I'm so glad to be here, happiest time of the year. This will be your best academic experience for those of you, it's your first time here at MisesU. So glad you're here, enjoy it, get as much out of it. This week, you'll look back on this later when you're my age and think that was the best. So we're gonna talk about money, what it is, why we all want it. We have at the Mises University, we're gonna have money the very first day, one of our most important topics and it's central in Austrian economics. The reason why is we're gonna have, all our analysis is gonna be done in money prices. Calculation, which we'll learn about later in the week is only possible with money prices. And as we learned from Dr. Rittenauer, money or division of labor, and we'll see how that leads to money, it allows civilization really to develop. Money is very important in Austrian economics. Some of our most important contributions, Carl Minger's book in 1892 developed the theory of money. 20 years later, Mises in 1912 expanded Carl Minger's approach to the regression theorem. His first book was theory of money and credits, some light reading for your beach trip this summer. Other great works by Murray Rothbard, what has government done to our money? Highly recommend and my favorite is the mystery of banking. If not for Austrians, we might still have the state theory of money. That money is really whatever the state says it is and the currency has its value just from the sovereign's decree. So that's why we need to talk about money on the first day. By the end of this week, you're gonna be well versed in why this price inflation we're experiencing now, it's not because of COVID, it's not because of Putin's price, it's not a Putin price hike, it's not because of supply chain, but it's really the chickens coming home to roost. It's the payoff of this wildly irresponsible monetary policy we've had really since 2008. So let's start with a question, let's start with a question, who needs money? Old Robinson Crusoe, a man on the island by himself, he would have no need for money, can't eat gold coins, there's no shopping mall for him to go spend money. So he has no need for money and then eventually he meets Friday on the island, his friend Friday and even then the two of them, they have no need for money because when they're exchanging fish and berries, they can just do that based on their subjective valuations of the goods. But when society expands beyond just a few families, then the stage is set for the emergence of money. So remember, voluntary exchange happens because both parties expect to benefit, both parties expect to be better off from this exchange and from Dr. Rittenauer's lecture, there are differences in people's abilities. We can't all play basketball like Michael Jordan, we have different abilities and then also there are differences in locations. So just based on that, there comes the impetus for us to exchange, specialization exchange through division of labor. We each develop our best skill and each region can develop its own particular resources. So we found that we're better off, more productive, more efficient, more productive when we're producing a limited number of goods and relying on what we get for most of what we're gonna consume from exchanging with others, as opposed to being self-sufficient, as opposed to imagine, I mean, I was saying many of you look very nice, all of you look nice. I'm not leaving anybody out. You all look very nice. Most of us did not make our own clothes when we came here. We look a lot nicer because of that. So we have a higher standard of living through exchange rather than being self-sufficient. So exchange of goods for goods, we're exchanging goods against goods under barter. It turns out it's hardly better. It's barely preferable to being self-sufficient. So barter has two basic problems. There are a lot of problems with two ones that we're gonna discuss. One is indivisibilities of the goods that are being exchanged and also double coincidence of wants requirement. So this spring at our house in Waco, Texas, we put a pool in our backyard. That's our actual pool. We put a pool in our backyard. Pools, if you don't know, it's the first time I've ever had a pool in my backyard but pools are very expensive but this one did come with a really cute pool boy. So let's imagine putting in a pool under conditions of barter. Now I teach economics at Baylor University and not surprisingly, I am really popular. And my classes are in high demand, no pun intended. My classes always fill and have very long waiting lists to get in. In fact, here's a picture that the registrar took of students begging for my class. There they are. So naturally, if I'm bartering to get a pool, naturally if I'm bartering, I bring a lot to the table with my fabulous economics lectures. With my economics lectures, I come with a lot of value. However, as amazing as my lectures are, what if the pool is even more valuable? What if the pool is say even four times as valuable as my economics lectures? What could Paco, Paco the pool builder, there he is digging a hole in our backyard. What could Paco the pool builder do if his pool building is four times more valuable than my economics lectures? Could he just dig a hole in my backyard? You can see there's the hole in the backyard. Could you stop