Money and Prices

0:00A lot of nonsense has been written on many areas of economics. By far more nonsense has been written on the topic of money than any other area. Every guy with a pen and ink and or a typewriter feels that a boy should come out of the track on money, most of it pure junk. In most cases, the people who write on money, usually known as money cranks, in one way or the other come up with the conclusion that what's needed to solve all the problems of the world is for the government or somebody else to issue unlimited amounts of money. And when this happens, all problems will be solved, because everybody has money to be able to spend it. 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. The definitions of money are usually also pretty weak.

0:47The 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. Money is whatever the government says it is.

1:26In the macro field, you're talking about supply and demand, individual action, prices, that sort of stuff. And suddenly you're in the macro field and you're talking about something completely different. You're talking about all sorts of equations and banks and so forth. And there's no relationship between the sort of fairly clear-cut supply and demand analysis on the one hand and the sort of all the stuff going on out there in the macro field on the other. We're going to tie it in. In order to really understand what money is all about, you can't start off with the current 1974. 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.

2:24Money 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. So far money hasn't originated. In barter there are certain difficulties which pop up very quickly in the game. As soon as you get beyond Crusoe on Friday and get a few people in the village, you run into some problems in trying to work out a system of barter.

3:09Well, to apply to a modern context, I'm going out and trying to buy a newspaper. There's no money. 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. And we bought this thing, we have a little go-round here, 30 seconds of economics on and off of the paper. Now obviously, it's going to be very, very difficult. I'm going to start with that pretty quickly. You have to find a grocer who wants some economic instruction, and so on and so on. Even in a primitive village, what if the shoemaker is allergic to eggs? He doesn't want any eggs. What's the egg dealer going to do if he wants a pair of shoes, or if he wants his shoes repaired? 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. 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?

3:56You 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. 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. Another problem with this is the problem of indivisibility. In other words, I've got a tractor, let's say, I want to sell the tractor. I want to sell it and exchange it for other things. I have 20 different things, let's say. I have to find a grocer who wants a whole tractor. I can't chop up the tractor into 20 parts. Once you start chopping up the tractor, it loses value. So you have the problem of indivisibility. Nobody wants a tractor. You can't chop up a tractor into five parts.

4:39You have problems with any large thing and trying to divide it into parts and use that for barter. There's also another problem which will be very severe in the world of barter. There's no way to really calculate if you're a business firm. There's no way to calculate what your income is and what your expenditures are. There's no way to calculate whether you're engaging in a profitable business, whether you're running a loss or a profit because you have to say, let's say I took in during the month the following things, 20 kegs of nails, 30 dozen eggs. You know, you list about 50 different things and you're paying out 20 kegs of this and five feet of lumber and there's no way There's no common denominator by which you can measure these things or estimate them. You don't know what the heck's going on. No accounting system can work under Boehm-Bawerk. One price for anything.

5:24If a former wants to know what the price of eggs is, you have to tell him, well, let's see, the price of eggs is as follows. One loaf of bread, two pounds of butter, one-tenth of a hat, and so forth and so on. It goes down a whole list of hundreds of thousands of different things. And so you never know what any price is until a complete state of confusion. So no real market of any size or any complexity can develop under barter. Okay, so you have this world of barter. It's a world of struggling to develop, but obviously getting nowhere fast. Let's go back to the egg dealer, and there's three guys in the village. There's a wheat farmer, an egg dealer, and a shoemaker. And the shoemaker happens to be allergic to eggs. The egg dealer's shoes are falling apart. The egg man gets a brilliant idea. He goes to the wheat farmer and finds out the wheat farmer's not allergic to eggs.

6:07He exchanges his eggs for the wheat, and he takes the wheat, and he doesn't want the wheat. See, this is the first time in the history of the world, so to speak, in this model, where the guy buys wheat not because he wants wheat, he might be allergic to bread. He's buying the wheat not because he wants it for himself or to eat it or whatever, but in order to exchange it for the shoes, because he knows that the shoemaker will buy wheat. So he had for the first time an indirect exchange, or an exchange with a medium. In other words, buying something not because you want it, as you do under a barter, The Theory of Money and Credit

7:05This 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. 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, 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. This encourages people who are dealing with North Western Brooklyn to start buying wheat themselves, and it has a snowballing effect. 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.

