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Foreign. Principles of Economics. My complete guide to Understanding Economics is now available in hardcover, audiobook and ebook from seifeddin.com, amazon and many more booksellers worldwide. And now I am also teaching a course based on this book on my website seyfeddin.com Principles of Economics will run the whole academic year from September to June and will have a new lecture every two weeks, as well as weekly live online discussion seminars open to learners from all over the world and from all walks of life. Whether you're a student, a professional, or a retiree, you are making economic decisions every day and this course will arm you with the wisdom of centuries of economists to improve your economic decision making. You'll also get a free book of Principles of Economics. If you sign up for the course, go to seifedin.com and sign up now. Hello and welcome to Lecture 10 of Principles of Economics course. This lecture's topic is money. In the previous lecture we discussed trade. Today we're going to discuss money, which is trade that is conducted using an indirect medium of exchange. So in the second part of the book, we discuss the methods of economizing that individuals carry out individually. In this third part, which began with the last chapter, in chapter nine, we begin to introduce other individuals. We introduce society. We have people dealing with one another, and now we look at how they economize in a social context. And so in this case, we're looking at how human beings are able to economize through the use of a common medium of exchange. And that's what we mean by money. To begin the chapter, I begin with this quote by Mises, which I think is the key to understanding money from the Austrian perspective. The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money. He wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. This is the conclusion that we're going to arrive at from the Austrian understanding of money. But it is a really important conclusion, and it is what sets the Austrian school apart from other economic schools, specifically on the question of money. So what is money and what is the problem that money solves? So a good way to understand why any kind of technology exists is to begin to think about why what is the problem that it solves? Why do people use it? If you're able to understand what problem it solves, then you'll be able to understand how it does it and why it does it the way that it does it. So we discussed trade in the previous chapter. We spoke about how beneficial trade is. But there is a problem that happens when you're trying to trade with people. If you are trading with somebody and you want something that they have, but they don't want the thing that you have, the thing that you want to give in exchange. But then you too have a problem. You have something to sell, but he doesn't want it. And he wants to sell you what he has, but he doesn't have what you want. So what is the answer in that case? The answer in that case is that you need to go buy yourself something with your money that he wants. In other words, you need to find a medium of exchange. Something that you acquire not for its own sake, but only so that you could give it to him. We call this problem the problem of coincidence, of wants. And once you understand that this is the root of the problem, this is the root of what money solves, this is why we have money, then it becomes easy to understand what money does and how money functions the way that it does in an isolated family or in a small tribe. There are only a few people and a few goods they produce. These can be exchanged directly. And that's what we call barter. Barter is the situation where you exchange goods directly. So you have fish, I have rabbits. We exchange them. I give you fish, I give you rabbits, you give me fish. We agree on exchange rate. One rabbit for two fish, and we exchange them directly. This is pretty straightforward. If you imagine that you are with five people on an island, there's only six of you. There is not going to be a very large variety of goods that the six of you can produce. You're not going to be able to make a lot of fish or a lot of rabbits. Or even if you make a lot of fish or a lot of rabbits, you'll be only able to make, though you'll only be able to make those goods. You won't be able to make many goods. On the other hand, as the number of people in the economy grows, you're going to have a wider variety of goods. When there's only a small number of you, there's only a few goods. You make fish, the other person makes clothes, the other person builds a shelter, and you exchange the right to live. In the shelter, with clothes, with rabbits, with fish, and you can figure out an exchange rate between all of those things that you both agree to, and you're able to carry out economic trade between one another. However, as the size of the economy increases, you get a wider variety of goods and you get a wider variety of needs. People now want and require and ask for different things, and that then becomes a problem, because we run into the problem of coincidence, of wants. And another way in which people can trade when they are in small societies, in a small family or a small clan, is through debt. I don't need to give you rabbits for your fish. I can take your fish today and tell you, tomorrow I'm gonna catch a rabbit and I'll give it to you. Or next winter I'm going to harvest my grains and I'm going to give you my grain harvest. And you'll be giving me, say, one fish a week throughout the year. And then when it's grain harvest year time, I'll give you all of the grains that we agreed upon. This is a debt transaction. But again, this is only possible in a situation where people are familiar with one another. You're able to trust the person that they're going to pay you back. You can't just give credit to somebody that you don't know. You have to trust that they're able to pay you back. And so there has to be some kind of relationship between the two of you. In other words, it only functions in a small setting. But as we grow the size of the economy and as we grow the number of people who are part of the economy, we keep running into the problem of coincidence, of wants. I want what you have, but you don't want what I have. And that's when barter breaks down. And that's why, inevitably, we must find a way to solve this problem. And the only way that we can find to solve that problem is for the purchaser to purchase a good that he doesn't want to consume, but he purchases it only so that he can give it to the other person. So the solution to the problem of coincidence, of wants is indirect exchange. Instead of exchanging goods directly, people exchange the goods they want to sell for another good, which they want to give to the person who sells the good they want. The intermediate acquired purely to be exchanged and not to be consumed is a medium of exchange. That's what we mean by the term medium of exchange. Reason drives us to use media of exchange, but the consequences extend beyond what we plan. So it's a Very simple thing. You have rabbits, but the guy who wants to sell you fish doesn't want your rabbits, he wants oranges. So you figure out when you find somebody who has oranges and wants your rabbits, and you give him the rabbits, he gives you the oranges. You give the oranges to the guy selling the fish, and he gives you the fish. So this is just a very common sense solution to the problem. But what results from it is beyond what we design. We intend to carry out this move simply so that we can exchange one thing for the other. So we figure out that oranges are a useful medium of exchange in this regard. But then over time, as we continue to facilitate more and more trade, we begin to specialize more and more, we begin to produce more and more goods, we create more opportunities for trade. And now we start seeing that there are consequences to the use of different media of exchange. Some media of exchange are good and some are not very good. Some are better than the others. And the way that we can think of the suitability of a particular medium of exchange is through the concept that we call saleability. Salability is the ease with which a good can be sold at its prevalent price. In other words, it's the ease with which you can exchange a good for other things. And some goods are more salable than others. So let's think of a couple of examples to try and facilitate this concept. A $100 bill is a highly saleable thing. If you have a hundred dollar bill, you can pretty much exchange it for anything. You go anywhere, people will take it from you. If you want to buy anything, people are almost always willing to take a hundred dollar bill for whatever it is that they're selling. So $100 bill is highly salable. You never find yourself in a situation, well, not never, but you will rarely find yourself in a situation where you need to exchange $100 bill for something else in order to sell it and buy something else. So, I mean, there are some examples. In some countries, some people might not take the dollar, so you will need to exchange it to the local currency. But still, the US$100 bill is the most saleable bill in the world. So it might not work everywhere, but it works more than any other form of money. It's a lot easier to sell a hundred dollar bill anywhere in the world than it is to sell a currency, you know, the Zimbabwe dollar or the Egyptian pound or the Norwegian krona. The $100 bill is a lot more saleable. Now for a quick word from our sponsors with Fiat money constantly debasing. Preserving your wealth isn't an option or luxury, it's a financial and moral imperative. 