WEBVTT 00:00:00.000 --> 00:00:03.800 After one of the previous banking videos, I got a comment: 00:00:03.800 --> 00:00:06.208 "If everyone puts gold in the banks, 00:00:06.208 --> 00:00:08.254 what can they use to transact, 00:00:08.254 --> 00:00:11.700 or to buy food, or to pay for services, et cetera?" 00:00:11.700 --> 00:00:17.200 And that is an excellent segue into the notion of a bank note. 00:00:17.200 --> 00:00:19.200 bank note... 00:00:19.200 --> 00:00:21.300 You've probably heard the word before, 00:00:21.300 --> 00:00:25.700 maybe in some Charles Dickens' novel or something, 00:00:25.700 --> 00:00:27.792 but we're going to find out in this video 00:00:27.792 --> 00:00:30.877 it's actually a much more familiar concept than you ever realized 00:00:30.877 --> 00:00:33.938 and you probably have some of these bank notes 00:00:33.938 --> 00:00:36.174 in your wallet as we speak. 00:00:36.174 --> 00:00:38.059 Let's go back to our example. 00:00:38.059 --> 00:00:39.987 I have the Bank of Sal. 00:00:39.987 --> 00:00:41.779 I use 100 gold pieces. 00:00:41.779 --> 00:00:43.372 That's my equity. 00:00:43.372 --> 00:00:44.656 Let me draw that. 00:00:44.656 --> 00:00:48.587 My equity... I have 100 gold pieces. 00:00:48.587 --> 00:00:51.387 And I use that to build a building. 00:00:51.387 --> 00:00:53.287 So the 100 gold pieces actually go to the builders 00:00:53.287 --> 00:00:54.587 and they're from out of town, 00:00:54.587 --> 00:00:57.387 so they're not going to deposit it back with me. 00:00:57.387 --> 00:00:58.987 So that's my building. 00:00:58.987 --> 00:00:59.687 I don't know if you can see that. 00:00:59.687 --> 00:01:00.987 It's a little picture of a building. 00:01:00.987 --> 00:01:02.887 And all of the villagers in my city, 00:01:02.887 --> 00:01:04.887 they come and deposit their gold with me, 00:01:04.887 --> 00:01:09.187 because my building looks very solid and safe. 00:01:09.187 --> 00:01:10.987 It's safer than their mattresses, 00:01:10.987 --> 00:01:18.387 so they then deposit 1,000 gold pieces with me. 00:01:18.387 --> 00:01:21.087 1000 gold pieces 00:01:21.087 --> 00:01:23.487 For the liability side of my balance sheet 00:01:23.487 --> 00:01:28.479 I could say owe 1,000 gold pieces 00:01:28.479 --> 00:01:33.856 owe 1000 gold 00:01:33.856 --> 00:01:36.151 And on my asset side, I actually get the gold pieces. 00:01:36.151 --> 00:01:39.127 I should have done that in yellow. 00:01:39.127 --> 00:01:42.487 So on my asset side of the balance sheet 00:01:42.487 --> 00:01:46.087 it's just strangely tilting to the left 00:01:46.087 --> 00:01:51.187 On the asset side, I actually have 1000 gold pieces 00:01:51.187 --> 00:01:55.187 So they're actually sitting in my vaults. 00:01:55.187 --> 00:01:56.487 Now the question was 00:01:56.487 --> 00:02:00.387 if all of the villagers put all of their gold into my vaults 00:02:00.387 --> 00:02:03.587 what can they use to transact every day? 00:02:03.587 --> 00:02:05.187 The way I do it right now 00:02:05.187 --> 00:02:07.487 -- this side is my assets 00:02:07.487 --> 00:02:09.087 and these are my liabilities, right? 00:02:09.087 --> 00:02:11.687 I owe them 1,000 gold pieces 00:02:11.687 --> 00:02:14.187 that they can come and get at any moment 00:02:14.187 --> 00:02:16.887 And this could kind of be viewed as a checking deposit. 00:02:16.887 --> 00:02:18.787 I'll go into that in a second. 00:02:18.787 --> 00:02:20.087 I'll probably go into that in the next video. 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, 00:02:24.187 --> 00:02:25.287 or at least in my vault, 00:02:25.287 --> 00:02:27.629 what can they use to transact? 00:02:27.629 --> 00:02:28.587 Well, the solution is, I say, hey, you know 00:02:28.587 --> 00:02:34.787 instead of taking some of your gold out and using that as essentially money 00:02:34.787 --> 00:02:38.387 why don't I give you a note 00:02:38.387 --> 00:02:42.687 a note that says you put X amount of gold into my vault 00:02:42.687 --> 00:02:50.110 So, for example, for each one gold piece 00:02:50.110 --> 00:02:53.415 I will issue a bank note 00:02:54.800 --> 00:03:06.374 So let's say I'll say one gold piece bank note outstanding 00:03:06.374 --> 00:03:09.174 And then I hand you a slip of paper 00:03:09.174 --> 00:03:10.374 and that slip of paper 00:03:10.374 --> 00:03:13.974 -- and this might start to look a little familiar to you -- 00:03:13.974 --> 00:03:20.474 says it looks about this shape. 