1 00:00:00,000 --> 00:00:03,800 After one of the previous banking videos, I got a comment: 2 00:00:03,800 --> 00:00:06,208 "If everyone puts gold in the banks, 3 00:00:06,208 --> 00:00:08,254 what can they use to transact, 4 00:00:08,254 --> 00:00:11,700 or to buy food, or to pay for services, et cetera?" 5 00:00:11,700 --> 00:00:17,200 And that is an excellent segue into the notion of a bank note. 6 00:00:17,200 --> 00:00:19,200 bank note... 7 00:00:19,200 --> 00:00:21,300 You've probably heard the word before, 8 00:00:21,300 --> 00:00:25,700 maybe in some Charles Dickens' novel or something, 9 00:00:25,700 --> 00:00:27,792 but we're going to find out in this video 10 00:00:27,792 --> 00:00:30,877 it's actually a much more familiar concept than you ever realized 11 00:00:30,877 --> 00:00:33,938 and you probably have some of these bank notes 12 00:00:33,938 --> 00:00:36,174 in your wallet as we speak. 13 00:00:36,174 --> 00:00:38,059 Let's go back to our example. 14 00:00:38,059 --> 00:00:39,987 I have the Bank of Sal. 15 00:00:39,987 --> 00:00:41,779 I use 100 gold pieces. 16 00:00:41,779 --> 00:00:43,372 That's my equity. 17 00:00:43,372 --> 00:00:44,656 Let me draw that. 18 00:00:44,656 --> 00:00:48,587 My equity... I have 100 gold pieces. 19 00:00:48,587 --> 00:00:51,387 And I use that to build a building. 20 00:00:51,387 --> 00:00:53,287 So the 100 gold pieces actually go to the builders 21 00:00:53,287 --> 00:00:54,587 and they're from out of town, 22 00:00:54,587 --> 00:00:57,387 so they're not going to deposit it back with me. 23 00:00:57,387 --> 00:00:58,987 So that's my building. 24 00:00:58,987 --> 00:00:59,687 I don't know if you can see that. 25 00:00:59,687 --> 00:01:00,987 It's a little picture of a building. 26 00:01:00,987 --> 00:01:02,887 And all of the villagers in my city, 27 00:01:02,887 --> 00:01:04,887 they come and deposit their gold with me, 28 00:01:04,887 --> 00:01:09,187 because my building looks very solid and safe. 29 00:01:09,187 --> 00:01:10,987 It's safer than their mattresses, 30 00:01:10,987 --> 00:01:18,387 so they then deposit 1,000 gold pieces with me. 31 00:01:18,387 --> 00:01:21,087 1000 gold pieces 32 00:01:21,087 --> 00:01:23,487 For the liability side of my balance sheet 33 00:01:23,487 --> 00:01:28,479 I could say owe 1,000 gold pieces 34 00:01:28,479 --> 00:01:33,856 owe 1000 gold 35 00:01:33,856 --> 00:01:36,151 And on my asset side, I actually get the gold pieces. 36 00:01:36,151 --> 00:01:39,127 I should have done that in yellow. 37 00:01:39,127 --> 00:01:42,487 So on my asset side of the balance sheet 38 00:01:42,487 --> 00:01:46,087 it's just strangely tilting to the left 39 00:01:46,087 --> 00:01:51,187 On the asset side, I actually have 1000 gold pieces 40 00:01:51,187 --> 00:01:55,187 So they're actually sitting in my vaults. 41 00:01:55,187 --> 00:01:56,487 Now the question was 42 00:01:56,487 --> 00:02:00,387 if all of the villagers put all of their gold into my vaults 43 00:02:00,387 --> 00:02:03,587 what can they use to transact every day? 44 00:02:03,587 --> 00:02:05,187 The way I do it right now 45 00:02:05,187 --> 00:02:07,487 -- this side is my assets 46 00:02:07,487 --> 00:02:09,087 and these are my liabilities, right? 47 00:02:09,087 --> 00:02:11,687 I owe them 1,000 gold pieces 48 00:02:11,687 --> 00:02:14,187 that they can come and get at any moment 49 00:02:14,187 --> 00:02:16,887 And this could kind of be viewed as a checking deposit. 