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If you're ready to move beyond the false promises of fiat, start your long term bitcoin strategy@swan.com safe s aif but now finally Daylight have delivered a fantastic full function tablet with a paper like screen that's easy on your eyes and great for outdoor use. I've been using the Daylight computer to write my next book and it is absolutely fantastic and it has led me to invest in this company myself. Check out my interview with Anjan katta in episode 249. The Bitcoin standard Podcast is brought to you by Coinkite. Coinkite are my favorite makers of Bitcoin hardware. They produce the legendary open Dime, the first Bitcoin bearer asset, as well as the reliable cold card hardware wallet, the excellent stainless steel seed plates for storing your seed phrases, and the block. If we think of it on a larger scale, things like US treasury bonds are also highly saleable. US treasury bonds are probably the largest, most salable and most liquid market because it's got an enormous amount of liquidity for the Treasuries that are being sold in it. And this is where large financial institutions park their money. So if you're a large financial institution, you're going to put a lot of money in a lot of your cash balance in treasury bonds because this is the one market where you can get in and out with a relatively small slippage. By slippage you mean this idea that when you are trying to sell the good that you have sometimes because you're selling your good because you're trying to sell a large quantity of it, you bring the price down. And the bigger the market, the less slippage you're going to get because you can sell large quantities without being very consequential on the market. So this is why large financial institutions, sovereign wealth funds, central banks, this is why they all hold U.S. treasury bonds. If you hold U.S. treasury bonds, you can sell $5 billion of bonds and not have to worry too much about depressing the price of those bonds. Whereas if you're holding other financial assets, then it's not easy to get rid of $5 billion. So let's think about houses. If you buy $5 billion worth of houses in the U.S. for instance, and then you decided you wanted to sell those $5 billion of houses, you're going to bring the price of houses down simply by selling it. So the salability is not very good for large financial institutions. And in the case of houses, it's also not a very good saleability, even at an individual scale. In other words, if you're trying to sell your house, it's not a straightforward thing. It's a lot easier to sell, say, a government bond or to sell physical cash than it is to sell a house. When you want to sell a house, you need to get it listed. You need to get people to come and see it. People will make offers. You're going to negotiate, they're going to make counter offers. Somebody's going to tell you, all right, I'll do it, I'll buy it, but you have to fix this thing and you have to fix that thing or they'll ask for a discount because they don't like this thing or the other. So it takes time to sell a house. It's not something that you can just go and sell into a large market with a lot of fungible liquidity. And by fungible, we mean things that can be exchanged for one another. So houses are not fungible because each house is different. They have different locations, different sizes and different facilities and different amenities. So houses are not fungible. Hundred dollar bills are fungible. They're all the same. So there's a huge market for $100 bills. And if you have one, then it just goes into that market. So that increases the saleability of it. Other examples of things with low houses, washing machines, pianos, all those things are not easy to sell compared to, say, gold or physical dollar bills or U.S. treasury bonds. These are much more saleable. How to think about saleability, and this is a concept that's very important in the work of Carl Menger and the work of Antal Faquete, another Austrian economist. Not really Austrian, he's Hungarian, but he's kind of an Austrian school economist, although there are some disagreements between him and the Misesians. But in any case, I find their framework to be helpful to understanding this. High saleability for a good means a low bid ask spread means there's a small spread between the bid and ask. What we mean by bid is that it's the maximum that a buyer is willing to pay, Whereas the ask is the minimum that a seller is willing to accept. And for goods that are not very saleable, there's usually a big bid and ask spread. And it takes a lot of time to find two people whose bid and ask spread can shrink enough for them to be able to conduct a trade. So it's very easy for you to sell your house if you sell it at half the price that people expect to pay for it. So let's say you have a million dollar house, your ask is a million dollars. You'd like to get a million dollars. If you go around and you ask some random person on the street, how much would you pay for this house? Most people don't really need your house and so they don't value it much. So someone will tell you, I would only pay a hundred thousand. This is not the kind of house I want to live in. But if you give it to me for a hundred thousand, I'll take it. Someone will say 200, 300, 500. You might eventually find the guy that will pay you the million dollar. There are other people who will value it at a million dollars, but it'll take you a while to find find him. But generally there's a big spread between the bid and the ask. And that's why the thing is not very saleable, because this huge spread between the bid and ask makes it difficult to find a buyer on short notice. Now, for things that have high saleability, the bid and ask is very small. So think about, say, gold. Gold is a highly liquid market all over the world. And there's a very liquid market where people are constantly buying and selling. And the bid and ask is very narrow. So if you want to sell an ounce of gold, there's a couple of dollars difference, or 10, $20 difference on a $2,000 ounce of gold between the rate at which a gold dealer would buy and sell the gold. And that's really the difference between the bid and ask. So that's a relatively high amount of salability. Now why does this Matter. And how is it related to liquidity? Imagine a good in which there's relatively small liquidity on demand available for buyers compared to what you are bringing in. So you live in a town with a thousand houses and you want to sell your house. Well, there are only a thousand houses in the town, only five houses are currently on sale. When you bring in your sixth house on sale in this town, you're adding the supply and you're adding to the supply. And therefore that's making the marginal utility that you sellers would get from this good lowers lower if somebody was thinking of buying it. So if you were, think about it. If you're a real estate company looking to buy houses in this town, now they had five houses, now you're adding a sixth one. If they're going to be buying a sixth house, the marginal utility for them of the sixth house or the marginal value that they attach to having a sixth house to add on their portfolio to be able to sell it is lower than the fifth house, lower than the fourth house, even assuming they were identical houses for, for simplicity. But the more houses go on the market, the more the marginal utility or the marginal valuation that a potential buyer places on the house because now they have a higher number of houses available. So for buyers, their ability to soak up increased demand is limited. Sorry, the ability to soak up increased supply and is limited. As you add more to the supply, it becomes more and more difficult for them to buy it. Well, not necessarily more and more difficult. It becomes they, they become willing to pay less and less in order to buy the goods. So this effectively lowers the bid, causing the bid and ask spread to increase. So this is really the thing, as you add more products in a good that doesn't have a lot of liquidity, the bid that the sellers are willing to pay declines. And so then the spread between the bid and ask increases and it makes it harder and harder for you to sell your houses. And this is, this is what happens in housing crashes. And this is why housing can be such a terrible investment. Because when you want to sell your house, it's the time when everybody else is trying to sell their house. So something bad happens in this neighborhood. There's a big crime problem or there is a environmental risk. There's a factory downwind that is spewing noxious toxic fumes that are coming into your, into your neighborhood. And now everybody wants to leave. So now everybody wants to leave. Everybody's trying to sell their house. At the same time, the price of houses is crashing and Then it becomes harder and harder for people to buy those houses. And so the bid ask spread increases. Now, when a good has a narrow bid ask spread, then that is a good in which there is, there's less impact of bringing in increasing supplies onto the market. So think of a high salability good, say treasuries, there's $25 trillion approximately of liquidity in the treasury market, just the US government treasuries, there's $25 trillion of liquidity in there. All the world's central banks, all of the world's large institutional investors, the world's sovereign wealth funds. So many financial institutions all over the world with a lot of money are parked in Treasuries. And when these financial institutions are going to try and sell one of their treasury holdings, it's a drop in a large bucket. As long as the Treasuries are at around, say, 25 trillion, then even if a very significantly wealthy sovereign wealth fund, like to say the Saudi or the Norwegian sovereign wealth fund, needs to sell $10 billion, it's $10 billion in a market of $25 trillion. It's not going to make such a huge difference. It's very different from a house in a neighborhood of 100 houses, where adding the second house for sale in the neighborhood compromises your ability to sell the first house and reduces the price that you would get on them. So the more saleable a good, the more people will hold it in increasing quantities, further increasing in saleability. So the process naturally amplifies salability of the most saleable goods, resulting in one most saleable good emerging. This is a key dynamic to remember when people are trying to hold money. They look at the different salability of these different goods and they realize that it's better to hold things that have high saleability. And they might not even realize that. But even if they chance upon it by mistake, even if they happen to hold more saleable things by mistake, it works out well for them because they end up having more wealth, because when they want to sell those things, they make more money than the people who held things that are not saleable. And so that's a useful way of understanding how money's saleability helps us understand how money emerge. So the another way to understand is that the less the marginal utility of a good declines, the more saleable it is, the more salable a good is. On the other hand, the less its marginal utility declines. That's a key concept to understand about how money operates. You end up choosing money as something that has A marginal utility that declines a little because then the more you add on to it, the more supply you add on to the market, the less you're likely to cause the price to crash. And this is a self reinforcing thing because things that have low marginal utility declined, they are more salable