Good morning, everyone. The lecture this morning is on money and prices.
Monetary theory is a very interesting compartment of economics.
It really ultimately addresses the question and answers the question of why anyone should routinely and universally
accept pieces of paper with ink on them in exchange for very, very valuable goods and services.
How did it come about in history, and how is it explained by theory, that today, as I said, people all over the world are willing to accept little tickets or bits of paper which intrinsically have very, very little value, or their materials, their inputs have very little value on the market, and yet exchange for these pieces of paper with a stamp with various symbols, very valuable goods and services?
That's really the function of monetary theory, to explain that phenomenon.
So let's start at the point at which money originates.
There are, as we know, a number of problems with barter.
Whether or not there was ever an extended developed barter economy, we really don't know.
But theoretically we know there are strict limits to how much development,
how much accumulation of capital can take place under barter.
Because there are various inefficiencies involved in what we call direct exchange, which is another name for border.
The first problem, which you see in all textbooks, is that of the lack of coincidence of wants.
That is, for any exchange to take place, there must be a double coincidence of wants.
Not only must you find someone who has what you want, but they themselves must want what you're willing to exchange for that good.
So one example might be a situation in which you have a person A who wishes to, he specializes in, let's say, producing berries or picking berries and wishes to obtain shoes somewhere, okay, so he prefers a pair of shoes above the berries that he owns.
So he approaches a shoemaker, let's call it B, who indeed possesses shoes, but does not want the berries.
Let's say he's allergic to the berries, he breaks out in rashes and so on, so he doesn't want berries at all.
And especially if the shoemaker was one of the few in the area, and there were few and far between shoemakers,
This person, A, would be at a loss. He wouldn't know how to complete his exchange.
Unless he was ingenious and perceived that, in fact, there are goods out there that everyone pretty much accepts in a given society.
In which case he would then approach people who specialize in producing that good,
sell the berries for a quantity of that good, even though he did not intend to use that good directly.
But intended to re-exchange it for the good that he ultimately desired, the pair of shoes.
And let's say that there's someone who sells wheat out there, C.
And people in the society use wheat for various food products and so on.
So he goes and exchanges the berries for the wheat.
There are numerous, let's say, farmers that sell wheat out there.
And some of them want berries.
In exchange, he gets wheat, which he values sort of indirectly more than the berries,
but only because he knows he can then turn around and exchange the wheat for the shoes that he ultimately wants, so the wheat goes to B.
That is the solution of the lack of divisibility of wants.
And that results in the emergence, not yet of money, but of a medium of exchange.
The key in that example functions as a medium of exchange, meaning that it is purchased or is exchanged for in order to be re-exchanged for something else.
So this more roundabout process of exchange actually brings about the solution to the problem.
There's a second problem with barter, and that is that there are indivisibilities in goods.
If he wishes to sell a horse and wants to get some shoes and eggs and let's say legal advice and a suit,
he would have to, with that single horse, somehow break it up.
But in breaking it up, in dividing it up, it would lose its value.
So he again would confront the problem in obtaining the various goods that he desires from these different specialists.
So what would he do? He would, again, go and sell the horse for a quantity of a good that is widely used in the society, let's say it's wheat again,
maybe for a hundred bushels of wheat he would exchange the horse, and then he would use certain quantities of that wheat to buy shoes, legal advice, eggs, and so on.
And this then would solve the problem of indivisibility that arises on the border.
So, this occurred in various societies, independently, that people hit upon a medium of exchange, and over time, in fact, over the millennia, there was a self-reinforcing process that took place, in which people began to recognize that other people were more successful in their exchange activities when they used a medium of exchange,
exchange so the new group of people would would then emulate those people who
were using the medium of exchange and that would increase the demand for the
medium of exchange okay whether it's wheat or whether it's salt as it was in
Africa and we'll go through some of the different types of media of exchange in
any case as the demand for the medium exchange rose it made it even more
generally acceptable more and more groups were drawn into to this this
Indirect exchange economy. And as more people demanded the medium of exchange to eat, its value rose even more.
And it became even more generally acceptable. Until, over the centuries, and throughout various areas of the world,
one or two media of exchange emerged as the general medium of exchange. And that's how we define money, as a general medium of exchange.
Exchange.
So that by, certainly the Middle Ages in Europe, gold and silver had emerged as the general
medium of exchange.
But as I mentioned, there are various media of exchange that were used in human history.
Again, you can see this in textbooks.
There were cattle in ancient Greece, leather in ancient Rome, animal pelts, whiskey and
tobacco leaves were used in the American colonies.
Wampum, which were strings of beads, were used by American Indians.
dried fish were used in the Canadian maritime colonies,
maize, which is corn, was used in Mexico,
and salt and iron farming implements were used in Africa,
wives were actually exchanged in ancient Egypt,
but they were not politically correct,
and cigarettes in the famous German POW example were used.
Now, one other point about money, as money becomes a general medium of exchange,
promotes tremendous efficiency in the economy.
Not only by reducing transactions costs and trying to find someone to exchange with,
but more importantly by expanding the market and allowing people to specialize in one good,
with full confidence that they could exchange that good for the medium of exchange
and therefore purchase all the other things that they needed.
So it tremendously expanded the division of labor and specialization
and allowed the accumulation of capital.
Just a few qualities that are important for a good medium of exchange.
First, it must be, obviously, what? Generally acceptable, right?
For it to even start off as a medium of exchange, it must be generally acceptable.
It must be widely demanded for non-monetary employment.
Certainly this was true of gold and silver, which were used for ornamentation,
We use it in meditation, we use it in religious rituals, we use it for plate and so on, even on military outfits.
It must be easily portable. For example, as I mentioned, iron was used in Africa.
But iron isn't easily portable. That is, it has a low value to weight ratio.
Gold and silver have a very high value to weight ratio.
So, if today you were to take a, if you wanted to buy, let's say, a high-definition television set, let's say for $2,000, and we were on a gold standard, you might only have to bring two and a half ounces of gold to purchase the television set.
On the other hand, if we were on an iron standard, that would, you know, let's say iron is $300 a ton or something like that, you might have to take six or seven tons of iron.
Iron dropped out as a competitor in the emergence of a medium of exchange.
They must be homogeneous. All units are identical to one another.
That's certainly true of gold.
Every unit of gold is chemically exactly alike every other unit of gold.
Now, it's not true, for example, of precious metals, precious gems,
I mean, diamonds and emeralds, they could also be used.
But it would take tremendous amount of time and effort for each exchange in order to find out their value, because each diamond, of course, that's its charm, right?
Each diamond is unlike every other diamond, sort of like a snowflake, right?
And so that's good for someone you want to become betrothed to.
They're special, they have a unique diamond, the expression of your love and so on, but it's not good for exchange.
Must be highly divisible. Again, precious gems, if you divide them up, they lose their value.
