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you okay last time what we were doing is we were talking about the functions of money it starts off basically why do people use money why use money and what I said was because of the services that money provides and then that gots got us down to this list of functions or services functions performed by money you remember number one on the list as this money is the thing that people spend money is a medium of exchange and we talked about the m1 money supply as that spendable kind of money in our economy and almost all of that m1 money supply is currency coins and the paper currency and checking deposit balances and the other thing I mentioned traveler's checks is a small amount and our total m1 money supply is in the neighborhood of 1.4 trillion dollars I'll come back and talk about that a little bit more in a few minutes but anyway me if exchange money is the thing that people spend money is generally acceptable and payment for goods and services number two we talked about last time money is a unit of account if there were no money then the value of everything would just be expressed in terms of other things the value of your time hey how much is an hour worth of your labor or how much is an hour of your labor worth two dozen eggs three pounds of hamburger and just we would just value things in terms of other things and that becomes extremely confusing what we said about this is that there would be a vast amount of economic information that we would need to have in order to interact in our economy that where there would be high transactions cost so instead we come along with the dollar and we use the dollar for express in these economic days and so it's a common unit of man now we face the same problem throughout our lives and you know if you go to the gas station to put gas in your car we use a common unit of measurement there the gallon and so everybody goes oh those are gallons there's so many gallons of milk so many gallons of water so many gallons of gas and so forth we've got a common unit of measurement of these fluids and so we can keep track of what's going on easily without becoming confused and if we get rid of such a thing as the gallon then we start talking about these unit sizes you know like how many mouthfuls of water or how many handfuls of whatever and you know like motor oil for your car and things life would become confusing when we talk about the foot how you know how tall are you feet or meters or whatever how tall are you we use the pounds or kilos and so forth to measure weights so we're always using these units of measurement to simplify life and economic life is simplified by using the dollar and it just so happens that we use the dollar for our medium of exchange and we use the dollar for our unit of account and that makes that simpler and what we're doing is lowering transactions cost let me draw a graph before I go on to number three which I'll do in a moment but I want to draw a graph that sort of shows about these transactions costs and the role they play in the economy we'll just take some typical representative good good X and so whatever you'd like that to be it'd be fine whether it is hamburger cars or houses or whatever just goods in general and we'll measure that along the horizontal axis and along the vertical axis I'm going to put a dollar sign everybody studied this before you've had another economics class there's a supply curve and a demand curve and every single time we do that we find some equilibrium in the market place we'll put Q and P and that's the way the picture is drawn okay and everybody's familiar with that the only thing is when you learn that and what principles of macroeconomics or principles of microeconomics when you learn that they made an assumption and it's an assumption we don't make because this is money in banking what they assumed when they drew that is there's money in the economy and for sure we have money in our economy but right now we're going back and talking about the role played by money in the economy and what if we didn't have money what would this look like if we didn't have money well here's what we would do is we'd say you know this supply curve it represents production costs and marketing costs and so forth but this represents production costs how much does it cost to produce a car how much does it cost to produce a pound of chicken or a dozen eggs and so forth okay whatever the good x is to come back to here of what I told you last time is that without money in a barter economy we have higher transactions costs we have to find trading partners people that want to do business with us we have to satisfy that double coincidence of wants and I use the example if I wanted to trade economics for breakfast I'm going to spend a substantial part of the day looking for people that would trade with me and then there be lunch and then there would be dinner and then there's time that I need you know a car and I need shoes and I need all these things and I have to find trading partners and I'm using a substantial amount of my resources my time and so forth to find trading partners that's a transaction cost a cost of conducting a transaction what I mentioned to you last time is this about the unit of account that if we did not have money if there's barter and everything is expressed in terms of everything else then we would have an overwhelming amount of information to try and process you remember we had that formula the number of prices