and that then causes people to accumulate more of them, but then that in turn, because they start becoming more and more salable, that makes their utility decline less and less. The fact that it's easy to exchange money means that money's utility diminishes less than other things, because other things, utility diminishes with your own valuations for them because it's difficult to sell them, whereas money's utility diminishes with respect to it's the thing that you can exchange it for. And so you are always, you always have a decent amount of expectation that money's utility won't decline simply because money's utility is equal to the thing that you can exchange it for. And so this is an example that I try and illustrate this concept with. Imagine you have this schedule of utility that you see in this graph Here in Table 1, the first unit's utility of apple, oranges and bananas. You have a different utility ranking as you think of subjectively. So this is how much you value the first unit of apples, first unit of oranges, first unit of bananas. You value apples more than oranges and you value oranges more than bananas. So if you have a choice between all three, and they're all worth the same amount of money, and you get to choose, you choose the apples because the apple gives you more utility, and then you choose oranges second because the orange gives you second most utility. Now, would you choose a second apple if you're going to choose between the first orange or the second apple? No, you choose the orange first and then rather than the second apple, because the utility of the first orange is.90 in this example, whereas the utility of the second apple is 80. So the first apple has a higher utility than orange, but the second apple has a lower utility than the orange. So the utility of apples declines. As you accumulate more apples, your utility that you derive from each extra apple declines. And and as you accumulate more oranges, the utility that you derive from each orange also declines. And as you accumulate more bananas, the utility that you derive from a banana also declines. And this helps us understand how people make their choices between things. Even if you prefer apples to oranges, you still end up buying some oranges, because even because the utility of apples declines after you've had your second apple of the day, you don't feel like having any more apples, so you'd rather have an orange. Now for a quick word from our sponsors. The Bitcoin Standard Podcast is brought to you by the safehouse.com, my independent publisher and bookshop, selling the best bitcoin books in high quality cloth hardcovers built to last for generations. 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Assuming each one of these apples and oranges and bananas for simplicity's sake, is is priced at $1. So the utility of the first dollar is equal to what? Well, the utility of the first dollar is Equal to the thing that you can exchange it for, which is the Apple. So the dollar gives you a utility of 100 for your first dollar. Now, what does your second dollar get you? What is the utility of your second dollar? The utility of your second dollar is not the utility of the apple. It doesn't decline as much as the utility of the apple declines. The utility of the apple, the marginal utility of the apple declines from 100 to 80. But your second dollar doesn't buy you the 82nd apple. It buys you the orange with 90 utility. It buys you the utility of the first orange and the third dollar that you have. What's it going to buy? You've already got the first apple and the first orange taken care of. Now, what's the most valuable thing you have? You can either have the second apple at 80 utility or the second orange at 70 utility or the first banana at 85. So the third unit of money buys you the first banana at unit 85. And so as you see the third apple, if we get to the third unit of money, the third unit of money gets you a utility of 85 from the first banana. But the third apple has a utility of only 60, and the third orange has a utility of 50. And the third banana has a utility of. So what does that show us? It shows us that money effectively has the lowest utility of all goods, because you can keep exchanging each extra unit of money for the thing that you have, the highest utility to which you assign the highest utility at the current point in time, because it's easy to exchange money for those things. So this helps us understand how money emerges. It's the thing that we value value because we can exchange, because as utility declines less and it's a thing that is the most salable. So what makes things salable? Well, in order to understand that, we look at this chart that I made which explains the saleability of money through addressing the problem that money solves. So we can deduce what makes a good saleable from looking at the facets of the problem that salability solves, which is the coincidence of wants. And we can identify four axes or four dimensions of the problem of coincidence of wants. Four ways in which the problem of coincidence of wants manifests itself. The first one is the coincidence of lack of coincidence across goods. I want something that you have, but you don't want the thing that I have. How is this solved? It's solved by having the monetary property of finding one particular good that everybody wants as a medium of exchange. And then the second One is the lack of coincidence of wants across space. In this situation, I want to sell something in one location and buy something elsewhere. That's a difficult thing to do with money that is not transportable. So therefore your best kind of money is gonna be easy to move around. And the easier it is to move money around, the more saleable it's going to be. This is why land is a terrible form of money. It's a great thing to have land, but it's not money. Because if you need to move, it's not saleable. You can't take your land with you, you can't move it. And so you have to sell it into something salable, that is money, and then take it with you. And then there's the facet of scale. I want to sell something large and buy something small. This is a problem. So I have. I make cars, let's say, or something that is a big bulky product that can't be divided into small pieces. But I want to buy an apple. How can I sell you a tiny fraction of a car in exchange for an apple? I can't do that. And I can't do the opposite. How can I take a thousand apples, sell them, and then accumulate the price of a thousand apples in order to be able to buy a car? This discrepancy of scale, this lack of coincidence of wants across scales also is another problem, another facet of the coincidence of wants problem. And how do we solve that? We solve that by finding a form of money that is homogeneous, divisible and groupable. In other words, it's a homogenous substance that you can divide into small pieces in order to make payments, or that you could group into large pieces in order to make large payments. And so you want something like a metal, for instance, because you can take small bits of metal and. And add them together into one big bit of metal, or you can cut down larger bits of metal into smaller pieces. That is ideal. It's homogeneous and fungible and divisible. And it's not the case for most market goods. So TVs, houses, washing machines are not like that. They are not easy to transform across scale. They come in the scale of one washing machine, one house, one car. You can't chop it down and to any smaller bits. And then the fourth facet is time. Time. You want to sell something today so you can buy something in the future. And that's a difficult thing. You have a problem of coincidence of wants across time scales. And the way to solve that is to find something that is durable, that can survive across time. So you want to save apples in order to be able to buy a car. Not only do you run into the problem of scale, which you mentioned earlier, but there's also the problem of time frame. You need, say, a year's production of apples in order to buy one car. So if you do that, what is going to happen with the apples? If you save up a year of apples? Well, the apples are going to rot. And then when you try and go and exchange them for the car, you're not going to be able to exchange them for the car because the car owner does not want rotten apples. It's a lot better to go take the cars. Sorry, take the apples. It's a lot better to take the apples, sell them for something that is durable, that can hold on to its value for a year, and keep stacking that thing so that when you manage to get the price of the car, you could go and take that thing and use it to buy the car. So by looking at this chart, we can see what makes a good saleable and therefore a good use for as money. So scale, as I mentioned, helps us understand why metals make for good money. You can divide large pieces of metal into small pieces. You can take small pieces of metal and combine them into large pieces. Suitability across space helps us understand why gold and silver work as money and their limitations today. It helps us understand why bulky, large objects don't work very well as money, like, say, cows or houses or cars. And it helps us see why things that are smaller, that are easier to carry around, are much more useful as money because you can move them around and across space. It also helps us understand why among metals, specifically gold and silver, became money because they have the most value per unit of weight compared to other metals. So if you wanted to carry a certain amount of purchasing power in copper, nickel, iron, it's usually a lot bulkier and therefore a lot less convenient to move across space than if you try to carry the same amount of value in silver and gold. In particular, gold is the one that has the most value density in the world. And then, as I discuss in depth in the bitcoin standard and the fiat standard, thinking about salability across space helps us understand why gold and silver lost their monetary role over time. Because it's as communication advanced and we started moving and trading at a very fast speed across the world, moving gold around became very expensive and very inconvenient. And therefore, we started using credit as a, as an alternative form of money and scale. Also, thinking about money across scales also helps us understand why silver and gold, gold complemented each other as money and why gold eventually won out. So salability across space tells us that it's not useful. Celebrity across scale tells us that there's a limitation to being able to use gold, because gold coins are very valuable. And so if you wanted to make payments for small