Why gold and bitcoin don’t matter? I’M gon na explain this to you in three simple, fast steps, step number one: let’s get right into it and to do so, we have to understand full reserve banking. This is where it all started with full reserve banking. There is no government involvement, there’s no central banks, there is no fractional reserve banking, which we’ll get into in step number two there’s no new money, that’s created by the banking system. This is how it started with the average joe and he had three gold pieces. So he came and gave his gold pieces to the goldsmith or we’ll call it the bank, but really it doesn’t matter, it can be any fiduciary, be a bank, it can be investor ian or the abc fund and as you’ll see whether it’s gold coins or bitcoins. The process is still the same, so this is the balance sheet of the fiduciary joe gives the gold coins. They become an asset of the fiduciary but they’re in two separate categories. One coin is a demand deposit, which means that joe can come in and grab his coin at any time. The other two are a time deposit. So joe has an agreement with xyz entity that in two years five years ten years he’ll be able to collect on the money that he gave in the first place. In addition to that, a set amount of interest or return. So then, let’s say everybody’s favorite moody. The millennial is here, looking very disgruntled as always, but moody needs two gold coins to go to the next antifa rally. So she goes to the fiduciary and says fiduciary. I need a loan, so they said: okay, you’re, a good credit risk. Moody you’ve got a job, driving, uber and starbucks. We think you can pay us back, so those gold coins go to moody, so she can go to the next antifa rally and riot herself, like any good millennial, would right now so moody takes these two gold coins. So she so they can buy a ticket to most likely portland oregon, so they hop the next fly. I can never get those preferred pronouns right. One thing i want to point out is the interest rate is completely set by supply demand it’s market driven, so as demand for loans goes up, so does the interest rate, because there’s less supply of money to be lent. Therefore, it encourages people to save more money and put it into the bank, lowering the interest rate and bringing it down to an equilibrium and on the flip side, if the demand for loans goes down, so does the interest rate this discourages savings, increases spending. Then one could argue, more people are going to be starting businesses, more demand for loans that goes up, and then you just have this balancing act. It works extremely well, and so does this system here, where this kind of works in the exact same way but globally. Instead of just in the domestic economy, but we’ll get here in just a moment to understand how this works a little more insight on full reserve banking, let’s go to one of my favorite economists, bob murphy, there’s two distinct functions, so the first one is that banks Could have demand deposits that they’re offering to customers so that term demand means. You know your money can be returned to you upon demand, that’s what it means and the point of that would be for convenience or safety right that you have. Let’S say you got ten thousand dollars in in currency, that’s risky! Just to keep on your person or even in your house, in a safe. You know there could be a fire somebody could break in, and so that’s one function that the bank serves for the community. Is they have much more secure vaults? They have insurance, they have armed guards and blah blah blah, and so you can go ahead and put your money there. It’S just a safer place to keep it and then there’s also the convenience that they have an atm network around the world. They have agreements with restaurants and whatever merchants, and so just with your bank card, you can either go to an atm, get cash all over the place or you can just be somewhere and swipe your card right. So it’s just an easy way to keep track of. Where your money is being held in your name, so you can spend it in a very convenient fashion. Okay, the other distinct conceptual function is time deposits for credit intermediation right, so banks do also act as credit intermediaries and think of this as a savings account or like a certificate of deposit, a cd. That’S what that stands for. If you heard of banks, you know selling cds with certain uh associated interest rates or yields okay, so here you might go to the bank. You’Ve got a thousand dollars that you want to lend out and earn interest on. So you go to the bank. You buy a thousand dollar cd and what that says is the bank’s promising you, obviously i’m just making these numbers up. They’Ll say in 12 months time. The bearer of this note this this cd redeems it and gets 1050. Okay. So there’s the implied five percent interest rate on that for the one year loan and then they take the thousand dollars and they go lend it to somebody else, presumably for more than five percent a year. And so there’s where the bank’s earning the spread. And that’s where the bank is connecting the savers and the borrowers so one of the key takeaways and a misconception of full reserve banking. Is they don’t store all the money in the vault and you can just come access it for a fee at any time they actually do lend out the money, but they create time deposits. Therefore they’re not creating any additional money supply. We start with three coins. They go