What is money? Means of exchange How did people trade? Barter  not really convenient

1. 5. Gold, money and inflation • What is money? • Means of exchange • How did people trade? • Barter  not really convenient • Use of different commodities: tobacco, salt, weapons, cattle, etc. • Eventually, people would settle on two: gold and silver

2. 5. Gold, money and inflation • Why gold and silver? • Some properties: • Different uses • Easy to transport • Easy to divide • Easy to melt • It has been so for centuries  ‘natural monies’, ‘free-market money’, ‘commodity-based money’, as opposed to fiat-paper-based-money

3. 5. Gold, money and inflation • Paper or fiat money took the place of commodity-based monies by decree • When? Mid 19th century early 20th (1913) • Why? Control and manipulation, tampering with markets, fund monumental projects to gain votes, wars, etc. • How? Monetary policy, central banks

4. 5. Gold, money and inflation • What are central banks? • Central authority that provides liquidity (lender of last resort) and is entrusted with the monetary policy • What is monetary policy? • The manipulation of the amount of (paper) money in an economy • How does that affect the economy? • By changing its most important prices and by depreciating the purchasing power of money (inflation tax)

5. 5. Gold, money and inflation • One of those prices  the interest rate • What is it? • A reference on the time preference of individuals • We prefer present to future consumption unless there is a compensation • Mainstream: Rules or discretion? (Friedman / Krugman) • Austrian School: Boom-bust cycles

6. 5. Gold, money and inflation • Rules vs. discretion and the Phillips curve • Is there an active role for governments or not? • No: Friedman X% rule • Yes: Increase money growth  inflation shock • These seemingly opposing views share the same idea: central banks can stabilize the economy • Contrariwise, Austrians argue that the opposite is true