things, it's difficult to cut gold coins down into very, very tiny little fractions. You need something that is a little less valuable than gold, that can be used in convenient chunks to make payments with gold. And so that's what silver served. And that also became eventually why silver was obsoleted, because when we developed modern banking technology, say, paper backed by gold, checks backed by gold, then it became possible to make payments without having to use silver. Everything could be gold, and that's effectively what ended up destroying silver's monetary role. So gold coins, metal coins in general, but specifically gold coins and gold bullion bars, effectively solved the first three facets of the coincidence of Wundt's problem. But the most important facet of the coincidence of one's problem is the fourth one, which is saleability across time. And this one, of course, also gold excels in solving this one because gold is very durable and it's incorruptible. You can't destroy gold. You can't. It doesn't rust, it can't be ruined in any way. It just continuously continues to function as gold, and it continues to accumulate over time. And this, of course, is valuable on its own because your own gold coin is not going to rot or ruin. But in a very real way, it's also very valuable in the long run because it allows you to have a very important supply dynamic wherein the supply is not increased very quickly. You can't increase the supply at a very fast rate. So this, for me, is what makes the most critical dimension of the coincidence of one's problem salability across time. And the reason for it is not just the durability itself. It's what the durability creates in terms of the supply dynamics. Supply dynamics matter more for saleability than just the durability. So the most durable metals accumulate very large stockpiles compared to annual production, which makes them effectively impervious to inflation. What do we mean by hardness? This is a very important concept to understand here. We refer to the hardness of money as the difficulty of increasing the liquid stockpile of a good. This is a key concept to understand. The metals that are very durable, they accumulate large stockpiles because they don't corrode, they don't ruin, they don't get consumed. And so all of the production that we make continues to accumulate in stockpiles rather than get consumed. So we can think about this as contributing to the hardness of the money. And we can think of hardness as being the difficulty of increasing the liquid stockpile of a good. We can measure it with something we call the stock to flow ratio, which is the ratio of stockpiles divided by annual production. It is equal to the inverse of the annual supply growth rate, effectively. And this is a very powerful way of explaining what becomes money. I think it's an extremely powerful tool and it helps you understand why gold became money, and also helps us understand Bitcoin, in my opinion. And we'll get to that in a bit. So why does this matter? Well, very few people store large quantities of copper, nickel, brass, iron and seminal matters, similar metals. Most people purchase these things to consume them. You don't store copper or nickel, you use it. You put it into machines and you put it into equipment that you need it for. And then you get rid of gets consumed, it corrodes, it falls apart and it stops being copper. So all metals that corrode are constantly being consumed in industrial applications. We use them up and we get rid of them. Existing fungible liquid stockpiles of these goods are always around the same order of magnitude as annual production. In other words, we're not keeping a lot of these goods on hand and it wouldn't make sense to. We produce a lot of copper every year, a lot of iron every year, a lot of nickel, but very few people hold on to large quantities of those things. Sure, if you're a factory that uses a lot of these metals, you'll have a stockpile because you don't want to be buying every day and you want to have a buffer in case there's a problem with the supply supply chains, but that's not a lot. You're constantly consuming. The majority of people buy this stuff so that they can consume it. So this makes these things vulnerable to supply shocks. If demand goes up, supply can go up significantly because annual production significant compared to these stockpiles. And this is what makes them terrible money. We're going to explain this in detail now. And in order to understand this, we need to distinguish between market demand or industrial demand, which is demand for consuming the good itself. So copper for wires, iron for cars, etc. And monetary demand, which is demand for the good so that it can be exchanged for something else. So these Metals, they have industrial demand. People buy them because they want to use them. You want to buy copper so that you can make wires out of it. You want to buy iron so that you can make cars out of it. So people buy these things for industrial demand. Very few people buy them for monetary demand. Very few people buy them as a medium of exchange in order to buy them for something else. So monetary demand increases anytime someone acquires something to exchange it for something else. And that's going to increase the amount of liquid stockpiles of this good that exist, as we were mentioning earlier. So you can buy things for monetary uses, or you can buy them for industrial or market uses. So if you buy gold or silver or copper wires to use in electronics, to use for wires and electronics, that is market demand, you're buying it as a good. You're using it itself for its own utility. But if you're buying gold or silver or copper in the form of coins or bars, so that you could use those coins and bars to make payment for other things, or so that you could save into the future so you could buy other things with it in the future, then that is monetary demand. And that monetary demand translates to increased stockpiles. So monetary demand causes the price to rise. You're stacking more of that thing in your stockpiles, and the stockpiles go up. But if the metal has a low stock to flow ratio, its producers can meet the increase in its price with increased supply causing the price to fall again. If a metal has a high stock to flow ratio, then its producers increased production does not materially affect total supplies. And I like to express this using this figure. If you look at this figure, this shows us the difference between two metals, two kinds of metals. Gold on the right side, and industrial metals like copper, nickel, and iron on the left side. So if you think about the liquid stockpiles that we have of each of these metals, sure, there are places where people store those metals and they trade them. There are a lot of warehouses that have large sums of this metal for their users. And they can be bought and sold. These kind of liquid stockpiles, they're very small when compared to the industrial use. The industrial use is constantly taking up a lot of that stockpile. And the flow which is the new production, think of it as a new annual production coming in from that tap is also very small. So visualize this as a tap going into a bucket. Then there's a pipe coming out of that bucket that sends that stockpile to industrial use. With industrial metals they have a very small stockpile of liquid fungible goods that are held and stored in order to be used. And these stockpiles are accumulating because people are adding more and more flow to it. But it's deaccumulating because industrial use is taking up more. So therefore, you end up with a tiny little amount of stockpile compared to the flow. So the annual production is very significant and very large. And the total stockpile that exists at any point in time. If you were to look around at all of the people storing copper around the world, you'll probably see that it is maybe something like one year's production. So. So there's one year of copper production that is in copper warehouses around the world. That is probably a reasonable estimate, because a lot of people will want to have a lot of the major consumers of copper will probably have a few months consumption or a year or maybe a couple of years consumption stored, just because they want to protect themselves from the variation in the market, from problems in supply chains. But what is the difference between that and a monetary metal? When you have a monetary metal like gold, you've got something like 5,000 years production stacked in the stockpile. Why? Because very little goes to industrial use compared to the monetary stockpile. In other words, the majority of people who buy gold buy it in order to just sit on it. It's bought in a monetary way. You buy it as a medium of exchange. You buy it so that you could save it, so that you could exchange it for something else later on. There's new production every year, but the new production is tiny compared to the large existing liquid stockpile. Why? Because people are accumulating large quantities and they're not consuming them. There's a tiny amount of industrial use and a tiny amount of flow coming into the supply, but the stockpile itself is very large. This is how we can differentiate between industrial metals and monetary metals. So industrial metals are on the left and monetary metals are on the right. What distinguishes them is that the annual production of the monetary metal is tiny compared to the existing stockpile, and the industrial use of the monetary metal is tiny, tiny compared to the existing stockpile that is just being held because people want to use it as money. Whereas for the industrial metals, the existing stockpile is very tiny compared to the new supply that is being added and compared to the industrial use that is being taken out of that stockpile every year. So as a result of this, we can see why some things make for better money. If your metal does not ruin like the case of gold, then it makes sense for people to hold onto it for the long term as a store of value, as a medium of exchange. And so they stack it, they hold onto it. And so you get growing stockpiles because you have larger stockpiles Compared to the annual flow to the new money that is coming in. Then what happens is, as you add more flow into the stockpile, if there is an increase in the price, if more and more people start stacking of that supply, because so the price goes up, what happens to production? Yeah, producers are going to try and produce more, but they're adding a little drop in the bucket. The flow, the new supply is very small. It's only a small amount of new gold that can be produced to the Compared to the very large existing stockpiles. If