Industry sign banking missouri document simple
today we want to talk about money and the payment system basically what we use to buy things some of this is a little bit of history there's a little bit of analysis that's blended in here but mainly history and I think it's kind of interesting for a lot of people we've been using money for our whole lives and you know familiarity with money kind of makes us think we know something about it and sometimes we learn some new things about something that is so familiar first of all a definition money is anything that is generally accepted in payment for goods and services money is anything that is generally accepted in payment for goods and services and I'll underline a couple of words here a couple of terms the one is anything and then the other is generally accepted I underlined the word anything and I mean by that that we have a definition of money that is a functional definition of money functional in the sense of can it perform this certain function okay and it's our definition of money is it's not a coin made of metal it's not a piece of paper with the picture of a dead white man on it it's not anything in particular it could be anything 300 years ago tobacco leaves were money in Virginia and there are certain places where limestone rocks have served as money and other places where shells have served as money and some places beads this whole idea about Manhattan Island back in 1600s being bought from the Indians the natives of that area for beads for wampum this is something that you know that was money in those days interestingly enough the Indians that sold that land didn't own it but they said sure you can buy this and by the way I would sell Springfield to any of you would like to buy it also but the whole idea is that anything could potentially serve as money now there are things that are not useful as money ice cubes and things of that nature because they melt and then your money is gone but I'm just saying to you that we don't have a definition of money that it has to be a certain thing okay the real key about money is that it's generally acceptable if you could take a marker and just go out and get a car wash or bare and buy a pair of shoes with enough of these or get your haircut or buy a house with enough of them buy a car things like that then these things would be money okay anything that is generally acceptable generally this go far and wide roam around you can buy stuff with it that makes it money and so over the years and I've mentioned a few of these things that tobacco leaves and the shells and so forth the years many different things have served as money we live a fairly short life and so for us what money is hasn't changed very much what money is throughout my life and throughout your life has been essentially two things one is currency and I mean by that both the paper currency and the coins and the other thing is checking account balances and that is what is generally accepted in payment for goods and services in the United States now what has happened over the years is and we'll come back and talk about this more later on is that those checking account balances that have been that we can buy things with when I was a kid the only way to get access to those checking account balances you could go to the bank and get some cash but then when you go buy something you're really paying cash but the only way really to gain access to your checking account balance when I was growing up and really at about the time most of you were very young would be to write a check and what's happened over the years as we got to the point now where we've got the debit cards and then for a while we had cards they weren't debit cards they were ATM cards so you could go to the bank and get cash in a middle-of-the-night or something like that and then after a while you've got the the same card or you know a newly issued card but gains access to the money in that account and now you can go to the grocery store go to a restaurant or go to a gas station or whatever and use that car to buy things and so it's still the money in your bank account that's money the balance in your bank account that is money but now we have a new way of gaining access to it and of course now what you can do also because I do it is you can go online and provide some information from your bank account a routing number for your bank and then your account number and you can pay people online and then that is still the funds are coming from your bank account so when we're counting up how much money is there in the United States we're still counting that checking account balance but we have other ways of gaining access to it and so for us throughout your life throughout my life this money has been essentially two things currency including both the paper currency and the coins currency and checking account balances and we have a term for that we call that the m1 money supply I'll put little horns on that so it's clear it's not an L or not an AI m1 money supply and the reason they've got an m1 there and by the way this is the Federal Reserve's definition or just the Fed the reason that we have this one here is that there are other definitions there's an m2 there's an m3 and so forth and what happens as we go from I'll write it down here the currency and checking account balances when we start talking about m2 and m3 we start adding other assets in that hour it's a near money you can convert them to money easily and quickly money in your savings account for example but you couldn't take money in a savings account and spend it you go to the grocery store and walk up to the front and say I want to buy these groceries and they say well okay pay us and you say well I have ten thousand dollars in my savings account they'd say please get out of line that's not going to work here you'd have to go someplace and convert that and so that would be a near money not quite money not quite spendable and so that will be part of the m2 money supply and then there are other assets that are a little bit less