I think I have 45 or 50 minutes to talk to you about money.
This is simply ridiculous, you know, it's impossible.
Therefore, but on the other hand, you know already something about money, you know, even
Sometimes there are disagreeable experiences with not sufficient quantities of money.
And as we mentioned quantities, we approach already one of the problems, perhaps the most
important problem from the practical point of view, the problem of the quantity of the
supply of money.
We are talking in economics about the supply, supply of useful things, supply of useful
people, and so on, and then we are talking about the supply of money.
The supply of money is something very different from the supply of other things, you know.
The supply of shoes, the more shoes are available in the country, the smaller is the number
of people who must do without shoes.
And it's the same with most of the other useful things.
But with money, it is something a little bit different.
It's not true that the supply of money is something which you have to deal with as the
supply of other things.
The supply of money can be seen from the point of view of the whole economic system, it can
be too large.
While the individual and the whole society are in perfect agreement with regard to the
supply of most other things, the problem of supply is not so simple as that when we are
dealing with money.
You hear every time I see somewhere printed the word, the supply of money, I have an uneasy
feeling.
Because increasing the supply of money in the economic system, the total supply of money
is something quite different from increasing the supply of commodities.
Therefore, those books and lectures in which one talks about the supply of money and in
In which people are discussing the problem that the annual supply of money should be increased by 3% or 5% or some other percentage, these discussions are misleading.
They are misleading because they are leading directly to one of the most critical problems, to the problem of inflation.
What does it mean, inflation?
We know that most of the useful things, most of the useful commodities are not available
in quantities which would make it possible for everybody to enjoy as much of them as he
wants.
And we know that it is a very beneficial thing to be a man who increases the quantity, the
supply of useful things, whether these are shoes or books or something else, it is always
The better that the supply should be increased, then the supply should decrease, but with
money there is something different.
As we have today a state of affairs in which the governments are in a position to increase
the supply of money and they are doing it because this increasing of the supply of money
on the part of one institution, group or factor, while all other factors must be satisfied
with the money which they are getting on the market, because this increase brings about
certain problems, let us say, the problem of inflation.
I could try to deal with the problem from a right general standpoint, beginning with the
most simple things and proceeding step by step to a system that implies all the essential
This would not be a job for, I think, 45 minutes, I don't know, perhaps 48 minutes.
Therefore, I want to start with the most important, practically most important problem, the problem
of inflation.
As conditions are, as we have today in most of the countries of the world, almost in all
of Countries of the World. The Governments are in a position to increase the quantity
of money and they are making use of this power. The Government, let us say, wants to spend
People don't pay taxes with great enthusiasm and the government doesn't like a nation
that has little enthusiasm for the activities of the government.
And therefore the governments want to find a method of spending which does not burden
the individuals.
The governments want to appear as institutions that are giving, while in fact they cannot
give if they had not first taken away, and taking away by taxes is not very popular.
And therefore the governments are increasing the quantity of money.
Let us take the following situation, the typical situation.
The government wants to spend more than it did spent up to yesterday.
But it doesn't want to tax more or it simply cannot, by political reasons, it cannot tax
more.
It cannot also borrow the money because the conditions under which such a borrowing could
take place are considered from the point of view as unsatisfactory, but when the government
does something which is familiar to everybody, the government increases the quantity of money.
This is a very cheap prospectus in the world in which paper money is legal tender.
The governments and the writers for the government make fun of the fact that the nations of the
in the world consider gold as money and they try to say a lot of things against the gold
standard only that they have no valid arguments against the gold standard because the gold
The gold standard works like the paper standard of the government works in a way which the
government itself doesn't consider as satisfactory.
Let us take the most practical case.
The government wants to spend more and doesn't want to tax the people.
The government wants to appear as Santa Claus. This is a very agreeable situation. It is
a situation which is much more popular than the situation of a tax collector. And therefore
the government does not tax the people in order to get the money for its new expenditure,
But it prints it. This is very cheap, very cheap procedure. What happens now? If the government
had collected the tax, the money it needs for some additional new expenditure, by taxing
of the People, the taxpayers would have been forced to restrict their spending, their expenditure.
They had therefore a definite quantity of money, the money which the government has taxed away
would have disappeared from the hands of the people, of the citizens, and would have reappeared
in the hands of the government.
The people who had paid the taxes had been forced to restrict their expenditure, and
The government has expanded its expenditure. It is not to be expected that the commodities
which the government would have, which the government wants to distribute, directly or
and Directly are the same which the citizens would have spent and therefore there appears
some problems which we cannot deal with because we have only 45 minutes but what we have to
realizes this, if the government taxes the people and the people are forced to restrict
their expenditure, then the prices of certain commodities and services are necessarily dropping
because there is a smaller demand for them than was before.