But if you divide gold and silver up, even the very, very small coins and so on, they maintain the proportional share of their value.
And finally must be highly durable. Certainly gold and silver are highly durable.
There is still gold in the world that was dug out of the mines during the Roman Empire, for example, or even before that.
The only gold that has really perished is gold that has perished in fires or gold that has been lost beneath the sea when ships were sunk.
But pretty much all the gold that has ever been mined in the world is still in the world.
So that's why you couldn't use dried fish, you couldn't use hostess twinkies.
I just noticed today that they introduced for the first time the original Hostess Twinkie, which is a little pastry, which originally had banana cream in it.
This is a little off topic, but what happened was they had to remove the banana cream during World War II when bananas became scarce because they were sent over to the troops and ever since they've had vanilla cream.
Well, now they've reintroduced after these many years the original Hostess Twinkie.
This is Twinkie. But even they wouldn't be good. They would go stale, okay, as you held them.
One of the primary functions of a medium of exchange is to be held so that you can make your anticipated exchanges over time, okay?
Okay, let's mention one other important function of a medium of exchange, and that is it does begin to serve as a unit of account, again, in a spontaneous manner.
Businessmen begin to use it in order to calculate their costs and revenues, profits and losses.
It makes things easier also for comparing prices.
If all goods and services in an economy are compared or are priced in gold or silver, well then it's easy to comparison shop to compare prices.
Think about a barter economy.
Even a barter economy with only 1,000 goods would generate 499,500 prices.
So almost 500,000 prices.
Because each good under barter would have a price in terms of the other 999 goods.
A typical supermarket has 70,000 items in its inventory on display in the store.
Imagine how many different prices there would be if you had a barter system, okay?
Also, not only would the entrepreneurs be unable to calculate which lines of production were the most profitable,
but they also wouldn't be able to pay the workers.
What if you were producing cars?
How would you pay your workers with part of the car, okay?
and how many cars would they want if you could give them one a year or something like that.
So you wouldn't get the ability to accumulate capital as you do in a money economy.
Let's talk a little bit about the monetary unit. Assuming that gold and silver emerge,
because they encompass the important qualities that we talked about in a medium of exchange,
or they embody those important qualities, they emerge on the market and we call that a commodity money.
We now have a commodity money and the monetary unit then becomes really a weight of the commodity.
Gold and silver exchange both before indirect exchange that is under barter and after as or by weight.
So what we get then is a situation in which the initial monetary units were defined as weights of gold.
So that the British pound from 1821 to 1931,
one British pound was defined as one-fourth of an ounce of gold.
And the US dollar from 1834 to 1933 was defined as one-twentieth of an ounce of gold.
And the French franc was defined as one hundredth of an ounce of gold, or thereabouts.
In any case, what you'll note is that, in fact, the pound, the dollar, the franc, the mark, were not different kinds of money.
In fact, they were all just different weights of the same universal money, which was gold.
Now, silver tended to be used in the East, in India and China, and up until the 1870s, many countries had bimetallic systems,
in which the value of gold and silver were fixed by law, but it was basically gold and silver that were used as the main commodity monies.
Which brings up the question of exchange rates.
What was the exchange rate for about a hundred years, which never changed by more than one percent, above or below the so-called poor value?
What was the exchange rate between? It was about five to one. By the laws of arithmetic.
Dollar and a pound were simply different weights of gold. There was about five times the amount of gold in a pound as it was in a dollar,
in the dollar so that the exchange rate, the poor value was $4.86 per British pound.
And that exchange rate was fixed for, as I said, about 100 years.
Now, it's not really an exchange rate. Would we say that the exchange rate,
there's an exchange rate between dimes and nickels in the U.S. currency?
That's not a true exchange rate. No one changes dimes for buys and sells dimes for nickels.
In fact, a nickel is defined as the 20th part of gold, of a dollar, it's one-twentieth of a dollar.
And the dime is defined as one-tenth of a dollar.
So since a dime represents twice as much of a dollar as does a nickel, by the laws of arithmetic, it's two to one, two nickels for a dime.
True exchange rate involves an exchange on the market, which prices can change.
So if every monetary unit was really just the weight of gold, then you would have a system like we have today in the U.S. where the dollar is simply money throughout the U.S.
So the world, or at least the countries that use the gold standard as their currency,
really want a part of the same currency area.
Just as everyone who uses the dollar in the U.S. is part of the same dollar area, which is the currency of the U.S.
Now let's talk a little bit about the supply of money.
Under a gold standard, it's easy to calculate the supply of money. It's really the total monetary gold in existence.
Initially, when the gold standard did emerge, it was 100% gold standard. People simply used full-bodied coins and bars, which are called bullion, to make their exchanges.
Later on, what we call fiduciary media or banknotes arose, which were convertible into gold.
But initially it's simply the money supply is equal to the total weight of gold.
So we would add up the money supply in this room if we were on the gold standard by just finding out how many gold coins and gold bars everyone had in terms of weight.
Now, given those preliminaries, how is it then that the value of money is determined?
Well, given that we've emphasized that money is a commodity, like any other except in one respect, which I'll get to,
Every commodity's value or market value, more precisely, or price, is determined by supply and demand, and the same is true of money.
Supply and demand determines the value of money. But before we get to what the value of money is, we have to talk a little bit about, or rather how it's determined, we have to talk a little bit about exactly what the value of money is.
Let's introduce the term purchasing power at this point.
The purchasing power of any item is the amount that it can purchase on the market.
So if a pizza sells for $10, the pizza has a price of $10, we say that the pizza has a purchasing power of $10.
You can buy $10 with a pizza.
We're not used to thinking of buying money, but when we talk about money, you have to now look at the other side of the coin.
Every exchange or half of every exchange involves money.
So the person with the money is buying the car or buying the pizza,
but the person with the pizza or selling the car is purchasing money
to be held for a longer or shorter period of time, to be demanded
by the person that's buying the money.
Right, so if you say then
that the pizza has the purchasing power
of $10. You can turn that around and say that in terms of money, $1, if that's the monetary unit, buys one-tenth of a pizza.
So what we can show then is that the purchasing power of money, and I'll call it the PPM following Murray Rothbard,
Okay, is the reciprocal or inverse of the money price of different goods, okay?
So if a high definition TV costs $2,000, then the purchasing power of money in terms of TVs is one two thousandth of a television.
And Murray Rothbard in his book gives a very simple example of a four good economy, actually it's a five good economy,
in which there are eggs, butter, shoes and TV sets, all of which are priced in money,
Because now we know that money is the general medium of account.
And notice that these are the money prices.
Now, given that these are the money prices, what would be the price of money?
Well, we see immediately that unlike all other goods in the economy,
okay, this is one difference between money and other commodities,
money does not have one price.
Every other good has a single price.
Okay, it's emerged out of barter, it has one price.