50 00:02:16,887 --> 00:02:18,787 I'll go into that in a second. 51 00:02:18,787 --> 00:02:20,087 I'll probably go into that in the next video. 52 00:02:20,087 --> 00:02:24,187 But if all of their 1,000 gold pieces are sitting right here on the asset side, 53 00:02:24,187 --> 00:02:25,287 or at least in my vault, 54 00:02:25,287 --> 00:02:27,629 what can they use to transact? 55 00:02:27,629 --> 00:02:28,587 Well, the solution is, I say, hey, you know 56 00:02:28,587 --> 00:02:34,787 instead of taking some of your gold out and using that as essentially money 57 00:02:34,787 --> 00:02:38,387 why don't I give you a note 58 00:02:38,387 --> 00:02:42,687 a note that says you put X amount of gold into my vault 59 00:02:42,687 --> 00:02:50,110 So, for example, for each one gold piece 60 00:02:50,110 --> 00:02:53,415 I will issue a bank note 61 00:02:54,800 --> 00:03:06,374 So let's say I'll say one gold piece bank note outstanding 62 00:03:06,374 --> 00:03:09,174 And then I hand you a slip of paper 63 00:03:09,174 --> 00:03:10,374 and that slip of paper 64 00:03:10,374 --> 00:03:13,974 -- and this might start to look a little familiar to you -- 65 00:03:13,974 --> 00:03:20,474 says it looks about this shape. 66 00:03:20,474 --> 00:03:24,274 It has a nice picture of Sal in the middle, 67 00:03:24,274 --> 00:03:25,274 because it's the Bank of Sal, 68 00:03:25,274 --> 00:03:35,374 and it is denominated as one gold piece. 69 00:03:35,374 --> 00:03:37,474 And now you gave me that gold piece 70 00:03:37,474 --> 00:03:41,800 and you get this green piece of paper that only I can print 71 00:03:41,800 --> 00:03:45,500 and no one else has the sophistication to do something this fancy. 72 00:03:45,500 --> 00:03:49,600 Maybe I use some colors here and I sign it Sal 73 00:03:49,600 --> 00:03:52,900 and I do all sorts of stuff that makes it really hard to forge 74 00:03:52,900 --> 00:03:56,800 so that no one else can-- I put some holograms on it. 75 00:03:56,800 --> 00:03:58,700 Who knows what I do to it, but no one else can forge it. 76 00:03:58,700 --> 00:04:01,000 So this is essentially a piece of paper that I hand you 77 00:04:01,000 --> 00:04:02,600 that says, you know what? 78 00:04:02,600 --> 00:04:04,200 Anyone who holds this piece of paper 79 00:04:04,200 --> 00:04:10,692 can go back to the Bank of Sal and get back a gold piece. 80 00:04:10,692 --> 00:04:13,023 Then since everyone in the village, 81 00:04:13,023 --> 00:04:15,900 they trust that the Bank of Sal will always be willing to exchange 82 00:04:15,900 --> 00:04:18,600 one of these slips of paper for a gold piece, 83 00:04:18,600 --> 00:04:24,900 instead of using a gold piece to buy something, 84 00:04:25,500 --> 00:04:26,550 why don't you just this slip of paper? 85 00:04:26,550 --> 00:04:27,600 And even more, for one gold piece, 86 00:04:27,600 --> 00:04:29,500 you don't want to just have a stack of 87 00:04:29,500 --> 00:04:30,850 one gold piece pieces of paper around. 88 00:04:30,850 --> 00:04:32,200 Maybe if you gave me 5 gold pieces 89 00:04:32,200 --> 00:04:39,700 -- I'll do that in another color --Maybe if you gave me 5 gold pieces 90 00:04:39,700 --> 00:04:43,185 -- that rectangle is much larger than it should be relative to 1,000, 91 00:04:43,185 --> 00:04:44,277 but I think you get the point -- 92 00:04:44,277 --> 00:04:48,123 then I'll do - I'll have a liability here that says: 93 00:04:48,123 --> 00:04:51,981 five gold pieces bank note outstanding. 