7:55When you get to that point, and you get to one commodity or two commodities which are being used as a medium for all exchanges, this is called a general medium of exchange, and this is the definition of money. Money is a commodity which is used or a thing which is being used as a general medium for exchanges. And once you have a situation where you have a general medium of exchange, when money has been established on the market, not because the government has come in and said, I think we'll make cowry shells money or I think we'll Money emerges on the market, and always has emerged on the market, as in this sort of process. In fact, the people on the market see that certain commodities are more marketable than others. They start using it as media. They find this expands their horizons enormously. Pretty soon you wind up in the market process with one or two commodities as a general medium of exchange.

8:41Once a commodity has been established as money, all sorts of goodies flow from it. Enormous economic benefits flow from this fact. 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? 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. 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. And money then becomes the other term for every exchange. 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

9:43The Theory of Money and Credit

10:13The whole process of accounting, the whole process of figuring out whether you're making profits or suffering losses now becomes possible. 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. It came about, of course, not because one single person invented it, but because natural, unquote, market processes. No one person sat down and said, hey, I think we'll have something called money and establish it. Also, what happens is that this goes along with the ease of economic calculation. If you want to know what the price of eggs is, instead of having to say, let's see, the price of eggs is one loaf of bread or half a pound of butter, etc., etc., and go down in a list, there's only one price for everything, that's the money price. Whatever the ruling price is in money, so the price of loaf of bread is whatever, 75 cents, and that's it. Okay, so we see these enormous advantages and benefits from money, then the question arises,

11:02what good will be established in the market as money? What will usually emerge on the market as money? Usually it's the best money-able product, money-ish, when is that term good? A whole bunch of different types of commodities have been used as monies in the past. Soil, tobacco, cattle, southern colonies in America in the 17th century and 18th century. Tobacco is used as money, tobacco is a major product and business accounts are kept in terms of hogs heads of tobacco. One of probably the most single anthologized article in economics is a very excellent article 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 economics of a prisoner of war camp 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 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

11:58and he began to have a situation where everything was priced in terms of cigarettes, a market developed British officer would post on the board periodically what the price of, you know, a can of anchovies, three packs, a can of so-and-so, one pack, etc., etc. Everything would have its price. The whole price system develops. A beautiful example of the market in action. Oh, some enterprising speculators would do it. They'd buy up something when the care package, let's say, would come the first of the month. So during the first week, prices would tend to be lower than the last week because supplies would be eaten up by the end of the month. So enterprising speculators would buy the stuff when it's cheap, say the can of anchovies of the Reserve, hold it off the market until the last week and then sell it, just taking advantage of the higher price, thereby smoothing out the price fluctuations and shifting the supply of the commodities, allocating to where the consumers are most needed, over the last

12:41week. So all these things began to emerge. And sure enough, another thing that emerged was also inflation, because sometimes more cigarettes would start pouring in and the prices would go up. And then, sure enough, wouldn't you know, they decided, finally, the British officers 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. That's a beautiful microcosmic example of the current situation, past, present and future, for that matter.

13:28Anyway, cigarettes were the best money around. They had, of course, in the absolute sense, some disadvantages. First place, they crumpled easily. You know, you sort of make the wrong move and the whole cigarettes, your money goes down the chute. So the cigarettes got stale, and stale cigarettes were discounted, and had a discount of fresh cigarettes. They weren't very durable, and so forth. And also, they existed in an abundant quantity. 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, Transactions and Silver or Smaller Transactions.

14:21The two can really continue side by side. Here the old money and banking textbooks used to have a great chapter dealing with the question, which of the commodities make the best money? Which are the money-ish qualities? Of course, that's all about that now because there's no commodity money anymore. And the money which does exist has obviously so bad in relation to any money-ish qualities, it's best not to talk about it. In other words, paper and government fiat bank accounts are about the last thing the market would choose as money. One of the great money-ish qualities, well, first of all, it should be very marketable. It should be something in great demand before it even begins as money. And these things that you're picking in each society are usually in great demand. The cowry, shells, gold and silver has always been in great demand as an ornament. Start off with sort of a firm base in its original non-money form. Also, it should be divisible.