into, let’s say the bank. Those two coins go out. Moody now has them on their balance sheet and there’s still three coins in the system, one on demand deposit for joe and two with moody, the millennial. No additional currency units have been created, but there was an actual loan and, like i said earlier, this system works extremely well when you’re looking at global trade. This is something that david hume referred to as price specie sounds a little weird, but to check it out further. Let’S go right over to the internet. Here’S the price species flow doctrine, and this was thought up by none other than david hume. Back in the time of adam smith, it was a counter argument to mercantilism, basically, trade surplus possible only in the short run, inflow of gold or other form of wealth, including this could be bitcoin, would lead to an increase in the price of domestic goods. Higher prices for domestic goods would eventually lead to an increase in imports and a decrease in exports. This would reverse the process and bring prices down again, so you would see bouts of inflation and deflation and i’m defining that by the money, supply increasing or decreasing, and the price of goods and services increasing or decreasing as well. But over the long run the prices would be relatively stable. The way this works is pretty simple, usa and europe they’re trading back and forth with one another all year at the end of the year, they settle up with their gold pieces or their bitcoin, and we’ll talk about this in a moment. In this case, let’s say: europe sells more goods to the united states, so europe has a trade surplus, more gold coins or more bitcoin will go to europe. Let’S say more equals a hundred, so these hundred coins go to europe, which increases the money supply. If the money supply increases and there’s no central banks involved, there’s no quantitative, easing you’re going to have more currency units or more gold pieces or more bitcoin chasing after the same amount of goods and services. Therefore, prices in addition to the money supply will increase. What i’d like to point out is: even if we are using gold or bitcoin as money, we still would see potential price inflation and increase in the money supply in a domestic economy. If we’re trading back and forth from country to country. It’S the exact same thing we saw when we had the gold standard and, let’s think through what happens. Next, if the prices go up in europe, it makes their exports less attractive and it makes the imports coming in from the united states more attractive because they are cheaper relative to the money being used in this case gold or bitcoin. So the goods in the united states get more attractive. They become cheaper, so there’s more goods being sold in europe the next year. Let’S say if there’s more goods being sold in europe when they settle up, then those hundred gold pieces on net or a hundred bitcoin are going to go back to the united states. This increases the money, supply, increasing prices and you go back and forth. So here you would have inflation the very next year you could have deflation. So if you look at a chart going all the way back, you’ll see it looked like a heartbeat as far as inflation deflation. It goes up down up down over the span. It doesn’t change much in fact, prices gradually go down as they should, with an economy functioning properly, creating more goods and services cheaper and more efficiently. This system was a great example of the free market, solving very complex problems, extremely well: no government involvement, no central bank involvement in the united states. Some other countries did have central banks, but we won’t get too far into the weeds. Now you may be asking yourself, george, who is this guy down here, is that the mmt troll guy? No? No, no, it isn’t, but it is the mmt troll guy’s bitcoin, worshiping cousin. Oh yes, he has a sign that says i love trolling and boy. Does he ever his name is satoshi the simp, i’m not quite sure what a simp is, but i almost guarantee the bitcoin troll guys do and of course he has his hoodie on and he’s pissed off in fact he’s given moody, the bird and she or or They are giving him the bird he’s very proud of his only fan’s hoodie, but he steps in and says george whoa, you don’t understand. What’S going on you’re, comparing bitcoin to gold, that is crazy talk and it is true. There are some significant differences, but my point is whether you use gold, bitcoin seashells oil. It doesn’t matter if you have an asset and give it to a fiduciary in a full reserve banking system. This is how the process works. Also, the price to specie model would work the exact same regardless of what you’re, using as the underlying asset, some of those differences with bitcoin. It is more secure, therefore, with the fiduciaries they would be held more accountable, you’d be able to tell exactly what they were doing when and how much they actually kept on reserve. You could hold jamie dimon’s feet to the fire, so to speak. Bitcoin is more portable and this would lead to a more decentralized system, because fewer people would have the need to actually deposit their asset. In this case, bitcoin into the overall system – and it’s very measurable, like we said before – i think the takeaway is – it – would lead more people to keep them in their own possession, and the system would be more decentralized. There would be decentralized lending, maybe