94 00:04:51,981 --> 00:04:54,500 I'll call it b-note outstanding. 95 00:04:54,500 --> 00:04:58,392 And I'll issue a -- I think you have guessed it. 96 00:04:58,392 --> 00:05:00,515 Maybe I'll do it in different colors 97 00:05:00,515 --> 00:05:04,938 to show you that these bank notes can come in different colors 98 00:05:04,938 --> 00:05:08,023 but once again, I'll put a famous person there maybe 99 00:05:08,023 --> 00:05:10,046 and I'll make it really hard to forge, 100 00:05:10,046 --> 00:05:12,358 and I'll put holograms on it 101 00:05:12,358 --> 00:05:16,562 but it'll be denominated as a five gold-piece bank note. 102 00:05:16,562 --> 00:05:19,000 And now, if you were one of the villagers, 103 00:05:19,000 --> 00:05:20,200 you gave me your gold pieces, 104 00:05:20,200 --> 00:05:23,300 now not only is your gold safe, 105 00:05:23,300 --> 00:05:27,400 you have these pieces of paper that are very hard to forge, 106 00:05:27,400 --> 00:05:28,700 and that's a key issue there, 107 00:05:28,700 --> 00:05:30,000 because if they were easy to forge, 108 00:05:30,000 --> 00:05:33,300 then someone maybe completely unaffiliated with this trustworthy bank, 109 00:05:33,300 --> 00:05:37,200 completely unaffiliated with Sal, could go out and print these things. 110 00:05:37,200 --> 00:05:38,300 So you don't want that to happen. 111 00:05:38,300 --> 00:05:41,600 So we're assuming that you can't forge this thing. 112 00:05:41,600 --> 00:05:43,500 And now not only is your gold safe, 113 00:05:43,500 --> 00:05:47,400 but you have something that you can transact with 114 00:05:47,400 --> 00:05:48,550 -- that's frankly a lot easier than gold. 115 00:05:48,550 --> 00:05:49,700 I mean, I could even have a denomination 116 00:05:49,700 --> 00:05:54,200 that's -- it could be a 500 gold piece. 117 00:05:54,200 --> 00:05:55,700 So if someone gave me 500 gold pieces, 118 00:05:55,700 --> 00:06:02,200 I could give a 500 gold-piece bank note out. 119 00:06:02,200 --> 00:06:03,954 That'd be my liability, right? 120 00:06:03,954 --> 00:06:05,400 Because I know that at some point, 121 00:06:05,400 --> 00:06:08,400 someone might give me back that 500-gold-piece bank note, 122 00:06:08,400 --> 00:06:11,400 and I'll have to give them 500 pieces of gold, 123 00:06:11,400 --> 00:06:14,200 so that's why it's a liability. 124 00:06:14,200 --> 00:06:18,146 And maybe that piece of currency is orange. 125 00:06:20,600 --> 00:06:29,692 So it's 500... to kick the idea 126 00:06:29,708 --> 00:06:31,154 And now this is super useful. 127 00:06:31,154 --> 00:06:34,100 Now my bank-- we've done all of the other things, 128 00:06:34,100 --> 00:06:35,331 how the bank increases the money supply, 129 00:06:35,331 --> 00:06:36,581 and fractional lending, 130 00:06:36,581 --> 00:06:39,908 and how the money supply adjusts for the total production 131 00:06:39,908 --> 00:06:41,692 and wealth creation in the economy, 132 00:06:41,692 --> 00:06:45,800 but now we've found another useful thing that a bank can do, is that 133 00:06:45,800 --> 00:06:47,400 besides securing your gold, 134 00:06:47,400 --> 00:06:50,115 it's actually providing a unit of exchange 135 00:06:50,131 --> 00:06:53,673 that's frankly a lot easier to deal with than gold. 136 00:06:53,673 --> 00:06:55,600 I mean, could you imagine lugging around 137 00:06:55,600 --> 00:06:59,800 and counting and verifying 500 gold pieces every time you had to spend it? 138 00:06:59,800 --> 00:07:02,100 Or everyone would have to have scales, et cetera. 