15:06It should be a commodity which you can chop up into small pieces and not lose the whole value. Gold and silver have two remarkable qualities as metals that you can take and slice into very small pieces

15:45It should be also durable. It should be able to sock it away on a mattress or something and pull it out 50 years later. 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. It also should be something that's easily recognizable and difficult to counterfeit. And gold is also that way. 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. You just bite it and you ring it on the table, etc. and drop it quickly. So, for all these reasons, gold and silver emerged from very early in the game as the best monies. And also, as we'll see later, one of the great qualities of gold and silver as the best monies, it has to be dug out of the ground. It's not subject to government turning on the printing presses.

16:23The market chooses gold and silver for these reasons. Free market economists tend to choose it for those, plus the fact that you can get them outside of government, you can be supplied outside of government, fiat, as an extra reason. And those are really the reasons why gold standard types 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. 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. 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.

17:17Basically, 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. 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. 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. The reason why you have a marginal utility for money is precisely because you have pre-existing prices in terms of money. Money has a pre-existing purchasing power. You have a problem with supposedly circular reasoning here.

18:04In other words, the problem for explaining the price of money, demand for money in terms of marginal utility, is that you can see you can have a marginal utility for eggs because you like to eat it, but you're not presuming a previous price. But when it comes to money, the very fact that you have a marginal utility for it presumes or assumes a preceding price for it, preceding price level, in quotes. So how do you get out of this, what used to be called the Austrian Circle? Mises is the one who solved this by saying as follows, yes it's true, there's a time element in the demand for money, which doesn't exist in the demand for other things. Say the marginal utility of money and day x is in some way a function of or dependent on the price level or the purchasing power of money and the day x minus 1, previous day. However, he said, if you push this back, keep pushing this back logically in time, you'll

18:48We 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 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. Which means that no money can ever originate unless it originally was a non-monetary use.

19:33In 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. Ergo, all monies have to emerge as originally a useful non-monetary commodity by gold or silver. For the, you know, you can kick gold and silver out of this, the thing can still function as money afterward. Keep on indefinitely on momentum. But as far as originating money, you have to begin with a non-monetary useful commodity. Okay, we have gold and silver established, we say it has to be established on the market. What's the currency unit? What unit do you keep the account in? You're talking about income and expenditure. Well, metals are always exchanged in terms of weight, units of weight. You're talking about tons of iron or pounds of copper or whatever. Therefore, the monetary unit will be a unit of weight of gold or silver.

20:21Let's say if you take gold as the money, in that case the gold gram or the gold ounce will be the monetary unit. Then economic calculations, income expenditure, prices, all these will take place in terms of the gold gram or the gold ounce. The unit of weight of gold becomes the currency unit. 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. The dollar, for example, began as a, I think, 16th century Bavaria, somewhere around that area. It was the Count of Joachim's Tall. During those days, the noblemen often issued their own coins. The Count of Joachim's Tall issued a coin, which had the name of the Count of Schlick, Count Schlick of Joachim's Tall. They issued these coins, which circulated all through Europe because they were pretty and they lasted a long time and looked good.

21:10The first time it looked good, it was called the Joachim's Tollers, or Schlichten Tollers. I think an ounce weight of silver. It became a famous coin, the Schlichten and the Joachim's Tollers. And pretty soon, as people do, they abbreviate. And if you lopped off the Schlichten and the Joachim, it was just called Tollers. It becomes transmogrified into dollars later on. And the pound sterling, the British currency unit, of course, originally meant that. It meant a pound of silver. That's what it was. A pound sterling was a pound of silver. Gold is a heck of a lot less than a pound of silver. So currency, you know, is originally a weight of gold and silver. One of the first pieces of evil, which was injected into the monetary system, was beginning to use names instead of weights, sort of a special name. Once that happened, that was the beginning of the end. The first step on the slippery slope down on current to accelerated runaway inflation

21:58was the first time that the king, instead of talking about gold lamps, why don't you talk about the, if the king's name is Edward, why don't you talk about the Edward? It's classier than talking about the gold lamps. 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. During the late 19th century, when most nations were on the gold standard, there were several international monetary conferences. 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. 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? Let's scale first. Most of them were sort of multiples of each other.

