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Current time:0:00Total duration:10:12

Video transcript

I think now might be a good time to address another question that's probably circulating in your head and that is what happened to the gold remember when we started this Reserve Bank all of these national banks or whatever we want to call them they had gold as their reserve and then at some point they said well you know why are we each holding gold why don't we just all concentrate our gold in one Reserve Bank and then that reserve bank can issue and it was the only person that could issue it could issue bank notes that could be tradable into gold and then we said we know over time people just got used to the notion of using the bank notes themselves let's do think using the bank notes themselves as reserves and that's what the reserve ratios were all based on run based on the bank notes itself and we talked about that if the Fed or the Reserve Bank wanted to increase the money supply it could essentially just print a new notes print new notes and it would have offsetting notes outstanding liabilities and then it could use those to perform open market transactions and it essentially allows it to grow the monetary base with the economy or with the needs of different projects out there so that those projects happen and in that whole discussion we you you might have noticed that this yellow stuff was just sitting here it had nothing to do with the economy it was just sitting there and if you if you really wanted to force me to say what it was doing well it was giving a little bit of confidence behind what this thing was right it gives you a little bit of confidence because at first at least when we said you know that it was backed by the gold there was maybe a similar amount of gold as there was there may be a little bit later we said oh you know this could be exchanged for gold at some rate maybe I don't know $35 per ounce I think that's what it was when we were last on the on the gold standard $35 per ounce but if you think about it it's a couple of weird things here first of all almost from the get-go when we did this the whole purpose of having this this flexible money supplies so you can grow and contract money with the needs of the economy and we would for the most part have notes outstanding because this was a fractional reserve system we would have notes outstanding more than the actual amount of gold and this has been the case even when we were on the gold standard he had more dollars than you actually had gold he had to keep a little bit of gold there just so in case people wanted to call your bluff in case you know X percentage of the people wanted their gold back so they would come back to the central bank as they give us our gold but the gold fundamentally it had no other function it wasn't in the economy it wasn't helping transactions happen it wasn't doing anything it was just sitting in Fort Knox or wherever it happens to be sit and and and to some degree it was it's more of a pain than any kind of real value because because you had to keep up this notion that these things these dollar bills could be translated into gold it kind of forced a reserve ratio requirement on the central bank itself and that a reserve ratio requirement if you think about is kind of arbitrary it's dependent on how much gold is found in the world right in order to increase the money supply with GDP because you know people are inventing computers and railroads and cars and highways are being built and we're all becoming more efficient in order to keep the money supply up with that extra economic activity we have we if we stay on the gold standard and if we want to keep kind of these ratios between the money and gold we'd have to grow our gold with the economy and you know that's kind of arbitrary you know maybe we find a big bunch of gold or maybe we find no gold and that really should have no bearing on our technological progress and how hard we're working and it makes a lot of em you could imagine in a world where all of a sudden you know an asteroid made of gold lands on you know in the middle of the US does that all of a sudden you know because gold is less valuable should that make the dollar less cheap or in another world where for whatever reason we can't find any more gold should that all of a sudden decrease our ability to circulate money around and then when it becomes and I said it three videos ago that these dollar bills aren't just the liabilities or the obligations of the central bank there are actually obligations of the US government so let me ask you a question would you rather have something back to buy gold or backed by the US government and I know many of you your gut reaction say gold the gold is real value the US government what are they good for they're a bunch of crooks they you know they lie cheat and steal they you know they miss allocate wealth all of the time but think about it gold as we said before gold really isn't well it can be used to represent wealth only because it's pretty only because it's some period and it doesn't corrode at some period in the past someone says oh I'm willing to plow your field if you give me that cool rock that you found that's the only gold value Gold has it can't do work it can't be eaten it doesn't make us more motivated it doesn't make us happier it's not real wealth not real wealth now what about the US government well it has the right the authority to tax and I know taxes are bad words and I don't like them myself but it essentially it can it can extract these rents from the US economy right tax the US economy and the US economy that's real wealth that's labor ideas land resources everything that makes a stick are our labor our goods and services our ability to educate ourselves and innovate and come up with technology and become more productive that's real that's real wealth so if you really think about I know I'm getting a little abstract here but I wanna I really wanna hit this point home because a lot of people I think are still under the notion that somehow if something is somehow tradable for gold that it is of a sounder currency while if it's if it's an obligation of a government with a very dynamic economy but not gold it's somehow less it's somehow backed by less wealth but I'd argue that this is actually a more profound amount of wealth I mean we've had currencies in in in ancient history that were backed by gold but in a lot of cases you still had inflation when you know the the Spanish currency and in in in the in the 15th century was backed by gold but all of a sudden they discover that you know Central America had a lot of gold and you had a ton of inflation and that gold really didn't give any real wealth to the Spaniards at the time it just made everything more expensive to for them it did allow them to buy a little bit more from other countries but it really didn't create any innovation or any any it didn't really make their pie that bigger except they did steal some pie piece from other parts of the world but we'll leave that aside for now but this is real wealth a currency backed by a whole nations ability to generate wealth in some ways is a lot more valuable but gold was a stepping stone it was necessary because in order to get this whole thing started in order for people to really have trust in in this currency and just the way people are trained to think you had to originally sell them on gold right so if you think about it gold didn't play any role so in 1971 when Richard Nixon decides to go off of the gold standard if if and this is a big if if you trust the government's ability to manage to manage the money supply effectively that they're not going to print so much money that we have hyperinflation or they're not gonna print so little money that we end up with you know a deflationary spiral if you trust the government's ability to do that it really doesn't matter that we went off of the gold standard and it really just kind of gets rid of a little nuisance and if you actually look at the Federal Reserve's balance sheet today there still is some gold sitting on their bow sheet because there's really not obvious what they what they what they needed to do with it so they just kept it anyway well we'll talk a lot about this you know what is wealth and what isn't wealth and in the future I have one example I often tell people is if you were let's say you're your plane is going down you know you're the pilot of a plane you're the pilot of a plane and it's it's going down it's burning you know you might see this it's burning and you see two islands in the horizon and you have to ditch your plane on one of those islands so one of those islands it just has a big pile of gold on it right it has a big pile of gold and then another island you can see with your telescope from the plane it has cows on it it has cows on it it has I don't know all these all these random fruit trees on it with these luscious fruits you see I don't know it has a big random pool of I can't draw oil because oil is black on black for it has a pool of oil it has another big nice lake of fresh water that's away from the oil so it doesn't get contaminated and it has and you can even see from your telescope that it has a bunch of hard-working innovative smart people on it who could and I don't know do all sorts of interesting things and and you see and they have roads they have roads and they have horses and they have all sorts of stuff which island would you ditch your plane on assuming that you'll never be able to get back to you know civilization well we'll the obvious answer is you'd rather diss your island you're playing on that island because that island has more wealth and so when we went off of the gold center I know it seems like this big horrible thing and the whole scheme of of the world and gold has become a lot more expensive it's no longer $35 an ounce it's you know whatever 700 or $800 an ounce now so you might think oh there's been all this inflation it would've been great if we were on the gold standard but think about what's happened since 1971 other than some of this excess credit that was given out maybe over the last 10 or 15 years other than these bubbles we've seen it - tremendous amount of innovation and we haven't seen hyperinflation and and that's and and that's all in the world of you can call it a fiat currency a currency that's not backed by any kind of hard asset it's backed by people's trust in the ability for the US economy to support debt on the - to pay off the the value of this currency we'll talk more about that in the future I don't want to get too circular in my in my my conversations but I'll see you in the next video I just wanted to touch on that point that we are now off the gold standard