139 00:07:02,100 --> 00:07:03,400 Now people can just count there, 140 00:07:03,400 --> 00:07:06,400 and as you see, this is money or this is cash. 141 00:07:06,400 --> 00:07:10,800 You might be experiencing some form of dissonance in your head 142 00:07:10,800 --> 00:07:12,631 because right when I drew that, you were like, wait, 143 00:07:12,631 --> 00:07:15,200 Sal, that looks a lot like a dollar bill. 144 00:07:15,200 --> 00:07:20,600 And that's true because a dollar bill is a Federal Reserve bank note. 145 00:07:20,600 --> 00:07:23,300 It is a bank notes from the U.S. that-- there was a time, 146 00:07:23,300 --> 00:07:26,000 and this was a time before central banks 147 00:07:26,000 --> 00:07:28,123 and especially if you think about colonial times, 148 00:07:28,123 --> 00:07:32,215 you had banks all over the colonies, 149 00:07:32,215 --> 00:07:34,000 and they would actually issue their own bank note, 150 00:07:34,000 --> 00:07:36,200 so you didn't have one uniform currency. 151 00:07:36,200 --> 00:07:37,692 So one bank note might look like that 152 00:07:37,692 --> 00:07:39,100 and have Bank of Sal. 153 00:07:39,100 --> 00:07:41,754 Another bank note might have Bank of 154 00:07:41,754 --> 00:07:44,719 -- I don't know-- Bank of George Bush or something, 155 00:07:44,719 --> 00:07:47,700 and people would kind of have to have exchanges between them 156 00:07:47,700 --> 00:07:50,900 to realize which banks are good for what. 157 00:07:50,900 --> 00:07:53,200 Now we're not as familiar with the term bank note 158 00:07:53,200 --> 00:07:56,800 because we only see one type, or at least one type per country. 159 00:07:56,800 --> 00:08:00,300 We only see bank notes from one bank, 160 00:08:00,300 --> 00:08:03,600 or at least one bank has the right to issue them within the United States 161 00:08:03,600 --> 00:08:06,000 and that's the Federal Reserve Bank. 162 00:08:06,000 --> 00:08:07,500 And it's not backed by gold. 163 00:08:07,500 --> 00:08:09,500 It's actually backed by U.S. Treasuries, 164 00:08:09,500 --> 00:08:12,100 and I'll go into that a little later on. 165 00:08:12,100 --> 00:08:15,400 Actually, that's a whole fascinating realm of thought. 166 00:08:15,400 --> 00:08:17,900 But I just wanted to get this point home, 167 00:08:17,900 --> 00:08:21,300 that all you have-- that this bank actually has this other service of 168 00:08:21,300 --> 00:08:24,500 issuing these bank notes that are different than 169 00:08:24,500 --> 00:08:27,800 the checking deposits, which I will cover in the next video. 170 00:08:27,800 --> 00:08:30,369 And then I will use both of those concepts 171 00:08:30,369 --> 00:08:36,000 to redo that lending that we did with the irrigation ditches and the factory 172 00:08:36,000 --> 00:08:39,800 to show you that the gold actually never even has to leave the bank. 173 00:08:39,800 --> 00:08:42,100 The gold just sits in the bank the whole time 174 00:08:42,100 --> 00:08:45,200 and the bank can just use its bank notes and checks 175 00:08:45,200 --> 00:08:47,800 to actually conduct all of the transactions. 176 00:08:47,800 --> 99:59:59,999 See you in the next video.