there? Could he maybe just build 25% of a pool? Say put in one wall of the pool and then just stop. Well, a fourth of a pool is not gonna be a pool at all because you need more sides of that. You need at least three, at least a triangle, right? For it to be able to hold water. So trading goods that are not easily divisible like a swimming pool, it's gonna be a hindrance to trade under barter. So even when goods are divisible into smaller units though, it's very difficult for two exchangers to find each other under barter. In barter, a double coincidence of wants is required for exchange to take place. I have to have what you want, you have to have what I want and we have to find each other. So for example, if I have these incredibly passionate, eloquent moving lectures, explains economics so clearly, it's intuitively obvious to the most casual observer where they would really just go away, change from economics lectures. And Paco, he can put in this beautiful pool. How are Paco and I gonna get together if Paco's not interested in economics? Instead, he really wants to learn our history. So then there's no exchange that's gonna take place. So for the survival of my economics, Professor colleagues, I'm so glad we don't live under barter any longer. Think of us trying to find food in exchange for our economics lectures. In fact, y'all, I can't believe I was able to get this, but I have an actual photo of some of our Mises University faculty when they were living under barter conditions. So there's Solerno Gordon-Klein. So with barter, we've got the indivisibilities and we have the double coincidence of wants requirement. One other problem is because every good trades against every other good, there would have to be, each good would have to have a whole array of prices. Each good is gonna be in price in terms of every other good. So in a barter economy with only 1,000 goods there would be almost a half a million prices. For a sense of scale, the average, I should say, pre-COVID, pre-supply chain problems, Walmart, the average Walmart store carries over 120,000 goods. So under barter, the prices, that's above my math level. The number of prices would be, somebody else can calculate that for me. But anyway, Mises said, money becomes more necessary as division of labor increases and wants to become more refined. As we have greater degree in division of labor, we can finally have our rocket science. Like Dr. Rittner was talking about, we can finally have our rocket science when only really when we have a monetary economy. It's really clear from these examples that any sort of developed, any sort of developed modern economy is only gonna be possible with money. It would not be possible under direct exchange or barter. Okay, so under indirect exchange, you're selling your product that you have that you're going to market to exchange. You're selling it not for the good that you need directly in indirect exchange. You're exchanging it for another good that then you can in turn, turn around and exchange it for the good that you want. And at first it seems like, gosh, this is just adding an extra clumsy step. Isn't this more complicated? Now I wanna go get bananas and I have to make two exchanges. The good that I want for something else and then I go get bananas. But it's actually it's a really incredible instrument that allows civilization to develop. Under barter, we can imagine that all the goods are gonna have a different degree of salability, how marketable they are. The more saleable a good, the more easily the owner of it could exchange it for other goods at some price. Okay, somebody selling potatoes has an advantage over me if what I have is a great big chandelier. I'm coming in with a big old chandelier and I'm looking for somebody to trade it with. So I'm gonna have a harder time, the big chandelier of a more difficult time finding trading partners. Who's coming to market looking for a big chandelier? Of course it's not impossible, especially if I'll accept a low price. If I'll be willing to accept a lower price for my chandelier, then I'm gonna be able to trade it more easily. But a chandelier, clearly on the scale of salability, potatoes are more saleable than chandeliers. So the owners of the relatively less saleable goods will exchange their goods, not only for what we want to consume, but for goods we don't directly wish to consume. So long as the good that I receive in my trade is more saleable than the good that I give up. As long as I'm going from a big chandelier to something that is more saleable, that puts me in a better position to get closer to the good that I do want to have. Over time, Minger argued the most saleable goods were desired by more and more traders because everybody recognizes this advantage. The demand for this very saleable good changes then. So it's not only demanded for its use value. We're buying potatoes, not just because we wanna have baked potatoes, mashed potatoes, french fries. We're buying these because also, potatoes are more marketable, potatoes are more saleable. So I have this, the potatoes then have this demand that's for its use and also this other component of the demand for is a medium of exchange. And the choice of the good or goods is medium of exchange. The gradual self-reinforcing process is more people accept it than the commodity