Money has at least four prices in this economy.
It has a price in terms of eggs, butter, shoes and TV sets.
So, we can then state the purchasing power or price of money as an array.
It's not a unitary figure. It's not a single figure.
It's an array of alternative goods and services that the monetary unit can command or purchase.
So, a dollar can purchase either two dozen eggs, which are 50 cents a piece,
or one pound of butter or one-twentieth of a pair of shoes or one-two hundredth of a TV set.
So money is still in a state of border with all other goods and services, paradoxically enough.
Or another way of putting that is that money does not have a single market.
All other goods and services have a single market in which they're exchanged for money.
Which brings us to the relationship between overall prices, the prices of goods and services,
and the Purchasing Power of Money
note something here
that if
suddenly
all prices were to double
okay let's say due to inflation of the money supply or expansion of the money supply
we would then have a rough doubling of the price of all goods and services
as I show you there in the second set of figures
now in the third set here we see in fact
as prices go up what happens to the value of money
What happens to the purchasing power of each monetary unit?
It falls, because it's the inverse of the money price.
We simply turn it around, we turn it upside down.
So now, you can only purchase one dozen eggs
at a dollar a piece instead of two dozen eggs
when they're 50 cents a piece, and so on.
So, inflation causes the dollar to shrink,
It's purchasing power to shrink. It represents this phenomenon. It causes the dollar to buy less. It's purchasing power to shrink more appropriately.
So now you can only buy a half a pound of butter, one four hundredth of a TV set, whereas before you could buy twice as much of each of those goods.
So to sum up, the purchasing power of money moves inversely to the price level.
So the value of money, which is, again, the inverse of all the prices in the economy, is determined by supply and demand.
Why do we draw the supply curve vertically? We draw the supply curve vertically because at any given moment in time, there's a fixed amount of money in people's cash balances.
We use the term cash balances to mean everybody's individual money supply.
So, if you want to total up the entire money supply, which we symbolize as capital M, it's equal to the sum of all the individual money supplies in the economy, which we call cash balances.
Now, I'll explain in a moment why the demand curve for money would slope downward and what that means.
And what that means, it means this, that as money loses its purchasing power, all other
things equal, people want to hold more of it, all other things equal, including their expectations.
Now first that seems sort of paradoxical, right? Why would people want to hold more
money as money's value falls? Well, it's the law of demand. And let me explain that very
Let's say you wake up tomorrow morning and prices have doubled.
You wake up and now you have to pay $4 for a McDonald's hamburger instead of $2.
You have to pay $6 for a gallon of gasoline instead of $3.
You have to pay $20,000 for a Ford Tours instead of $20,000 and so on.
But, remember, we're assuming all prices are doubled and the price of labor and wages and salaries are also a price, the price of labor, they've doubled also.
Now, you have to make anticipated purchases during the course of the week.
They're going to cost you twice as much. So are you going to hold more or less money? You're going to hold more money.
And you're able to hold more money because your nominal income has gone up.
You have more dollars in your pocket because your wages and salaries have doubled.
So if the money supply doubles and all prices have doubled, including the price of labor,
people are going to want to hold more money to pay the higher prices.
Okay? Conversely. Yes, go ahead.
Have you included the amount in your banking account as having doubled?
Yes, what we're going to assume is all, well, that might be a sort of a transition problem where that hasn't doubled.
We're just assuming all prices have doubled.
And maybe you would include the price of all assets, too, which would mean that you're in a sense that you're saving the account as an asset and that's doubled.
That's a good question.
So now, on the other hand, if you wake up and prices have been cut in half, have been halved, including your salaries, of course,
In the long run, you're going to want to hold less money.
It's only $1.50 to buy a gallon of gas. Lunch costs you half as much.
A beer at happy hour costs $1 instead of $2 and so on. Everything is cut in half.
So what we get then is the downward sloping demand curve.
So if the purchasing power of money is very low, down here, meaning that prices are very high,
prices are very high when the purchasing power of money is low, then people are going to want to hold much more money,
and I'll put figures in in a moment, much more money than they would have if prices were low.
Prices were low, they don't need the whole of that much money because each purchase absorbs less money.
So the demand curve slopes downward to the right.
Now let's talk a little bit about the monetary adjustment process in which we'll explain a little bit more about what happens when the money supply changes
and how we get to what's called the equilibrium.
Okay, let's say that initially, for whatever reason, there's more gold in the economy, okay?
And so, this is the stock of gold, 100 million ounces, let's use dollars, 100 billion dollars of money in the economy.
And yet people only want to hold, given the demand curve, at that purchasing power, they only need to hold half as much, let's say 50 billion.
So they have 50 billion excess dollars, not in the sense that they want to throw them away and don't want them.
If you feel that you're holding more money than you need, let's say if you just hit the lottery and you have 10 million dollars, you just won 10 million dollars.
You're going to have excess cash balances. What will you do? What's going to be your first thought if you hit the lottery?
Either invested or either buy financial assets or buy consumers' goods.
So you're going to rush out. That's how you get rid of excess money. You don't throw it away, obviously, because it's valuable.
What you do is you allocate it to other goods that are now more desirable than all this money.
So you might buy a yacht. You might buy an estate. You might, as you pointed out, invest it in stocks or even buy an entire company.
Company. As you do that though, as money is put in circulation, if this is the economy
as a whole now where there's excess money in the economy, people rush out and spend
the money and that does what? Increases the demand for goods and then causes prices to
go up. That's called the monetary adjustment process. And let me just set it out here for
Here's what we're going to assume. We're going to assume that people have more money than they demand to hold, because prices are low, they don't need that much money.
So the money supply is greater than the demand for money.
Now, using sidewood arrows to mean causes, that excess amount of money, the excess supply of money causes an increase in the demand for goods in the economy.
Okay, so the demand for goods shoot up. As you pointed out, prices rise. People begin to buy more, more yachts, more hamburgers, more of every item in the economy.
As prices rise, however, that means that each dollar buys less and less, becomes less powerful.
So, remember, the purchasing power of money is simply the inverse of the price level.
Purchasing power of money drops,
and that leads then to
people wanting to hold, having to hold a greater
quantity of money. The quantity demanded of money goes up
because now people need more money in their pockets as all these prices begin to rise.
And finally,
we get a situation where
The market adjusts the purchasing power of money so that the amount of money in the economy
equals the demand for money.
So let me put this up again.
If you have a surplus of money, eventually, that's not going to last.
People are going to rush out and spend the money.
As they spend the money, the prices will rise, the value of money will drop and they'll move
down along this demand curve to the point where they will want to hold a full $100 billion
for Anticipated Purchases. They will feel that they have no excess money that they have to rush out and spend immediately.
Now, the reverse, that's called the monetary adjustment process.
The market always makes sure that the price level is set at the point at which people will hold the whole amount of money in the economy.
