Ladies and gentlemen, I came to this room with the intention to deliver a lecture.
But now I got, instead of the lecture, an invitation to answer these questions.
These are questions out of the questions you have asked, and Miss Bean was so kind to organize
these questions in the system.
In my estimate it would take about three days, every day six hours to discuss these questions
and to answer me these questions, to try to answer them and to react to your reactions
to my answers.
You can therefore understand that I am postponing my real lecture, which I intended to deliver,
and will try as much as possible to answer some of the questions, those which I consider
as the most important and most urgent of the list, which was compiled by Miss Bean.
Otherwise, one of the questions is, what is inflation? What causes it?
Can you describe some of the effects of inflation?
To do all this in a correct way, it would take me several hours and several days.
I will try to be as concise as possible.
Inflation is an increase in the quantity of money available.
What causes it, you ask the questions.
The cause of inflation can be different.
It can be, if the country is, for instance, on a metallic standard,
It could be an increase in the production of the precious metal, gold or silver, which is the monetary unit of the country.
More often inflation is the effect of an over issuance of paper money.
It's the simplest way to produce an inflation. You have only to print and it doesn't make
any difference for the printer. Whether you print a $1 bill or a $10,000 bill. And therefore
It is very easy to proceed very far in inflating.
Inflation means that the quantity of money is increased against the quantity which prevailed at the beginning of the period in question.
And this means, of course, that somebody must get these additional bills which were printed.
And some bodies who are getting this increased quantity of bills
are now in a position to buy more or to pay more than they did before.
Therefore, inflation brings about a tendency to an upward movement of prices.
If inflation is very modest, then it can be considered as a system that can last for some time, at least, and can be discussed.
If these conditions are absent, if the inflation is practically without any limits, then it
means that the monetary system concern is simply destroyed.
This is perhaps if one had said this several hundred years ago, people would have said
this is of course a possibility.
But today we can say this happened. It happened again and again. It happened in various countries
where the government or the banks or the financial authorities in general started to increase
is the quantity of money. They started modestly, but the effect of any kind of inflation is
that there is an increase in prices, and therefore as the prices are increasing, the increased
quantity of money does not render better services to the various individuals than the smaller
What quantity did before the inflation and therefore inflation is something that is difficult
to stop.
If one wants to stop it, one must change one's economic ideas and one's political goals.
We had more modest inflation. We had in the last decades again and again.
And I don't want to talk about it now, because more or less our contemporaries have had the experience and know what this means.
Here the next question asked is, you have written in your books that the policy of inflation
helps some persons and hurts others. Can you give some examples? This is the easiest question
If you increase the quantity of money, that means with the result that the purchasing power of the individual money unit is dropping,
Then, the meaning of a definite quantity of money changes considerably.
When, let us say, in central Europe in the 19th century,
In the 19th century, a man was in debt with 10 units of his country's money.
This meant much more than it did mean several years later with the progress of inflation.
That means the inflation in lowering the purchasing power of the monetary unit,
lowers the burden of the debtors,
and makes and deprives the creditors of a part of the claim they had before the inflation
started.
What we went through again and again, especially also in the 19th century and later, was that
in various countries the government increased the quantity of money to such an extent, that
means the quantity of banknotes, let us say, to such an extent that the purchasing power
The law of the monetary unit dropped considerably.
The way in which this is affected can easily be understood.
If you give to a man who used to have his lunch at a simple restaurant
and paid for it one dollar.
If we give to such a man several additional dollars,
he is prepared or ready to pay more for his lunch.
And if you do this in the whole country, then you bring about a situation in which the various individuals
are paying more for what they used to pay less, and therefore the prices are going up,
And they are even forced to pay more if they want to buy the same quantity they used to buy before.
If you give to a man who used to have a daily income of $5,
If you give to a man a daily income of $10, then he is in a position to pay more for the same things for which he paid yesterday less.
But if you do the same thing with a great many or with all people,
Then the result is that everybody is in a position to pay more for the same thing for which he paid yesterday less.
And if you do this in the whole country, then you bring about not only a situation in which every man is in a position to pay more,
You create a situation in which he is not only able to pay more,
but also forced to pay more, because he competes now with other people
who are in the same situation, that they are prepared to pay more
if they can't get the same for a smaller quantity of money.
The misunderstanding of this problem brought about the great monetary troubles which dominated the economic scene of the world and especially of Europe in the 18th century, and of Europe and America in the second part of the 19th century.