peer-to-peer, but i do think at the end of the day, a lot of those people holding the bitcoin would give their bitcoin to either investor ian or abc fund to get a return because they just don’t have time to do the Due diligence on lending to people like moody, xyz, corporation or abc small, to mid-sized business, to be clear, i think the functionality bitcoin has that would create a more decentralized system, has significant benefits, we’ll get more into that in step number three, but for this step, just To reiterate, with full reserve banking, the system works like this, regardless of whether you’re using gold, bitcoin, seashells oil or anything else, you want to throw in the mix step number two free banking. Most people think this is when they can go down to the local wells. Fargo or b of a and not get charged for a checking account, but it’s actually a thing: it’s what full reserve banking evolved into over time. We had a system like this in the united states from 1792. The coinage act all the way to the civil war. It’S where the banks themselves created their own currency without the government and without the federal reserve. So you’d take your gold coins down to the local bank and they would give you green purple orange. Who knows what type of piece of paper? And it would be, a currency unit backed up by the bank? It’S basically the bank giving you a receipt saying that you can come back and redeem that receipt for your gold and it’s transferable from bank to bank and person to person. So it’s fractional reserve banking, which just like full banking at the beginning, was a creation of the free market. In this case, though, it’s fractional reserve banking, without the government and without the fed just in the private sector, and one key i wanted to emphasize – is why this system ended for that, let’s go right to the internet. The national bank act of 1863 was designed to create a national banking system, float federal war bonds and establish a national currency. Up until this point, the currency was exclusively created by the private sector. Congress passed the act to help resolve the financial crisis that emerged during the early days of the american civil war. So the point i want to really emphasize is the private sector was doing a great job of creating money and currency. Then the government came in and ended it all as a result of going to war. The war took priority over the system, the free market and the private sector. So let’s compare free banking with the full reserve banking. We went over in step number one joe’s got his three gold coins or again they could be bitcoin doesn’t really matter gives them to the fiduciary, and i know you say george: they probably wouldn’t give the gold coins to investor ian. But if you had bitcoin and you had the flexibility of that security, knowing at all times who owns it, you would really have no problem, giving those bitcoin to investor ian or abc fund, or maybe even lending them out yourself that goes down a different rabbit hole. We’Re gon na get into in step number three. So for this example, let’s just use gold coins. They go over to the balance sheet, just like they did with full reserve banking, but now there are demand deposits where, before some of them were time deposits, so joe can access his three coins at any time, the bank will lend two of those gold coins out To moody the millennial like they did before, so they can go to their antifa rally. So those two gold coins for the moment go to moody’s balance sheet. So on joe’s balance sheet, he has three gold coins. Moody has two gold coins that she would deposit with her bank. There would be liabilities of the bank, but deposits of moody, so you see what’s happened. Is the system has five coins in total, but it only started with three, so we’ve added two additional coins. This is the main difference with full reserve banking and free banking. Free banking is fractional reserve, it’s where it can expand the money supply and to get more insights on free banking. Let’S go right back to one of my favorite economists, bob murphy. The distinction is the rothbardians who are for 100 reserve banking versus the so-called free bankers, who many of them call themselves austrians, but what they say is hey we’re, not central planners. We don’t want the government to regulate it. Let banks choose whatever reserve ratio, they want. Okay, so they got ta, you know, follow their contracts if they say to their customers, hey whenever you show up, and you want to pull money out of your checking, account we’ll be able to give it to you and if there’s a bank run and they get Caught with their pants down, then okay, they should get in legal trouble just like any entity. Any firm in the economy that doesn’t live up to its contractual obligations has consequences, but we’re not going to at the outset. You know have some regulation on the banking sector saying you have to have 100 reserves right, so that’s their position. So that’s why they call themselves hey we’re free bankers, we’re not going to micromanage the banks and have them set their particular policies. Just like you know: how much should they charge for a checking account or what should the rate of interest they pay on deposits? Be we’re not going to tell them that we’re we’re free market lays a fair people, so who are we to tell them what reserve ratio to hold and to be very clear, this form of fractional reserve banking, although