It sets supply of money equals the demand for money.
On the other hand, if there's a shortage, if people want $150 billion, but there's only $100 billion in the economy,
Does that mean the economy is going to go into recession and people be laid off?
No, not necessarily. What's going to happen is that,
again, thinking about it on the individual level,
if you suddenly find that you can go on a cruise for a real bargain,
and you have to come up with, let's say, $3,000 for you and your spouse
to go with your friends on a cruise in the Caribbean,
and you have to come up with that money, let's say, within a month.
What are you going to do?
If people then suddenly require more money than they're currently holding,
you cut back on your spending.
That's how a monetary shortage is adjusted.
Now, if everybody wakes up one morning and feels that there's going to be a recession
and that they're going to face greater prospects of being laid off
or not getting their bonuses or having their salaries cut,
they're going to feel that they have a shortage of money.
They're going to be uncertain about the future.
and uncertainty about the future is going to cause them to demand more money than they would have.
So let's assume that the prices are quite high in this economy, the purchasing power of money is low,
and people want to hold 150 billion dollars instead of 100 billion dollars.
Well, how are they going to do that? Well, again, it's the monetary adjustment process.
As everyone cuts their spending, prices are going to fall, all of these arrows are going to be reversed.
Prices will fall as people demand fewer goods, which means that the price level will go down,
the purchasing power of money will rise now.
Each dollar will buy more as prices fall, and people will feel that they don't have to hold as much money as they did before,
so we will move up this demand curve.
People will demand less and less money as prices fall.
So, take a radical example. If prices were one-tenth as high tomorrow, it was cut by 90%, so that an auto bill was $2,000 instead of $20,000, and gasoline was $0.30 instead of $3, and you had the same amount of money in your checking account, what would you do?
You'd rush out and spend it. Or on the other hand, if prices were to triple tomorrow, you would need more money, so you'd have to cut your spending.
So what we're saying here, and this is a very important point, is that there is never a need to increase or decrease the supply of money.
The market will always adjust the price level to a level at which people are satisfied with the amount of money that they are holding.
Second thing to keep in mind is that, like any other price, the price of money, which we call the purchasing power of money, is determined by the market.
Now we can talk about inflation and its consequences.
The original definition of inflation, which I think was used pretty much up until the
early 20th century, even into the 1930s.
Inflation means a volume, right?
You inflate a balloon, a volume that has more than two dimensions.
It meant initially to increase the supply of money.
That was what inflation, that's how it was defined as an increase in the supply of money.
And one of its consequences, but not the only one, was a rise in prices.
Later on, especially after John Maynard Keynes wrote his famous general theory, his treatise,
in 1936, but actually even before that, economists began to use inflation as a term denoting
using the consequence, one consequence of inflation, which was the price level rising.
But you can see that inflation refers to a volume expanding, which is like the volume
of money expanding, not to a level going up or down.
But nonetheless, that word was then applied.
Now there was a problem with that, using inflation to denote or refer to a change in the price
level.
What was this? There are many other consequences of inflation, artificially lowering the rate of interest, or pushing up the prices of real estate and financial assets.
All of that is ignored when you use inflation to denote a change in consumer prices, which is the way it's used today.
So, let's just look at a change in the money supply. Let's say that, actually before I do that, let me quickly mention one other thing.
And that is that over time, people became used to using fiat money, okay? That is paper money.
And so for that, we'll get to a little bit more detail in a moment, but for now, governments were able to manipulate the supply of money.
Even when it was convertible into gold, they had some power to manipulate through the banks the supply of money.
So let's see what happens when you have an increase in the supply of money.
So now you have a quantity of a hundred million initially, a hundred billion dollars in the economy.
And here is equilibrium purchasing power. Purchasing power of money is at point A.
There's a certain level of prices, overall prices for various items are at a certain level.
And then there's an increase in supply of money by 50 billion dollars.
People now have 50 billion dollars more than they need.
So they rush out and they spend the 50 billion.
Well, that's where the monetary adjustment process comes in, sometimes called the inflation adjustment process.
What occurs then is that as people rush out to spend that extra money, prices rise to the point where the purchasing power of each dollar falls and we eventually get higher prices and a lower purchasing power of money.
So we have had inflation. Now, what changes occur as a result of that? Does that benefit society in any way?
In fact, even though the money supply has increased by 50%, there are no more goods in the economy.
There's the same amount of goods in the economy. They depend on the available resources, the amount of capital and technology.
They don't change, assuming those things are constant.
What happens is simply that prices are pushed up, but the real money supply does not change.
So, if a central bank increases the money supply, wanting to give people more purchasing power, they don't succeed in doing that.
All they do is they raise the price level in the same proportion as the money supply.
So, to give you a simple example here, if pizza is the good that we're talking about in the economy, let's say the representative good,
when we have $100 billion, let's say that pizza is $10 a piece, so $10 per pizza.
The real money supply is defined as the money supply divided by the price level in the economy.
So if we use pizza, we divide this by ten dollars, and it's ten dollars for pizza.
What we get is a real money supply equal to the amount of pizzas that the hundred billion dollars can buy.
And that's simply ten billion pizzas.
So the real money supply is always stated in terms of goods.
How many goods can the money supply buy?
It can buy 10 billion pizzas.
Now let's see if the Fed or the central bank has changed anything by increasing the numerator.
So it increases the money supply to $150 billion.
Prices of pizza have gone up to $15 by 50% by about the same proportion as the increase in the money supply.
What's happened to the real money supply? Has it changed? No, it's still 10 billion pizzas.
So there is no change in the money supply. People just have to carry around more money and have to pay higher prices.
They don't have any more purchasing power because there are no more goods in the economy.
All right, now let's see what happens when we get a change in demand for money.
Why might the demand for money change?
Well, people might want to hold more money, as I said before, because they fear a recession in the future.
Or there might be an increase in the amount of money that people want to buy because there's more goods and services.
That is, we have economic growth and there are more computers being sold on the market.
So that exercises an increased demand for money or represents an increased demand for money.
So let's say we have an increase in the demand for money as a result of economic growth.
That is, we had initially, let's say, the $100 billion, but now let's just make this a 50% increase.
Let's say there's a tremendous amount of economic growth in a given year, this wouldn't happen, but 50%.
50% there's 50% more goods and services on the market because of growth so those sellers want to sell those extra 50% of goods and services how can they sell it those extra goods and services with the same money supply doesn't the Fed need to step in and increase the money supply out to this point here they move this whole line out here so that now at the same prices they can sell the additional computers and other things that have increased in supply
No, not at all. In fact, what happens is that as the demand for money increases, people suddenly, or the people that have the extra goods and services, realize that they have to do what?
They have to lower the prices. They have to lower the prices. As has happened as we talked about in the high-tech industries.
Even if this is a demand to hold more money and not to sell more goods but to just hold more money because people are fearful of recession,
What will people do?
