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Current time:0:00Total duration:11:07

Video transcript

so let's take a little bit about what happened in the last video I'll review again these different notions of money supply then let's let's talk about whether it's fair for people to think that their that they really have the money that they have so in the original video I you know after the the crop was harvested the farmers deposited a thousand gold pieces in my bank then I lent out nine hundred of those had to keep some reserves in case those farmers wanted some of their money back and I figured no they would never need more than ten percent at a time I lend it out they build an irrigate you know someone has a great idea to build a irrigation canal to so that more fields become usable and get access to water so to build that irrigation canal they take those nine hundred gold pieces and they pay a bunch of workers those workers now have the gold pieces and so they need someplace safe to put it they put it back in my bank now I get 900 gold piece of deposits I put 10% aside again and now I lend out 810 gold pieces and let's say I'd lend it out for an entrepreneur who wants to build a factory to to build some type of tools that might make the the apple harvest more efficient or faster or need less labor or whatever but whatever that that entrepreneur takes those 810 gold pieces and pays the Builder in the town and then the Builder now has the 810 gold pieces and he gives the money back to me in my bank because I'm the safest place to keep it so and I stopped the chain there you could keep going on and on although there is some end notice that these values get smaller and smaller every time and we'll do a little bit of math on that to figure out how far it can go but then I take the Builders money and I said well you know this banking ideas and UID to me I'm just going to leave it all those reserves I want to see how it all plays out first so then we said how much money is in the system and it all depends on how you define money and we made one definition of money called M 0 and M 0 we said we will call this our narrowest definition and this is literally how much gold is there in system or how much stuff is there in the system that could be immediately used for for for conducting a transaction and I'm assuming for the sake of this argument that none of these players actually kept any gold in their pockets or kept some cash in their wallets for whatever for a rainy day although if they did we would include it in this calculation I assume that everyone always deposits their gold with Bank of Sal so when we did that calculation we got where there was this hundred gold pieces of reserve so we had set aside at first then ninety here and nine hundred here sorry nine hundred here and then 810 here and so if you add those up you get a thousand gold pieces in the system which makes a lot of sense because we originally had a thousand gold pieces in the system and and gold doesn't you know and in the example at least as I described it we didn't have anyone discovering any new gold nor was any gold eaten or destroyed in in some way so it makes sense that there are thousand gold pieces but there's a more interesting question if you went around the city and use asked everyone how much money they had they'll say oh well I have this much in my checking account with the bank of sound I mean if you ask me how much money I had I would tell you how much it's in my checking account I actually have very little cash in my wallet right now if any of you are thinking of mugging me all of my money is in a checking account so if someone asked me how much money you have I'd give that number so if you went around the town and you asked everyone how much money do you have and you added it up you would get the the total of their checking accounts and so let's see we had 810 gold pieces from the contractors 900 gold pieces from the ditch-diggers and then a thousand gold pieces from the farmers and it is seen nineteen hundred plus eight ten right you get two thousand seven hundred and ten gold pieces collectively in checking accounts and since I'm the only bank that's the that's the total of my liabilities here and we call that m1 and I'm calling these for a reason because these are the actual words that are used by economists and our government officials but there's a couple of really interesting questions here one is how did a thousand gold pieces get turned into two thousand seven hundred and ten and then is this 2710 a real does it represent real wealth or was this some kind of weird shell game we played and it represents some type of weird pyramid scheme well how it got created we went through the mechanics right ii quit you know it every time i set a little aside i lent some out and then they deposit excetera and that's how it got created the interesting question is does it represent real wealth the answer is it represents real wealth if each of these investments were real investments so if this nine hundred gold pieces that were used to build this irrigation ditch or whatever it is if that project actually does generate at least nine hundred gold pieces of future wealth essentially it can at least pay back the 900 gold pieces it'll probably generate more if it's if it's a good project but if it generates at least 900 gold pieces of future wealth then this is a real asset right this is a real asset likewise if this Factory really does generate at least 