22:36The pound sterling was almost $5, so it was a little bit less. Why don't we make it $5, change it a little bit, and then we can proceed on, the next step after making each one a multiple of the other, to abolish the dollar and pound altogether, just make them weights of gold. We'll have one world, gold unit. And that was the objective of most of these guys in the late 19th century. They were all laissez-faire liberals, they were all hard money types. They founded on the whole silver question, very esoteric. 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. 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.

23:24But even now, it's the official definition of a dollar is one forty second of a gold land. That's what a dollar is. A dollar is not just a dollar, not just a piece of paper printed by the government. It's supposed to be, at least officially, it's supposed to be one forty second of a gold land. How did this change? Very early in the game, the government, the kings and so forth, established themselves as the guardian of the nation's weights and measures. Of course, the big thing, you have to have a government to make sure that the yard is always a yard. You have the metric yard or whatever it is somewhere under a glass. 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. As part of this guardianship of weights and measures is also guarding the weight, gold, and silver.

24:12First, the first place is to nobody's real interest, really, to juggle the yards and feet. The government issued a decree saying, okay, from now on, a yard is no longer 3 feet, it's 2 and a half feet. A foot is no longer 12 inches, it's now 11. It's obviously pretty absurd, you have to be pretty kooky, even for the government to do something like that. So nobody's really managed to do this. So you have the fixed foot in the fixed yard, and it's there forevermore, the meter and so forth. But, in the case of money, you don't have this question. In the case of money, you have the economic vested interest of the compulsory monopoly guardian of the purity of the money to start juggling the definition, first the government started, by establishing a compulsory monopoly of the mint, the mint function. Usually gold, for example, is changed by weight. You have a pound of gold, an ounce of gold, etc. Then after a while, we discover that certain forms, certain shapes of gold are inconvenient.

24:55For example, gold dust. There used to be back in the old California gold strike days, people walked around in gold dust. You remember the western movies? 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. And you can do that, but it's kind of inconvenient. First of all, the gold dust begins to evaporate. And then you walk around in a cloud of gold dust and your money is disappearing very rapidly. So you want to have a sort of a hard form. Over the centuries, the two most convenient forms are bullion, or bars, and coins. The coins for smaller transactions. When you transform a bullion into a coin, there's a certain amount of cost involved in it. Usually a coin will then be at a premium in relation to the bullion. The king saw a good thing here. The king very early established the view that a compulsory monopoly of the mint

25:38was essential to the sovereignty of the king. 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 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. Usually it works something like this. A new king is crowned, and he looks around and he says, 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.

26:26Besides, the old coins are getting dirty and kind of shabby, they're getting worn. 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. Everybody troops in and usually make a compulsory to hasten the process. Say you have the Edward. Let's say the Edward is defined as a unit of weight of 2 ounces of gold. Come in with your 2 ounce coin. You get the 2 Edwards back. You have your 2 Edwards. That's terrific. You're not really losing anything at all. Except there's one slight hitch here. Instead of the Edward being 2 ounces apiece, the Edward is now an ounce and a half. It's been redefined. In other words, the unit of weight has been lowered. You're getting a much lighter weight coin back. If you have a two ounce coin, you redefine the Edward as one and a half ounce. What happens to the other half ounce? Well, obviously, you know what happens to the other half ounce.

27:10The king keeps it. Takes all these half ounces of gold and mints his own coins and spends it. He spends it. The public is in great shape. They've got the same number of Edwards back. The king is in even better shape. He has Edwards that he didn't have before at all. As we'll see, what happens as a result of all this is he has an inflation. More Edwards are on the market in relation to whatever goods and services are available. The price of everything else goes up. So that was the earliest, the classic form of inflation. Before paper money was invented, before bank credit was invented, was coin clipping or debasement. Obviously when private people clip coins, this is very bad. The maximum punishment of a law is to send it upon their head, because that means you're taking the guy's coin, you're taking the guy's two ounces, you're shaving off a tenth of an ounce or something, and then you collect the shavings together and you make your own coin.