Even with the same amount of goods in the economy, they'll cut back on the amount of money they're spending on goods and services and that will lower prices.
In either case, the increase in demand for money will result in lower prices.
So let's say prices are cut in half to make it simple.
Okay, now the market does increase the real money supply.
So an increase in demand for money will increase the real money supply.
That increase in demand emanates from private people.
So let's say that the money supply remains at $100 billion, but demand more or less has doubled, let's say, to make it a simple calculation.
If demand doubles, what happens is that price of pizza are cut in half, right? Price of pizzas are cut in half.
What's that? Okay, let me move it up, thank you.
Price of pizza is cut in half and calculating the real money supply here, M over P.
How much that $100 billion can now buy? With prices lowered, that $100 billion can now buy 20 billion pizzas.
What has happened to the real money supply? It's increased. The market has increased the real money supply.
Money Supply, why? Because people wanted to hold more money, or they had more goods that they wanted to sell for money.
In either case, prices have adjusted. They've come down so that people now, with the same amount of dollars, each dollar is worth twice as much, right?
So if each dollar is worth twice as much, then by holding, let's say you hold $1,000 in your bank account on average, that $1,000 now does what? Buys twice as much.
So, every part of that money supply has doubled in value, every dollar of that 100 billion, as prices have come down.
So, in contrast to an increase in the supply of money by the government, which does not increase the real money supply, does not give people any more satisfaction,
an increase in the demand for money which lowers prices does make people better off, because it makes their cash balances more powerful.
Okay, now we come to an important question, and that question is this. What is the optimal supply of money? Economists use that term optimal, okay, or another way of putting it is what should the supply of money be, given the analysis that we just went through? Is there ever a reason to increase the supply of money, or to change it?
Okay, that's the main objection.
Certainly in the case of economic growth, we need more dollars to buy these extra goods.
But if you look again at areas or sectors of the economy that are growing,
they adjust fine without big increases in the supply of money.
As I mentioned, when personal computers were first introduced, they were $20,000.
$500. Now they're $500. When hand calculators were first introduced in 69, they were $350. Now they're $5. So growth in any sector is no different than growth in the economy as a whole, because the economy as a whole is composed of all the various industries and sectors.
So, you don't need an increased supply of money to accommodate economic growth, because in fact, the demand for money will change in such a way that it will lower prices, okay?
Now, here's a way of approaching this, and it's as follows. Here's where money is different from the other classes of commodities, okay?
Think about a consumer's good. The function of a consumer good is to yield direct satisfaction to consumers.
Now, in functioning as a consumer good, a thing is generally either used up immediately, in the case of a meal, or used up over time, in the case of a normal meal.
In either case, in performing its function as a consumer good, things are used up.
Same thing with capital goods.
Almost all capital goods, whether it's a factory or it's a raw material, it's used up in the process of production.
But what about money?
Money is neither a consumer good or a producer good.
Producer good yields indirect satisfaction, consumer good yields direct satisfaction.
The function of money is to be obtained and then re-exchanged for something that you desire more.
So the function of money is to be re-exchanged. It's like a hot potato. It's passed throughout the economy.
In performing this function, do either fiat dollars or silver or gold, is it part of that function to be used up?
No, it's not part of it. There might be some wear and tear. There is wear and tear on gold and silver.
and the paper dollars do have to be replaced every five years or whatever it is
but that's not an inherent part of the function of a medium of exchange.
It's just to be re-exchanged.
It's not to be consumed either in producing consumer goods or in satisfying directly human wants.
So given that, we can then use what Murray Rothbard calls the Angel Gabriel model
to show why you don't need an increase in the money supply.
Supply. And Milton Friedman calls it the helicopter model. Basically what happens is that there's an angel up there who wants to benefit humanity but is economically ignorant and decides that since a given person, when their money income increases, he observes that a given person is better off. Well, he's going to make everybody better off by doubling their cash balances. So when you wake up tomorrow morning, you're going to have twice as much money in your wallets, purses, and in your
Bank Accounts. So he does that. He doubles the money supply. Everyone wakes up. First, let's assume everybody wakes up at the same time, for simplicity. And what do they do? At the same price level, they now have more money than they want to hold. They don't need to hold twice as much. They already adjusted their cash balances to what they needed to hold. Everybody rushes out and spends it, and almost immediately, what happens to prices? They rise and you get inflation. The angel has not benefited anyone. All that has happened is that we have twice as
The real money supply is not changed, okay. So there is no social benefit conferred by an increase in the money supply, okay.
Any quantity of money, this is sort of Ricardo's law, one of the first economists to recognize it, David Ricardo.
Any quantity of money is sufficient to perform the function of a medium of exchange.
Exchange. If there are $50 billion in the economy, let's take three economies. Economy
number one has $50 billion, number two has $100 billion, number three has $150 billion.
And everything else is the same. They have the same consumers, labors, goods, technology.
Everything is exactly the same. Is the economy with $150 billion better off than the economy
with 50 billion? No. The only difference is that prices are three times as high in the economy with the greater supply of money. That's the only difference.
There is no increased satisfaction of human wants. Now, if the angel had known some economics, he'd come to this seminar and paid close attention to the Salerno part of the seminar,
He would have realized that the way to benefit humanity was to do what?
Not to increase the supply of money, but to increase the what?
Goods.
Well, if you woke up and you had a second car in your driveway,
or if you had two and you had four cars in your driveway,
everybody had twice the amount of goods and you had a second home and so on,
everybody would be better off because more human wants would be satisfied.
The same thing is true if he decided to double the amount of producer goods,
The amount of capital goods in the economy, the amount of factories, the amount of software programs, the amount of computers and so on, trucks.
Eventually, those things would allow the fixed amount of labor to produce more goods and services and the economy would again be better off.
So that is another way in which the commodity of money differs from producers' goods and consumer goods.
Okay, now let's talk a little bit about, oh, let me introduce a twist into the Angel Gabriel scenario.
Let's say some people are early risers, okay.
Some people get up early. I know Lew Rockwell gets up very early.
He has to have his page up, lewrockwell.com.
So he gets up very early, and he finds that his money supply has doubled.
Okay, now Peter Klein lays around, kind of slothful, lays around in bed, reads the papers, doesn't venture out until 11 o'clock.
He's a typical college professor.
Okay, now what happens? Lew Rockwell and others like him rush out and spend the new money.
What happens to prices? Well, they buy when prices are still at their old level, okay?
And so prices begin to rise. The people who get up a little bit later have to face slightly higher prices.
However, when Peter Klein gets up and goes out, he finds out that prices have increased tremendously.
So, in effect, what has happened is that wealth has been transferred from Peter Klein to Lew Rockwell.
That increases social welfare, in my estimation.
