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Current time:0:00Total duration:11:02

Video transcript

let's explore this notion of using something other than actual physical gold as a unit of exchange so let me draw my balance jam and draw it a little bit neater this time so I built my building my bank my vault whatever you want to call it and I and I used a hundred gold pieces to build it so this is just my bank's balance sheet Bank of Sal those 100 gold pieces and when I say hundred gold pieces this is this is equity hopefully you're familiar with it by now but it's not like there's actually a hundred gold pieces anywhere anymore I took this hundred gold pieces paid the builders of my vault looking temple looking bank and maybe they live someplace else and they just took those that gold with them so I'm just saying I have a hundred gold pieces worth of a building maybe if I had to sell this someone else would give me a hundred gold pieces for him and that's why I say I have a hundred gold pieces worth of equity anyway that's not the point of this video so I go I tell everyone hey you can keep your money safe wear your gold safe with me so let's say that uh I don't know citizen a citizen say says well this looks like a good Bank and Sal you've lived in this this village all your life and I trust you and and your ancestors so I'm going to deposit five hundred gold pieces with you so that becomes an asset in the bank five hundred gold pieces I'm gonna try to draw it as neatly as possible got the width off a little bit but I think you get the idea the width shouldn't matter the height kind of represents the quantity so this guy maybe it's my uncle five hundred gold pieces deposits in the bank because this vault that I built seems a lot safer and I say well do you want it all in your checking account sir or would you like some cash back and he says oh well how I need some cash you know to just transact everyday and and to buy you know supplies or food etc so why don't you put 400 equivalent in my checking account so let me draw that let me do the cash back first so let's do say I do one hundred cash back first so then I have this liability here of one hundred so it's one hundred gold pieces equivalent of notes outstanding no.4 notes outstanding and maybe I just hand him five 20s for that as most ATMs today do but I just want to get confused things too much remember this is in my fictional world these aren't necessarily dollars just yet these are bank notes from the Bank of Sal saying that anyone who were to hand back one of these 20s to me will get 20 gold pieces that's all it says and they're hard and I've signed them and I've made them hard to forge just because I don't want anyone printing these notes and then coming to me and getting my gold pieces I only want the ones that I printed coming back to me but anyway that depositor so he got 100 gold pieces of notes and that's what I've drawn here and then the rest of we'll just stay in his checking account so checking account it's a liability for me right because he can he could at any point withdraw the checking account and get back four hundred gold pieces so four hundred gold pieces for a checking account is checking call it checking deposit there's a bunch of ways you can write it but this is a liability for me these are my assets fair enough someone else who trusts a says oh you know print let's say let's call them person B so say if it's good enough for a it's good enough for B so let me put my money into this bank account as well and I want to do a similar type of transaction as a although maybe they don't have as much money so let's say that they have I don't know let's say they have 200 gold pieces so let me draw that on the left-hand side first so 200 gold pieces from person B it looks like about 200 200 gold pieces and they want half of it in cash and half of it as a checking deposit account so let me do it like that so let's see it's about half of it will be 100 gold pieces for B's account and then we also give him some which are essentially banknotes in our current universe and let's say he wants it all in ten so we give him so let's say a hundred gold pieces gold pieces equivalent notes outstanding and I'm going to hand him let's say he likes it all in ones I don't know something he likes the weight of the money where he has to I don't know what he does with the one dollar bills but a hundred times a one gold piece denominated banknote right I give him 100 of these fair enough so let's explore a little bit about how some transactions can occur with a and B let's say a needs to buy an Apple from B so let's say let me draw this up here I don't want to run on a space I'll draw it actually down here so let's say I have person a and I have person B so B has an Apple B has an apple that's my drawing of an apple and person a wants it an ask person B how much is an Apple cost and person B says well an apple cost two gold pieces so person says well that's a little high but I'm hungry so I will give you two gold pieces for it but I'll tell you what you know I there's this new thing called a bank and I don't have gold pieces and I think you know what it's all about instead let me just give you these pieces of paper that the bank says at any time I can go and trade for gold pieces so person B says oh that's fair enough I'm very familiar with that concept as well so person a person a gives person B so person a has you know maybe they broke maybe they maybe some of these weren't 20s maybe some of these were worked for $2 bills or something or let me just say they were $1 bills so one gold piece note one gold piece no actually let's just make it since he got five 20s let's say he gives him a 20 he gives him a 20 gold piece note I should draw it in green because that's the color that I originally drew the 20 gold piece no it's one of these he hands one of these over to person B be hands over the Apple to person a and he also hands over he also hands over 18 of those $1 notes that he got so $1 notes right that these were these notes here that person be God and over 18 of these $1 notes so times 18 and so the net effect is that you had two dollar notes switch hands and an apple was exchanged and what's neat here is a couple of things one no gold ever had to exchange hands it can gold is heavy and you don't want to carry but around a bunch of gold you were able to do very exact change in this situation you could imagine a world where gold is worth you know 20 times your smallest unit of exchange you want so it'd be very inconvenient to have to break up little gold coins in this case our small U our smallest unit of exchange is one gold dollar bill or whatever you want to call it but you could imagine you could break these up you could this bank could issue notes that are our quarter of a gold piece or an eighth of a gold piece and that's a lot easier than actually cutting up gold pieces and then having to put them all back together and of course these notes can then switch hands between people as as the economy needs as it functions and the bank doesn't have to worry about anything and the goal doesn't have to be moved around so everyone is happy let's say that that person B actually wants to buy something large from person a let's say person B wants to buy let's say person B person a let me let's person a is richer so let's say person a is buying something from B so let's say B is a homebuilder all right let me do that in blue let's say person B is a homebuilder and person a is going to get him to buy a house and get them to build a house for him so he's gonna say well I'll pay you 200 gold pieces to build a house that's a huge amount of money I don't like walking around with that how about I write you a check and person B says well what is it check well a check person a says is I just write you a note and that essentially instructs the bank to transfer that amount of gold pieces in my name to it being in your name and person B says oh well that sounds reasonable enough so person B gives personai a home works for weeks to build a house and then person a rights be a check and now we're getting an introduction to checks and the check will look something like this person B will fill person a will fill out you know it will have a zame there and they'll say two hundred gold pieces please and then a will sign it a and probably date it you know ten I don't know two thousand eight and then give it to B and then B can take it back to this Bank B can take it back to the bank and the bank will do the transfer and all the bank has to do is take two hundred gold pieces from here and put it there so this is all the bank has to do really right now four hundred gold pieces in a's name just take two hundred of those and put them in b's name so now this is b share b's new share which would be one hundred plus two hundred so it's three hundred gold pieces and then a share has shrunk to just being this part right here but notice the bank didn't have to do anything except a little bit of paperwork two hundred gold pieces and that was useful because he didn't have to exchange cash there's you know we talked about gold being dangerous to keep at home because obviously someone could steal it and it's also inconvenient because it weighs a lot it's hard to break up and carry around if you're doing a lot of it but cash is the same thing these banknotes are also dangerous because someone can steal them and no one's keeping track of who has which banknotes so they can there's still something that's very stealable but a check was nice because one you could write a very large amount and also only if we're doing our authentication right person a can write the check so it's not like someone could in an ideal world someone could not have stolen a checkbook and signed for him because hopefully this bank has a signature on record and can recognize when when a has written a bad check or maybe they'll even check with a to say if something is a little bit suspicious but anyway that's an introduction to bank notes and checks in the next video I'll talk about how we can use all of these notions to actually lend money also without giving out any gold see in the next video