it has no government involvement, no central bank involvement Would increase the money supply, regardless of whether bitcoin or gold was being deposited into the bank and because this was a creation of the free market? The austrians go back and forth as to which they prefer. So the argument is something like this: with free banking, since you can match up demand for productive loans with supply of money or the supply of those loans, they argue that growth can happen more efficiently and quicker, but there will be a slight boom and bust cycle. This is what mises always would argue. He liked the concept of free banking, because it was free of government involvement, but he said the more fractional reserve banking. You have. The more it’ll increase the business cycle, so those that favor. This argue that over time, you’re going to have slightly higher growth, but the cost is going to be the misallocation of resources and that boom and bust cycle that we referred to. The other argument would be for full reserve banking, where it grows over time due to the productivity of the individuals, creating goods and services in the real economy, a little bit slower growth, but it’s far more stable. Those who favor this type of full reserve banking would argue it doesn’t misallocate resources. Therefore, over time you would actually see greater growth, but the debate goes back and forth. There’S definitely good arguments on both sides so to reiterate: free banking, potentially faster growth of goods and services, not just the credit supply or the money supply, so growth in the actual wealth of the economy and the standard of living. But it lends itself to a boom bust cycle, but it was generated by the free market. This is not something that the government thrust upon us. Full reserve would be slower growth, but maybe more stable, no boom and bust cycle. No misallocation of resources, which some would argue would lead to higher growth long term. Another benefit to full reserve banking going back to step number one. Is it wouldn’t distort the price specie flow model we discussed from david hume? I didn’t want to get too far into the weeds, but with fractional reserve banking with those currency or gold, or with the money going back and forth from country to country. If the banking system had the ability to increase the money supply, it could distort the equilibrium, but the main takeaway right here is regardless of whether you’re using gold or bitcoin – and i know the bitcoin troll guys – are gon na freak out here, but just settle down. Beavis, regardless of whether you’re using gold or bitcoin, this system of free banking and fractional reserve banking would be almost identical. Step number three: everybody’s favorite, central banking, i’m being pretty sarcastic there in fact i’ll break out my good old, sound effect machine. Just for the introduction of central banking that pretty much sums it up right there, so we started with a full reserve system. Then we went to free banking, which is where we got fractional reserve banking a result of the free market. Then we nationalized the banking system due to the civil war. The next step for the united states, like i said before, was central banking in 1913.
So this is how it works, and i want to point out is going back to step number two and i believe, step number one or i’m sorry, step number two when i was talking about the ious the coins over here. What i was referring to is the banking system creating new currency, so they were keeping the gold coins and issuing currency or ious to the average joe. Those were the gold coins on his balance sheet or the gold coins on moody’s balance sheet. There are actually ious from the bank. I just wanted to clarify, so this makes a lot more sense. The first step of the process is very much the same joe gives his gold coins to the bank, but then what happens? Is the bank gives the gold coins to the central bank so they’re now assets on the central bank’s balance sheet, the central bank issues ious for those gold coins back to the bank where joe deposited his coins in the first place? So the bank gives joe the ious for the coins. Those are liabilities on the bank’s balance sheet and the ious from the fed are now assets on the bank’s balance sheets. So what it actually gives joe are three ious for ious and you can see i put hashtag stiff drink time right there, because that’s when it really dawns on you how insane this system really is. The bank lends out money to moody like we talked about in step, number or lens out currency, i should say, actually lends out ious to moody. I think that’s a better way of saying it and moody puts those onto their balance sheet, so we have increased. The currency supply started with three gold coins that turned into five ious through this process of central banking. So, let’s go over this one more time to make sure we’re all. On the same page joe gives his gold coins to the bank. The bank gives those to the central bank. They issue ious against those gold coins which become assets on the bank’s balance sheet. Also liabilities the bank is telling joe. We owe you three ious that we received from the fed, so you can take those out in the real economy and spend those much easier than you could spend the three gold coins. You gave us and of course that’s what they lend to moody that goes on to their balance sheet, and it’s all these ious going back and forth where we