becomes even more saleable and more and more therefore accepted. I've heard Bob Murphy make the point that we don't know how long this adoption process takes, but we can imagine that it may not take a very long time. It may happen. It may be recognized very quickly. We don't have really historical accounts of that, but just imagining people recognizing the benefits of the marketable or saleable medium of exchange. It might happen fairly quickly. Okay, so what makes a good more likely to become accepted as a medium of exchange? Well, if it's easily divisible, not like a swimming pool, if it's easily divisible into smaller units without losing value, if it's durable, it holds its value over long periods of time while changing hands frequently. Also, if it's easily transportable, if it has a high value to weight ratio, right? That's gonna make it easier for you to carry a little bit of it in your pocket and you still have a good value to exchange. Also, it's fungible. One unit of money is basically equivalent to any other unit. Also, it needs to be scarce. Eventually, one or two commodities are used as a generally accepted medium of exchange. That is, in almost all exchanges, the commonly accepted medium of exchange, then it's called money once it's generally accepted. So historically, we've had lots of goods that have served us money. We've had beads, bread, shells, nails, other examples. You hear about the fascinating case where cigarettes in the prisoner of war camps served us money. Through the centuries, though, two commodities, gold and silver, have displaced the other commodities as a generally accepted medium of exchange. And some critics, they'll make fun of Austrians. They'll call us gold bugs. Like we just love it because it's shiny and we have some kind of obsession with these shiny objects, but that's not it at all. But gold happens to be the commodity that the market has chosen because it fits these characteristics really the best. But we'd be just as happy if the market had chosen some other commodity that worked just as well. Karl Minger pointed out it's not necessary, even conceivable, for money to be established by some authoritarian decree or by an explicit contract among the citizens. In fact, no historical record of any government's creation of money can be found. Even though I don't think that's the strongest argument to say we don't have a historical record of it, but it just, it doesn't make sense. So more plausible explanation is that money originates spontaneously because the immediate and obvious benefit of using the more marketable good as a medium of exchange is recognized just by the parties involved. They recognize this is easier, more convenient, this makes sense for me and so I adopt it and that happens. So it's hard to really imagine if anybody coming up with this idea of money or a medium of exchange without actually experiencing it. Okay, so Minger said, hence it's also clear that nothing may have been so favorable to the genesis of a medium of exchange as the acceptance on the part of the most discerning capable economic subjects for their own economic gain and over a considerable period of time of intimately saleable goods in preference to all others. And that is from on the origins of money. So money is unlikely to origin any other way because embedded in the demand for money is this knowledge of the money prices that that had when it was a commodity when you're demanding it for you. So you have this knowledge of these past prices. So unlike consumption goods, money has to have these preexisting prices that we can ground our demand for it on this knowledge of what is this going to exchange for. I knew of this exchange for before it was a medium of exchange. Now I know that and I can have an idea when I go and exchange my goods for this medium of exchange. Mrs. Regression Theorem explains this can only happen beginning with a subjectively useful commodity under barter and only then adding a demand, this other component of demand for this good as medium of exchange to the demand of the good that you had for it when it was just commodity or demanding for your use. Okay, how do we go from, we're not trading in gold coins now, how do we go from commodity money to paper currency? Well paper doesn't have very much intrinsic value and people when they, you know, you have to work hard to be able to have nice things and you have, you've produced these goods that's a fruit of your labor, people are not willing, would not be willing to surrender these real goods that they have produced in exchange for worthless pieces of paper. So how do we go from paying with commodity money to paying with paper? Well, carrying around gold, I mean, it is heavy, right?  