27:55It's obviously immoral and evil, but when the government does it, When the government does it, it's part of an essential part of an attribute of sovereignty and therefore good. Getting back to coin clipping. We'll get back to coin clipping, of course. We now have the gold ounce, let's say, established as the currency unit. And all coins are in terms of gold ounces or gold grams. This means that every coin or every currency unit is automatically fixed in relation to every other one. We have a big controversy now among economists about fixed exchange rates versus fluctuating exchange rates. The point is, there's no such thing as fluctuating exchange rate, because there ain't no exchange rate. Let me put it this way, if you're exchanging a pound of something for a certain number of ounces of the same thing, 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. Then if you have one coin, let's say if Boston is putting out the Adams coins, which are weighed two ounces,

28:45and Texas are putting out Houston's, which weigh one ounce, then two Houston's will always exchange for one Adams, because it's two to one, that's what the ounces are. 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. Those economists who claim the fixed exchange rate is somehow coercive or somehow statist, misconceive the whole point. 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. 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, In a truly free market situation, only one fluctuating exchange rate is between gold and silver.

29:36Everything else, within gold or within silver, exchange rates are automatically fixed by the respective weight of the currency units. Of course, if each person in the world put out his own money, for example, obviously it's not going to be money. 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. There'll be fluctuating exchange rates, I guess, with each one of them. Five Rothbards might exchange for one somebody else's around here. But, of course, the point is, nobody's gonna take any of this stuff, fuck it. It's gonna be scrap paper very quickly. It was not an inherently useful commodity to begin with. 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.

30:27And 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. I mean, it would be a waste of paper, nobody would take it, and it would be the end of their personal paper money. The gold and silver right quickly emerge as the monies in that kind of society. And there'd be no panacea, although it'd be a lot better than there is now in the economic system. This is what has been called, by the way, parallel standards. When you have a situation where you have gold and silver both functioning as independent monies without a government fixed rate between them. And it has happened all during the Middle Ages and the early modern period. Gold and silver would fluctuate. And so, for example, in the Italian city-states, in Florence, in Venice, et cetera, Gold, Silver, Relationship, Purchasing Power, Ever since Keynes wrote the General Theory in 1936, the concept of purchasing power has been completely distorted.

31:36In the Keynesian system, purchasing power means the total number of dollars, let's say. If there are two million dollars out, that's the purchasing power. If there are 20 billion out, that's the purchasing power. This is not the original concept. Purchasing power, let's go back, for example, to the price of eggs. Under Boyer, what's the purchasing power of a dozen eggs? Well, it's the same thing as the price of a dozen eggs. The same thing. The price is the purchasing power of the thing. In other words, the price of something is whatever the thing can buy in exchange. If the price of an egg is, let's say, the price of a dozen eggs is a dollar, This means that a dozen eggs can command an exchange, an exchange for one dollar. That's the purchasing power of a dozen eggs. Under Boehr, every commodity has a whole array of different purchasing powers. Or we can say this purchasing power is a whole array of possible alternatives.

32:21Under Boehr, let's say a dozen eggs could exchange for the following. 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. When money is established, you limit all this stuff, and you just have one price for the money price. So the money system, the purchasing power of a dozen eggs is its price, its money price, let's say, a dollar. That's the price of money. Well, the price of money, or the purchasing power of money, which is the same thing here, is an array of all the different goods that can be bought from money. When money has been established, let's say if gold has been established as money, all the other things have a money price, one single price. 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.

33:14So 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. 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. You go through this whole array of alternatives. That is the purchasing power of an ounce of gold or a currency unit of gold. 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 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.