810 gold pieces of future wealth if it if it really will allow us to produce that much more apples or you know gold or whatever this is a real asset here right so these people this wealth really does exist this two thousand seven hundred and ten gold pieces of quote-unquote wealth really does exist as long as the projects that were that were the justification for borrowing the money actually do generate future wealth so there's a couple of things to realize there are not two thousand seven hundred ten gold pieces in this world there are only a thousand physical gold pieces but if these projects are real projects that are actually not mismanaged they're not just you know some type of pouring money into hole type of project then we do have two thousand seven hundred and ten gold pieces worth of wealth and I really want to stress this point remember gold isn't wealth in of itself gold is used to represent wealth you cannot eat gold you cannot live under gold you gold will not transport you someplace gold it will not improve your health it's it's something that used to use is used to represent wealth sometimes people think it is wealth itself and that's actually a misconception so this 2710 perceived gold pieces that does represent real wealth although it doesn't rep real gold pieces and this is and and and once again you might say oh boy you know this is some type of a shell game but it's really not as long as these investments are good investments remember these are wealth generating investments and notice the money supply at least as we defined it with this m1 it expanded to facilitate real economic production so as long as as long as this factory does generate wealth or this irrigation ditch does generate wealth then we then then the money supply did not grow faster than the amount of wealth out there and so a gold piece if you know before a gold piece bought an apple now hopefully a gold piece will still buy an apple in fact in fact and this is an important thing to realize if if these investments are very good very good you're actually going to have let's say that you know on Apple let's say we used to produce a thousand apples per year a thousand apples per year and notice apples are real wealth apples are something that you can consume that they will keep you living and you can also view them as a form of investment because by eating them you're able to do work but anyway let's say before all of this investment started happening you that our economy could produce a thousand apples now let's say that this master of this irrigation ditch was produced instead of a thousand apples now we go from being able to produce a thousand apples to Perdue behaving being able to produce I don't know two thousand apples a year and once again a lot of wealth was created remember we only took 900 gold pieces to build this and all of a sudden we're doubling we're being able to produce another incremental thousand apples a year which in our old economy is worth a thousand gold pieces so that actually will definitely pay off right you borrowed 900 gold pieces and this project will generate not a thousand gold pieces in total it will actually generate the equivalent of a thousand gold pieces per year it increases our production of a thousand apples per year and likewise let's say that this takes us from two thousand this factory it takes us from two thousand apples year to three thousand so let's think about it now in a given year how many apples are being produced we used to only have a thousand apples being produced now we have 3,000 apples being produced because these were really good investments they really improved our productivity so now if you say well everyone in the economy thinks that they have two thousand seven hundred and ten gold pieces or some equivalent of them and we can produce three thousand apples now the money supply 2710 actually grew grew slower than our wealth right maybe I should draw that but let me let me draw that out before let's say money wealth and I think it's really important to separate the two concepts money is used to transact wealth or represent wealth it is not wealth in and of itself and that has some important philosophical underpinnings do it it'll probably make you live happier if you realize this difference but before we had a thousand gold pieces before the banking and this fractional reserve system existed and we had a thousand apples of wealth per year right and I'll go more into the velocity money but after all of this stuff happened later we had two thousand seven hundred and ten perceived gold pieces this was our m1 definition our m0 the actual physical gold was still a thousand but how many apples do we produce a year we now produce three thousand apples so notice the ratio of gold to apples has actually improved and now if you think about it an apple is actually going to cost less goal before use roughly had one gold piece per Apple now you have less than one gold piece per Apple so because of our innovation we actually experienced deflation so you might have said oh boy all of this money was created out of nowhere this money doesn't exist this will lead to inflation but no because because this is a very important point because the money was put to work in actual productive investments that create wealth that make the pie bigger or the the the pie of apples bigger we actually experience deflation and our economy actually grew and this was actually a very very positive example I'll see you in the next video