00:03:20.474 --> 00:03:24.274 It has a nice picture of Sal in the middle, 00:03:24.274 --> 00:03:25.274 because it's the Bank of Sal, 00:03:25.274 --> 00:03:35.374 and it is denominated as one gold piece. 00:03:35.374 --> 00:03:37.474 And now you gave me that gold piece 00:03:37.474 --> 00:03:41.800 and you get this green piece of paper that only I can print 00:03:41.800 --> 00:03:45.500 and no one else has the sophistication to do something this fancy. 00:03:45.500 --> 00:03:49.600 Maybe I use some colors here and I sign it Sal 00:03:49.600 --> 00:03:52.900 and I do all sorts of stuff that makes it really hard to forge 00:03:52.900 --> 00:03:56.800 so that no one else can-- I put some holograms on it. 00:03:56.800 --> 00:03:58.700 Who knows what I do to it, but no one else can forge it. 00:03:58.700 --> 00:04:01.000 So this is essentially a piece of paper that I hand you 00:04:01.000 --> 00:04:02.600 that says, you know what? 00:04:02.600 --> 00:04:04.200 Anyone who holds this piece of paper 00:04:04.200 --> 00:04:10.692 can go back to the Bank of Sal and get back a gold piece. 00:04:10.692 --> 00:04:13.023 Then since everyone in the village, 00:04:13.023 --> 00:04:15.900 they trust that the Bank of Sal will always be willing to exchange 00:04:15.900 --> 00:04:18.600 one of these slips of paper for a gold piece, 00:04:18.600 --> 00:04:24.900 instead of using a gold piece to buy something, 00:04:25.500 --> 00:04:26.550 why don't you just this slip of paper? 00:04:26.550 --> 00:04:27.600 And even more, for one gold piece, 00:04:27.600 --> 00:04:29.500 you don't want to just have a stack of 00:04:29.500 --> 00:04:30.850 one gold piece pieces of paper around. 00:04:30.850 --> 00:04:32.200 Maybe if you gave me 5 gold pieces 00:04:32.200 --> 00:04:39.700 -- I'll do that in another color --Maybe if you gave me 5 gold pieces 00:04:39.700 --> 00:04:43.185 -- that rectangle is much larger than it should be relative to 1,000, 00:04:43.185 --> 00:04:44.277 but I think you get the point -- 00:04:44.277 --> 00:04:48.123 then I'll do - I'll have a liability here that says: 00:04:48.123 --> 00:04:51.981 five gold pieces bank note outstanding. 00:04:51.981 --> 00:04:54.500 I'll call it b-note outstanding. 00:04:54.500 --> 00:04:58.392 And I'll issue a -- I think you have guessed it. 00:04:58.392 --> 00:05:00.515 Maybe I'll do it in different colors 00:05:00.515 --> 00:05:04.938 to show you that these bank notes can come in different colors 00:05:04.938 --> 00:05:08.023 but once again, I'll put a famous person there maybe 00:05:08.023 --> 00:05:10.046 and I'll make it really hard to forge, 00:05:10.046 --> 00:05:12.358 and I'll put holograms on it 00:05:12.358 --> 00:05:16.562 but it'll be denominated as a five gold-piece bank note. 00:05:16.562 --> 00:05:19.000 And now, if you were one of the villagers, 00:05:19.000 --> 00:05:20.200 you gave me your gold pieces, 00:05:20.200 --> 00:05:23.300 now not only is your gold safe, 00:05:23.300 --> 00:05:27.400 you have these pieces of paper that are very hard to forge, 00:05:27.400 --> 00:05:28.700 and that's a key issue there, 00:05:28.700 --> 00:05:30.000 because if they were easy to forge, 00:05:30.000 --> 00:05:33.300 then someone maybe completely unaffiliated with this trustworthy bank, 00:05:33.300 --> 00:05:37.200 completely unaffiliated with Sal, could go out and print these things. 00:05:37.200 --> 00:05:38.300 So you don't want that to happen. 00:05:38.300 --> 00:05:41.600 So we're assuming that you can't forge this thing. 00:05:41.600 --> 00:05:43.500 And now not only is your gold safe, 00:05:43.500 --> 00:05:47.400 but you have something that you can transact with 00:05:47.400 --> 00:05:48.550 -- that's frankly a lot easier than gold. 00:05:48.550 --> 00:05:49.700 I mean, I could even have a denomination 00:05:49.700 --> 00:05:54.200 that's -- it could be a 500 gold piece. 00:05:54.200 --> 00:05:55.700 So if someone gave me 500 gold pieces, 00:05:55.700 --> 00:06:02.200 I could give a 500 gold-piece bank note out. 00:06:02.200 --> 00:06:03.954 That'd be my liability, right? 