34:03But 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. The relationship between these commodities do change over time, it's not just one average price level which you can then juggle. The purchasing power of the dollar will be this array, which is the same thing as the price of the dollar. 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. First of all, all prices on the market tend to be uniform. In other words, if the price of Wheaties is 50 cents in one store and 60 cents in another store, unless other forces come in, in other words, unless one store can charge more with their services or better, they allow credit or they deliver at night or something like that, barring all that, the prices of each product will tend to be the same, because if the price of Wheaties is 50 cents in one store and 60 cents next door,

34:56very few people will buy the 60 cent Wheaties. The price might go up in the 50 cent store and down in the 60 cent store, A $0.50 story might have a resolution of a thing of $0.52 or something like that. In other words, it will reach equilibrium with the uniform price for any given good or service. The same thing will be true with the purchasing power of the dollar, the purchasing power of gold, or the gold ounce. The purchasing power of the gold ounce will tend to be the same throughout its trading area. If the world was its trading area, then the purchasing power of the gold ounce will tend to be the same throughout the world. or the Uniform is usually called price levels, even more so than in the case of specific products because specific products are usually produced in one place and then transported somewhere and then consumed in the other place. For example, the price of wheat in Kansas will not be the same as the price of wheat

35:43in New York because you have to transport the wheat from Kansas to New York. The price of wheat in New York will tend to equal the price of wheat in Kansas plus the transportation cost to carry the wheat from Kansas to New York. 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. 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. If, for example, the purchasing power of gold, let's say, is higher in France than it is in England, then gold will tend to be shipped from England to France, which will tend to lower purchasing powers in the two countries.

36:29In terms of price levels, if the price level in terms of gold is higher in France than it is in England, then people start spending money in England. They take their gold and go to England for it, buy stuff in England and not in France, in France. This will tend to lower French prices, raise English prices until the price levels or the arrays of prices are equilibrated. So the purchasing power of the gold will tend to flow like everything else where you can make most money at it or most income at it. Gold will tend to flow from those areas where it has the lowest purchasing power to the areas where it has the highest purchasing power. And this will tend to equilibrate. What determines the purchasing power of gold? Essentially, the supply of money and the demand 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.

37:19And 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. And supply and demand drops out of the picture altogether. Supply and demand really is still in the picture. 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, What is the supply of money exactly? Let's assume it's just gold coins and gold bullion. 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. The stock of money at any given moment or any given time. First place, money is very durable, gold is very durable. The annual production of gold is small in relation to the stock which has been accumulated for hundreds and hundreds of years.

38:05There'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. 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. The first thing to look at about the supply of money is that everybody at any given time owns some money. In other words, there's no supply of money which isn't owned by somebody. There's no money floating around in the empyrean somewhere. All money is in somebody's cash balance. This brings us to the concept of cash balance. Cash balance is the amount of money, the stock of money, that any given person has at any given moment. You have some money in your wallet, you have some in your mattress, some in the safe deposit box, some under the floorboards.

38:54The Individual Supply of Money Each individual has his own stock of money, which we can call small m. 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. Big M is the usual symbol for the quantity of money or supply of money. It will simply be the sum of all the small m's. This ties in immediately with the macro money analysis. Supply and Demand

39:52Money is always sitting somewhere. In other words, it's always in somebody's cash balance. What happens during an exchange, any exchange that takes place, using money as one of the terms of the exchange, 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. So the money is circulated, or rather cash balances are transferred from one person to another. 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

40:46of the so-called price level of the purchasing power. Then we have demand for cash balances. Why should anybody demand a cash balance? Well, first of all, he has to get money in order to buy it, in order to use it for something else, in order to spend it. So the usual process is you produce a good or a service, you sell it, you get money, you get a cash balance, you hold on to it for a short while or a long while or whatever, you spend some of it on other goods. The demand for a cash balance is how much you want to keep, how much you want to sacrifice for it How much do you want to sell in terms of goods and services for cash balance? How much do you want to hold on to it? You have the same kind of demand and supply curve, except now in vertical terms, that we had when we talked about the supply curve at any given moment was vertical.

41:29You have the price on the y-axis. You have the quantity purchased or held on the x-axis. Supply and money would be a vertical line, which we call M. Then we have the demand for money, which I maintain is going to be falling. 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. Purchasing power of the gold ounce, whatever you want to call it, or the inverse of the so-called price level. It's easier to think in terms of price levels. It's one over the price level of everything else. 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. 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.

