welcome to crash course economics i'm
adrian hill and i'm jacob clifford and
today we're going to talk about money
and finance i know we said in the first
episode that economics isn't really
about money well economics isn't about
getting rich quick but it all boils down
to trading things you have for the
things you want like i've got this giant
zucchini i love that piece of pizza
wanna trade no way
imagine you live in a world without
money and you're a dentist that wants to
go buy a car first you need to find a
bunch of auto workers who need dental
work and if these workers don't want
dental services and prefer being paid in
something else like flat screen tvs then
you have to find tv manufacturers that
have toothaches try posting that on
craigslist this is called a butter
system and it takes a lot of time and
energy of course many people still
barter for stuff but for most
transactions we use money which is a way
more efficient way to do business the
people who really need dental care will
pay you with money which you can now use
to buy a car economists point out the
money serves three main purposes first
it acts as a medium of exchange it's
generally accepted for payment for goods
and services now that medium of exchange
means we're not stuck in the barter
system next money can be used as a store
of value the reason why a dentist
doesn't usually accept fruit or baked
goods is because you can't save those
things up to go buy things like cars
plus bananas go bad pretty quickly in a
safe deposit box money also serves as a
unit of account we don't measure the
value of cars and bananas muffins or
root canals instead we use money because
it's a standardized metric that allows
us to measure the relative value of
things most people assume that money is
just cash and coins issued and endorsed
by a government coins have been used for
thousands of years and they're a great
example of money but technically money
is anything that's used as a medium of
exchange for example cigarettes were
used as money in prisons until smoking
bans were put in place nowadays
prisoners used postage stamps and even
small pouches of mackerel as currency
animals like cattle and sheep also sacks
of grain all these have been used as
money some societies even used feathers
or shells the indigenous people on yap
island in the pacific ocean used money
called rye stones these were large donut
shaped disks made out of limestone the
largest ones are around 10 feet wide and
weigh 4 tons the point is what
economists consider money is anything
that's accepted as a medium of exchange
and that's changed a lot over time today
cash and coins are often used as money
since they're easy to carry around
physically durable and hard to
counterfeit but a lot of money today
doesn't end up in anyone's pocket or
wallet or duffel bags or even
wheelbarrows it moves around
electronically increasingly people get
paid in the form of checks or direct
deposits into their bank a lot of our
money isn't physical it's digital it
exists on some bank's computer and as
long as that computer is secure and the
zombie apocalypse doesn't permanently
knock out the power and your nation's
monetary system is functioning as it
should those electronic dollars do all
the things they're supposed to do
another form of digital money that you
often hear about is bitcoin bitcoin is a
virtual currency that is not issued or
regulated by a specific country but
since some people accept it as payment
many economists consider it money unlike
other electronic currency bitcoin
doesn't involve a bank so people can in
theory buy things more anonymously this
appeals to people who don't trust
central banks and also people who want
to buy illegal stuff online that illegal
trade means law enforcement and
regulators are also very interested in
bitcoin bitcoin isn't only for internet
drug deals though there's a lot of
speculation in bitcoin meaning people
buy up bitcoins hoping to turn a profit
on them this makes bitcoin more of a
speculative asset and limits its use in
buying and selling actual goods and
services could bitcoin or another
virtual currency be how everyone pays
for things in the future who knows but
if anyone wants to give me 10 bitcoin
for this zucchini we've got a deal
there's kind of a glaring question here
what makes these pieces of paper so
valuable well in the past each dollar
issued by the us government was
redeemable for a specific amount of gold
that was called the gold standard and it
meant that the government couldn't issue
more money than it had in gold reserves
back in the 1930s the us decided to move
off the gold standard and some people
freaked out about not having something
tangible to back our money but it's
important to remember that money whether
it's cash or gold or small pouches of
mackerel is all about confidence the
nobel prize winning economist milton
friedman said the pieces of green paper
have value because everyone thinks they
have value with that in mind a gold
standard or even a macro standard might
not make money more valuable or reliable
a lot of economists agree with this
which is why no country uses the gold
standard there are calls by some
politicians to bring it back but that's
probably never going to happen sorry ron
paul okay i know we said economics is
not about the stock market but now it's
time to explain what it is and why it's
important the stock market is just one
piece of something much bigger the
financial system to understand the
financial system you need to picture two
different groups first you have lenders
sometimes these are corporations with a