in the economy is a number of goods times the number of goods - 1 / 1 - and I used a very simple case what a different goods and what we had was approximately a half a million different prices relative prices goods traded for goods and we try and juggle a half million prices what if they're only what if there are 1000 goods and we have money each Goods got a price or a thousand prices so with money we've got a thousand prices with barter and a thousand goods we got a half a million prices what if we have a situation where there are a million different goods in the economy Wow a million different goods that'd be a million different prices and a money economy but this would be approximately a million times a million beside less but a million times a million that's a trillion divided by two a half a trillion prices right and so money reduces the amount of information that we need to process money makes it easier for us to do business with other people because we know the value of what we're buying and selling we're more likely to get a good deal and you know what if you went out there in the world and you were just gonna trade with somebody and there's no unit of account there's no common way of measuring and you've just got to figure out oh gosh what how many shoe strings is a dozen eggs worth and you've got to do this all the time you'd be so people be taking advantage of you constantly and after a while what what do we do we just withdraw from the marketplace and say you know what I think I'm gonna keep chickens I think I'm gonna raise my own chickens I'll have my own eggs and that way I don't have to worry about going out here and doing business with somebody and then taking advantage of me so having all this information to deal with as a transaction cost with barter and no medium exchange with barter and no unit account we have high transactions cost so let me come back over here to my graph this supply curve represents cost of production in our modern world if we had those same costs of production but then we had transactions cost in addition then those transactions costs will be on top of production costs right now if you buy something if you buy a car you're paying the cost of producing that car but if in addition to the cost of producing and building the car producing the car if you also had transactions cost those transaction costs would be an extra cost for do you deal with and let's just put those on top of there this vertical distance is transaction cost and so we'd have a new supply curve and they'll put B next to that that would be the supply curve in a barter economy and this would include production cost and transaction cost and the supply curve the first one I'll put an M up here this is a supply curve at a money economy got the supply curve and a barter economy let's go back to our original P and Q where I said well here's equilibria in the marketplace this is really the quantity and the price in a money economy and so if we go to a situation where we're looking at a barter economy then what would happen is the price we pay would be higher for things and the quantity we have would be lower now we pay a higher price for things we consumers the difference would just be the transactions cost the seller wouldn't get that much this would just be what buyers pay sellers would get less we're paying so much because partly we pay to the sellers are the good but partly we're using resources to find trading partners we're using resources to manage all this disinformation and we have this data so anyway we end up with consumers paying higher prices having smaller quantities guess what this is a graph but it just means poverty it just means poor when you don't have as much stuff you just have a lower standard of living and another way of saying this is over time these transactions costs come down partly because we've introduced money into the economy as a transactions cost come down then we end up in this money economy situation with larger quantities and with a higher standard of living and what we could say is this without money it would not be possible for us to have the highest standard of living that we enjoy today okay without money we'd all be living out here on the farm and basically raising our own chickens and raising our own cows and so forth and and bartering with the neighbors and we'd be conducting economic activity on a small scale so anyway this is the graph there's only one thing wrong with the graph still and it is I still left a dollar sign up here even in a barter economy and of course that's inconsistent but I don't know what to put up there in a butter economy so anyway it's the idea of prices that I'm trying to represent here rather than a specific dollar price so I recognize that's there anyway so this is the idea this is a substantially lower standard of living and here's another thing you can say it's this nobody forces us to use money today if you wanted you could go out and you could talk to some money and say hey I'll work for you for you know two dozen eggs an hour and this sort of thing we had the option of bartering even today but guess what that's an inferior possibility people don't want to do that or they would be doing it there's no law against it but we don't anyway and so that is something else that would tell us that's an inferior outcome we don't want a barter we want lower transactions cost so anyway let's go on now these are the two areas where money is lower transaction costs in our society and allowed us