It's a common misconception
that price levels are dictated purely by the
quantity of money out there. And to see why this
isn't the case, let's imagine an island
that has two players in it. So it has a farmer, who
obviously will produce food, and it also has a-- let's call
him a landlord-- landlord slash builder, who will either
rent out buildings or can build you more
buildings or build themselves more buildings to rent out. And we're living in a
reality where all you need is food and shelter. And let's imagine
one reality where this island, this country,
whatever you want to call it, they haven't discovered
a lot of currency. So they only have a
little bit of gold. So maybe the farmer only
has a couple of gold coins to start off with, and
the landlord slash builder also only has a couple of
gold coins to start off with. They're very currency poor,
only a little bit of gold. But they're very optimistic. The farmer says, hey, you know
what, things are looking good, landlord. I want to rent a nice building
from you for my family, and for you to build
more buildings. So here, take both
of these coins and build me or rent
me out something nice. And he gets both
coins over here. And then the landlord
says, wow, things are good. The farmer seems
pretty optimistic. Farmer, I want you to grow
me a ton of really good food, because things are good. So here, take four coins from
me and really grow me a ton of really nice food, the stuff
that's really hard to grow. So grow a ton of food for me. So he gets those four coins now. These are now gone. The farmer doesn't
have those anymore. Now the farmer's feeling really
great, really optimistic. And then, of course,
these are now gone now. The landlord has given
them to the farmer. The farmer's feeling
really optimistic. He says, landlord,
you know what, I'm feel even better
than I did before. Why don't you build me
even a few more buildings. I want to expand
my house even more. But now the
landlord's like, man, you've already given
me a lot of money, and I already have
a lot of work to do. You've got to pay me more if
you want me to work overtime, because that's going
to take time away from my family and all the rest. And the farmer says, sure. Last time I paid you two gold
coins for some buildings. I'll now pay you
three gold coins for the same number
of buildings. And so he gives
three gold coins. And all he's going
to get in return is what he used to get
for two gold coins. So if you think
about it, the price has gone up for whatever
service or product the builder is providing. And then he gives
those three gold coins to the landlord and the builder. And then the builder says,
things are really good. I'm getting a lot of
business from the farmer. I can get even more
food from the farmer. And he goes to the
farmer and says, hey, give me what you just gave
me that last time for two gold coins. The farmer says,
no, you know what? I'm really busy now. I'm almost tapped out. If you want me to work overtime
or expand my facilities, you've got to give me three gold
coins for what I gave before. And besides that, the
cost of buying houses has just gone up to
three gold coins, so you've got to give
me three gold coins now. And so the builder
says, oh, sure, I'll give you three gold coins. So the one thing I want
you to notice in this video is we only started off with
two gold coins for each of these players. But because they were really
confident, because they kept spending it
with each other, because there were a
lot of transactions, there was a high velocity
of the actual money that you actually had
an increase in prices.