Welcome to Crash Course: Economy, this is Adrian Hill. And I'm Jacob Clifford, and today we're going to talk about cash and finance. I know we said in the first episode that economics is not about money. Economics is not about getting rich quickly Rather, it is by bartering the things you have for the things you want. For example, I have this lot but I want this pizza, you want to trade me in? No way! Imagine that you live in a world without money and that you are a dentist who wants to buy a car, First, you have to find a group of car workers who need dental treatment.
And if these workers do not want dental services and prefer to receive the wages in another body, Like flat screen televisions, you should look for TV manufacturers that are in pain in their teeth. Try posting this on Craiglist. This is called the "barter system" and it takes a lot of time and energy. Of course, many are still bartering But we use cash in most transactions. It is a more effective way of working.
People who need dental care will pay money That you will be able to use to buy a car. Economics indicates that money serves three main purposes: First, a "medium of exchange" works. Where it is generally accepted to pay for goods and services, And that medium of exchange means that we are not part of the barter system. Second, money can be used as stored value, The reason why a dentist usually does not accept baked food or goods Is that he could not save it to go buy a car, Also, bananas spoil quickly in a deposit box.
Cash is also used as a unit of account, We don't measure the value of cars with bananas, donuts, or tooth root canals Rather, we use money because it is a standardized measure that allows us to calculate the relative value of things. Most of people assume that money is the banknotes and coins issued by the government. Coins have been in use for thousands of years and are a great example of money, In practice, however, money is everything that can be used as a medium of exchange. For example, cigarettes were used as money in prisons until smoking bans were in place. Now, prisoners use postage stamps and even boxes of mackerel as currency. Also, animals, such as cows and sheep, and cereal bags were used as cash. Even some societies used feathers or shells. Indigenous people on the island of Yap in the Pacific Ocean They used money called "rays", They were large circular limestone discs.
The largest of them is three meters wide and weighs four tons. The whole point is that what economists consider money Anything accepted as a medium of exchange, It is something that has changed a lot over time. Today, banknotes and coins are used as cash because they are easy to carry They are very durable and difficult to counterfeit. But a lot of your cash today does not end up in pockets and wallets Bags or trolleys, Rather, it travels electronically.
Increasingly, people receive their money via checks or direct deposits with their banks. Much of our money is not physical but is digital and is on a bank's computer. As long as that computer is protected And zombies apocalypse will not cut off the electricity And the financial system in your country is working in the right way This electronic money will do everything it is supposed to do. Another form of digital money that we 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 a payment method, many economists consider it cash. And unlike other electronic currencies, Bitcoin does not need a bank. So people can theoretically buy goods anonymously. This is preferred by people who do not trust central banks And people who want to buy illegal materials over the Internet.
This illegal trade means that law enforcers and regulators are also interested in Bitcoin. But Bitcoin isn't just about online drug deals. There is a high risk in Bitcoin trading. That is, people buy Bitcoin with the hope that it will return them a profit. This makes Bitcoin a speculative asset It limits their use to buy and sell services and actual goods. Could Bitcoin or some other cryptocurrency become everyone's payment method in the future? Who knows! But if someone wants to pay me ten Bitcoins for this lot, I agree.
An important question here is: What makes these papers so valuable? In the past, every dollar was issued by the US government It could have been charged for a certain amount of gold. That was called the "gold standard." It meant that the government could not issue more money than it had in gold reserves. In the 1930s, the United States decided to ignore the gold standard Some people dread that there is nothing tangible to support the cash.
But it is important to remember that money, be it cash or gold Or little packages of mackerel, it's all about trust. Nobel Prize-winning economist Milton Friedman said: Green leaves have value because everyone thinks they have value. With this in mind, it's the gold standard or even the standard of mackerel They may not make the money more valuable or more reliable. Many economists agree on this, which is why countries do not use the gold standard. There are calls from some politicians to return it But that will never likely happen. We apologize, Ron Paul. Well, I know we said that economics is not about the stock market But now it is time to explain what it is and why it is important.
The stock market is part of something much bigger that is the financial system. To understand the financial system, you need to imagine two different groups. First, there are the lenders. Sometimes they are institutions that have a lot of money. But the lenders might also be regular people like you and me. We ordinary people will need cash in the future to retire Or enroll our children in universities or travel on vacation to the island of Yap.