So people for their own convenience and security, they put their gold and secure warehouses and they had paper claims or receipts for the units of gold that were stored in there. To make purchases instead of going to the warehouse, getting their gold out and going to make the exchange with their gold for convenience, they started paying just to the paper claims. Here's the receipt I have, I have this many units of gold here and signing over this much of it to you for your bicycle or whatever. So eventually the paper claims to the gold commodity money became generally accepted medium of exchange where everybody was trading in these claims to gold. Okay, so once we have, once we have a monetary economy and we all have a generally accepted medium of exchange, most transactions are happening, being paid with this money, all the problems of barter are gone, we don't have to worry about indivisibilities, don't have to worry about double coincidence of wants. Also, there's a great reduction in the number of prices now. Every good is now priced in one unit and it's the money unit. So all of them are, everything is priced and it has only, everything only has one price. Very seen that without money, there could be no real specialization and therefore no advancement of the economy but now that we have money, now we can have an elaborate structure of production that can be formed, land, labor services, capital goods, cooperating to advance production at each stage of production and each one of them are receiving payment in money. And only with the establishment of money can we have rational economic calculation. Now businessmen can determine if they are earning profits or losses because both revenues and costs are gonna be denominated in the same units, right? It's not one cow was my revenue minus bushel of wheat and three, you know, sacks of oranges. Now everything is denominated in the same units. Also with money, people can compare the market worth of each good, compare the worth of one good to the worth of another. So if we have a gaming laptop computer costs about one ounce of gold and we know a new stripped down basic Ford Escape costs 20 ounces of gold. Cars have gotten so expensive, have y'all seen this lately? So if a basic entry level Ford Escape costs 20 ounce of gold, it's easy we can see, everybody can see that the escape is worth about 20 gaming computers. So most physical goods are sold in terms of units of weight and the size of the unit of weight, whether it's an ounce or a pound or a gram, it doesn't matter because each one of those can be converted into another one. Remember with units of measurement elementary school you had to learn, well, if you're in the United States you had to learn 12 inches is a foot. Right, okay, so same thing with weight. They're all convertible, one pound of 16 ounces and one ounce is 28.35 grams. So it doesn't matter which size we choose for the currency. I can sell something for one ounce in the US or I can sell it for 28.35 grams in France and these are the same price. This all seems very obvious but because people forget the simple truth there's a lot of confusion. People didn't think of money as being a dollar as being representative of so many ounces of gold. It was everybody thought money as units or some kind of esoteric something. Even where on the gold standard people thought in terms like this, American money is dollars, French money is Frank's, German money is Mark's, et cetera but really all of those were tied to gold and because they were considered sovereign and independent monies, people were just used to thinking of their names, thinking of here's a dollar, here's a Frank. It was easy for countries to go off the gold standard. This made exchange rates very confusing but it's really simple when you remember that these before government fiat money, the names were really just names for a weight of some commodity of gold. On the gold standard before 1933, people used to say that the price of gold was fixed at $20 an ounce. That's really a backwards way of thinking. The correct way of looking at it would be to say the dollar was the name given for 120th of an ounce of gold. Because this misunderstanding of the monies being names for units of weight of gold was misleading to talk about exchange rates of one country's currency for another but it's really simple. The pound sterling did not exchange for $5. The dollar was at that time defined as 120th an ounce of gold. The pound sterling was one fourth of an ounce of gold. They said the pound sterling exchanged for $5. It was really a fourth of an ounce of gold exchanged for 520th of an ounce of gold and so 520th reduces to what? One fourth, okay so we're gonna stay in school, learn our fractions. Okay so what about the specific value of money? What is the price of money? I think it's easier to understand this if we think of it first with some other good besides money. Let's take my laptop. If I take my laptop to the market to sell how much money could it command in the market? I think because my laptop I've had it since 2019 maybe I could get $100 for it, okay? So the purchasing power of my laptop is then when I go to the market it's gonna buy me $100. Or I could say that $1 buys how much of my laptop? One one hundredth of my laptop. It's the same thing with money. If I sell this money what can I get in exchange? The laptop just traded for money but money trades for everything else so we need to list all the possibilities of what a dollar trades for. So $1 could buy one one hundredth of my laptop. One dollar could buy one pack of gum. My daughter says it's more now like two thirds of a pack. So Jimmy Fallon's thank you notes. Thank you Federal Reserve. Or $1 buys one thirty thousandth of a car. So what then is the purchasing power of money? It's this whole array of all the quantities of the other goods and services that it commands in exchange. So the purchasing power of the