spendable a little bit harder to get to and so forth m3 money supply the money supply that is spendable is the m1 money supply and it's these things and by the way this is almost all of it and then there are a few billion dollars of other minor items used to be they talk about traveler's checks and that would go in here I'll put traveler's checks but there's two issues about that one is any more traveler's checks are going away and now what we're getting is these stored value cards where you have a plastic card and look very much like a debit card but you'd go someplace and give them money out of your checking account to buy a plastic card it's got some value stored on it 100 or 200 or 500 dollars or whatever and then you would use that card as you go around buying things the old traveler's checks was actually something that looked like a check you signed it when you got it and you signed it when you got it at the bank and then you would sign it again there'd be two signatures on it when you would spend it and they were for fixed amounts of money $20 $50 $100 that sort of thing anyway so what we have over here are some things that are of minor importance there may be and I'm going to put a question mark there there may be ten billion dollars worth of these or something like that and ten billion dollars a lot I'd like to have you know just a decent fraction of ten billion dollars I'd feel you know set for life but these numbers that we have in the overall money supply we're talking about these two things added up in the neighborhood of one point I don't know one point four trillion dollars and so when we start talking about another 10 billion dollars thrown in there that just gets rounded off to zero so anyway most of the time when we say m1 money supply most economists leave off these minor issues over here to write to traveler's checks and the stored value cards and so forth we leave those off and just focus on the two big ones currency and the checking account balances this is money in the United States today and what I'm telling you is that the evolution in money during our lifetimes the evolution has not been to change the components of the money supply it's been to change how do we gain access to that and really not so much the currency part but how do we gain access to the funds and our checking account balances this is money will it ever change it's hard to say never I'll tell you what I don't think anytime in the near future there will be a change it may be that a hundred years from now 200 years from now we come back and why don't we just make a deal to get back here in two hundred years but it may be that 200 years ago from now I should say historians will say oh look here's what used to be money and now we have something different that could be but I think it won't happen any time soon because these checking accounts it's our balances in the checking account but those checks a checking accounts are banks those banks are for-profit institutions and so if somebody tried to develop some other form of money in a sense what would their would be as competition in the marketplace if I came along and said hey I've got a great idea for money then the bankers would say hey people are going to get rid of our checking accounts to get this other kind of money that's bad and so then the bankers would get busy to make their bank accounts more appealing and they would compete to hold that market share and so they would do everything they could to prevent these new forms of money from developing and so I guess what I'm saying to you is mmm those banks are out there they are huge trillions of dollars worth of assets they've got marketing departments and they got smart people working for them and so they're not going to give up without a fight and so it will be a long time I would think before we just go well you know the checking account that was a good idea for a while but now we got something better probably not if there's something better those same banks are going to try and offer that as well right so anyway so I doubt if there is any quick change I would imagine what the change will be is over time as you know as time goes by I would think that we'll have new ways of gaining access to those checking account balances they do a little bit of it in Japan today maybe a little bit in Europe there may be places in the United States but you know where you can touch something on your telephone get near some kind of like a toll booth or a vending machine or something like that and a signal goes from your phone to that machine and basically it says you can take $10 $2 20 cents whatever it is out of my checking account I want to pay this fee or I want to buy that merchandise but some kind of purchase with your phone but still would be going back to our checking account and get into money and so that would be an innovation that's probably not very far down the road how many of you have cell phones put your hand up you get a cell phone keep them up I want to see you know I don't see one student in here that doesn't have their hand up so you know wouldn't that be convenient since everybody's got cellphone wouldn't that be a convenient thing to put that service in there and of course we just don't have a select group of people with cell phones and arrests the world doesn't have it people have cell phones everywhere and so this would be an awfui easy way to gain access to the bank accounts and the same people MasterCard and Visa and so forth that are providing these services with our debit cards and they'll no doubt have some kind of a chip and cellphones at some point in the future so anyway view preliminary comments about money I want to distinguish between two three terms here money and income and well now sometimes people confuse these things and the reason they confuse them I believe it's simple is that each one of these have a dollar amount at least in the United States a dollar amount attached to it and since you see the dollar sign each time it's easy to just say oh those are all the same but this is not a place