to have a higher standard of living the third function performed by money money is a store of value money is an asset held to preserve purchasing power over time a great example because it involves almost everybody is saving for retirement you know everybody wants to get old enough and retire and I guess revert back to the lifestyle of childhood where you just didn't have any responsibilities and just kind of take it easy and the way that happens of course is in your 20s and 30s and 40s and 50s and 60s you put something aside and you save and then you retire yes sir yeah we're not making things here are you sure well first of all you know and the question is basically how does you know what about a service economy and information economy we're not doing as much to that physical manufacturing processes in terms of a percent of our economy as we used to or as other countries do now is that get in a way of our prosperity I can tell you about the economics of it and I will a little bit but one thing you can do is kind of look around the world and see well where's there a more prosperous country than this one and the answer is we don't find one and if we don't find one then gotcha I guess it didn't get in a way too much another thing is this and just think about it in your own life we only need a certain amount to eat and once you've got that much to eat do you need twice as much three times as much five times as much and so there's prosperity more you can only drive so many cars once you get one car do you need another one do you need a third a fourth a fifth a tenth you know like if someday our economy is twice as prosperous today will that mean that every single person has two cars well I mean everybody is carrying two cellphones well I mean everybody's got two houses well you have a closet that's ysus big with twice as many clothes in it and so I guess what I'm driving out here by asking these questions is to say that that's not really what we mean by prosperity our need for physical things is at first it's great I mean you know you cannot live without some food and at least in a cold climate you've got to have a substantial amount of clothing you got to have some shelter and so we've got to have these things but once you get those things then at that point the good life to quote good life doesn't involve so much just tangible stuff you can touch and now it's more a case of I like to be amused I'd like to be entertained I'd like to be educated I'd like somebody cutting my hair you know and so what happens is when societies become you know attaining higher and higher standards of living it's more of a service economy that people want we have a choice if you want you can put your resources into just buying more clothes and saying okay I've got a cause at this you know I got six feet of clothes here you know and now if my income triples I'm gonna have 18 feet of clothes in the closet and I'm gonna had three times as many shoes of my income triples and I'm gonna have three cars of my uncomfortable you've got that choice but when you're given that choice guess what you don't choose that so what we choose is things like oh gosh I'm gonna I was in graduate school I used to cut my own hair that was a sad story I'd hold like a mirror but here's a mirror I'm holding a mirror up now put that mirror down I grab a hunk of hair and I would cut it and people would say Tom is there something the matter it's like are you dying or something I noticed there you're losing hair back there you know it's just falling out in clumps no it's not falling out in clumps I'm cutting my own hair why poor so once I got a little bit of money the first job you know I start paying somebody cut my hair I always had my hair cut as a kid because my parents paid for it once I started paying I'm just like you know that pretty good yeah anyway so then I pay somebody to cut my hair go to a barber shop once I got more money I stopped going to a barber shop because those guys cannot cut here no they can't cut here but they cut everybody's hair the same so anyway the point is services this is a service here this service of Education I hate to be you know bragging but this is a service people don't have college and poor countries you know the kids get up and they go to work clean as soon as you can get them to work and they just work throughout their life after a while yeah you attain a certain standard of living send the kids off to college then send the kids off to graduate school that kind of stuff medical school so I guess what I'm saying to you is this it is true that our production of services as a percent of our economy is shrinking over time but that's by choice and what we do instead is I mean we've got a labor force of 160 million people and if we wanted everybody to be working in a factory all we have to do as consumers is just start buying stuff out of factories you know manufacture goods and then there'd be more factories and those factors are hiring more workers and the marketplace will accommodate that we just don't want that and so what we want is everybody who wants to be without the internet you know everybody wants this it's a service based information services we want that used to be what would happen is you know a lot of people sti