42:20Why does the man curve for cash balances falling in this situation? 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. You want to keep a certain amount of money in your wallet for various reasons. First place, you don't really know how much you're going to need for spending. Emergency money, you might get hit by a truck, it might be raining, you might want to buy an umbrella or something. In other words, you want to keep a certain inventory for emergencies or for uncertainty or whatever. If the price level is higher, supposedly the prices double tomorrow. Prices of everything double. Angel Gabriel has descended and doubled all prices. You don't need Angel Gabriel anymore for that, I'm afraid. 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.

43:35If you don't have money to buy lunch, all these things require a higher cash balance, if prices are higher. Conversely, if prices were low, if Andrew Gabriel finally did something good once for change and cut all prices in half by magic, 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. 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. If you link these two or more points together, what you get is a falling demand curve for cash balances. In other words, there's an inverse relationship between the quantity demanded to keep your cash balance and the price of money. Okay, now we have the demand for money which is falling, we have a vertical supply line of money, and I will now contend that the price of money is determined by the intersection point at any time,

44:25the day-to-day equilibrium will be the intersection point of the demand for money, Money, the Manor for Cash Balances and the Supply of Cash Balances, that the intersection will determine what the price of money tends to be at any given moment, what the price level, in other words, tends to be. You see the analogy is perfect between this and the price and demand of supply and price for individual products. Supposing we're up here, supposing the price of money is higher than the equilibrium, it's up here, in other words, the price level is lower. At this low price level, we have a situation where the existing supply of money remains the same, you can't change the fine money, that's given in any time. There's the amount of gold that we're hanging around. At that low price level, people don't want the money in their cash balance. Prices are low, and let's say there's two billion dollars worth of gold around, people only need 1.8 billion in their cash balances, the rest of it, spend

45:17the other 200 million. As they spend the other 200 million, the demand curve goes up, price goes up, the price level is so low that the gold and silver that you've got, I'd say 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. In the aggregate, you can't get rid of cash balances. You're stuck, like a hump, so to speak, humping your back. The society as a whole is stuck with existing cash balances. The total supply of money remains fixed. Unless you take the gold and throw it in the river, which I don't think anybody's going to do. So what happens is, as you're desperately trying to get rid of your cash balances, in the aggregate you can't do it. 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.

46:01As this happens, as the price level increases, the gap disappears. 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. Conversely, looking at it the other way, if the price of money is too low, if, in other words, the price level is higher than equilibrium, then you have this kind of situation. You still have the $2 billion worth of gold, but now prices are so darn high that you want more cash balance than you've got. Rather than burning a hole in your pocket and you haven't got enough money. This is a shortage of cash balances. If everybody feels a shortage of money, not in the sense of, of course, everybody wants more income, In the sense that if you want more cash balances than you have available, because prices are so high, people try to get, desperately get more cash balances. How do they do it?

46:52The amount of the cash balance is fixed in the aggregates. The amount of gold can't be increased magically or anything. You're given the same amount of gold. What you're trying to do is you spend less money on goods and services. You hold on to more of your income and keep it in your cash balance in order to increase your cash balances. As people restrict their spending, prices fall, and as prices fall, the shortage of cash balances no longer appears. By this action, the public is able to lower prices until they don't want any more cash balance. 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, 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. What happens is that this action raises prices until they're satisfied with what they've got.

47:41Similarly, 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. The result is the prices will fall until they've satisfied what they've got. There's a tradition in economics theory to sneer and deprecate people who want to increase their cash balances, the so-called hoarders. Hoarding is when somebody else, then yourself, wants to increase the supply of cash. It's supposed to be a terrible, evil thing, cause of depressions and all sorts of other nonsense. Actually, all it's doing is, if people are holding on to more of their cash balances, the demand for money increases, then since the supply of money has remained the same, 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.

48:27In other words, in real terms and quotes, Correcting for price changes, you're increasing the real cash balance. 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, if it's legitimate to save more and invest more, or save less and invest less, it's certainly just as legitimate to want to increase your cash balance proportions, and to have that satisfied by prices falling. People, for one reason or another, want more cash balances than they've got. This will be satisfied by this cash balance will go up, prices will fall, Price of money will go up, this will satisfy the desire for increased cash balances. The price level then is determined at any given time by the vertical supply line on the falling demand curve. What then changes it? Well, two things can change.