dollar is gonna be the inverse like we've seen here or the reciprocal of the price level. So if we have a doubling of prices then the purchasing power of money is cut in half. So if the laptop is now $200 so instead of buying one one hundredth of a laptop it only buys one two hundredth of a laptop. So the price level rises, the purchasing power of the money falls. So the purchasing power of money can be thought of really as the price of money where the price or the value of money is gonna be determined by supply and demand just like supply and demand for any other good is gonna determine its value in exchange in the market. So if there's an increase in the supply of money we find that its value in exchange is going to fall just like there's an increase in supply of anything else it's value in exchange is gonna fall. There's a decrease in supply. It's value in exchange is gonna rise and it's opposite with demand. There's an increase in demand for money. It's value in exchange rises. If there's a decrease in demand for money it's value in exchange falls. And we should point out here that the demand for money is not just how much money do I want the demand for money is we call it demand for money is the amount of money we should hold in cash balances. So what is the optimal supply of money? We always hear about the Federal Reserve is increasing expanding the money supply. Now they're tightening the money supply. They're always tinkering with it in some way. And what should the supply be? Is there this optimal amount that we're finally going to achieve? Okay, now this is the amount of money that we should have in the economy. What is the optimal amount and would there be any reason why that optimal amount should change? Rothbard pointed out this is really a silly question. Nobody ever asked the question what's the optimal supply of pizzas? What's the right number of tennis shoes to have in the economy? An increase in consumer and producer goods which we consume, we use up, they wear out. An increase in those goods would make us better off because those goods are consumed and they're satisfying our wants, right? But money is different, right? As a medium of exchange money is not used up, okay? Money is not destroyed, it's just transferred from one cash balance to another. So that's why any money supply, any amount of money is just as good as any other money supply, amount of money, in performing the medium of exchange function. So purchasing power of money always adjusts, purchasing power of money, the value in exchange, money adjusts to permit the exchanges to all the exchanges to take place. All the exchanges we wanna have can happen whether our money supply is 20 billion or 200 billion, the price level would rise with the higher price level, or sorry, with the higher money supply, price level would be higher with the lower money supply, the price level would be lower so that every exchange could be facilitated. So we can see the effects of the increase in my supply of the Angel Gabriel model. In this model, we have a benevolent but very economically ignorant spirit decides, comes down, descends, decides to come down and try to benefit humankind one night by magically doubling the cash balances everybody has while they sleep. So everybody wakes up in the morning, discovers their cash balances have been doubled and they have excess cash balances, so they rush out and prices have not changed, right? The only thing that's changed is our cash balance. We have extra cash, we rush out and we rush out to go spend this excess money on consumer and producer goods, okay? The result then is an increase in demand for all those goods and then therefore when the increase in demand for something, the price of it rises. So we have a, the result will be a doubling of the price level. So society is no better off and no additional wants are gonna be satisfied from Angel Gabriel's doubling our cash balances. All the consumer goods, productive resources, they're all the same. There are no more of those to meet more additional, to meet, no more of those to meet additional wants and needs. So despite the angels doubling the number of monetary units, the real money supply, which is the money supply divided by the price level has remained the same. So the purchasing power of money's just been cut in half. So you see how that works, we were talking about before. So, so a little bit more closely to what Angel Gabriel did, was that some people were actually benefited at the expense of other people, even though all received the same proportional increase in their cash balances. The people who woke up the early birds, or as I call them the freaks, the early birds woke up early to discover their cash balance had been doubled and so they rushed out, these people tend to be impulsive. They rushed out and they bought at yesterday's prices but when they, in doing so, they fit up those prices, prices rose, those who slept in, smart people, are waited a few days, not as impulsive, before spending the money, they lost out because they made their purchases with the extra money after the prices have risen and their cash balances have decreased in purchasing power. So the increase in money supply did not benefit society as a whole, but early spenders are benefited at the expense of late spenders. Since every money supply