People, if you ask the very simple-minded men,
what can be done in order to improve my situation,
you see I am earning three dollars a day,
and for three dollars a day it's impossible to make a decent living
Living in the place in which I am living, then this man would answer,
you give me a little bit more, and if this man who has to pay
provides this little bit more by printing it, by increasing the quantity of money,
as far as it is possible for you, then the result, and if all other people do the same
thing, then the result will be that the prices will go up and you will be in the same situation
it was before.
That means if the government increases the quantity of money, it must give this money
It doesn't mean that the government increases the quantity of money in order to keep the money in the property of the government.
If the government increases the quantity of money in paying additional quantities to various people under various titles,
Then these people are in a position to spend more for the same things for which they spent less yesterday.
They are in a position. And they are also forced to do this because they are competing now with people who are in the same situation.
If the government increases the pay of its employees, it does not improve in the long run the economic situation of these people, because it is true Mr. A has now more than he had yesterday.
He can spend more. He can. But he is forced to spend more because all the others are in the same situation,
did also get an additional quantity and are therefore spending more.
Therefore, the inflation, the increase in the quantity of money on the part of the government
does not change ultimately the situation.
I mean the economic situation, not the monetary situation, and ultimately only.
It results finally in a situation in which everybody has to pay more
for the things for which he paid less yesterday.
This situation seems to be very strange, but it is not unknown to our contemporaries.
They didn't learn it from books. They learned it from the daily experience.
And they asked for higher wages. The people who were responsible for the payment of these
wages were forced to do it. And there were threatened strikes and demonstrations and
and they cooked to it because the government increased the quantity of money.
An increase in the quantity of money, other things being equal, brings about an improvement
and the economic conditions of those people to whom the additional quantities of money,
the newly created quantities of money come.
They are now in a better position.
And what are they doing?
They want to spend more for their own purposes.
They want to let us say that they are very simple people and they have no other wishes than to eat and to drink.
They are now forced, if they want to drink better, better things,
or if they want to drink more things, which happens also in the world sometimes,
then they are forced to spend more, and thus prices are going up.
In what we call inflation means an increase in the quantity of money and such an increase in the quantity of money
as this money does not remain in mid-air, but goes into the pockets of various peoples, necessarily,
that these people are now in a position to spend more.
And they are not only in a position to spend more, they are forced to spend more
because they compete for the same quantity, for the not increased quantity of goods,
with other people who are also driven by the same wishes
to get more of this good than they did yesterday.
Therefore, the idea of very simple-minded people, I must say,
but there are still such people in the world,
The idea that the only thing that is necessary for improving their conditions is to give them more money.
And if they look around in the world and when they discover that the money can increase,
the quantity of money can increase by printing additional banknotes,
they are asking the government to print such additional banknotes
They do not seem to give it to them. But what they do not see in the first instance is that if this happens not only to them but to other people too, they are getting more money, it's true, they could now pay more for the same thing for which they paid less yesterday, but the others are in the same situation.
This is the problem of inflation.
Increasing the quantity of money means giving,
that this increased quantity of money must appear in somebody's cash holdings.
And this somebody, or these many somebody, these millions of somebody sometimes,
Who are getting more money are now, at the first instant, happy.
They say, it's very nice to have more money.
But in the morning, but when they go to the market,
they discover something which they did not take into account before.
They discover that the prices are going up.
And why are the prices going up?
The prices are going up because other people are in the same happy condition
that the income which holds them up, you know.
And this is the problem of inflation.
It seems to be very simple,
But it is certainly not so easy to be understood by the masses,
because what you see is that the people, various groups of people,
are asking for more pay, in spite of the fact that they know
This additional quantity must be printed as an additional quantity of paper money.
If people are asking for more money, then there are two, let us say, higher salaries to make it as simple as possible.
Then there are two methods possible, either one takes away from other people.
This is not such an easy thing, you know, and this is a thing that cannot be done.
Or one increases the quantity of money, and this can be done under the system of paper money,
It can be done because printing a bill of $10 is much cheaper than $10.
Therefore, the governments can enter into this line of action.
The whole problem which we had to monitor, or let us say, financial problem,
we had to deal with in the last 200 years, let us say,
or 100 years, it depends how you want to describe this situation,
consisted in the fact that it was possible to increase the quantity of money
in a way that caused the increasing gentlemen much less than the nominal amount in question.
If this is done by private citizens without any, let us say, approval on the part of the government,
it is a rather risky affair, and it can sometimes end, or very often ends, for the gentleman who did it in being sent into a prison.
But if it's done by the government, then, of course, it's another affair, you know.
If the government says,
we want to make an additional expenditure, something very good,
we want to give to poor children more bread.
And for this purpose, of course, we want to print additional banknotes
and use it in additional quantity of banknotes.
This is the final goal which they want to attain.