you look at the total stockpiles of gold that are being held today, something like maybe 5,000 years of production. We've been producing gold for more than 5,000 years. Some of it has gone to industrial use over the past millennia, but the majority of it is sitting there looking pretty, doing nothing. It's in gold coins, gold bars, or even gold jewelry, which is effectively monetary use. It is a store of value. People use gold as a store of value effectively. And most gold jewelry is highly liquid. You can sell it relatively easy. It's relatively saleable. So the stockpile refers to the salable sum of the metal. And in the case of gold, and in the case of silver, to a lesser extent, we have large stockpiles compared to flows and compared to industrial use. And so therefore, if the supply, if the demand increases for gold as a form of money, There is no mechanism for increasing the stockpile significantly because the flow is very tiny and the industrial uses are very tiny. And therefore, if people use gold as a store of value, it appreciates and it goes up in value, but it doesn't drop back down, because there's no easy way for somebody to generate a large sum of it and add it on and bring the price down. On the other hand, with industrial metals like copper, nickel, or iron, because people don't stack them because they corrode, because people need to use them up, there's a very small stockpile. So if you were to decide that you wanted to use copper as money, or even if all the richest people in the world, imagine if the 1 million richest people in the world got together in a conference and decided to launch a conspiracy to make copper money, and they started buying up all of that copper. Well, what is that going to do? There's a small stockpile of copper compared to the all the flow of copper that is being added onto it in the left chart here. And so therefore, as they bid up the price of the stockpile of copper, copper miners have a significant amount of new copper that they could bring onto the market so they can produce a lot more copper and they could add this copper to the stockpile. And then if they add the copper to the stockpile, what happens? The price of copper drops. So because the stock to flow ratio is low for copper, it's close to one, it's around one. That's not clear how much it is because it's difficult to estimate how much copper there is out there being stored. If people start buying all the stores of copper and using them as money, all that that's going to do is that it's going to increase massively the amount of copper production that's being added onto the copper stockpile. And therefore it's going to bring the price of copper down. And so that's ultimately why copper is going to make for a bad money. And that's why copper is not money. That's why ultimately industrial metals cannot be used as money. And anyone who tries just donates as well to their producers. This is what I call the easy money trap. If you're trying to put your wealth in an easy money, all that happens is the people who can produce that easy money are going to take your wealth. There's not going to be such a thing as an easy money because so much of it is going to be produced that it's going to fail in its function as a money. So the stock to flow for copper and zinc are probably under 1. The total stockpiles of copper is probably close to 1 or under 1. The stock to flow for gold is around 50 to 60, meaning every year. The annual production that we're adding onto the stockpile of gold in this chart is, in this figure is approximately only one and a half percent to 2%, something like that. We only add one and a half percent every year to the stockpile. The stockpile is so huge that the annual flow is only 1.5%. So even if we manage to double annual production, even if there is a huge spike in the price of gold and that leads to people trying to double annual production, the only thing they'll be able to do is to add to the stockpile by about 3%. In fact, if you look at a century of gold production from 1920 until 2020, and I have data on this, there's a chart in the book that you, you can see, you'll see that the gold supplies, the stockpiles of gold. Their growth rate has never gone up above 1 and a half or 2% because as we get better at producing more and more, we add more to the stockpile. So the stockpile gets bigger, so the growth rate continues to stay low. So it's difficult to break out of this cycle. The only way to break out of the cycle is if the gold starts getting used extensively in industrial uses and then it's taken out of the monetary stockpile that we use for settling trades and settling debt. And therefore that brings the stock to flow down. And then that makes the supply market, the supply on the market, more susceptible to being manipulated or being affected by an increase in the flow and in the new production. Meanwhile, if we look at silver, we see that the stock to flow for it is around four. It used to be a lot higher, but the fact that silver is being used a lot in industrial uses actually undermines its monetary use case and it reduces its stock to flow ratio. So if you talk to silver industry people, they like to present the stock to flow ratio for silver to be closer to 30 because they look at all the overground supplies, including the silver that is used in industry. But the majority of silver that is used in industry cannot be counted as part of the monetary stockpiles. So silver looks a lot more like the industrial metals that are on the left than the monetary metal on the right, which is gold. We really only have one monetary metal left, and that is gold. And I think it's probably fair to say that gold is being undermined in its monetary role as well because of the increase in the amount of industrial use that is happening. As more and more use, more and more gold is used in industry, then the stockpiles dwindle and the stock to flow ratio is probably declining. Now, if we look at silver, I think we can see that the reason for its demonetization and the fact that it's no longer a monetary metal is probably due to the fact that banking became more and more a replacement for silver. You no longer needed to have silver as a money for small scale payments, as I mentioned earlier, because you could just use paper that was backed by gold and you didn't have to have, you didn't have to divide the gold into small little pieces. You could just use papers that could be divided into smaller pieces depending on the amount of silver, amount of gold that you wanted to pay, pay. And historically the ratio between the price of silver and gold was always around 12, 13, 14, 15, until about 1871, when the German government won the Franco Prussian War and decided to take their indemnity from France in gold. And then they used that to go on a gold standard. So they sold a lot of silver, acquired a lot of gold, and switched their economy to a gold standard. And that just was the final punch that took silver down, or the knockout punch really, maybe not the final punch, because it's slowly started to lose value compared to gold. And as we see right now, it's somewhere in the range of about 80. So it's gone down significantly. It used to be that one ounce of gold could buy you 12, 15 ounces of silver. Now one ounce of gold will buy you 100 almost ounces of silver. And so the price of silver has gone down repeatedly. And as a result of that, silver becomes more and more affordable. So it starts getting used more and more in industrial applications. And as it starts getting used more in industrial applications, the size of the monetary stockpile, the liquid stock of the good that is available for people to buy and sell also declines. And therefore it becomes less and less of a monetary metal. So demonetization is a self reinforcing process, just like monetization is a self reinforcing process. And so as a result of this, by the end of the 19th century, the whole world was on a gold standard. The hardest metal is the only one that can resist this process. Of that we call the easy money trap. Its high stockpiles make it the most resistant to inflation, which causes people to hold it more, which increases the stockpile to go grow, further reducing industrial demand. And here we can think of two concepts of money that are very useful to understand. Hard money and easy money. Hard money is money whose stockpiles are hard to increase significantly, no matter what its producers do, since the producers output is a tiny fraction of the existing stockpiles. In other words, hard money has a high stock to flow ratio. Easy money is money whose liquid stockpiles are easy to increase because it has a low stock to flow ratio. In other words, stockpiles are insignificant compared to the large amounts of flows being added. People can use anything as money, but some things work as money and some things don't. People can also use anything as an airplane, but some things work and some things don't. Contrary to what a lot of Marxists and a lot of people who are ignorant about economics. Excuse the resundancy. All Marxists are ignorant of economics. Contrary to what these people say. Money is not just a collective hallucination. It is not a story that we all tell each other. We can't just choose to believe that something is money and then we make it money. And you'll notice a lot of people believe this. For instance, Yuval Hararis, this famous author, he always repeats this idea that money is just a story that we tell each other. And it's exactly as ridiculous as saying airplanes are just a story that we tell each other. If we decided that we could make a banana into an airplane, we can all say, yeah, a banana is called an airplane, and then bananas will be airplanes. It's exactly as ridiculous as saying that, no, we mean something by the word airplane. An airplane is something that allows you to travel by flying, and it allows you to travel much faster than you could travel by walking. No matter how much we hallucinate that a banana is an airplane, a banana is not going to fly. A banana doesn't have a jet engine and it doesn't have wings. So you can't ride a banana and cross the Atlantic. Doesn't matter how much you hallucinate. Similarly, with money, if you understand what money does, if you understand how money functions, you understand that it's not just a hallucination. It's not just the story that we tell ourselves. If we all get together and hallucinate that we want copper to be money, it will not be money. If we all get together and say we want to make tree leaves as money, they will not be money. Some things work as money and some things don't. And if we all decide to make copper as money, no matter