold standard. That is, a commodity money 127 00:19:41.740 --> 00:19:57.740 that was used on a worldwide scale and by being used on the worldwide scale facilitated exchange to the utmost degree possible. 128 00:19:57.740 --> 00:20:10.740 We are then completely out of barter. I can exchange my goods for buy and sell anywhere I want without delay and any difficulties. 129 00:20:10.740 --> 00:20:40.740 Now to the second important fundamental insight about the nature of money. The first one being money must originate as a commodity money. It cannot possibly begin as a paper money. The second fundamental insight regarding money is that contrary to consumer goods and producer goods, in one respect money is fundamentally different from consumer goods and paper money. 130 00:20:40.740 --> 00:21:05.740 and Producer Goods. For consumer goods and producer goods we would have to say upon the question what is the optimal supply of consumer goods or what is the optimal supply of producer goods, the answer would have to be the more consumer goods we have the better and the more producer goods we have the better. 131 00:21:05.740 --> 00:21:13.740 However, this law, the more the better, does not hold for money. 132 00:21:13.740 --> 00:21:22.740 Again, recall, the purpose of money is to serve as a facilitator of exchange. 133 00:21:22.740 --> 00:21:26.740 Now, why does this law not hold for money? 134 00:21:26.740 --> 00:21:32.740 In order to see this, again, a simple thought experiment will immediately explain why that is. 135 00:21:32.740 --> 00:21:43.740 Assume that the money supply would be doubled overnight. However, the amount of consumer goods and producer goods in existence remains exactly the same as the day before. 136 00:21:43.740 --> 00:21:51.740 Now would mankind then be twice as rich? And the answer is, of course, no way would mankind be twice as rich. 137 00:21:51.740 --> 00:21:57.740 The standard of living depends exclusively on the amount of consumer goods and producer goods in existence. 138 00:21:57.740 --> 00:22:10.740 All that would now happen with twice as much money but the same amount of consumer and producer goods is that the purchasing power of money, what we can buy per unit of money would roughly fall in half. 139 00:22:10.740 --> 00:22:15.740 That is, the standard of living for society as a whole remains completely unaffected by this. 140 00:22:15.740 --> 00:22:21.740 The same is of course also true if the money supply were to fall in half overnight. 141 00:22:21.740 --> 00:22:28.740 But again, consumer goods and producer goods in existence remaining exactly the same as before. 142 00:22:28.740 --> 00:22:35.740 Society would then not be only half as rich, but they would be just as rich as the day before. 143 00:22:35.740 --> 00:22:40.740 Instead, the purchasing power of money would roughly double. 144 00:22:40.740 --> 00:22:46.740 Now, saying roughly falling in half or roughly doubling, 145 00:22:46.740 --> 00:22:52.740 that indicates already that I have to make a little amendment to this story. 146 00:22:52.740 --> 00:22:58.740 Because if it were really the case that increases in the money supply for instance 147 00:22:58.740 --> 00:23:06.740 would only lead to a loss in the purchasing power of money, 148 00:23:06.740 --> 00:23:13.740 we could discover, so to speak, no motive why anybody would ever want to engage in inflationary policies. 149 00:23:13.740 --> 00:23:40.740 However, while what I said before, by and large, prices will double or will fall in half if we double or cut in half the money supply, under the surface, an increase in the money supply would redistribute the existing income from one person to another. 150 00:23:40.740 --> 00:23:54.740 That is to say, even though the overall wealth in society will not be increased, it does not mean at the end of the inflationary process everybody will be exactly as rich as he was before, some people will be richer and some people will be poorer. 151 00:23:54.740 --> 00:24:08.740 In which way? Imagine that we would all find our money supply doubled in the morning and assume two different types of people. 152 00:24:08.740 --> 00:24:22.740 One person who now holds onto his money and spends it, let's say, in a month, and the other person immediately rushing out to spend all his newly found fortunes. 153 00:24:22.740 --> 00:24:33.740 It should be clear that the person who spends his money immediately will drive up some prices, those prices on which he spends his money. 