It's absolutely correct. There is nothing to say against a policy
that gives to hungry children more bread.
But the method, if you tax the people in order to give something to poor children,
then those people who are paying the taxes are forced to restrict their expenditures
in order to pay the tax.
And you can use this restriction
in a complicated way which I have not to describe here.
This restriction of some expenditures on the part of the taxpayers
makes it possible for the government
or for the institution which is in question
to give subsidies to poor people.
But if you do not take away from somebody in order to give to somebody else,
but only declare that this has to be done
and do it in increasing the quantity of money as the only way which you can do it,
Then the result is that there is a greater quantity of money on the market fighting for
a not increased quantity of gold.
So this is the situation.
It's a very simple description of the situation.
The situation is very simple, but it seems to be very complicated
if you are either in the government,
or if you are writing newspapers, articles for this government,
or if you are afraid of some, let us say,
things which one calls labor unrest or similar things which are not very, which have not the sympathies of everybody.
The problem is that the quantity of money is not some innocuous or neutral affair, you know.
The prices are determined by one part of the determination of the prices,
is in the quantity of money available.
And increasing the quantity of money available,
properly called inflation, is the problem which we are dealing with.
You may say, why does he explain it to us?
It is so extremely simple. Everybody understands it.
I will not deny that everybody could understand it
if he had not some reason
to close one apartment of this brain
And why does he do it? Because he is in self-interest.
It will be difficult for a statesman to tell to a group of people,
I know it would be very good for you, you would be very happy if you could get higher salaries.
But in order to pay you a higher salary, I, the statesman, the head of the state, I would have either to tax other people or to increase the quantity of money.
It is very difficult to tax other people, everybody understands.
And everybody ought also to understand that increasing the quantity of money means a change
in the purchasing power of the monetary unit.
You may ask, why does he talk about such a thing which is so easy to understand and which
Everybody knows, why does she talk and make such a long talk?
We have more important things to discuss and so on.
I deny that you have more important things to discuss.
And I deny that it is very simple.
It seems very simple if you try to explain it to an individual.
If you take Mr. X or Mrs. X and explain him the whole story,
then he understands it very well.
But if there are 100,000 or a million Mr. or Mrs. X,
then they say, I don't care what the consequences are.
I need more.
I wish more.
And if you don't prepare to admit it, then you must be forced to it by violence.
The whole thing is, as you see, very simple.
The question is that even the most simple things become complicated
if into the thinking process of the individual
enters the problem or the question,
what is good for me this afternoon?
It's important to say this after, because if you explain to the individuals the later effects,
the effects in the long run of this policy, they will understand that the policy of increasing the quantity of money,
The Policy of Inflation brings about a situation which from the point of view of the individual
which was enthusiastic about the short-term effects, appear as undesirable, very undesirable consequences.
This is the problem of inflation.
You will say, why does he explain such a simple thing to us?
We all know it. I know you all know it.
But it's a great step from knowing it
and from adopting a policy which is based upon that knowledge.
And this is the problem, the problem of the inflation.
You must not believe that the government of countries
that proceeded to boundless inflation were idiotic.
They were not idiots.
They were even, some of them knew even what the effects are, you know.
But under the conditions under which they had to act,
and looking, not upon the long run effects, but only upon the short run effects, they acted in the way in which they did.
You could, if you take intelligent people, most of our contemporaries fortunately are intelligent,
If you take them and explain it to them, they understand it very well.
But, they say, this is a later affair.
At this instant, I prefer the solution
of which you say that it is impossible or that it is dangerous
or bad or detrimental as a long run solution.
It's the difference between the short run and the long run, you know.
In the short run, many dangerous poisons have good effects.
You could compare it.
I am not in favor of such comparisons, but many people do it,
do it, and therefore I want to refer to them. You could compare it to the conditions of
certain drugs which bring about, when in the short run, agreeable results. Results which
The men who undergo sin are considered as agreeable, but in the long run very bad effects.
And the transition from short-term effects to long-term effects is the problem for which
which we have to do, you know, in this case.
And therefore there is nothing that is more important for economic discussions
than to explain to the people who have to make the decision.
And this is mankind.
To explain them the effects in the short run and the effects in the long run.
and to tell them that they cannot choose everything or anything
without being fully aware also of the long-run effects.
When we do this, it is unnecessary to answer the question
which you have on page two, on the head of page two of the paper.
I don't know whether you have distributed this paper or not.
The question, can you describe some of the effects of inflation?
I am not in favor of describing some of the effects of inflation.
I think you must say,
can you describe all the necessary unavoidable effects of inflation?