is equally optimal and a larger money supply is no more beneficial than a smaller money supply, nobody, including economists, including the Federal Reserve, nobody need be concerned what the optimal supply of money is. Under the gold standard, the one and only way to increase money supply would be mining. You'd have to dig gold out of the ground. Mining, that production process requires the use of scarce resources and therefore it's costly so we're only going to be mining gold as a productive endeavor if it's profitable. And the profitability of mining is gonna be affected by the cost of mining. So if the costs fall, that means mining is more profitable so we would mine more gold. If the costs rise then production is gonna be less profitable and we would decrease our mining activity or maybe even shut it down altogether. So one factor that's affecting the cost of this gold production is the price level which is affected by changes in the money supply. So when the price level rises, the prices used in mining or sorry, the costs of the resources used in mining gold will also increase and gold protection would decline. The opposite would occur of course when the price level fell. So we should point out that with commodity money like gold or silver, that an increase and that does have a benefit in society because part of this increase in the gold or silver goes into consumption. It's not all used as a medium of exchange but we can have more jewelry, electronics, those things. So you can get gold by buying it or mining it. You can also get it fraudulently by counter-fitting it. Now I want us to look at the effects of counter-fitting so we can better understand the inflation process. So let's say some bad guys get together. They mint some counterfeit coins. They're actually made of brass instead of gold and they're, you know, to the naked eye, untrained eye, they are not easily detected. They go, these brass coins are spent and not detected. So they spend these fakes and that's increasing the money supply and increasing also the demand for goods.  That increase the price level is gonna decrease the purchasing power of money. It's just like the Angel Gabriel model except for one crucial distinction. The key here is that the fake money enters into the economy. It's not spread out over all of us. It's not where all of us have our cash balances double. It enters in a specific point in the economy and then it spreads throughout the economy as the fake coins get spent and re-spent over and over. The result is gonna be that the demand for the local goods, where the counterfeiters, the bad guys were, the prices of those goods will increase first and then it spreads until eventually all prices are affected. So the counterfeiters, they're like the early birds, the ones who went out and spent first, they spent the money early in the process and they benefit at the expense of those who get the money late in the process or not at all. Think of the people who are on fixed incomes, they are worse off, they have the same income but their money now has lower purchasing power at the higher price level. So counterfeiting is really a subtle method of fraudulently gaining at the expense of the rest of society through this inflation increase in the money supply process. It's okay, so the last thing, and this is from Hans Hoppe said, and I learned this at my very first Mises University in 1992. He said, we would not expect money to be paper. We would not expect money to be paper because we said money is not intrinsically valued. It's not gonna be able to command a lot in exchange. This doesn't have a high value in exchange. Also, we would not expect money to be national because then at the border, we're back to double coincidence of wants problem, right? I have to have, I have to find somebody who has Franks and wants dollars when I have dollars and want Franks. So then we're back to that problem of double coincidence of wants. Then also, we wouldn't expect it to be under the control of any particular entity. We wouldn't expect it to be that because we could have just the money supply adjusting with the price, as a money supply, sorry, any money supply would work just as well as any other amount of money through changes in the price level, right? And the purchasing power of money or the value of money in exchange adjust so that every single exchange can be facilitated. So we would not expect it to be under the control of any entity. So why do we have national paper money under the control of a central bank? Why is that? Well, it turns out, as we saw with the counterfeiters, the counterfeiters who get the money first and get to spend the money, get to spend the money first with their favored, with their favored retailers, right? With their favorite stores, they buy their first and then that money then spreads out into the rest of the economy and then we have the price, purchasing power of money falls as a price level rises. And so what happens is we have just transferred a good deal of wealth away from people late in the process to the people who get to spend early. And so this is a very viable tool, I would argue that the monopoly and the provision of money is really the most desirable of all tools for the state. And so that's why we see the way that we have the money the way it is today. Okay, thank you.