So, what happens is that the people who receive the new money late are victimized by the inflationary process,
and the people who receive the new money first are the ones who gain, okay?
Because they buy before prices have risen, so the purchasing power of their dollar is still high,
whereas Peter Klein buys after the prices have risen, and so the purchasing power of his dollars have already declined, okay?
We're going to come back to that point again.
Now let's talk a little bit more about government paper money and how it came about because I want to get to the case of hyperinflation here.
Initially the kings monopolized the mining of gold and silver coins and they charged their subjects a monopoly price.
They banned private minting of coins which had existed in various parts of Europe.
And they charge a monopoly price, and that monopoly price, if you want information, was called seigneurage.
The right, representing the right of the lord, or the prerogative of the lord of the manor or of the king to monopolize the process of minting coins.
Okay, and Signorage would also, now I don't know how apocryphal this story is, but it's interesting, so I'm going to tell it.
It also referred to the right of the feudal lord to spend the first night with the bride of his vassals.
Now, that was never actually enforced. What they would do is that the vassal would have to pay him a sum of money so that he would renounce that right.
So, supposedly, this is where the terms and yourage comes from. I've heard that story and other people have said it's apocryphal, that it's a made-up story.
It has no basis in fact, but it's a good story to tell, because the government basically screws you when it's minting money or at monopoly prices or producing paper money.
So, now the important point here is that when you have the king monopolizing the mint, they can engage in what's called debasing the coinage.
They can do it in a number of different ways. There's something called sweating the coins, where they call the coins back.
When a new king comes in, let's say King Nitwit now ascends to the throne.
Okay, so King Knit would now ascend to the throne, and he wants his picture on the coins, okay?
So, he calls the coinage back, and he'll put his own picture on the coin, you know, and he'll name it the Knit, okay?
And let's say the Knit was initially one, okay.
Does it look like Peter? The nose in here. Okay.
The Knit was initially one full ounce of gold, let's say.
What he'll do is he'll reduce the gold content to, let's say, nine-tenths and he'll debase it by adulterating it maybe with a copper, okay,
recoin it with some copper in it, which is a base metal, or he'll sweat the coinage, that is, he'll put the coins in a bag,
he'll have his lackey shake the bag and the loose piece of gold will fall off the coins and then he'll give the coins back,
In fact, he'll be lighter weight and he'll use, obviously, the residue and coin that into coins and use them himself, as he would if he clipped the coins. Clipping the coins is just shaving off the outer edge, okay?
In any case, the amount of the precious metal becomes less, but yet the name Knit sticks, okay? And he now has more revenue, okay?
And so the kings can only get away with this, you know, once or twice during their reign, all right.
Sometimes they'll call back the coinage because it's becoming lightweight, okay, and they want to re-coin because it's becoming, the face of it is becoming sort of, it's becoming defaced as it's being used.
So you might call it back for that reason. And again, he debases it, okay. Over time, coins have been tremendously debased.
For example, I don't have it here, but in Spain, the coinage was the base of the point where the coins had become so small that they couldn't even, you know, they were too small to even circulate, okay?
The key point, however, is that people begin to think of the monetary unit not as an ounce of gold because now it's a half an ounce of gold or a quarter of an ounce of gold, it keeps getting smaller and smaller.
they think of it as the knit, okay? So they accept the name as the monetary unit and not the weight, alright?
Now, in order to gain general acceptance, okay, for paper money, once the printing press was invented,
the government saw that, you know, you can only debase the coinage so far, okay, there is a limit, obviously.
So inflation can't extend very far under the gold standard, but if you can print paper, then it will.
So, how did they get paper into circulation? Well, given that people were now accepting the names, like Frank, Mark, Dollar, rather than the weight, as the monetary unit, the kings then guaranteed redeemability on demand initially.
They would say, look, you accept the paper money we issue, we will pay you the full amount in gold if you come back with it. And the paper money is more convenient, and so on.
They also said that they would accept the paper money in payment of taxes, due, and they imposed legal tender laws that forced people to accept the paper dollars in full discharge of debts incurred in the gold dollars at par, or gold nits, or whatever it is.
So, for all these reasons, paper money got into circulation, which then allowed the kings to pay for their wars and building palaces, basically that's the two things they spent their budgets on.
It allowed them to issue or to get banks, the banks, to loan them paper money and to use that paper money to pay for the wars and to pay for the palace building and other boondoggles.
So the government then began inflating through paper money and secretly redistributed money from the populace, from the citizens to itself.
And they were able to run budget deficits because they could finance it by paper money.
Under a full gold standard it was very difficult, you really couldn't run budget deficits unless you get somebody to lend you the gold.
and so it was a narrow limit on the amount of deficits you could run
and in fact there are stories of armies just leaving the battlefield
because the kings could no longer pay the wages for the soldiers.
Now, eventually, and I don't want to go through the whole historical process,
but by 1914, well generally during wars all countries went off the gold standard,
off the gold standard. That is, they suspended the redeemability of the paper money for the period of the war, promising that they would go back after the war and redeem the paper money again in gold and silver at par.
But during wartime, they went off the gold standard. The United States did during the Civil War. Great Britain did during the wars with Napoleon in the early 19th century.
Every belligerent did in 1914 and stayed off the gold standard until well after the war ended.
And finally, in the 1930s, 31 Great Britain went off, 1933 the US went off, 1936 France and a number of others in a monetary block with France went off the gold standard.
So that really after World War II we didn't have, we went back to a very watered down phony type of gold standard.
We pretty much had paper money. But during wartime, even earlier, as I said, nations went off the gold standard.
This allowed governments to print money without any limit to finance the wars.
And we got the phenomenon of hyperinflation. The phenomenon of hyperinflation arose.
The most famous incident of hyperinflation was that of Germany after World War II.
I'm sorry, World War I, excuse me, in the early 1920s.
Basically, Germany had, if you take 1913 as a base year and take the price level as equal to one,
The price level rose one trillion times by 1923 in Germany.
Let me just read you some of the interesting...
What happens is the government, of course, kept printing money, especially...
It had to pay reparations by the Treaty of Versailles.
The German government had to pay reparations, as well as the other members of the alliance,
had to pay to the French, British, for the damage allegedly caused by the war.
and some interesting stories about how bad this inflation got and what I want
to first do is show you the price of a German newspaper very good way of
getting a feel for the magnitude of the inflation okay rather than just using a
price index something like a newspaper is an everyday item its quality doesn't
can change much, pretty much the same over time, so it gives you a good idea of the magnitude
of the price increases, you know, when those price increases are large.
So if you take 1921, January 1921, start of the hyperinflation, there was a lot of inflation
during the war but nothing, it wasn't a hyperinflation at that point, it was about one-third of a
mark, then by May 1922, a little bit more than a year later, it had tripled, so the
The price level had tripled in 14, 15 months.
That's as if 15 months from now the price of a Ford Tourist would be $60,000 instead of $20,000.