l do it but you go to the movies see a movie what happens over time well what happens over time is you get Netflix or maybe you watch movies on your computer and so all of a sudden if people are watching a greater percent of our movies are being watched on Netflix or DVDs that you rent a blockbuster or coming over the computer then that means that they're building fewer theaters around the countryside and so there's less construction activity and that's a tangible good but that doesn't mean we're poor if you would rather watch a movie in your living room then go to a movie theater you're better off and we don't build as many theaters and also there's lower construction costs we've saved those resources so anyway I guess what I'm saying to you is we live in there's a certain part of the economy that's dominated by the government where rules are just like here we're gonna do this we're gonna build a highway we're gonna build a hospital we're gonna do this or that that's the end of a pay your taxes and we'll make that decision but most of our economy is a market economy where freedom reigns and it's whatever we want and so when we see our economy you know the percent of it devoted to manufacturing shrinking and the percent devoted to service is going up that's because that's what we want and what we want that's the stuff that is truly wealth you know it's like a higher standard of living is I'm getting more of what I want and so a prosperous economy is one that basically raises the standard of living of the people who live there and for us a prosperous economy means having more services and fewer goods I mean that's kind of how that works out mmm there's an old debate about that and the debate first came up where something reals something tangible something meaningful that's farm products and this was what economists talk about you know 75 years ago and people say it's this not real anymore you know real is you raise your own food and you make your own clothes and this kind of stuff and it's just not real to get that stuff out of a factory someplace we ought to get rid of those big you know like slaughterhouses and all that stuff and raise your own cattle and sell them to the butcher in town the butcher will slaughter those cows and you go right down there and get some food that's real and then they start saying it's kind of artificial to be you know like slaughterhouse in Chicago and they do all that stuff and then it's a shipped out to us and some refrigerated train car and this kind of well so what I'm saying is there's always this question we always have a transition we always have changes in our economy and that always raises a question of hey it's what we're doing meaningful is have we gotten away from the good old days and the good old ways and that sort of thing and the answer is not really so anyway that's kind of a long answer to your question but that's my answer let's come back to here some money performs a function by the way not very well but money performs a function of a store value it is an asset money is and if you are saving for a time right they're just saving up some some funds to buy a car and saving is a key term here but if you're saving if you want you can save money you can use that as the asset that you hold onto you can get some cash you can get some money in your checking account and just build that up but that's not a very good way of saving and there's a couple of reasons for that one is money earns little or no interest right that if you've got a dollar bill in your pocket and you put it in that pocket and keep it there except for when you you know wash your clothes then change to a different pair of pants but if you put that money in your pocket and you just keep that there for a year after year after year and you get it out 20 years from now it's still a dollar so it didn't earn any interested in grow some checking accounts earn interest but not very much and so that's an inferior thing what we have in more advanced societies more advanced economies I should say is we have all these different options of places to hold our savings we can put it into a savings account you can put it into stocks and bonds and there's really a wide range of investments you can hold on to gold or silver and real estate and mutual funds and so forth so anyway money is not a very good store value it isn't a less advanced economy but ours is a pretty advanced economy and so money is not a very good store value the other reason that money is not a very good store value is inflation let me write this term down inflation just refers to increases in prices and it's not a law or anything like that but what economists do is they use the term they say inflation is a tax on money balances here's what I mean by that suppose and I'm gonna use an example but it's in just an example to make it more obvious to you suppose that you go over to McDonald's or Burger King or someplace like that and you pull a dollar out of your pocket and say hey I want to buy a hamburger with that and they say okay here's a hamburger and the price of a hamburger let's say as a dollar and so you hand a dollar over they give you a hamburger that's great what if we have inflation prices start going out what if we have hypothetically what if we have inflation where prices double them and I mean prices throughout society shoes and everything else but price of hamburgers doubled it was a dollar and now it went up to two dollars so you go to McDonald's the next day and you pull that dollar out of your pocket you slap it down on the counter say give me a hammer and then they hand you half a hamburger and you say hey what's the story and they say well a dollar that's just for half a hamburger and you say yesterday I got a whole hamburger