154 00:24:33.740 --> 00:24:48.740 On the other hand, the person waiting, spending his money, will encounter a situation where some prices have already risen, are already higher, when he begins to purchase. 155 00:24:48.740 --> 00:24:59.740 That is to say, the person who spends his money first, will gain at the expense of those people who spend their money later. 156 00:24:59.740 --> 00:25:06.940 and if jumping a little bit ahead here in my story and if of course we assume 157 00:25:06.940 --> 00:25:13.060 what is the case in reality that money increases in the money supply do not 158 00:25:13.060 --> 00:25:18.500 appear in all of our wallets at the same time but appear of course at specific 159 00:25:18.500 --> 00:25:26.180 points in society and usually appear of course at the point of the government 160 00:25:26.180 --> 00:25:32.920 itself or the government central bank, then you can clearly recognize that by increasing 161 00:25:32.920 --> 00:25:39.920 the money supply first within the system of banks and governments, they spending the money 162 00:25:41.180 --> 00:25:47.500 first, then prices begin to rise of those products on which they spend it. We have not 163 00:25:47.500 --> 00:25:53.780 seen any of this money yet. Our income has still remained. However, we now have to pay 164 00:25:53.780 --> 00:26:23.780 If we pay higher prices for those products which the government and the first receivers of government money have driven up due to the fact that they have received larger amounts of money, then we can see that there is a systematic income redistribution going on, so to speak, from the hands of the general public who receives the new money late or not at all onto those people who receive the new money first. 165 00:26:23.780 --> 00:26:46.780 So while inflation does not at all increase in the money supply, does not at all increase overall standards of living, it does engender a massive amount of redistribution of income and wealth from the hands of the general public to the government and the central bank. 166 00:26:46.780 --> 00:26:52.780 Now a third point that needs to be emphasized. 167 00:26:52.780 --> 00:27:07.780 If we look at the interest of money owners, what would money owners wish to occur to their money in terms of the purchasing power that money has? 168 00:27:07.780 --> 00:27:15.780 Would people want to have money that loses purchasing power over time? 169 00:27:15.780 --> 00:27:25.780 Would people want to have money that maintains a relatively stable purchasing power over time? 170 00:27:25.780 --> 00:27:32.780 Or would people prefer to have money that increases in purchasing power over time? 171 00:27:32.780 --> 00:27:39.780 There are some economists like monetarists, Milton Friedman and his followers, 172 00:27:39.780 --> 00:27:56.780 and its followers, who without giving any reason for that, simply assume that people would prefer stable money, that is a money whose purchasing power remains pretty much the same in the course of time. 173 00:27:56.780 --> 00:28:02.780 Now given that we live in an inflationary environment, that sounds surely good. 174 00:28:02.780 --> 00:28:17.780 However, it seems to me that this is a rather daring claim to say that people would prefer a stable money even over a money that increases in purchasing power. 175 00:28:17.780 --> 00:28:33.780 Take another example. What would you like to see to happen to your house, that it increases in value over time, that it keeps the value over time, or that it loses value over time? 176 00:28:33.780 --> 00:28:58.020 Now, my guess is that, of course, everybody would say, guess I want my house to increase in value over time and to have it, to see it only remain stable in value over time is, so to speak, only the second best solution, obviously better than losing value over time, but certainly I would like it to increase in value over time. 177 00:28:58.020 --> 00:29:28.020 Now I would contend that this is by and large also true for money, that by and large people prefer if the purchasing power of money in the course of time increases and this in fact is what has happened under a commodity money standard as a gold standard, not as a necessity, that is there is no economic law that 178 00:29:28.020 --> 00:29:37.020 would help us predict that this increases in the purchasing power of money will of necessity be the case. 179 00:29:37.020 --> 00:29:44.020 But as an empirical regularity, it has indeed been the case that under the gold standard, 180 00:29:44.020 --> 00:29:55.020 a commodity money standard, the purchasing power per unit of money has in fact over several centuries increased. 