where we want to blur the distinctions we want to make these distinctions fine because we're talking about money and banking in this course I've already told you what money is that's a spendable asset right it's the thing that is generally accepted in payment for goods and services you can spend money okay what's income income is what we receive for working for example you might receive forms of income also from renting out property if you own it or it might be it you'd have income from royalties if you own some kind of asset like if you write a book and you get royalties from that you could have income if you own some stock and you're getting dividends on that okay so there are various ways to earn income but that word earn is a key to this is we're selling services and that's how we get income and that is not a spendable asset what we get paid in most cases not everybody but in most cases what we get paid is money and then we can go out and spend that but income is a payment to owners of productive resources or factors of production and so that's different than this asset that we spend sometimes people get paid income in kind not in terms of money but in terms of services part of my compensation working here at the university is health insurance health care right and so I have income that's my receipt what I receive for working I have income but it's not in a form of money some people of course get housing some people get cars there would be other forms of income compensation for working wealth this is all of your assets minus your debt obligations so what are all the things you own okay and what do you owe now when I say all assets I've used that term asset before asset is just something you own I've talked about assets before spendable assets so all assets for example I could have money in a savings account I could have some stocks I could have bonds I could have gold or silver or land those would all be assets but those things that I just mentioned the savings accounts and the stocks and the bonds and the land and so forth those aren't things I can spend and so those be things I own but nothing's I can spend debt same idea is it may be that that debt is liquid that I have to you know pay today but it can be that this is longer-term debt has nothing to do with the liquidity or the spendable aspect this money is an asset so it would fall you know of all the assets I own or all the assets you own one of those assets is money but money is the one that is spendable that we can use it today to buy something not only today but right now to buy something if I want somebody to wash my car and then with money I can get them to do that without you know selling stocks and bonds and so forth so anyway as I say all these things the assets those are valued in dollars usually the debt valued in dollars my income I normally would value that in dollars he's all I have from them but they're all they don't all refer to spendable assets okay and so only money is and so when I say you know if you hear somebody say this how much money do you make that's perfectly all right for almost any situation in the world but it's just not perfectly all right for a discussion and the money and banking class because we don't make money we make or we earn income right we receive income for working and part of it or maybe all of its going to be in the form of money but income is what we get for working okay let's talk about functions performed by money and I'm going to come back to this in just a moment money's been around for a long time and so a question that we may want to ask or have answered would be why do people use money why do they do it and you know as I say without studying this stuff you've all gotten to this point in your lives without studying it in any depth without studying this it's kind of hard to have an answer we're so familiar with money we use it but it's hard to know what life was like without it and so why do people use money and the answer is because money does certain things for us you know now this is not really any mystery here and I'm kind of saying something obvious to you if I say why do people use cars well
t's because cars do something for us it provided service why do people you know we're in coats well because those codes provide a service why do people have television sets for a service that the television sets provide and so the same thing is true for money why do people use money because money perform certain functions money provides certain services the one we've already talked about money is and this is over here money is a medium of exchange and medium of exchange means money is the asset that people use to purchase things and that's where I said to you a moment ago money is anything general except in payment for goods and services we were talking here about the medium of exchange function performed by money what we do before money pretty money anybody want to say the word barter and there is no law that prevents us from bartering today barter refers to exchanging goods and services for other goods and services I mentioned a while ago that you know we could take one of these markers and go out and say hey you want to wash my car give me a haircut whatever and I'll give you these markers I've got 10,000 amount in the car and so if you'll know my yard I'll give you 80 of them if you'll cut my hair I'll give you six of them and I'll go for those fancy haircuts so but you'd probably already guess that anyway but the point is that I could give people these things and get them to perform services for me or provide things to me and if I do that that's barter that's trading goods for either goods or services okay what makes what's the difference between or why isn't this money and the answer is if I give this to you and say would you mow my lawn and I'll give you however many I set 80 I'll give these and you say yeah I'll do that we have traded goods for in this case a service if I could take these and go anywhere in society more or less everywhere and get people to work for me and to provide me with