for a dollar and I said yeah but we've raised prices and with inflation that's not the price of hamburgers grown up it's things throughout our society but the point is that you've got the same dollar that you had today before the same amount of paper but now the purchasing power of that paper has been cut in half by the inflation and so it's as though inflation took away half of that dollar from you the purchasing power of that dollar is being eroded it's as though inflation is taxing away our money so now let's go back to this idea of money as a store of value let's say you're saving for retirement let's say you got $100,000 in maybe your checking account or even cash or whatever and you're saying oh I'm saving for retirement and prices go up all of a sudden you can't afford to retire because we've had inflation it's eating away eroded the purchasing power of that money what can you do to avoid that and the answer is you can hold on to other assets other assets whose value keeps pace with maybe even gets ahead of inflation when we have a lot of inflation Gold tends to do very well real estate tends to do very well and I'm not talking about the buildings but the land itself tends to appreciate in value and so during inflationary periods something else is a much better asset to hold on to as a or value rather than money and so what I'm saying to you is this is there's almost nothing that can take the place of money for medium exchange in unit of account but money is not a very good store of value and if people just stopped using money as a store of value there would still be people using money for these other roles a store of value or money as a store of value usually only occurs in the less advanced economies where they just don't have the stocks and bonds and savings accounts and mutual funds and these other things that's usually where it happens and it especially does not happen money is especially not used and those as a store value and those societies where they have a lot of inflation I'm gonna give you a little bit of a story about this and the late 80s 1988 89 90 along and there they had the so-called Russian Revolution basically and of course before that had been the Soviet Union basically what was happening was the Soviet the Russian economy was going through this very bad phase kind of having a meltdown never having a political crisis they were having an economic crisis and so what happened is they ran into a situation where there was a lot of inflation okay prices were going up rapidly well if you live in Russia during this period you could hold on to the currency they had there the ruble but that ruble just like the example I used a moment ago was being eroded by inflation and the example I use a minute ago as you go into the store and one day died hamburger the restaurant one day that a dollar bill buys a hamburger the next day the dollar bill buys half a hamburger they were going through that in Russia and so then people said I do not want to hold at least for my store of value I do not want to hold rubles those are being eroded rapidly people would still use the ruble to buy things and to express values but in terms of holding something for any period of time that ruble was being eaten up by rising prices so what did they do like I say they continue using the ruble on the street but then when it was time to store some wealth for a week a month a year for retirement they just said no I'm not gonna hold on to rubles as soon as I get a ruble if it's not to spend it as soon as I get it I'm gonna convert it into something other asset and they didn't have mutual funds and stock markets and all these things so what they converted into dollars what they would say is I want to trade my rubles for dollars and there was a black market there where people were selling dollars out on the street oh you want to trade some rubles okay give me a million rubles and here's a hundred dollars or whatever I don't know the exchange rate but so people would do this I remember seeing on television at the time I don't know if a CBS or which one of the news channels it was but they went into an apartment of some fairly wealthy person in Russia and you know they're kind of looking around like this and how they gonna border the face and so forth and the person goes into their bedroom opens a closet down into the closet and then pull out a shoe box open the shoe box $100 bills boy I'd like to have a shoebox full $100 bills anyway but just hundreds and hundreds of hundred dollar bills why that and answers well if you had a billion rubles or whatever these numbers are what would you do with it would you keep it in rubles and just let it be and erode it on a daily basis you can't put it in a stock market because they didn't have a stock market in Russia you can't put it in you can put it in a bank savings account but then they would just pay you back in rubles and so it's being eroded by inflation where would you put that trade it for dollars now the Soviet economy and was at 89 I think they had basically it went from Soviet Union to Russia but anyway and this was going on for several years generally this these inflation problems are the worst in countries that have a political problem you know you don't if you don't have a political problem you usually don't have the monetary policy it creates this inflation but anyway so this was going on from multi-year period for a decade or longer but what was happening was people were just constantly going out and trade the rubles