Then from May to October, so from the fifth month to the tenth month of that calendar year,
the price level went up eight times.
By February 1923, the price of a newspaper was 100 marks.
So from the beginning, comparing to the beginning, it went up 300 times about.
Then it went up to 1,000 marks about 7 or 8 months later.
Then from September 1923 to October 1st, within a month, it doubled.
And then within 14 days, it went up 10 times.
Now 20,000 marks to buy a German newspaper.
Two weeks later, it was now one million marks to buy the newspaper.
Then 10 or 11 days later, it was $15 million.
Eight days later, it was $70 million, 70 million marks.
That's as if you go for a haircut when it's $10.
And then in, let's say, two years, pretty much it, a little bit more than two years, two and a half years,
The haircut is now 70 million times that, or 700 million dollars, okay?
So that's the magnitude of the inflation, which caused a lot of behavioral changes in people, obviously,
especially as prices were going up hour by hour, okay?
You all, or you've heard of, or maybe have seen the picture of, or the, yeah, it's a picture or photo,
of the German worker with a whole wheelbarrow full of marked notes and pushing them into a grocery store to exchange them for just like a pound of butter.
Also, what began to happen was that people began to demand to get paid more frequently.
So workers were getting paid every two weeks, they demanded every week because they didn't want to hold money for a very long time because the purchasing power was declining so rapidly.
Then they were getting paid every day and then two and three times a day and their families would show up at the factory gates, the grandfather, the wife, the children, and he would bring out the notes and they would give them to the family and the family would rush out and spend it on anything at that point.
You couldn't even comparison shop because prices were going up minute by minute or hour by hour.
Even if no one in your family played a piano, if there was a piano for sale you would just buy it right then.
This was the flight into real values, it was called, all right?
There was also another sort of behavioral change that occurred.
Women would begin to bring their laundry baskets full of marked notes to the stores, okay?
But you couldn't fit them down the aisles, so they would leave them outside, you know, with the notes in them.
And thieves would come by and dump the notes out and steal the baskets,
Because the basket was more valuable than the notes, okay?
College professors, civil servants,
they began to quit their jobs
because they were being paid every two weeks or every month
and they couldn't afford to wait to get their income
because it was declining value so rapidly.
So they became waiters and taxi drivers, okay?
Or another service people that got paid immediately.
So you had that occurring. Of course now the government claimed that we had nothing to do with it, they claim.
Because if you looked at the statistics, what you saw was that prices were rising more rapidly than the money supply.
That's very interesting. Prices were going up much more rapidly than the money supply.
The key is what we call inflationary expectations though.
And that means this, that if people expect inflation, prices to rise to a great extent at a period in the future,
the period in the future. Let's say we expect prices of, let's say, automobiles and various adorable goods to double next year.
What will people rush out and do? They'll buy them. They'll buy them this year.
That occurred when we had the first sort of housing boom in the 1970s where young couples were rushing out.
When young couples, instead of waiting two or three years and saving for a down payment to buy a house,
were borrowing from their families and putting down payments on their homes.
As the inflation rate increased to the point where, I think in 1980, it was about 16% per year in the U.S.,
you saw more of this anticipatory buying, which means that people are trying to get rid of money.
The demand for money is falling to the left. The demand for money is going down.
People don't want to hold money, or as much money as they did before. They want to get rid of it almost as soon as they get it.
At the end, of course, at the end of hyperinflation, no one really wants the whole money.
That is to say that everyone who has anything real will sell, or another type of commodity, will sell the commodity for money.
But let's look at some of the other things that happened during the German hyperinflation.
As I said, the German government pointed to this phenomenon and said, look, it's not us, it's the speculators.
They're selling the mark very cheaply or they're short selling the mark on the foreign exchange market and that's pushing down the value of the market and causing import prices because the mark then needed more marks to buy foreign imports to explode.
So they blamed on speculators but of course it was this inflationary expectations.
Not only were they increasing the money supply but people were spending money faster so prices were going up for two different reasons.
but all related to the increase in the money supply.
So the government made the argument that we're just increasing the money supply rapidly
so that people have more money to pay the higher prices.
In fact, prices were becoming so high that they actually developed sort of a shortage of money during this hyperinflation.
Because sales were raising the price in anticipation of a much higher price the next day.
So it was a hyperinflationary spiral.
So to meet this, the government began to, at one point in the Weimar Republic,
2,000 printing houses were working 24-hour shifts to keep worthless paper flowing to banks that didn't count it, but waited on butcher scales,
because they were all like one million mark denominations, and I'll show you some of these.
There were other, as I pointed out, many of the people who traditionally, like teachers and professors and civil servants, who were traditionally paid once a month, had to quit their jobs as a rate of inflation sword in order to take jobs as taxi drivers or waiters.
Okay, a couple other points I want to make here that are interesting rather.
Okay, by the middle of 1923, the price of a full dinner on Friday night would not cover the cost of a cup of coffee on Saturday morning.
So that's how rapidly prices were rising, okay.
Yeah, by the height of the inflation in 1923, an egg that had cost 25 fennigs in 1918, which is much less than a mark,
In currency already inflated by four years of war, so there already had been inflation through the four years of war, cost 80 billion marks.
So one egg went from, you know, like a quarter of a mark to 80 billion marks.
A glass of beer priced at 17 phoenix in 1918 cost 150 billion marks.
So, what did the government do?
Well, it was running the printing presses 24 hours a day, as I mentioned, and it ran out of paper to print the money.
So what it did was, now this is a 1,000 mark note, 1,000 marks, but you see the red stamp across here?
When the notes came back to the banks, what the government did was to take a stamp and stamp 1,000,000,000 marks.
That's 1,000,000,000.
So, they were just issuing these, just stamping the old notes, the 1,000 mark notes, and they stamped them with 1 billion, okay?
And so prices continued to rise.
Eventually, the government stopped the inflation call by promising to, by introducing a new mark, okay?
And setting an exchange rate of 1 trillion old marks.
If you brought one trillion old marks in, you could get one new mark.
And they claimed that they would not inflate this, that it would be backed up by the land, and so on.
They didn't really go back to the gold standard immediately, but they did make a credible effort to stop the increase in the money supply,
so that the hyperinflation stopped cold.
Very interestingly, there's a story. Again, this may be apocryphal, I'm not sure, but Austria also suffered a hyperinflation.
In 1920, Ludwig von Mises, the world-renowned economist, was called upon by frantic government officials to give his remedy for the ever-worsening Austrian inflation.
He agreed to meet with them on one condition, that it was to be at midnight on a certain street corner in Vienna.
Let me just insert here the following. Most German economists, or economists in the German-speaking world, did not recognize the link between money and prices.
They claimed that prices were going up because of speculation on the foreign exchange market and the government was just trying to keep up with it by printing more money.