how much we hallucinate, no matter how many Marxist economists, we get to explain to us that money is just a hallucination, copper is not going to work as money. We buy up the copper, what happens? We go back to the graph that we looked at earlier. We buy up copper, we start buying it to store value in it. We start increasing the size of the stockpiles, but the stockpiles are still tiny compared to the flow. And so the new flow that is being added is going to be massive compared to the stockpiles. And the price of the copper is going to decline. No matter how much people keep buying copper, copper miners can keep adding more copper supply onto the market. So all that we end up doing is enriching copper miners. And so if everybody decides to hallucinate that copper is money, don't be an idiot like them. Just go and mine copper. Profit from their stupidity. And they're not going to make copper money. They're going to make you rich by mining copper. And the same is true for any other thing. As long as there is no easy way of restraining the increase in the production, or I should say, as long as there is an easy way of making this thing and increasing the existing stockpiles, it's not going to work as money. Airplanes are not stories or collective hallucinations, and some of us understand how airplanes work. Similarly, money is not a collective hallucination and it's not a story that we tell each other, because some of us understand how money works. And that's a really, really important thing. Of course, the Marxists, they're not just clueless. It's tempting to just laugh at the Marxists because they are clueless, but they're more than just clueless. They are very pernicious. Because these ideas, idea that anything can be money is the way that Marxists and statists and socialists and all kinds of horrible people in the past century have managed to convince many people to go off gold as money and to use government toilet paper as money and to use government credit as money instead. Well, since it's all a hallucination, let's just hallucinate that it is our government's money that is the real money, and then our government's money will work very well. That's not how it works. Money is not like that. It doesn't work that way. Money has a function, and if it serves that function, then it succeeds and it can function as money. So to recap, money solves the problem of coincidence, of wants, and in the long run, the best solution to the problem wins out over the rest. People don't even need to understand this dynamic. It's not like we need to be conscious of it in order for it to take place. Most people don't understand it. The vast majority of people don't understand it. People don't need to understand it. And yet it'll still take place, because wealth will only concentrate in the hands of those who choose the hardest money. People don't need to understand that copper has a low stock to flow in order for copper to fail as money. Copper will fail as money no matter what happens. Because if people choose it as money, if you believe it as money, they will not have any wealth left. And the people who choose something better as money, they will have wealth left. So the process of monetization is the process of money appreciating and resisting debasement. This is an enormously important idea if you understand what makes things money. Things become money because they appreciate in value. And nobody finds an easy way of debasing them and destroying the value that is stored in them. That's what makes something money. Just like what makes an airplane. An airplane is that it has propulsion, and then the propulsion makes it take off and fly and elevate over the earth. If you can pull this off, if you can have lift off, then you have an airplane. And also if you have landing, because if you don't have landing, then then you just have a rocket. But if you can have liftoff and landing, then you have an airplane. That's what makes something an airplane. It's not just an idea that we hallucinate. And similarly, with money, what makes lift off for money is its ability to hold on to value and not get destroyed by an increase in the supply. That's what makes something money. And this is why it's so absurd that Keynesians think that money needs to grow in supply, that they think that the money needs to be increased because we need to meet the needs of society. That's ridiculous. Money is always what holds value best and grows in supply the least. That's what we're always choosing. Everywhere throughout time and place, you'll find that whatever is the hardest to produce ends up being used as money. The liquid fungible good that is hardest to produce is always the one that is used as money. Now let's think about why we have one money. We've discussed this earlier, but it's good to recap it again. Remember that we end up with one money because the saleability of a good incentivizes holding it as a store of value. So because a good is saleable, you're going to want to use it as a store of value because it's something that you can sell quickly. So if you're planning on storing wealth over the next day or week or year or month, you would want something that is easy to sell, and that having something that is easy to sell will increase the size of the cash balance that is available in that. And then the more cash balances are held in that thing, the more the saleability increases, the more that people out there are holding on to cash balances, the more people are willing to accept it as payment, and the less there's going to be a decline, the less rise in the bid and ask spread that we mentioned earlier. In other words, what this dynamic, what this means is that the most saleable goods continue to become more saleable, and that creates a winner take all dynamic. Everybody wants to have the good that is the most saleable, and that makes it even more saleable, and it makes the lower saleable goods less and less saleable. That's why by the end of the 19th century, we see that the whole world was effectively on gold as money. And that's why by the end of the 20th century, we see that the whole world is effectively on the dollar as money. The world is on a dollar standard. Now, I know there are other currencies out there than the US Dollar are the national currencies, but they are effectively just the dollar plus country risk, as I like to call them, because their central banks hold on to dollars, they are holding on to US Dollars, and they use the US Dollar to set up their own payments with each other, and then they give their citizens money that is backed by the US Dollar. So the value of national currencies is entirely dependent on how much US Dollar the people who issue those national currencies hold in reserve. So now a medium exchange has a precise definition. A medium exchange is anything that you purchase in order to sell it to somebody else. You buy it with the intention of selling it in order to solve the coincidence of one's problem. It's not something that you buy for its own sake, and it's not an investment, because an investment is something that yields a return. So a medium exchange is something that you buy in order to sell. It's something that you buy it so you could exchange it. And that's what defines a medium exchange. And anything can be a medium exchange. Now, the definition of money is a lot more subjective. So whereas medium of exchange is a precise definition, money can be understood as the general medium of exchange or a general medium of exchange. It's something that not just one person or a few people are using at a medium of exchange. It's something that a large number of people are using as a medium of exchange where it becomes recognized to the point where people start understanding that, yes, it's okay, and it's possible, possible to just sell this thing. And that's of course, a subjective metric. It's easy to define what a medium of exchange is, but the definition of money is a little bit more subjective. So what is a generalized medium of exchange? Is gold money? Arguably, you could say, yes, people still use it as a medium of exchange. People still hold it in order to exchange it later on. You could say silver. I'd argue not because a lot fewer people hold silver and a lot less values being held in silver. But I can see why you would say yes, because some people do it. So it's not clear where you draw the line. Is the dollar money? Yeah, obviously it's the most liquid thing in the world. Is Bitcoin money. Yeah, it's probably more money than silver, probably less money than gold at this point. It's got less liquidity than gold, and fewer people use it than gold. And it's less of a money than the dollar. It's less general as a medium exchange than the dollar. But it arguably is money because a lot of people are using it as money. But again, this is subjective. Now, a very important question in the economics of money is the role of the state in money. And this is where the Austrian school is unique and very different from all the other schools of economics. In that Austrian school accepts the idea that money emerges on the market on its own, and it does not need government to make it happen. All other schools of economics think of money as being the product of the state. The state is needed in order to make money work. But the Austrians explain meticulously how money emerges on the market on its own without needing government authority. And the reason for that is the analysis that we've seen so far. There is a very clear understanding of how money emerges out of the actions of people without somebody needing to put a gun to their head and force them to accept it. People develop money in the same way that they develop the concept of labor, that they develop the concept of property, that they develop the concept of capital, that they develop all of the tools that we use. We develop arrows that we use to hunt animals, we develop fishing rods, we develop fishing boats, we build cars. These things identify needs that we have, and they solve them. We figure out things that we have that we need, and we figure out how to solve these things. And we develop these solutions, and humanity is constantly finding solutions. And money is just one of these solutions that emerges to solve the problem of coincidence of ones. Just like language emerges, just like all kinds of social customs and traditions emerge, money is just another thing that human beings are able to do. As Menger puts it, money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally as a result of economic relationships that were independent of the power of the state. End quote. So even before, and this is a paragraph that I write in the