So we need a way to convert the money we have now to more cash in the future. The second group is borrowers, and there are several types of borrowers. First, there are other families who want to borrow money to buy things like a car or a house. A business has a great idea for a new product but is in trouble And she needs money to make that product And she'll have cash after selling the product, But now, they need to borrow money that they can invest in capital As machinery, tools and factories, and they'll give that cash when they sell the product. In short, they need to purchase materials in order to produce other materials. Third, there are governments that need to borrow money Because it spends more than it earns. So we have the lenders who have cash now and want to convert it into more cash in the future. We have borrowers who need cash now and will pay it back in the future. The financial system is a network of institutions, markets, and contracts These two groups come together.
Lenders put money into the financial system that lends it to borrowers, And those borrowers repay those loans with interest making it worth the trouble for the lenders. Let's start reviewing the command: There are three ways for this commercial exchange to happen, the first being banks, Where a lender places money in a bank Then the bank lends that money to a family that wants to buy a house. Or for a business that wants to expand, And when those borrowers pay interest on their loans, the bank takes a portion of that cash To cover its costs and give the rest to the depositor. The second method of dealing between lenders and borrowers occurs via the bond market. Where a government or large institution needs to borrow money by selling bonds to lenders, A bond is, in short, a debt acknowledgment document in which the borrower agrees to pay regular interest, He promises to repay the entire amount borrowed at a fixed date in the future.
If that lender decides he would prefer to take the cash now He is free to sell that bond to a third party. The third way lenders deal with borrowers is through … well done, the stock market. Let's say Jacob and I want to expand our lemonade company But we don't have the money to do that. In this case, we can sell shares, which are, in short, shares of the company’s ownership. The lender gets the shares and we get the cash. And if our company wins in the future and we become a huge lemonade company, We will share some of those profits with our stockholders, Or shareholders can sell shares at higher prices. Either way, they make cash if the company is making a profit. So, there is a common factor between banks and bonds, Which is that they trade in something called "religion". If you get loans from a bank or if you are a government that sells a bond, The amount you have to pay is due.
In almost all cases, you are obligated to pay back the amount you borrowed With a fixed amount of interest. Shares on the other hand are known as "equity", If the company makes high profits, the shareholders get more cash. If the company goes bankrupt, the shareholders will get nothing. We hear about changes in the Dow Jones Industrial Average, But volatility in the stock market is not a reliable indicator Knowing the economic situation. Changes in the stock market are mostly reactions On real or just noticeable changes in economic fundamentals, Consumer confidence, unemployment rate, and GDP growth. Bonds and stocks also have a common factor. They are traded in the markets as financial instruments, Where bonds are debt instruments and stocks are equity instruments, But both are papers that trade in the markets with many buyers and sellers.
Banks, on the other hand, are financial institutions You help the Federal Deposit Insurance Corporation guard our money While providing loans to individuals and businesses. So why do we need this complex financial system? Why shouldn't a person take their savings and lend them directly? If you want to lend your life savings to your neighbor to establish his creative smartphone business, then do so. But this is a big risk, so it is better to use a financial system. Financial markets that deal in instruments such as stocks and bonds Allows borrowers to use crowdsourcing to borrow the cash they need, That is, they raise their capital from a lot of investors and thereby spread the risk. And banks do the same thing, accumulating small deposits from thousands of people And she uses it to make loans. Like the Kickstarter Foundation but better Because you get paid instead of thanks via email. From a lenders' perspective, the financial system allows them to distribute their savings On dozens or hundreds of different loans.
A few companies go bankrupt and a few people may not pay off their car loans But these losses will be compensated by the borrowers who repay their loans, You don't need to put all your eggs in one basket. So this is the money in the financial system, The thing that we have to remember is that these matters are not just general matters or not of our business Almost all of us are both lenders and borrowers at some point in our lives.
And understanding lending and borrowing is very important. While it may appear that you are borrowing from an anonymous institution You might be borrowing my money from that anonymous institution. And I'll want to get it back if I can't see anyone accept this lottery as a payment. Thanks for following you. Crash Course Economics has been done with the help of all these nice folks Somehow believe that green leaves have value. Your green papers may help support a Crash Course on Patreon. You can help keep Crash Course free for everyone, forever. You will also get good rewards. Thanks for watching, and don't forget to be awesome.