On the other hand, the government appears now on the market with the money collected
and the prices of those commodities and services which the government wants to buy and buys
in order to spend certain things are going up. By and large, the average prices do not
change. This is only an approximate statement but for our purposes it is sufficient. Therefore,
The purchasing power of the monetary unit by and large remains the same.
But if the government prints the additional money, the situation is quite different.
This is the situation which people have in mind when they are speaking about inflation.
The government appears on the market with a newly created quantity of money, created
specially for this purpose, to buy.
And the quantity of commodities and services didn't change.
Therefore, the result of this government printing of additional money and spending this money
Money on the market means a tendency for prices to go up, and there is a different situation
now.
If the government had taxed the people, the taxpayers would have been forced to restrict
They are not forced to restrict their buying on the market immediately enough because the
government didn't take away the money.
And so we have now on the one hand higher prices paid by those people to whom the government
gives the money.
Let us assume that these are government employees. Certain government employees who do not discuss
the problem, whether it was necessary or not necessary to improve their situation. This
is quite a different thing. But the fact is that these government employees or people
who are getting money from the government for some other reasons, that these people
are now in a position to pay more, to offer higher prices on the market and there is nobody
on the market who is forced to restrict this expenditure and whose behavior brings about
without a drop in prices, and then this drop would be compensated by the opposite tendency
emanating from the higher pay of the government.
And this is the situation of inflation, and this is all the wisdom of the governments.
I can say in all the periods of history, but in the period of history in which we are living.
This is inflation.
This is precisely this inflation, this is a word newly created when these things appear
There is, from the point of view of government finance and public finance and general finance,
there is no possibility to avoid a tendency to add higher prices when the quantity of
money is increased.
It could only be avoided if this increasing of the quantity of money were compensated by
something else.
For instance, in the 19th century, there happened several times that with improvement of geographical
knowledge and the increase in traveling, the people discovered new sources of gold production.
The gold production increased and for instance, in the middle of the 19th century, there was
There was such an increase once in California and there was at another time such an increase
in Australia for a definite period, a new quantity of gold above the regular yearly
increase in the production of gold was flowing into the market.
And this brought about higher prices, this was, if you want to call it inflation, we
use another term in order not to confuse the things, but it brought about similar effects.
That means the people who were happy enough to meet the first arrivals in California and
I found that gold quantities, these people, they are appearing on the market with additional
gold, new gold in this world, and they bought many things in a very short time.
Some places in California who had been simply in the uncultivated zone became equipped with
many things which in the west were known before.
The people in these countries, in these districts of Australia and California had at that time
a similar experience, similar to the conditions of inflation, but this was a limited problem.
It was limited because the quantities, the additional quantities were very soon integrated
into the whole system of monetary problems and there were no further increases in the
quantity of money.
But this is different if the increase in money is simply an effect of the printing on the
part of the government.
The government prints.
The government may declare never again, but who is the government?
In the best case, it's the present chief of the government.
And tomorrow, there will perhaps be another man in the government, or the same man will
say, I said this under different conditions.
of Change.
It seems now to be necessary to increase the quantity of money.
Why?
Because next month there are elections, and such in this way one must say.
Some people tell us how silly to take this yellow metal as money and so on and so on.
Why are you in favor of the gold standard, they say?
My answer is because you who are asking this question, because you can print money, but
The answer is the gold standard is an accident, a geological accident, I would say, that there
is such a limited quantity only available that we can deal with it as much.
Perhaps, I don't know it, nobody knows it, perhaps one day people will discover a method
of producing gold out of nothing, out of not-gold, that is, saying, if this will happen, the
people who will live at that time will have a problem today.
But we today have another problem. Our problem is not to increase the quantity of money, not
to make inflation. You know, inflation, this is like all... I don't want to say that
Inflation is a bias, I don't take these methods of talking serious and so on, but seriously
there is one thing with inflation.
You cannot tell today, later or not, tomorrow or today after tomorrow, people in the government
will not be prepared to inflate for some reason, they will have some excuse, they will say
inflation is bad, never should be a question of inflation and then they say yes but we
didn't take into account the conditions of an important war, really this is, they didn't
And then, they are increasing the quantity of money.
And then it happened again and again in the history that inflation was continued up to
to the point in which the purchasing power of the monetary unit reached the zero point.
This has nothing to do with the problem of the cause for which people did the inflation.
Let us now talk about historical problems. It happened again and again in the history
of mankind in the last 200 years, not earlier times, that people went inflating, that means
In modern methods of inflation, that means imprinting paper money so far that they finally
reach the zero point.
This happened, for instance, with the so-called continental currency and the War of the American
Revolution in 1781 and so on.