49:12Price levels, of course, change all the time. The price of money changes all the time. What then changes it? Two factors and two only. Either because the supply of money changes or because the demand for money changes. We were talking just now about the demand for money going up. People want more cash balance for For whatever reason, even if they might be more miserly than before, whatever, if the management money goes up then, the man curve will shift to the right, it means that the old intersection point, with of course a fixed vertical supply line, means that the old intersection point, now see before they were satisfied, before it was a market clearing purchasing power level. But now, because people want more cash balances for whatever reason, so their marginal utility Money is going up. So now, in this new situation, because of these new value scales on the part of the people, now we have a shortage of cash balances, something emerged.

50:04So now we are not satisfied, people want more cash balances, people then spend less money, restrict their purchases. As they do that, the price of everything falls, and as the price falls, we reach to the new equilibrium point, the new market clearing point, which is now higher, because the demand curve for money has gone up. At a new, higher equilibrium point, it means that the price of money is now higher, prices in general are lower, and people now have achieved their desire to have higher proportion of cash balances by the fact that prices have fallen because of their action. Conversely, people's demand for cash balances falls, for whatever reason. Demand curve for cash balances falls, and then the exact opposite happens. This means that the old equilibrium point, you now have all of a sudden the gold is burning Money burning a hole in their pocket, trying to get rid of it, we wind up again at a new equilibrium point where there's no longer money burning a hole in anybody's pocket.

51:01The proportion of cash balances to everything else has fallen. So now we have a situation where we have the same aggregate supply of money but it's doing less money work, less cash balance work because prices in general have gone up and people have achieved their goal of arriving at a lower proportion of cash balances. 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. Conversely, if the demand for money goes down, people want less in their cash balances, this will lead to the price level going up. 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.

51:50Usually, people's demand for money doesn't change very much. It's influenced by a lot of institutional factors. For example, it's influenced by the frequency at which people get paid. A simple thing like that can very strongly affect the desire, how much you want to hold your cash balances. Supposing two people have the same income, say they have an income of $12,000 a year, A and B both have an income of $12,000, but the difference is that A is paid once a month, so A gets a check of $1,000 the first of each month, say, and B, however, gets paid twice a year. I used to be in that position way back, I was in the position of getting paid twice a year. 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,

53:01January 1st and another $6,000 in life first. Their total income is the same. If you simply look at the income over the years, $12,000. However, let's look at their different average cash balance. Let's assume that neither of these two guys save anything. Let's assume also that each one spends at a smoothly uniform rate, a certain amount, proportional, fractional amount per day, which of course is unrealistic, and it gives the idea here. A starts off the first month with $1,000. By the end of the month, he's got zero, Just ready to expire before he gets his new $1,000 check. His cash balance on January the 1st will be $1,000. His cash balance on the last day of the month will be $0. So therefore his average cash balance for the month will be $500. 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.

53:50So the average cash balance Mr. B gets paid once a month is $500. This is the average amount that he keeps in his wallet or whatever. The other hand, look at poor B here. He starts off at $6,000 in his banking account. He winds up with zero. And so for each half year, he's got an average cash balance of $3,000. So he's got an average cash balance for the year of $3,000. Poor B is really in bad shape because he has to keep an average cash balance of six times the amount of Mr. A. So what happens, for example, if frequency at which people are paid institutionally shifts, If something suddenly shifts, which is what happens sometimes. It usually remains the same for a long time when something happens. 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.

54:40In that situation, supposing they shift, everybody shifts from blue collar, or their status suddenly shifts. Everybody is dubbed the white collar workers. You're really a big shot now, Jim. You're really a white collar type. And to honor this change in status, instead of paying it once a week, I'll now pay it once a month. In that situation, his demand for cash balances goes way up. He's got to kink a lot more, and so if there's a general shift from weekly payment to monthly payment, the demand curve for cash balances will go up. I guess it would be a good way of licking inflation, in a way. Price level will then tend to fall. Pay people less often. In other words, you pay people the same amount, but you pay them less often, and everybody has to keep a higher cash balance. So there are things of that sort, there are institutional matters of that sort, plus there are value scales, but it turns out that, again, empirically, one of the big reasons for shifts

55:31in demand for money is what's going to happen to the price level of money.