originally had gold pieces. I also want to point out that this is the way that old school fractional reserve banking works. It’S a little bit different now in the modern age, but for this video it’s just important. You understand this concept. So, let’s think about this, we went from full reserve to free banking and fractional reserve banking as a result of the free market just doing its job, but we had the civil war. Then the government came in and nationalized the whole process. We had central banking coming in 1913 because we wanted a system that was safer, sounds a lot like today. Doesn’T it and then in 1944 we had bretton woods, which was a tops down government type of solution and as a result of bretton woods, the euro dollar system evolved to solve a problem of scarcity. There wasn’t enough dollars outside of the united states to facilitate maximum global growth, but i want to point out all of this was done. While we were on a gold standard, so is going back to a gold standard, really the solution for all the problems we have today. It might be a short-term solution solve it for 10 20 years, but in the next 100 years. Don’T you think we’d probably be right back in the exact same spot as an example of this, i want to go right to the internet and point out an article that was fantastic, but it really illustrates what i’m referring to. This is an article from philosophical economics entitled how money and banking work on a gold standard. The article does a great job on describing the systems and how they evolved. But let’s look at the conclusion of the article and you can kind of tell this guy. Isn’T an austria, the reason not to use monetary systems based on gold is that they are obsolete and unnecessary, with no real benefit over fiat systems, but with many inconveniences and disadvantages and a fiat system, the central bank can create base money in whatever amount would be Economically appropriate to create, but on a gold-based system, the central bank is forced to create whatever amount of base money. The mining industry can mine and destroy whatever amount of base money. A panicky public wants to destroy, and that would be from them turning in their dollars. For the original gold there’s no reason to accept a system that imposes those constraints. I like that word constraints, even if they aren’t much of a threat in the majority of economic environments. If the goal is to constrain the central bank, then constrain it directly with laws. Let me read that one more time, because this is the point i’m really trying to emphasize. If the goal is to constrain the central bank, then constrain it directly with laws. So what the author is saying is: if we’re worried about the central bank going crazy, we should just set up laws to prevent them from doing stupid, things that are going to destroy the economy. We should prevent them from being the arsonist and we should really just make sure they’re the firefighter, but that’s what the federal reserve act is supposed to do. Let’S go back to march 2020 of this year. How much teeth did the federal reserve act have zero? The fed completely ignored it are they allowed to buy corporate debt? Are they allowed to buy junk bonds? Are they allowed to set up these special purpose vehicles? Absolutely not, but they did it anyway, regardless of the law. Why? Because they’re human beings and we had a catastrophe, we had fear in the markets and we were saying fed do whatever you need to do to make sure we are safe so right about now, all the bitcoin people are probably screaming. George bitcoin solves all of those problems, but does it i understand that bitcoin is decentralized and we would have a lot less government power if any government or central banks at all. But let’s think this through go back to the beginning of the cerveza sickness and let’s assume that the united states or the entire world had one form of money: bitcoin, that’s it and there was no fractional reserve banking, but we had this virus come into the system That no one could have foreseen, everyone starts to panic and they hoard their bitcoin. So no lending, even in a full reserve, decentralized system and everything starts to collapse. So you can see what would happen. The people would go to the streets and say we need fractional reserve lending. We can’t be so strict on these rules that we can’t issue currency or pieces of paper against our bitcoin. This is a national disaster. We have to take emergency action and you could see the exact same thing happen if we went to war or had a national disaster, and i want to point out that one of the og’s of bitcoin hal finney, editor go ahead and throw up the quote, saw Bitcoin as being kind of a substitute for gold, not really money itself, but it would be used as a reserve asset to issue currency against very similar to what we saw with the free banking and fractional reserve system. We had prior to the civil war, but again once you have a war or national disaster, everything seems to change. So my whole point with this video is not to say that gold and bitcoin don’t matter at all, but it is to say that at the end of the day, human nature and the fact that we are imperfect creatures living in an imperfect world matter even more For more content, that’ll help you build wealth and thrive in a world of out-of-control central banks and big governments check out this playlist right here. I will see you on the next video