things then this would be money but if I can just work out a few transactions a few trades with people where they'll accept this but most everybody won't then these things would not be called generally accepted and so they wouldn't be money it would be a barter transaction and so really what happened way back in time something became money it was at first barter because a few people did it and it was just a barter transaction and then other people said hey that's a good idea I'm going to do that too and then over time more and more people found it convenient to barter you know the same things and then as more and more people were using the same things and these barter transactions the thing became generally acceptable became money but they didn't use that term money we're talking about thousands of years ago the first forms of money that we've been able to find out about and something possibly came earlier but we can't find out about those things because it wasn't written down the first place that they were able to write was in Sumer which is now Iraq and we're talking of a period around what 2,000 to 2,500 BC Sumer was this area and then later Mesopotamia was what a call it was called and today modern times Iraq and back in this period of around 2000 2500 BC people started using a few things it was barter at first but then more and more people started you know conducting transactions with the same things but they used just a few things barley and wool and silver and they started paying for things with those items and like I say maybe somebody was using money before this but we wouldn't know because this is where they started writing things down and when that's history and everything before that was prehistory and we just don't know what happened in that previous period but we don't have evidence archaeologists haven't dug up something and said gosh I think this was used as money because you know it was basically we found at these situations that will apply money transactions so for archaeologists don't have good examples of that anyway barley this is it was grown over there but it's really for us the equivalent of wheat something they would make bread and cakes and things like that out of this area Sumer is an area let me kind of give you a little bit of a map here up in Turkey up in the mountains there are these two rivers that start close together and they flow down into here's the Persian Gulf I'll say Persian Gulf pg and so this area in here and the southern part of the journey of these two rivers this would be Sumer and these are the people who first developed riding canal form and they are also the people who first developed cities now there were obviously towns before that small villages and things like that originally if you go back far enough in time what happened was people would just wander around in small bands and tribes they were the hunter-gatherers and so forth and then they started moving into villages and a little bit bigger towns but this was the area where we had the first cities with actually thousands of people and some of those cities were very large not the first ones and so this is where they developed a lot of the things that nowadays you know when you study like ancient history and so forth this is they developed riding their I'm getting ready to tell you that they developed a crude form of money they invented like the wheel they had chariots and things of that nature a lot of things developed in this area okay there was an agricultural revolution era where they were going out in farming areas they were raising animals and you know pins and so forth they had livestock this is really an area I think some forms of astronomy this is an area where lots of things happen and so anyway the reason I tell you about these rivers what anybody know the rivers go ahead Tigers and Euphrates which is which he's got a 50% chance of getting right you brady's was over on the west and the Tigris is over on the east and they were different you know in terms of what they were like the Euphrates was really the river that was most conducive to travel it was a wider river and a slower moving current and also lower banks the Tigris was fast moving steep banks and so forth and so it was a source of water but it wasn't so much a you know useful for their economy the way the euphrates was in anyway in any case what happened over time as these people would start developing irrigation channels out here and irrigating wider and wider areas and what happens over time and we're not talking about overtime like over a year or two but we're talking about hundreds and hundreds of years go by and all this water that came down there and it was used and it would be used to irrigate this area out in what would otherwise be desert then it would evaporate and then there's more they would evaporate and so forth and there was a salt that build up in the soil from that water and those salts made it really inhospitable to growing wheat but barley deal you know can survive or really thrive and that sort of salty soil and so what people used over there was borrowing but what I'm saying to you how about wool well they had sheep and they would send those sheep out in the fields grass fields barley fields and so forth in a sheep would graze out in this area and the rivers were of course and they're a mile or two wide but then there would be several miles on either side of each River that would be irrigated so there would be grasses and borrowing and things like that growing and so there was a large area for people to graze their sheep and so forth and then they would obviously cut the wool off the sheep and use that to make clothing and other textiles so anyway when I say to you that these things were used as money these things were useful things everybody needed to eat everybody needed some clothes and blankets and things of that nature and so there was this widespread use for these things and so if you said something like oh I'm going to go out in society and start trading just some common object and with people some people