181 00:29:55.020 --> 00:30:23.020 Of Great Britain, for instance, we have a relatively long time series of statistics and we know, for instance, that prices, let's say, in 1760 were lower than they were in 1660, and we know that prices in 1860 were lower than they were in 1760, 182 00:30:23.020 --> 00:30:38.020 and in 1914 they were still lower than they were in 1860. Prices under the gold standard gradually fell to 3% per year. 183 00:30:38.020 --> 00:30:49.020 That is, we observe for the overall economy something similar to what we can still discover in certain sectors of the economy nowadays. 184 00:30:49.020 --> 00:30:55.860 Nowadays, let's say in the sector of computer or electronics, where we see that every year 185 00:30:55.860 --> 00:31:01.500 prices of these products actually fall. Now, nowadays this is of course an unusual phenomenon 186 00:31:01.500 --> 00:31:07.820 that takes place only in certain sectors. The overall tendency is of course for prices 187 00:31:07.820 --> 00:31:13.580 to rise. For several hundred years under the gold standard, this tendency characterized, 188 00:31:13.580 --> 00:31:22.580 and so to speak the development of the overall economy that almost all prices gradually fell in the course of time. 189 00:31:22.580 --> 00:31:31.580 Now at this point obviously three observations come to mind. 190 00:31:31.580 --> 00:31:37.580 If it is true that money must originally develop as a commodity money, 191 00:31:37.580 --> 00:31:46.580 If it is true that money then has a tendency to become an internationally used commodity money, 192 00:31:46.580 --> 00:31:57.580 and if it is true that this international commodity money has by and large the tendency of increasing in purchasing power of money, 193 00:31:57.580 --> 00:32:04.580 then the current situation should strike one as extremely odd. 194 00:32:04.580 --> 00:32:10.580 is to say, what we observe here is of course, we do not have a commodity money, we have a paper money. 195 00:32:10.580 --> 00:32:23.580 The second thing is, we do not have an international commodity money, instead we have freely fluctuating paper currencies, 120 different currencies. 196 00:32:23.580 --> 00:32:32.580 And thirdly, we also do not have anywhere a situation where the purchasing power of money increases in the course of time. 197 00:32:32.580 --> 00:32:43.580 Instead, we have almost an unstoppable tendency towards inflation, in some countries more, in some countries less, 198 00:32:43.580 --> 00:32:53.580 but nowhere do we have a situation where we don't have inflation, losing purchasing power of money. 199 00:32:53.580 --> 00:32:57.580 Now, what explains this phenomenon? 200 00:32:57.580 --> 00:33:22.580 In order to explain this phenomenon we briefly have to talk about the nature of government because it is the result of government interference in monetary affairs that has changed the original situation to the present disastrous situation. 201 00:33:22.580 --> 00:33:28.580 Now, governments are institutions that are very different from normal firms. 202 00:33:28.580 --> 00:33:34.580 Normal firms have to produce something and have to find voluntary buyers for their products. 203 00:33:34.580 --> 00:33:40.580 That is, they earn their money in the old-fashioned, honest way. 204 00:33:40.580 --> 00:33:46.580 I'm not saying that all firms do that. Sometimes they do that in cooperation with government. 205 00:33:46.580 --> 00:33:57.580 The idea of a private firm is of course to sell something that consumers may or may not buy. 206 00:33:57.580 --> 00:34:04.580 On the other hand, governments of course do not finance themselves in such a way. 207 00:34:04.580 --> 00:34:14.580 Governments finance themselves essentially in no different way than a highway robber does. 208 00:34:14.580 --> 00:34:26.580 saying that here I'll offer you some nice thing in return but you must give me the money whether you like what I offer you in return or not. 209 00:34:26.580 --> 00:34:30.580 That is, they finance themselves through taxation. 210 00:34:30.580 --> 00:34:49.580 Another way of financing themselves, which is similar to taxation, but not as easily visible as having the same impact as taxation, is by engaging in counter-fitting activities. 