00:06:03.954 --> 00:06:05.400 Because I know that at some point, 00:06:05.400 --> 00:06:08.400 someone might give me back that 500-gold-piece bank note, 00:06:08.400 --> 00:06:11.400 and I'll have to give them 500 pieces of gold, 00:06:11.400 --> 00:06:14.200 so that's why it's a liability. 00:06:14.200 --> 00:06:18.146 And maybe that piece of currency is orange. 00:06:20.600 --> 00:06:29.692 So it's 500... to kick the idea 00:06:29.708 --> 00:06:31.154 And now this is super useful. 00:06:31.154 --> 00:06:34.100 Now my bank-- we've done all of the other things, 00:06:34.100 --> 00:06:35.331 how the bank increases the money supply, 00:06:35.331 --> 00:06:36.581 and fractional lending, 00:06:36.581 --> 00:06:39.908 and how the money supply adjusts for the total production 00:06:39.908 --> 00:06:41.692 and wealth creation in the economy, 00:06:41.692 --> 00:06:45.800 but now we've found another useful thing that a bank can do, is that 00:06:45.800 --> 00:06:47.400 besides securing your gold, 00:06:47.400 --> 00:06:50.115 it's actually providing a unit of exchange 00:06:50.131 --> 00:06:53.673 that's frankly a lot easier to deal with than gold. 00:06:53.673 --> 00:06:55.600 I mean, could you imagine lugging around 00:06:55.600 --> 00:06:59.800 and counting and verifying 500 gold pieces every time you had to spend it? 00:06:59.800 --> 00:07:02.100 Or everyone would have to have scales, et cetera. 00:07:02.100 --> 00:07:03.400 Now people can just count there, 00:07:03.400 --> 00:07:06.400 and as you see, this is money or this is cash. 00:07:06.400 --> 00:07:10.800 You might be experiencing some form of dissonance in your head 00:07:10.800 --> 00:07:12.631 because right when I drew that, you were like, wait, 00:07:12.631 --> 00:07:15.200 Sal, that looks a lot like a dollar bill. 00:07:15.200 --> 00:07:20.600 And that's true because a dollar bill is a Federal Reserve bank note. 00:07:20.600 --> 00:07:23.300 It is a bank notes from the U.S. that-- there was a time, 00:07:23.300 --> 00:07:26.000 and this was a time before central banks 00:07:26.000 --> 00:07:28.123 and especially if you think about colonial times, 00:07:28.123 --> 00:07:32.215 you had banks all over the colonies, 00:07:32.215 --> 00:07:34.000 and they would actually issue their own bank note, 00:07:34.000 --> 00:07:36.200 so you didn't have one uniform currency. 00:07:36.200 --> 00:07:37.692 So one bank note might look like that 00:07:37.692 --> 00:07:39.100 and have Bank of Sal. 00:07:39.100 --> 00:07:41.754 Another bank note might have Bank of 00:07:41.754 --> 00:07:44.719 -- I don't know-- Bank of George Bush or something, 00:07:44.719 --> 00:07:47.700 and people would kind of have to have exchanges between them 00:07:47.700 --> 00:07:50.900 to realize which banks are good for what. 00:07:50.900 --> 00:07:53.200 Now we're not as familiar with the term bank note 00:07:53.200 --> 00:07:56.800 because we only see one type, or at least one type per country. 00:07:56.800 --> 00:08:00.300 We only see bank notes from one bank, 00:08:00.300 --> 00:08:03.600 or at least one bank has the right to issue them within the United States 00:08:03.600 --> 00:08:06.000 and that's the Federal Reserve Bank. 00:08:06.000 --> 00:08:07.500 And it's not backed by gold. 00:08:07.500 --> 00:08:09.500 It's actually backed by U.S. Treasuries, 00:08:09.500 --> 00:08:12.100 and I'll go into that a little later on. 00:08:12.100 --> 00:08:15.400 Actually, that's a whole fascinating realm of thought. 00:08:15.400 --> 00:08:17.900 But I just wanted to get this point home, 00:08:17.900 --> 00:08:21.300 that all you have-- that this bank actually has this other service of 00:08:21.300 --> 00:08:24.500 issuing these bank notes that are different than NOTE Paragraph 00:08:24.500 --> 00:08:27.800 the checking deposits, which I will cover in the next video. 00:08:27.800 --> 00:08:30.369 And then I will use both of those concepts 00:08:30.369 --> 00:08:36.000 to redo that lending that we did with the irrigation ditches and the factory 00:08:36.000 --> 00:08:39.800 to show you that the gold actually never even has to leave the bank. 00:08:39.800 --> 00:08:42.100 The gold just sits in the bank the whole time 00:08:42.100 --> 00:08:45.200 and the bank can just use its bank notes and checks 00:08:45.200 --> 00:08:47.800 to actually conduct all of the transactions. 00:08:47.800 --> 99:59:59.999 See you in the next video.