bunch of cash but lenders can also be
ordinary households people like you and
me us regular folks are going to need
money in the future to retire or send
our kids to college or go on a vacation
to yap island so we need a way to turn
the money we have now into more money in
the future the second group is borrowers
there are several different kinds of
borrowers first you have other
households who want to borrow money to
buy stuff like a car or a house you also
have businesses that have a great idea
for a new product but they have a
problem they need money to make the
product and they'll have money when the
finished products are sold but for now
they need to borrow money to invest in
capital things like machinery tools and
factories and they'll pay it back once
they make some sales basically they need
to buy stuff to produce other stuff
third you have governments who need to
borrow money because they're spending
more than they're bringing in so you
have lenders who have money now and want
to turn it into more money in the future
and you have borrowers who need money
now and will repay it in the future the
financial system is a network of
institutions markets and contracts that
brings these two groups together lenders
put money into the financial system
which loans it out to borrowers these
borrowers pay back those loans with
interest which makes it worth the
lender's time let's go to the thought
bubble there are three ways this
exchange takes place the first is banks
a lender deposits money in a bank and
then the bank turns around and loans
that money to a family who wants to buy
a house or a business that wants to
expand as those borrowers pay the
interest on their loans the bank takes
part of that money to cover their costs
and passes the rest along to the
depositor
the second way lenders and borrowers
link up is through the bond market a
government or a large corporation that
needs to borrow money will sell bonds to
lenders a bond is basically an iou in
which the borrower agrees to pay regular
interest payments and promises to repay
all of the money back at a set date in
the future if that lender decides they'd
rather have cash now they're free to
sell that bond to another party the
third way lenders and borrowers link up
is through you guessed it the stock
market say jacob and i want to expand
our lemonade business but we don't have
the money to do it we could sell stock
which is basically slices of ownership
in the company households get the stock
and we get the cash if our company
profits in the future and we become
lemonade moguls we'll share some of
those profits with the shareholders or
the shareholders can sell the stock at a
higher price either way they make money
if the company's profitable thanks that
bubble so banks and bonds have something
in common they're dealing in something
called debt if you get a loan from a
bank or if you're a government that
sells a bond the amount you must repay
is set in almost all cases you're
obligated to pay back the amount you
borrowed with a set amount of interest
stocks on the other hand are known as
equity if a company enjoys high profits
shareholders get more money if a company
goes bankrupt shareholders may get
nothing in the news you'll hear about
changes in the dow jones industrial
average but fluctuations in stock
markets are not reliable indicators of
how the economy is doing often changes
in the stock market are reactions to
real or just perceived changes in
economic fundamentals like consumer
confidence the unemployment rate and gdp
growth bonds and stocks also have
something in common they're traded on
markets for financial instruments bonds
are debt instruments and stocks are
equity instruments but they're both
pieces of paper that are traded on
markets with many buyers and sellers
banks on the other hand are financial
institutions with the help of the fdic
they safeguard our money while making
loans to individual households and
businesses so why do we even need this
complicated financial system why don't
households take their savings and lend
them out directly well if you want to
loan out your life savings to your
neighbor so he can launch his artisanal
smartphone business go for it but that's
a pretty risky bet so you're more likely
to use a financial system financial
markets with instruments like stocks and
bonds allow borrowers to crowdsource the
money they need to borrow they raise
their capital from lots of investors and
spread the risk around banks are the
same thing they accumulate small
deposits from thousands of people and
use that to make loans it's like
kickstarter except better because you
get money as opposed to an earnest thank
you email and from the lender's point of
view a financial system allows you to
spread your savings over dozens or
hundreds of different loans a few
companies might go bankrupt and a few
people might not pay back their car
loans but those losses will be offset by
borrowers that do pay back their loans
you don't have to put all your eggs in
one basket so that's money in the
financial system the thing to remember
here is that this stuff is not just an
abstraction or someone else's concern
almost all of us are lenders and
borrowers at some point in our lives and
understanding lending and borrowing is a
big deal while it might seem like you're
borrowing from a faceless institution
you might be borrowing my money from
that faceless institution and i'm gonna
need that back if i can't get anyone to
accept this zucchini as payment
thanks for watching
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