211 00:34:49.580 --> 00:34:58.580 Under a gold standard, however, and of course governments, just like any other institution, prefer higher income over lower income. 212 00:34:58.580 --> 00:35:04.580 So they can raise taxes, but people do not like if taxes are constantly raised. 213 00:35:04.580 --> 00:35:11.580 So they look for a different method of increasing their income. This different method is, by and large, counterfeiting. 214 00:35:11.580 --> 00:35:15.580 Under the gold standard, however, counterfeiting is difficult to do. 215 00:35:15.580 --> 00:35:36.580 What can you do if gold is used as money? What you can do is once in a while you call in the gold coins and promise to the public that you want to re-mint them and make them look shinier and then you return the gold coins to them. 216 00:35:36.580 --> 00:35:46.380 But in the course of melting them down and re-minting them, you simply reduce the gold content of the coins, let's say by 10%. 217 00:35:46.380 --> 00:35:55.780 You give to the public the same number of coins, but each coin has 10% less gold than the coins that they originally did deliver to the government. 218 00:35:55.780 --> 00:36:03.080 And the 10% that you extract from each coin, you appropriate yourself. 219 00:36:03.080 --> 00:36:09.960 You mint 10% new coins, each one of them with 10% less gold content. 220 00:36:09.960 --> 00:36:19.320 Now obviously, this is also nothing else but a 10% tax increase because there will be no inflation resulting. 221 00:36:19.320 --> 00:36:26.280 You can buy less and the king or whoever is in charge of the government can buy 10% more. 222 00:36:26.280 --> 00:36:32.200 Obviously, this cannot be done very frequently and because of that governments were not very happy 223 00:36:32.200 --> 00:36:39.040 with the fact that they had to operate under a gold standard. Now, what did they do in 224 00:36:39.040 --> 00:36:44.840 order to get rid of this? What they did was, and again I want to just very briefly indicate 225 00:36:44.840 --> 00:36:51.840 the steps, what they did was essentially first to monopolize the minting process, to say 226 00:36:51.840 --> 00:36:59.320 look if there are competing minters of gold, they will cheat you. They will not be honest 227 00:36:59.320 --> 00:37:04.640 and say in saying how much gold is in there and all the rest of it and the 228 00:37:04.640 --> 00:37:09.320 public by and large being ignorant of course might have bought this sort of 229 00:37:09.320 --> 00:37:13.160 idea even though it should be perfectly clear that as long as there exists 230 00:37:13.160 --> 00:37:17.320 competition in the field of minting the likelihood of cheating is very low 231 00:37:17.320 --> 00:37:22.040 because every producer of gold coins will of course only wait for the moment 232 00:37:22.040 --> 00:37:25.680 that he finds out that his competitor is actually cheating and then we'll use it 233 00:37:25.680 --> 00:37:30.320 in the form of advertising and say, look here, this guy is a cheater, buy my gold coins, 234 00:37:30.320 --> 00:37:35.600 I'm an honest man. So competition by and large forces people to be honest whether they want 235 00:37:35.600 --> 00:37:41.340 to be honest or not. As soon as the minting process is, however, monopolized, only the 236 00:37:41.340 --> 00:37:46.880 government can mint and certify how much is in there and nobody else can do it, then of 237 00:37:46.880 --> 00:37:51.920 course cheating becomes immediately a great danger because even if you find out that there 238 00:37:51.920 --> 00:37:56.280 There is cheating going on. What can you do? They are the only ones who are permitted to 239 00:37:56.280 --> 00:38:03.800 do so. So that is the first step that they do. Then, again, in different countries that 240 00:38:03.800 --> 00:38:07.880 process went slightly in a slightly different fashion, but by and large the pattern is always 241 00:38:07.880 --> 00:38:14.240 the same. Then they usually insist that, and under the gold standard, of course, not only 242 00:38:14.240 --> 00:38:19.360 gold coins are used for transactions, but people also use, and I'll explain that in 243 00:38:19.360 --> 00:38:27.480 in my next lecture in detail. But people also use of course tickets, paper tickets that 244 00:38:27.480 --> 00:38:34.340 are titles to gold. They don't want to schlep the gold around but deposit it in certain 245 00:38:34.340 --> 00:38:39.120 institutions and they get a deposit ticket for it. And if the public has absolutely no 246 00:38:39.120 --> 00:38:48.080 doubt that the deposit ticket for gold can be at any time redeemed for the real thing, 247 00:38:48.080 --> 00:38:54.040 Then people are actually willing to accept also paper tickets in exchange. 