their savings $4 estimates were made this is all being done secretly there's nobody announcing hey today I traded a billion rubles for dollars this was the kind of stuff you'd keep secret and so but estimates were made and here's what the estimate was on a daily basis I'm not saying a week or month on a daily basis 100 million u.s. dollars would go into Russia Oh 100 million dollars a day how much does that add up to well in a week at 700 million dollars not quite but the better part of a billion dollars a week so how much would that be in a year Oh 35 or 40 billion dollars a year how long did this go on Oh a decade hundreds and hundreds of billions of dollars currency from the United States going into Russia Russia's labor force soviet union's labor force was bigger than the united states in the area that they had of land was huge I think 8 million square miles where we had 3 million so Russia had the Russian people had an enormous need for savings there weren't all these other financial institutions that we have so they're just accumulating dollars and so vast numbers of our amounts of our currency worked its way into Russia yes sir who are they trading the rubles to well basically they're our currency markets right I mean like banks we don't come into contact with this on a daily basis but banks are just trading and there are other currency traders just trading one kind of currency for another kind of currency and so what what happened is somebody go out and get a bunch of dollars and trade it for rubles and then take it and sell it on the world market for rubles sell those for whatever they can get maybe more dollars now how about us what's the situation we're in here's what we're in we're going Oh we're giving up paper I mean isn't that it we're giving up paper in exchange for if we want rubles and then we can take the rubles we Americans and so forth and go over and buy oil or timber or gold or diamonds or whatever it is they have for sale they didn't have any consumer vaz we want to buy but they had a lot of raw materials and so basically we were handing over paper and you know we could make that paper ten times as valuable just by adding another zero here's a one dollar bill put a zero after it same amount of paper same amount of ink and we can get ten times as much stuff out of Russia in terms of timber and oil and natural gas and things like this and so we were giving up something that's very little cost to produce it and getting something back valuable why are they willing to make that trade and the answer is they didn't have a good place to save their assets their wealth their savings they didn't have a good place to do that so they just took our paper now this went on for years and years I know I don't mean to say a hundred years but it went on for years almost at any point in time there are some country or countries experiencing some kind of an economic crisis of this nature and in those countries they are going Wow I'd like to hold something else something that's not being eaten up by inflation and the dollar is something that's very commonly held but over time it used to be of course that in Europe you would have the German mark and a Swiss franc and the French franc and and so forth each country had its own currency and now they're working with the euro and so the euro which has become the common currency throughout Western Europe the euro has become something that in other countries they like to hold on to also to basically beat inflation to deal with this problem but this has gone on I told you I come back to this so this is a good time to do it these numbers are approximately I told you the m1 money supply it's about and these are ballpark numbers 700 billion dollars worth of currency and 700 billion dollars in checking deposits okay that's the official US money supply but I just told you a little story here and what you should know is that maybe on the order of I don't know 400 450 and I'm gonna put a question mark billion dollars of this currency is outside the US that is to say yeah we've got 700 billion more or less 700 billion dollars worth of currency in circulation but most of it not in circulation within our borders somebody overseas is holding on to it why because they got an economic crisis overseas and the way they deal with that hold on to dollars for their savings as opposed to hold on to their own currency if you look at these tables that show and you can find us online at the Federal Reserve's website if you look at the tables that show how much currency outstanding there is or currency in circulation far and away the biggest chunk of that 700 billion dollars is hundred-dollar bills now I have owned hundred-dollar bills and I'm sure many of you have but I'm just saying that most of the money I own is not hundred-dollar bills but most of most of the currency and I should say but most of the currency in circulation of u.s. dollars $100 bills why because when you're saving th