A very famous economist who wrote actually a good book on inflation or rather on money, Carl Helfrich, had become the head of the German Central Bank and made this argument.
Mises was one of the few economists and his students or some of his colleagues who had read his book that understood the link at that point between money and prices.
So, to go on, he agreed to meet them on one condition that it was to be at midnight on a certain street corner in Vienna.
Although government officials were baffled by the request, they nevertheless agreed.
When they met, it was quiet except for the continuous noise of the machinery in the adjacent building.
When officials asked von Mises how to solve their foremost economic problem, he simply pointed to the noisy building and said,
The building and said, first and foremost, you must stop that noise.
Well, what was the noise? The noise, of course, was the building, was the government printing plant, and the sound was the printing of money 24 hours a day, which was literally happening.
So we know economically it's easy to stop inflation. You stop printing money. Politically it's difficult.
Because once you've printed money, as we'll see in the next lecture, you set off a chain of effects,
beginning with an artificial reduction of the interest rate, which causes certain industries to over-expand,
and when the increase in money supply ceases, that expansion is reversed and we have a bust or recession.
So politically, it takes a lot of will to stop an inflation, but economically, it's very, very simple, just as Mises said, stop printing the new dollars.
Now, again, as we'll see in the next lecture, in today's world, the money supply is not increased by literally printing new dollars, but through the banking system, by adding reserves to the banking system, which are then lent out and turned into bank deposits.
One last point I want to make, and that is the German hyperinflation wasn't the greatest in history. It's the most famous, but it was not the greatest.
The greatest one occurred in Hungary after World War II, and after World War II, or rather before World War II in 1939, the Hungarian currency known as the Pengo,
So, the Pengo had a value in terms of dollars of 3.39 equals $1.
Now by 1946, in July of 1946, the same dollar was worth 500 million trillion pengos, that's a 5 and 21 zeroes.
So after the war, rural Hungarians quickly abandoned money in favor of primitive barter, but people in Budapest,
The people in Budapest, the capital, had to cope with the monetary system.
Wages were raised daily, prices rose by the hour, shoppers carried their money in large bags,
high-speed presses raced to turn out more currency.
The upshot was that if you had deposited $100,000 worth of pengos in a bank in 1939,
let's say you couldn't get to it during the war, you couldn't get it out during the war,
They weren't worth the trouble, that $100,000 worth of pengos, to withdraw in 1946
because the haircut now cost $800 trillion pengos in Budapest, okay?
And the average annual income there would buy only about $50 worth of merchandise on the black market, okay?
So, that was the greatest hyperinflation.
There was also one, let me just give you a short summary of the Bolivian hyperinflation in 1985.
In one six-month period, prices soared at an annual rate of $38,000.
I'm sorry, 38,000 percent, excuse me.
And so they take the example of an individual, Mr. Miranda.
If he doesn't quickly change his pay into dollars, it evaporates.
The day he was paid 25 million pesos, a dollar costs 500,000 pesos.
So he received just $50.
A few days later, the rate was 900,000 pesos.
So his pay was now $27 a few days later.
It was cut in half in a few days' time.
So that's what hyperinflation does.
It's the worst enemy of the market economy.
it thrusts the economy back or catapults the economy back into barter
and that means a breakdown of the industrial economy
so I will stop here and take any questions
yes, Ron
yeah, the civil servants quitting their jobs, absolutely
There was a lot of speculation in the sense that people stopped producing and what they were doing was trying to buy and resell factories.
So what they would do, or one guy would, they mentioned this article, would buy houses and then they would wait, they wouldn't pay right away, they would wait for a few weeks and then pay.
So the sharper people realized that, you know, if you bought something on time, you did better, right?
Because the real value of the nominal amount of marks was decreasing.
So a lot of people made out very, very well during the hyperinflation by speculating, okay, on prices continuing to go up.
I was never in a prisoner of war camp, but the war was winding me down, and I had my laundry down with a free cigarette. I offered to march or anything like that, but they refused.
I forget how many cigarettes they told me they had to pay to get a pair of shoes.
No, cigarettes actually circulated after the war outside the prison of war camps too.
I don't know what sort of inflation there was with Marx, but people lose confidence when a country loses the war,
the value of the currency goes down, demand for the currency goes down because they think it's going to be replaced by another currency and they don't want to be caught holding it.
So everybody tries to spend it.
When the war ended and the government inflated the cigarette money supply, every month I'd get a carton.
The night before people expected the US to land, what happened was that everyone rushed out and spent the Japanese-issued currency, and prices just became astronomical.
Because they just wanted to get rid of it. They knew it wouldn't be worth anything once US forces occupied the islands.
Any other questions? You had a question?
In Germany during that period, there were US dollars, there were coins and so on, gold and silver, contrasting that with today, if we had a hyperinflation here in the US, we wouldn't have the same recourses as they did to foreign currencies and so on.
Gary North gave a great example, an actual case example, of the hyperinflation in Germany.
It always impressed me. A German bought a farm, a potato farm, on a mortgage, with a mortgage in.
When his first potato crop came in, to proceed from that potato crop, he was able to buy one potato crop.
To pay off the whole thing.
Had he waited one year, he could have paid it off with one potato.
that's great that's great well that type of thing see see this is a little bit
more technical but but but people don't have the same expectations okay Mises
pointed that out in today's economic models everyone's assumed to have
adaptive expectations that is based on what's happened in the past or rational
expectations based on full information about what is currently going on and
what's likely to happen in the future but but Mises recognized that people in
developed inflationary expectations before the farmers, for example, so people would go out to the farms and buy the eggs and sell them very cheap, but then the farmers caught on, you know, and then even the dullest person would catch on, okay, and then everybody would develop inflationary expectations, but during that period, okay, as expectations were adjusting, you could make a lot of money, or let's put it this way, you could acquire a lot of valuable assets, as you've just pointed out. Yes?
Is there a difference of hyperinflation with a massive bubble in that both are creatures of expectations that are ahead of the reality at that moment?
And the analogy is working really well the way the one, the hyperinflation ended in Germany. That is, the bubble burst.
So do you think that model might work or do you think it's just far-fetched?
Well, no, it's not far-fetched, but I would say it's not exactly analogous because a market bubble,
well, to the extent that there are market bubbles, and there probably are,
yeah, that's self-limiting in some sense, whereas the government, in the case of hyperinflation,
sets off the spot, in other words, there's something else, another factor, and that is to increase the money supply,
which is a real factor and that then causes people eventually to develop expectations
which then intensifies the hyperinflation.
And the government, if this other factor stops and it's credibly stopped, then you can stop that hyperinflation.
But I guess in some sense a market bubble is also self-limiting when people see the underlying realities.
But I guess that's the point with the hyperinflation, there is an underlying reality driving everything
and that's the increase in the money supply, okay? Any other questions? Okay, thank you.