248 00:38:54.040 --> 00:39:00.780 So the next step consists in only the government, so to speak, can print these notes, these 249 00:39:00.780 --> 00:39:05.720 warehouse receipts to gold. 250 00:39:05.720 --> 00:39:13.760 And the third step is then once people begin to use notes, initially backed by gold, to 251 00:39:13.760 --> 00:39:20.600 who then at one moment say, okay tough you guys, tough luck you guys, we will from now 252 00:39:20.600 --> 00:39:25.560 on no longer redeem these paper tickets into gold. 253 00:39:25.560 --> 00:39:31.440 This is by and large the process how paper money comes into existence, that is it comes 254 00:39:31.440 --> 00:39:38.800 on the existence riding piggyback on an initial commodity money standard such as gold. 255 00:39:38.800 --> 00:39:44.680 Paper by itself could never have acquired any purchasing power, but paper as tickets 256 00:39:44.680 --> 00:39:51.680 to a commodity of course can acquire purchasing power. But if you then cut the tie and don't 257 00:39:52.120 --> 00:39:59.120 redeem any longer paper tickets for gold, then of course this paper still can retain 258 00:40:00.480 --> 00:40:07.480 its acquired purchasing power and float on its own. Now this of course occurred in the 259 00:40:07.480 --> 00:40:14.360 in the United States in 1933 when the gold standard was abolished and then on international 260 00:40:14.360 --> 00:40:20.960 level in 1971 when even the last remnants of the gold standard were abolished and now 261 00:40:20.960 --> 00:40:27.740 with paper tickets only being issued by the government monopolizing it and no longer any 262 00:40:27.740 --> 00:40:34.480 obligation to redeem it, it should be perfectly clear that you could not possibly expect anything 263 00:40:34.480 --> 00:40:37.500 but a permanent tendency towards inflation. 264 00:40:37.500 --> 00:40:40.580 Let me just give you one analogy that explains it. 265 00:40:40.580 --> 00:40:43.060 Imagine I would tell you, 266 00:40:43.060 --> 00:40:45.500 you are the only person in the country 267 00:40:45.500 --> 00:40:48.820 who can print money, greenbacks. 268 00:40:48.820 --> 00:40:51.100 Everybody else in the country, 269 00:40:51.100 --> 00:40:53.220 if he tries to do the same thing, 270 00:40:53.220 --> 00:40:56.940 will be treated as a criminal and will be locked up. 271 00:40:56.940 --> 00:40:59.540 Now, what will you do? 272 00:40:59.540 --> 00:41:01.820 And the answer should be perfectly clear. 273 00:41:01.820 --> 00:41:04.100 Unless you were an angel, 274 00:41:04.100 --> 00:41:10.660 You will of course immediately begin printing because at almost zero cost you can print 275 00:41:10.660 --> 00:41:15.840 these tickets up and then you can go out and buy a Mercedes and a BMW, pay off your mortgage 276 00:41:15.840 --> 00:41:20.140 for your house and all the rest of it. You will of course and also immediately find that 277 00:41:20.140 --> 00:41:24.420 you have more friends than you ever imagined that you have because they will all come to 278 00:41:24.420 --> 00:41:30.440 you and explain to you that they of course have the same type of desires that you have. 279 00:41:30.440 --> 00:41:39.440 Can there be any doubt whatsoever that if this institutional setup is in place, that there can be anything else but inflation? 280 00:41:39.440 --> 00:41:48.440 And also, can there be any doubt in anybody's mind that those institutions that have precisely this privilege that I just described, 281 00:41:48.440 --> 00:41:54.440 that those institutions and people working for these institutions will do everything under the sun 282 00:41:54.440 --> 00:42:02.440 to intellectually malign and smear those people who attack the whole scam as being a scam. 283 00:42:02.440 --> 00:42:04.440 Of course, there can be no doubt. 284 00:42:04.440 --> 00:42:10.440 That is, those people will do everything under the sun to keep this magic wand 285 00:42:10.440 --> 00:42:19.440 and to smear all people who attack them for causing constant inflation as being neanderthal men.