s stuff you want to put $100 bills in the shoebox not once this takes a hundred times I'm a shoebox have used once and so money as a store of value of our currency as a store of value is being held overseas by a lot of people and large denomination notes there's never been an official announcement about it but our biggest note our biggest denomination of currency is a hundred dollar bill when the Euro came out they said hey let's put out a 500 euro note and the 500 euro note nobody I shouldn't say nobody cuz it's not an absolute but almost nobody is walking around pulling out a 500 euro note saying give me a haircut here is the equivalent of $800 give me a haircut the 500 euro note is valuable to people that are holding their savings and shoeboxes and so I guess what I'm telling you is that I believe the European monetary bank or the Europe European Central Bank is putting out these five hundred euro notes because they're trying to compete with us in this world market out there of people trying to hold their savings there and store a value in the form of some foreign currency yes sir is it illegal well yeah I'll tell you what is legal for us is if you move I think that number is ten thousand dollars of currency over the border you're supposed to declare that you know where they come on airplane you're going overseas and they give you this thing and fill this out and for customs and all that stuff you're supposed to start telling them you're carrying a lot of currency and so if you don't tell it you've broken along and in some countries this is illegal several years ago there was a story of some Bank I think it was in Boston and it had some customer overseas or customers we don't really know the details because I just read about in the Wall Street Journal but anyway so his customer overseas and possibly somebody living in Russia but anyway they wanted US currency and so what was happening was this Bank had some official I think a vice president that was loading currency up in suitcases and going down and getting on an airplane and flying overseas and delivering this currency and coming home getting some morning and find overseas and deliver but this is before they had all the security you know after the 9/11 attacks and so forth but back in those days you just unless there's some reason they would not go through your suitcase and so this guy is carrying money and I think took over a billion dollars overseas that could be wrong about this but it was vast amounts and then they got caught the bank did doing that and then there was a substantial fine and you know and don't do that again but anyway so there are laws that govern us in some countries maybe those laws aren't so severe I think right now in Zimbabwe which is in Africa I think they have a severe situation right now with inflation I've seen pictures of this of the 100 trillion dollar hundred hundred thousand million billion trillion the hundred trillion dollar note the Zimbabwe dollar anyway people like I've had friends overseas and they send this to me saying I'm a trillionaire you know this sort of thing yeah anyway so when you've got inflation when prices are rising like that then what happens is people just start fleeing that currency it may still be the case though you walk out on the street and say hey I want to buy a loaf of bread pay with whatever the currency is that trades on the street but as soon as you get a bunch of that currency then hurry quickly convert it into something else that isn't being eaten up by inflation they would have to have my even bigger notes just to get the zero in it boy they put the zeros on there too you know I think the story I'm not sure but I think the story was Germany following World War one between World War one and World War two I think what happened was their printing presses could not keep up they had they were printing more currency and let's say here's a thousand they were printing more currency and so then their printing press was just couldn't print it fast enough so then they just would come back and put another zero on you know I go we got room for another one anyway a lot of interesting stories about this stuff anyway to kind of come back why do people use money money performs various functions and these two functions meaning exchange unit of account it performs very well and this third one store value not so well at least our own money doesn't perform that very good function as a store value in some countries if they do not have savings accounts and stock markets and things like that then maybe they do hold money as their store value but it's just not a very good store of value let's talk about evolution of the payment system this course is money in banking and this is the only unit where we just focus on money and it kind of goes slowly but it's good to know about money because it fits in our figures into so much of our later discussion we already talked about barter and so I'm not gonna continue with that barter is just exchanging one good for another good or good for services and so forth I didn't use the term but our second stage in this evolution of money is commodity money and what I mentioned to use in Sumer for example they use barley wool and silver and so commodity money now what we mean by commodity money is this we're using something for money but it can also be used as just a commodity people have a commodity use for barley and wool and silver and so if you came up and said hey I want to trade for you I'll give you some wool and they say no you can always make clothes out of it not you but awry but somebody can and so anyway money was a commodity okay we were just using commodities to begin with and now what's happened with commodity money is we've just focused on a few specific commodities not just everything okay it's like oh these three things work better than other things these are the things I'm gonna start buying goods and services with and by the way I will also accept barley wool and silver from other people if they want to buy something I have and so society starts