would trade with you but most people say I don't really have a need for that yeah I'm not too interested in that but what happened was if you go out and say hey would you accept barley for a piece of furniture or for a cow or for this or for that people would be much more likely to say yes because they needed eat and not only did they need to eat but people in the cities needed to eat and those people in cities don't roll a lot of food you know and you know what that's like living in a city here we're not growing a lot of food during might be a few you know tomato plants out on the back porch or something like that but not enough to sustain you throughout the year and so we've got a lot of people in cities and so if somebody came along and said hey would you accept some barley in exchange for working or for some furniture for a chariot or something of that nature what you might be thinking is there's a decent chance I'll eat that barley and need that to sustain life but even if I don't I know there are a lot of people in the cities that do want it I know that I'm not just going to get stuck with some barley that has no use but if somebody tried to trade something else with you you might say gosh I don't want that because you know if somebody came on and said hey I'd like to buy that cow or I'd like to you know hire you to work for me or whatever and what I'll give you is a chair you might say gosh I I don't really need that chair it's going to cost me a lot to carry that chair into town I don't know if anybody in town wants that chair I don't think so and so these have a lot of utilitarian purposes and also a very good chance that you can trade it wool same sort of thing if somebody came along and said hey I'd like to buy something from you I'll give you all then you as an individual may not be weaving that wool into textiles but there's somebody in your household that probably is it couldn't go to the Walmart or something like that to buy clothing and so there's somebody in each household these would be extended families of maybe 15 30 people livin in a household there's somebody that is weaving fabrics and so you say yeah I would accept a little wool there's a good chance we'll use it and if we don't there's somebody in town that's going to need it and so then the other thing silver was money part of the reason that was money of course it's pretty and so forth part of the reason that was money though was that people during those days did have bracelets and they had necklaces and things of that nature and so there was a desire for some ornamentation and some beauty and and so forth and so silver was desirable and these are the things but silver by the way was pretty valuable you've got to recognize that these people living 4,000 years ago 4,500 years ago were by today's standards very poor and so if you came along and said hey I want to buy something from you no I'll give you an ounce of silver that would be a lot I mean that might be a month's wages or something of that nature and so this is not something that would be changing hands all the time and the borrower in the wool would be something that on a common basis just any old time people would accept that so there was a first barter and then certain things became more and more used than barter and those things emerged as the first forms of money I don't mean to say they were money in the form of currency coins or paper money I mean they were generally accepted payment for goods and services just as I mentioned to you back in Virginia 300 years ago tobacco is or generally accepted in payment for goods and services but this was the first money in history I don't know if something came before but as well as long as we can go back and look at history on these canal form documents and so forth this is where we see some transactions or this is what we see people using to pay for things over and over again questions about this suppose that we want to stick with barter I want you to think just a for a moment about the inconvenience of that because I'm going to use a term here in a moment suppose Here I am as an economist suppose I wake up in the morning and I say gosh I sure AM hungry I'd like to have a little breakfast and there's no money so I say I guess what I'm going to do is get out and do a little trading and eat some breakfast so I go to my next-door neighbor's house or knock on the door and I say hey how you doing they say fine what kind of do for you I say I'm really hungry and I was wondering if I could trade a little economics for some you know bacon and eggs and you know they probably just because their neighbors invite me in and give me some bacon and eggs and send me on my way but that's charity but if they are just going to treat me in an arm's-length transaction it's a economics you know I don't have a big need for that today no one so I say ok and I go to the next door and I knock on the door hey let me introduce myself I'm you know whoever I am I'm Tom I'm your neighbor I live down the street and I'd like a little bacon and eggs for breakfast a little bit of toast something like that and they go well what are you going to give me and I say how about some economics I could you know while you're fixing the bacon and eggs I could tell you about the stock market and I could tell you about inflation and things like that they'd say no that would kind of make for a bad day and so no now I go on down the road and I knock and I ask the question I'm not going to ask the question on down the road you know before long it's going to be a lunchtime and I'm not I haven't had breakfast yet so what happened in this barter situation is people spent an inordinate amount of time is very inconvenient but in an economic sense we don't really measure inconvenience they spent a lot of resources trying to find a trading partner what you have to have in this barter situation to have a trade I'll put requires a we'll put the quotes around this double coincidence of wants that's a requirement for barter that's to be this double coincidence of once and what I