book, even before humans could record their actions, they engaged in direct and indirect exchange. And as humans seek to satisfy their Desires through indirect exchange, some goods begin to play that role better than others. And those who employ these media of exchange benefit from using them. Others copy them, and the successful solutions become more widespread. If they do not copy the successful solutions, they lose wealth to those who do. The better solutions impose themselves, as economic reality always does, by rewarding those who adopt them and punishing those who do not. There is no need for a central authority to decree a medium of exchange and compel everyone to accept it. Money emerges from the market out of the actions of humans and not as a result of any central planning government. It's worth remembering here, gold has been money from before any of the world's existing governments had existed. All of the world's current governments were invented and created far long after gold was money. All of the world's governments probably were created after gold was money. Gold emerged as money before we had the concept of a state that regulates money. And gold did not become money because governments decreed that it was money. But government money became money because it was made out of gold. If governments didn't make their money out of gold, they. They wouldn't have been able to make it into money. And that's how money has always been made, except for fiat, which we'll get to in a minute. Mises developed something called the regression theorem, which helps us understand this process. He explained how a normal market good can develop into a monetary good when it acquires monetary demand, thus raising its value and increasing its salability. As the good acquires increasing monetary demand, its price increases beyond its market demand price. Being able to separate market demand from monetary demand and understanding that added monetary demand increases the salability of money is key toward understanding Mises as a regression theorem. And it offers a compelling and, in my opinion, correct alternative to the Keynesian statist conception of what money really is. And on fiat money, well, fiat money is a misnomer. There was never a good that became money by fiat. No government ever said, all right, we're going to be using this piece of paper as money, and you have to accept it. There's no record of anything like this happening. All the examples of paper money or credit money being used as money all come from fraud. Effectively. It was all gold money. And the paper in the credit was supposed to be redeemable in physical, physical gold. And then governments reneged on that promise and told you, nope, sorry, you can't redeem your money for gold anymore. And then you could no longer redeem it. And then that became money. So there was never really a Money that just became money through fiat. Governments have to subvert the choice of the market because they cannot overrule it. They can subvert it, but they could never overrule it by just decreeing something as money instead of. Instead of the market's choice. And another example of why money is not a product of the state is Bitcoin, which is. Which made it to become one of the 10 biggest large, one of the 10 largest currencies in the world before it was adopted as a national currency by one country, which was el Salvador in 2021. So in all of the chapters that we've discussed so far, from chapter four to chapter nine, we've looked at an individual way of economizing. First, the individual ways of economizing. And then in chapter nine, we looked at trade. And in chapter 10, money is just another way of economizing. And remember, we said economizing is how we increase the quantity and value or quality of time that we have on this earth. Money is just another way of economizing. It's an economic act. When we use money, we are also economizing. We're increasing the quantity and value of time that we have. And how does money do this? Well, it does it in three ways. First, it increases the scope for the division of labor. Remember how we said trade is very beneficial, but solving the problem of coincidence, of wants increases the scope of specialization and the division of labor, allowing us to become much more productive and allowing us to trade more and allowing us to engage in trade with circles of society that are much, much larger. And as a result, it gives you an incentive to trade with others, therefore, to be peaceful with others, therefore to cooperate, cooperate with others. And that helps us bring about civilization. Money is essential to civilization because money is what gives us the ability to trade with large numbers of people that we don't need to know, but we can trade with them because it is in both of our benefit to trade with one another. So therefore, you're able to trade with a complete stranger that you will never meet again in your life whose name you don't even need to know, because you can just give him money, and you don't need to worry about what he wants. He doesn't need to worry about what you want. You don't need to worry about a debt transaction, about him paying you back. You take the money from him and you give him the stuff that he wants to buy, and that's it, and that's the end of it. And so therefore you need to find a way of being able to deal with others. And that's what civilization is. And that's what helps us develop into a civilization that is peaceful. Because being a peaceful part of civilization. Allows you to increase your productivity. Much more than anybody who is unable to engage in trade and civilization. The second thing is that money allows for economic calculation. And this is enormously important with direct exchange. Each good has a price expressed in every other good. In other words, one rabbit equals to three fish. And one bushel of grains equals to two rabbits, or something like that. But when you're using indirect exchange. You can express the prices of all goods against the money. Everybody uses money as a medium of exchange. And so everything now is a form of money. And then everything gets used. Everything now is traded for money. And so everything is priced in money. And so we are able to calculate the prices of things using money. This helps us a lot because it means far fewer prices. You can think of the number of individual prices as being equal to n times n -1 over 2. In other words, if N is the number of goods. Then you will need this many prices. In order to illustrate the prices of all goods in terms of one another. If you have 100 goods, a barter economy will have 4,450 prices. Whereas if you had money, you would only have 99 prices with 100 goods. If you had 1 million goods, a barter economy would have 5 billion prices. There will be 5 billion price pairs. Whereas money will only have 1 million prices. When you have 1 million goods. Or precisely 999,999 prices. So this allows people to calculate economic opportunity cost. And the likely implication of different courses of actions. In other words, economic calculation. Economic calculation is how we can get a complex economy. Beyond just a few people struggling for survival. It's how we can build all of these amazing things. It's how we can make economic plans for the future. All of that is only possible thanks to economic calculation. And then the third thing that money allows us is time preference. Money allows us to lower our time preference. It's a lot better way for saving than durable goods. Because it holds onto its value much better. And it's more saleable. So therefore, you would expect to lose less on it Than if you save in durable goods. So the higher salability of money makes saving in it better than saving in other things. Therefore, that incentivizes saving and future provision. Which decreases uncertainty about the future. And that in turn lowers our time preference. The more we are able to Use money to provide for the future. The more we can think of the future, the more we can provide for it. Money is unique among goods in two ways. First of all, it's not a consumption good or a capital good. It's a own kind of good. It's not a consumption good because you don't consume money. And it's not a capital good because it doesn't produce things. Money itself is not productive, it's not a productive asset. Gold does not make more gold. Dollars don't yield more dollars if you put them in a safe box. Bitcoins. Similarly, anything that you can use as money is not a productive asset. Usually, I mean, obviously you can use a capital good as money if you choose to. But generally capital goods are not money and they make for bad money because capital goods prices are determined by their yield, by the return that they make, rather than their value itself. And so that doesn't allow them to appreciate and resist debasement because they are not optimized for that. So the first thing is that it's not a consumer good or a capital good. And secondly is that it offers the utility for the of the good for which it is exchanged, which gives it the least diminishing marginal utility as we discussed earlier. Finally, the most important question about money is how much money should there be? And this is what we began with earlier, the Austrian view, the mind blowing way in which the Austrians approach the question of economics is that the supply of money does not need to grow. You do not need more money, you need more purchasing power. Any supply of money is enough because nobody needs money itself. People need purchasing power and there's no limit to how much purchasing power you can pack in into any unit of money. That's one of the most important and powerful concepts to understand about money. You do not need to increase the supply of money because you can add more purchasing power. It's the one good that is different. And there's a couple of good quotes by Mises and Rothbard in the book that I urge you to read very carefully. I'm not going to read them again here, but read them very carefully because they explain this really well. You do not need to increase the supply of money because nobody's actually looking for added unit of money because the money itself has no utility. The utility of the money is derived from the things that you can exchange it for. And the things that you can exchange it for are not dependent on the quantity of money. In other words, the purchasing power of dollars can go up. The purchasing power of Bitcoin can go up, the purchasing power of gold can go up, and therefore you'll be able to exchange it for more goods without you needing more units. Therefore, you don't need more units of money because they don't offer