Money: How It Functions (2ndEd, 1971)

[Music] so money for goods and services we have many goods and services in our modern world long ago life was simpler [Music] had you and i lived in those days each of us might have had certain abilities and possessions the other one wanted to get them we would simply make trades but you and i live in today's world could we use barter to get what we wanted we might but today we don't have to depend on barter because long before this film was made money was invented sometimes it was something useful a commodity like tea [Music] or a spear or a tool money could be special beans [Music] or a string of special beads it could be rare items of metal or stone a commodity was usually in limited supply but what was important was that people who used it agreed on its value as a medium of exchange all these are forms of money people used in the past [Music] then a major change took place the value of money was determined by what was written on it its face value not by its usefulness as a commodity [Music] today we have paper and metal money with different face values in addition to these kinds of money money today can take other forms we can put the paper money in a bank and the bank's records will show a figure equal to the money's value and we can write out an order called a check to a bank to transfer money to someone else all these are different forms of money as long as everyone who uses them agrees their money once that agreement is made money has all sorts of advantages for instance take an auto mechanic who wants a recorder he doesn't have to get it by barter the mechanic exchanges his services for money the money then gets exchanged for the tape recorder and in this way many goods and services can easily be exchanged [Music] the invention of money also enlarges tremendously the kinds of exchanges that can be made it also means that more and more people can specialize in one particular service get money for it and later exchange that money for all the other things they need increased division of labor and specialization and higher standards of living are some of the results of the invention of money [Music] money is a neat measuring device you can take almost anything say a refrigerator and measure its value in terms of units of money you can use the same units to measure the value of different kinds of work like the work of a carpenter the time it takes him to do a certain job might be worth so many units of money now you can easily compare the number of units needed to buy his service for that job with the number of units needed to buy a refrigerator if you want to start trading one for the other you have a standard to go by one unit of money and the more easily divisible the units are the more helpful they are for measuring various values large multiples of the units can be used for measuring expensive goods and services fractions of the units can be used for measuring inexpensive items the easier it is to make transactions the more efficient the economic system that uses it will be [Music] and the easier these units lend themselves to computation the handier the money system is [Music] money is useful and still another way it doesn't have to be traded right away suppose you don't want a sandwich well then you can store the money you would have spent you can store it in this kind of a bank or in this kind [Music] some money is stored as cash and the cash can be in the form of paper or coins but in a nation with an advanced economic system most money is deposited in banks in the form of checks the deposits might then be changed to numbers on a piece of paper or blips on magnetic tape charge cards can also be substituted for money suppose you use a charge card when you buy gasoline you sign the charge ticket to show you receive the gasoline later when you pay for the gas you probably still won't deal in cash but will pay by check general credit cards function in about the same way here too a piece of paper shows the exact amount of the purchase this paper is now like a check as far as the merchant is concerned it's an order to the bank to transfer money and the merchant can send it right off to be credited to his account the number on that piece of paper is changed to holes on a card then changed into blips on magnetic tapes that charge an amount against your account and add to the storekeepers account when you pay the bank by check the transaction is completed and no cash was involved these are the forms in which most of our money exists paper orders to banks to transfer funds [Music] paper orders or simply numbers on account books perhaps eighty percent of our money is this kind of money of course there's still some currency paper money and also coins and for convenience they can be exchanged for one another when people need more currency say around christmas time when they're buying more things they can take it out of the banks as the amount of currency in use increases the numbers in the bank's deposit accounts decrease the exchanges can be made in the opposite direction too and they can be made over and over again without changing the total amount of money in existence does that mean the amount of money never changes no for one thing as population increases the need for more money increases there are constantly more people who perform services with more services to exchange among ourselves we need more of the medium of exchange we need more money factories keep turning out more and more things more cars more television sets farmers keep growing more crops we have more and more things to exchange among ourselves so more of the medium of exchange is needed for that there are more and more small things to buy more and more changes to be made bills into coins there are more and more coin operated machines there are more and more people who collect coins so more and more coins are needed more money is more money just stamped out and printed when it's needed yes that's one way in which the government increases the supply of money available can it produce unlimited amounts of money this way not if we want to have the money still worth anything the government can only produce carefully controlled amounts of new money but new currency is only a small part of the total money supply and the government has another way of affecting the supply of money through its influence on the federal reserve bank system this is the central banking system of the country and all member banks are required by law to set aside a certain percentage of their deposits and keep them on reserve in one of the federal reserve banks banks can use the rest of their money to make loans if the federal reserve allows a smaller percentage of deposits to be held in reserve by banks this automatically increases the amount of money banks can lend suppose such an event takes place and a short time later a man comes to a bank for a loan to expand his business the bank considers his request it investigates his chances of paying the money back with interest and finds it good had the man come earlier in the year when the bank had already lent as much money as it was allowed the bank would have had to turn the man down but with the new reserves created by the federal reserve action now the bank can open a new account in the man's name from these newly available funds in effect this is new money no one else has any less and the man now has more so more will go into circulation the question that still baffles economists is just how much is enough the value of numbers in a bank ledger or pieces of paper money or coins is related only to the value men have given them money is only something people invented to help them exchange goods [Music] and services among themselves [Music] there must be enough money around to enable people to transact all these complicated exchanges but there can't be too much or it begins to lose its value [Music] men invented money because it was convenient they also invented its value how the value of money is determined though is much more complicated than simply printing a number on a piece of paper you may want to find out more about the value of money and how it changes but that's another story you