mean by that is this I had to find somebody and our ones have to match up I have to have what they want and they have to have what I want and there are people in the world who want economics I can see a number of them sitting here there are a number of people in the world who want economics and there are a number of people in the world who have bacon and eggs but that does not guarantee me breakfast it's possible that there is nobody in Springfield with bacon and eggs who wants economics now it's possible there are thousands of people in Springfield who have or who one economics and it's possible there are thousands of people in Springfield who have bacon and eggs but those don't have to be the same groups and unless I can find somebody you know unless we find a situation where we can match up these wants there's no trade so what we have is a lot of traveling around meeting people discussing things and so forth and so what economists would say is that this imposes high transaction costs and let me say this on a slightly different way what I mean is this is that there's a cost of breakfast the bacon and eggs that I want the cost is what I got to give up to get it if it were money if it's some of my time that's the cost of the bacon and eggs there's a cost of carrying out this transaction in addition to what I have to pay that person though I have to find them I have to negotiate with them if I come to your door and say hey I'll trade you know you give me bacon eggs I'll give you breakfast or give you an economics lecture and you say okay we got a deal what you don't know and what you don't receive is you don't know how many hours that I've spent looking for you and so it's all this other searching time and the negotiations that I go through and so forth these are cost to me or that you don't actually get anything so it's a cost of just working out the transaction and these transaction costs eat up our time if I spend half the day trying to find somebody to do business with then that's half the day that I can't go to work and produce anything else you know that is potentially there's a demand for and so if we go back in Oh societies and the barter days and people are s
ending so much time looking for trading partners they were not spending time working and so their society was poor because so many of their resources were burned up and just trying to find a trading partner transaction cost we have transactions cost today but what happens is over time we try to find ways to reduce those and that's really what money did for us is money made it where I could take with me go to the neighbor and take some barley or take some wool or take some silver and say hey I'd like to have breakfast I got some barley or I got some mole or I got some silver and I say come on in neighbor have a seat and I give that to them I eat breakfast and then I go about my business and the rest of the day I'm working and so what money did is it got rid of this double coincidence of wants requirement and it reduced these transactions costs and it allowed for us to have a more prosperous society let's go on and talk about and we'll come back to transactions cost let's talk about the second function performed by money the second reason that people use money money serves as a unit of account and money provides a common measure of value in our society in our marketplace let's go back again to the barter situation let's say all there are is just goods and services out there and there is no such thing as money now we start talking about and this is a little bit like visiting a foreign country where you're familiar with the dollar and all of a sudden they're using pesos or whatever the currency is another country you know that can be confusing but that's what we're talking about here is every place you go there's no way of saying what the value of something is in any familiar terms everything's just valued in terms of other things and so if we had three goods x and y and z then we wouldn't say this is $2 $3 $4 what we'd say is well the value of x we can express that in terms of units of y or the value of X we could express it in terms of units of Z and the same thing good Y we could express that we've already said Y in terms of X and X in terms of Y but Y in terms of Z and so and that's really all the combinations of these three different goods but each good would be valued in terms of the other goods and you might think that's not so bad you know three goods three different ways of stating values and by the way this is all the combinations you don't have to value X in terms of itself or Y in terms of self and so forth its goods in terms of each other so here's X in terms of good Y or Y in terms of good X that's that relationship okay X in terms of Z Y in terms of Z and that's all the combinations these what happens if we have four Goods I'll add W in here if there are four different Goods W in terms of X W in terms of Y W in terms of Z right X in terms of Y X in terms of Z Y in terms of Z and so what we did have is three goods and three prices and I'm abbreviating here but what we had as soon as we had four goods for goods we have one two three four five six prices six ways of valuing these goods and what's happening is the economy is getting more complex and I'm not going to go but what if we have not going to go through it but what if we have a fifth good and a sixth and a seventh what happens and I enjoy your little graph and then I'll kind of talk about this in slightly different terms here in a second draw you a graph and here's what it shows us here's the number of goods in our society and here are the number of prices by prices I mean and this is all a barter economy but prices are relative prices of goods in terms of other goods and what we have is a relationship that's nonlinear I'll put a zero down here because of course we want to see where we started and what's happening is this is that we start off and then this curve is going up at an exponential rate as the economy becomes more complex we're getting more goods and services in