focusing on just a few commodities different commodities different places I mentioned again I mentioned about in Virginia 300 years ago they used tobacco leaves so a different in a different place in the Mediterranean Sea there were little copper ingots and have a little bag and it was sewn shut so you knew that the contents hadn't been changed but anyway but a little leather bag and it would be full of copper and then this copper bag of a certain weight and a certain size that was used as money and copper head value as a commodity could be used to make metal objects with but also it could be used as on money okay the next step coinage and how we're still talking about commodities but now the commodity is put into a certain form and what's the form it's a little disc right and the first coins that we would say are coins of any substantial value and there's always a transition phase so I don't want to let on like this was all on one day but around 640 BC in Lydia which is Western Turkey bordering on the Mediterranean Sea those are the first coins that we would say qualify as modern coinage like I say there was a transition period and people tried other things oh by the way I mentioned it before but Sumer this is around 2500 BC and so gosh we're talking of eighteen nineteen hundred years later and somebody said hey let's put that commodity in a certain form okay what was the commodity where the coins made up something called electrum and electrum was a combination of gold and silver and this was an alluvial gold of silver and by alluvial I mean it was found in riverbeds Turkey has some mountains which are volcanic in nature and so what happened is all this heat activity and below the surface of the earth and there was gold and silver you know down there buried away from where we could see it but it got warmed up then the ball came and when it warms up it's just tiny little specks in many cases under the Earth's surface but when it warms up it kind of runs together and makes little chunks and then there's a volcanic eruption and we're talking a long time ago millions of millions of years and the volcanic eruption throws this stuff out and so now you've got gold and silver up and high mountains and then there's snowfall and then there's the melt and then the water runs down and over the not just centuries but over the thousands and tens of thousands of years some of this gold and silver got melted down and in the riverbeds and so forth running toward the Mediterranean Sea and so people in lydia western Turkey picked this stuff up and a merchant said hey this is a neat idea what I'm gonna do is I'm gonna standardize this I'm gonna get a little bit of this metal and I'll make a bunch of these little discs of a certain standardized size and I'll put my stamp on it and then that will be something people were recognized and people started using that to trade and it wasn't very long after that but I mean it wasn't very long in terms of looking we're talking eighteen nineteen hundred years but maybe twenty-five years something like that the people in Lydia and Turkey and so forth they're doing business with other people in that neighborhood of the eastern Mediterranean Greece and so the people in Greece they see this and they say hey that's a good idea let's make our own coins and so the idea of cornish spread from western Turkey into Greece they didn't have like you know a dotted line and guard posts and things like that saying here's the border just people doing business with each other and bunch of Iowans and things like that and so the people in Greece started making their coins and so along things go for about three hundred years and about three hundred years later around 3:30 and I'm gonna put up plus or minus BC there was this guy in Greece who had grown up and seen coins and so forth all of his life but the only thing is was that guy in Greece just he had these aspirations of having an empire and his name was Alexander the great Alex the great D was his middle name that's what they call sometimes they just call him D in fact anyway so Alexander the Great is out there with no that is not true he was out there and he conquered this empire in various times I mean the empire went to like the the western part of India all the way over to gosh the western part of Europe and then down into the Middle East he had this vast empire and he wasn't always everywhere he had generals that would basically run different parts of the empire but what happened was Alexander the Great conquered a city with vast amounts mainly of silver and I mean tons of tons of tons of silver and so then what he says is hey let's make some coins and he didn't invent the idea of coinage he had always seen it I mean like for 300 years in Greece where he grew up they had coins but now all of a sudden he goes hey I got all this silver let's make some coins and put my picture on it and so he's got this vast empire I think three four million square miles if you put it all together and so over his empire these coins with Alexander the Great's image on it started circulating his money and so the idea started small but Alexander the Great is the one who spread the idea of coinage throughout a large part of the world and there's never been a time since then when there wasn't coinage paper money and that is the first thing we're going to talk about next time paper money where did develop China ah that was just the teaser to get you back next time so long teaser by the way what happens next time quiz bye