you direct utility. And this is unique about money. More food is better than less food. More apples, more cars, more airplanes, more houses, more clothes. Every other consumer, every consumer good, the more you have of it, the more utility you get. Money is not like that. If you get more money, but with a lower purchasing power, the then you get less utility from it. What matters is purchasing power. If you have the same quantity of money but more purchasing power, then that's better for you. Then you get more utility from it. So you don't need the quantity itself. What you need is the purchasing power. And this notion that the government needs to stand ready to provide the economy with more money is a ridiculous excuse for printing money. And it is one of the fundamental and founding lies of modern economics. Because modern economics is one giant, elaborate excuse for people to print money at your expense. And they tell you that that is because you need money for the economy. It's nonsense. You don't. We can keep adding more and more purchasing power into the money that we have. And in fact, this is what would have happened in the 20th century. Now, what happens if the money supply is fixed? Well, if the money supply is fixed, then the demand for more money is not going to lead to an increase in the supply of money. It's going to lead to an increase of the purchasing power of money. That's it. And is that a bad thing? Well, Keynesians are paid to tell you that it is a bad thing, but it is not a bad thing. It is a very good thing, because an increase in the purchasing power of money means that the prices of things decline. As the prices of goods and services drop, you are able to afford more of these goods and services. That's a very good thing. Savings appreciate over time. So people have an incentive to provide for their future. So a hard money that doesn't depreciate, that you can't inflate, whose supply doesn't increase, just continues to accumulate purchasing power. And then that causes people to save more because they're able to provide more for the future, because they have a way of providing for the future. And here, of course, Keynesians will object to this. They'll say, no, it's bad if people save too much, because if they save too much, then they won't be spending. And then the Economy will collapse. And Keynesians think this is bad because they don't understand two very important concepts in economics which we covered in this book so far, marginal analysis and capital. Those are two things that if you are a Keynesian, you do not understand. I guarantee it. There's no Keynesian in the world who understands marginal analysis properly or. Or understands capital. And even if they are able to understand them, they definitely don't apply them in this case. So, no, they don't understand them. In the Keynesian mind, more saving leads to a collapse in spending. People stop spending, and then because people stop spending, that causes unemployment. You're spending less, so you're buying fewer things, so producers don't sell as much as they think they can, and so therefore they start firing people. So these people stop working. And the fact that they stop working means that they are able to spend less in turn, so they stop spending less. So they stop spending and they start spending less. And that causes more unemployment, which causes less spending, which results in a calamity, effectively. So this is the disaster of Keynesian economics. When people save, they stop spending. The economy comes to a grinding halt. You start off with you thinking, hey, I'm not gonna buy this stupid piece of nonsense that I don't need today. I'm gonna save this money so that maybe I need it next year. And you think you're doing a wise thing, but the Keynesians will tell you, no, you're destroying the economy because you didn't buy this stupid thing. The guy who produces the stupid thing is gonna have to fire some of his workers. Now his workers can't spend, and now the people, the things that they would have bought otherwise, they won't be buying them. And then the boss is going to have to fire more workers. So that's less and less spending. And you continue with this process that leads to, effectively, the collapse of spending and the collapse of employment and the collapse of the economy. And how do we fix that? Of course, surprise, surprise. The Keynesian solution to everything is government spends and prints money. Government will spend and print a bunch of money to buy the stupid stuff that you won't buy by devaluing your money and therefore putting those people back into work. And then that will cause the economy to recover. This is, to put it politely, very dumb. Anybody who believes this is, to put it politely, an idiot. There's no way around it. You are not a bright person if you think like this. You are not a bright person. You're not an economist. You should not be thinking about economics. I'd like to be more kind in my assessment. Maybe I try and not say very mean things in my lectures, but sometimes you just have to tell it like it is. If you believe this stuff, you're an idiot. I'm sorry. Because in reality, an increase in savings does not result in a collapse in spending, it is marginal. Remember, all economic analysis is at the margin. If you understand marginal analysis, you realize that more savings result in a marginal decline in consumption of final goods. But on the other side, it results in a marginal increase in capital production. So the fact that you're not spending money on buying things that you don't need means that now you have more money in your hands that you could use to save for savings. And the fact that you have more savings available means that more money is available for you to lend. So a marginal decline in consumption is a marginal increase in savings and therefore a marginal increase in investment. And so it results in maybe firing a worker from the consumer goods. So instead of going and spending money on restaurant, let's say which is a consumer good that you would spend, you decide that you're just going to eat at home, and then the restaurant will fire one worker or will hire a worker less. But because you've saved the money now you have more money in your bank, and then you can lend more money, and then that money is going to go to an investor who's going to use it in their business. So that waiter that would have been serving you the dinner at the restaurant will go and work at a factory in producing things that are capital goods. So they'll go and start producing machines, start producing cars. So you're only able to finance capital production, remember, by foregoing consumption. The only way that you can have capital in the first place is by foregoing consumption. And so when you save more, you do not destroy the economy. You bring about a marginal increase in the capital stock. And that increase in the capital stock causes more capital accumulation to take place, and it creates jobs in the capital intensive industry, and it creates more capital stock for us, and it makes production more sophisticated, more complex, allowing for higher productivity. So the notion that this would ruin the economy is completely fictional. Nonsense. Capital accumulation and saving are the only reason that we have anything that is good. The only reason that we got out of the jungle is because we defer consumption and increased our savings. If the Keynesians had their way, we would have never gotten out of the jungle. We'd all be monkeys in the jungle, still flinging our feces at each other. Because none of Us would be able to defer consumption. The problem, or among many of the problems amongst the Keynesians, is that they think that consumption is something that needs to be incentivized. When, of course, as human beings, we have an insatiable infinite desire for consumption. Everybody wants more things. Everybody, everywhere is looking for, having wants to have more things available. Everybody's looking to have things to consume, more things to consume. People want more food, want better houses, better cars, better clothes, bigger houses, better boats, everything. People are always looking to consume more. We don't need to be incentivized to consume. We need to find a way to reduce our consumption as much as possible so that we can defer our gratification, so that we can have some of our resources today available rather than getting consumed. We can have them available for production so that we can have capital. That's the tricky part of economics. The tricky part is not consuming. The tricky part is producing the things that we want to consume. Remember that time preference is positive, so people always prefer to spend. Consumption is necessary for survival. If you don't consume, you die. So people always want to spend. There's an insatiable desire for us to spend and have more things, but only by restraining that animal desire that we have for consuming all the time can we become human beings and rise above the monkeys and the Keynesians who are incapable of thinking of the future and instead become human beings who are able to defer gratification, give up on the enjoyment of now in order to accumulate capital. Restraining spending and accumulating savings allows us capital accumulation. So even if the jobs were to decline at the margin in consumption goods, they increase in capital goods. We have fewer waiters and we have fewer nightclubs. We have fewer places where people go and just mindlessly spend money. And we have more people working in factories, producing things that are going to make our life better tomorrow and next year and in 10 years time, more capital results in higher productivity and better living standards. Abstaining from consumption will allow you to consume more in the long run. And so, to wrap all of this chapter up, money appreciating is not a bad thing for us as individuals. In fact, money appreciating is what helps us understand what money is. It helps us understand what money gets chosen on the market. And it is what allows us to have capital accumulation is what allows us to have the division of labor. It's what allows us to have a modern civilization. All of these things are only possible because we build a system around money and because we save that money because that money holds onto its value. If we prevent the money from holding on to its value, we destroy money and we destroy the division of labor and we destroy the incentive for capital accumulation. We essentially bring down civilization. And this is something that we're going to be discussing in more detail in the coming lectures and the coming chapters. Thank you so much for joining us.