the economy then the number of prices is increasing very rapidly well guess what the first place that happened with a complex society was where a complex economy lots of goods was the first place there were a lot of people living with each other in doing business with each other and guess where that was Sumer right when you have 30 people living in a tribe they're a bane and aner just kind of roaming across the countryside they have a simple economy they might be making hatchets and arrows and you know a couple of different kinds of clothes and so forth and that's not very complicated but as we get a more complicated economy as there are people who specialize not in just making furniture but maybe making chairs with three legs and here's another person specialized in chairs with four legs and another one I'm making small benches and larger tables and so forth as we start getting thousands of people living near each other they start specializing what they produce there's more variety in the economy more goods and as soon as you have to start valuing each good in terms of other goods we've got a complicated situation if think about this you go to the store and suppose that you get up to the front you push the card up front and so then you say what I owe you well how are we going to do this you're going to pay me in shoestrings are you going to pay me in shoes are you going to pay me in basketballs a basketball tickets shirts bear skins what how you going to pay me everything is a possibility how many different goods are there items different unique items at a modern-day grocery store anybody like an account or a marketing major in here maybe had that in a textbook or something ten thousand would be a modest number not huge it's thousands of thousands and so if we've got thousands of different things like you walk up front and say here's a bag of potatoes what oh yeah and if they can just tell you what you owe in terms of thousands of different things what do you have inventories up and so it's a very complicated situation and so what happens is we start getting overloaded with information gosh I'm trying to keep track of this this is a little bit as I said like visiting a foreign country and if you've visited many foreign countries it's not very hard to get out smarted on a price and you think that's a good deal no it's not you just can't keep track of this fast enough the only thing is when you visit a foreign country you're used to dollars now they've added one more thing to the mix the peso or whatever well suppose you visited a foreign country where that there are thousands of different items and they can just value things in turn anything it's very easy for you to become overwhelmed here's a formula for this the number of relative prices is equal to G times G minus 1 over 2 or G is the number of goods okay and so I started you off let's go over here and just do a few simple calculations I started you off at the simplest possible calculation I say if there are three different Goods then G times G minus 1 3 times 2 over 2 is equal to 1 3 so we did that simple situation when there were 4 different Goods 4 times 3 over 2 equals 12 over 2 equals 6 what are there 10 different Goods 10 times 9 over 2 is equal to 45 yes 90 over 2 what if there are a thousand different Goods 1000 times 999 over 2 equals this won't work on the test but I'll tell you pretty close how to get an answer it's not exactly right though that's almost a thousand times a thousand and what's a thousand times of thousands a million so this is approximate but not exactly but approximately a million divided by two 1/2 a little dot therefore approximately 1/2 million different prices now the thing is if we just had 3 4 5 6 12 15 18 20 two things to remember we can do pretty well at that over time you get some experience and you can kind of process that in your head but if somebody asks you to remember a half-million things or to kind of just juggle these ayah these numbers around in your head can't do it so this becomes a transaction cost the cost of processing information and when the cost is prohibitively high and that's what's happening here then what happens is we become bad consumers we go to the store and we don't know if we're getting a good deal or a bad deal and I don't mean to say if you've overpaid by two pennies or underpaid by two P what I mean to say is you could pay ten times too much for something if you're just hit with more information than your brain can process and so what happens is we had already a transaction cost the cost of finding a trading partner but in a barter economy we had the cost of managing the information that is required to transact in the market economy it's a second kind of transaction cost and that makes barter a very costly a very efficient efficient way of doing business and so people said what can we do about this and what people in Sumer did is they found a single item and they said hey let's express values in terms of this one item and what they use grains of silver accountants in those days and there may be a few accounting majors in there but accountants in those days used silver grains of silver to express in values something's worth 10 grains of silver something else 30 greens something else 50 grains and so what you could say is hey 10 grains 30 grains 50 grand well this thing is worth 3 times as much as the first thing this next thing is worth five times as much as the first thing and as soon as we have some common unit of measurement a unit of account it simplified the economy and it made possible for people to trade and know they were getting a good deal or a good deal or a bad deal but know their situation in the marketplace but that is what they use they use the balance silver accounts in Sumer and that was the first example of a unit of account money performs that function we spend in our society dollars to buy things that's our medium of exchange and we use dollars as our unit of account in the United States today that's where we'll stop for the day and we'll pick up here tomorrow