It was a very desirable experience for some people, but don't forget, at that time, at
the end of the 18th century, the people of America, the colonists of America, the colonists
of the North American colonists that revolted against England, were an agricultural people.
More or less everybody was connected with agriculture and he didn't buy the food, he didn't buy
other things.
The food, this is something that you ask to your wife, where is our food, if we had to,
but it is not the problem of going to the market.
And therefore the impression which this left and the whole problem was of minor importance
only for the Americans at the end of the Revolutionary War.
I mention it only because I assume that you are very well familiar with the financial
History of the American Revolution. But it happened again and again in other countries.
Later and later, at the time, when everybody, more or less, was living in money economy.
and you should not believe that the whole thing is inflationary, that this is a vice of our
There is a very bad general tendency of historians or pseudo-historians to ascribe all virtues
to the past generations and all vices to those living today.
I would be very unhappy if you were to believe that what I wanted to say is that all ages
were very virtuous, but only since the invention of the printing press, they have developed
a paper money.
There were already inflationists in the ages, long, long before the printing press.
I can't give you all historical examples.
I want only to advise you if you want to study this problem.
There are many important cities, also in the United States, but still more natural in Europe.
There are historical museums in which you find the coins of the past collected and you
can look at these coins from various points of view, mostly people look at it from the
from the point of view of aesthetics, but you could also look at it from the point of
view of the history of not of coins but of money.
And then you will discover that for instance in the second century after Christ, the Roman
emperors were already very efficient in making inflation, only, imagine, inflation of a very
by different kind, which was not called inflation, developed only later, they didn't have the
printing press.
And people in general believe that most of the vices of mankind developed only with development
of Modern Methods of Production. Now, the printing press is certainly a modern method,
but the method of using money for such purposes as the inflationists of our days are using
it was already known and practiced by the Roman emperors of the second century after
only that they had other methods, they had only hard money, silver coins, and their method
was, there was no question of printing, the question was of admixing a little bit copper
to the silver and to more and more, and under the assumption that the people, that the masses,
that the people will be stupid enough not to see it.
At the beginning, really they didn't see it, but more and more and then the governments
became more aggressive, let us say, and they took more and more copper and the colors changed.
You know, when you add copper to silver, there's a tendency for the color to change a little
bit.
And this is some, this was too much for the people, you know.
And you had this story of dealing with silver coins and mixing copper, you had this as a
method of government finance even in the modern ages before the development of the printing
press in the field of the production of money.
What I want to say is, and this is, I think it must be known by everybody is this, increasing
the quantity of money is not the same as increasing the quantity of money.
Therefore, to use the term supply of money is already very dangerous, very dangerous.
Because you have a lot of people who consider themselves as specialists in monetary problems,
who are using this term supply of money and say, the supply of other things increases,
Why should not the supply of money increase too?
And there is one specialist says every year 2%
Another specialist says every year 3%
There is no limit to such progress
And really we have professors who are discussing
Should the yearly increase of money be 2% or 3% or 5% or what else?
If the money is made by mortal men who have the great facility of a printing press, then
And this is a very dangerous way of formulating the problems.
Every kind of question dealing with the problem of the supply of money can be answered and
is answered from the point of view of, from the personal point of view of the people who
have to answer this.
If people have debt, then they are in favor of what has been called a light monetary unit.
If people are expecting that the additional quantities of money, the creation of which
they are suggesting, will first come to the group of people to which they are belonging,
It is absolutely out of question to leave the decision where the quantity of money should
be increased by 1% or by 1000% to leave this to the people or to the government or to any
specialist and so on.
What this means has been again and again demonstrated by history.
There were, if you look at the history of the last 50 years, you will find that in almost
all countries of the world inflation went far beyond the proposals and ideas, even of
If we want to have money, it must be something that cannot be increased with a profit by anybody,
with the government or citizens and so on.
And the worst faking of money, the worst things that were done to money,
were not done by criminals, but it was done by governments, which by and large very often
could be considered as ignoramuses, but not as criminals.
We had the people who were living in the period of between 1900, that is 1920 and 1950, had
A dozen times this experience in various countries of the world.
People will say, oh, this may be the effect of bad monetary policies, but we are in favor
The problem is not what a man who has no power and no influence and no possibility to increase
the quantity of money or to derive any advantage from the increase of money may say.
These people don't come.
This is a pure theory, a very abstract theory if you say if I were the head of the government
I would only increase every year the quantity of money by X percent, not more, only X percent
and I will say three percent and not more.
And what will you say if the people elected will add one percent today and the second
percent tomorrow and so on?
Specifically, we cannot have a system of money, which the decision is left to the people who derive.