And then people will realize that this is something which is certainly not a policy of people who want to remain in the world,
who want to live longer than only tomorrow, who are thinking also of the day after tomorrow.
Then the next question, which was formulated here, says,
You have written in your books that the policy of inflation helps some persons and hurts others.
Can you give some examples?
This is not so complicated.
If you are a debtor,
If you have a debt and if you must pay for it, you are very happy if the purchasing power of the debt shrinks automatically without your interference.
And this is the reason why we have to talk about these things, why we have to deal with these things in such a detailed way is precisely that there are effects of inflation which all those people whom they regard, consider as very beneficial effects.
If it were not for this reason, there wouldn't be any reason for us to deal with the whole question.
What we have to realize is that the system of money
must not change, or let us say in any way change, neither to one side nor to the other sides,
the purchasing power of the monetary unit.
One must try to keep the power of the monetary unit as unchanged as possible.
It is not always possible to make this very strangely, but these are probably details which we must not deal with when we have only 50 minutes time for a lecture.
I want to say, I want now to ask, in other of these questions, which concern this.
Are there some times, says one of the questions, when the quantity of money should be increased?
For instance, when trade and production expand, when the population increases.
Suppose people hoard money and don't spend.
Now, why should somebody hoard money?
There must be some special reason, some special things going on with money
that bring about a situation in which a man thinks it's better to haught money.
If he haunts money,
he does not have any immediate advantage of the possession of money.
If he invests this money in commodities,
if he invests this money in business,
He will reap an income from it.
Why does he not choose this way?
There must be some special reason.
And this special reason would be that the situation in the money market is such
that the purchasing power of the monetary unit increases.
I think money in the long run, not for special purposes, which could exist,
but the question is something else.
We had in the past decades or the past hundred years,
We had still a system in many countries that consisted in accumulating a reserve of money for an unknown emergency.
That means people said unknown emergency, but what they had in mind was a war, you know.
And therefore, for instance, after the Franco-Prussian war of 1871, when the French had to pay to
To the Germans, a great indemnity in Keshe, the German government decided that a part
of this, a small part, of course, should be reserved in Keshe on a special place as a
The reserve for a coming war, they therefore had a cash reserve for the war.
The most interesting thing about this cash reserve was its size.
In France, the average citizen said, it's a very good idea, when there comes a war, then the government will have already the money.
It will be very easy to defend the country by spending this money.
Yes, but the question was the size of this war.
While a modern war costs a big country like Germany was,
at that time billions of dollars,
they accumulated five million dollars, ten millions or so on.
It would have been to think if a man would have said I want, I am, an individual would have said, I am prepared for everything, for every dangerous affair that may come in life, because I have in my reserves 5,000 mark or 10,000 mark.
5,000 mark and 10,000 mark were a nice sum of money, but a catastrophe which would have forced a nation, a big nation, a nation of 50 or 80 millions of people to use its reserves would not have been provided sufficiently
with five or fifty million dollars mark or so on.
You cannot, you cannot, people overrate, and this is one of the most popular things,
People overrate or transfer from the life of individuals to things without any scruples
to the life of a nation.
An individual can say, if I accumulate a certain reserve, then it will be very useful in case of something that happens to me, an accident, or so on.
But for the nation, this story is quite dangerous.
It would not have been possible to do away with the effects of any great political affair by such a reserve in the things.
What we have to realize is that money is in the popular doctrines,
in the popular ideas, on the one side, tremendously overrated in importance,
and on the other side, tremendously underrated in importance.
If one cannot, one can say of a man, he travels to a foreign country,
to an under-civilized country for a longer travel,
and he has in his pockets a reserve in case of, let us say, 5,000 marks,
in Case Something Unexpected Should Happen to Him.
But, to the things that could happen to a nation, you can do these things, you know.
You can say to a man, it is very, you can provide for the situation, for an accident,
you can say, if you go, you can do this every day, you can say, I have in my pocket 100 marks extra because one cannot know what happens, but you cannot say, with regard to history, I have collected 500 billion marks in case Germany should
undergo, again, such a bad experience as it had to undergo in the Thirty Years' War, or something like that.
You cannot transfer your ideas from the lives of individuals to the lives of nations.
You cannot, what your experiences which you have made as a citizen, as a very wise citizen of a country are of no value at all if you have to deal not with one citizen,
not with one family, not with hundred citizens,
but with all the citizens, with the whole nation,
and with the situation of the whole nation and the world.
Now, let us ask a question which is very practical
and is asked every day,
or let us say it has to be answered every day practically by the policies of the government.
If the government wants to spend more money than it has been for whatever reason, where
should it get the money?
What can the government do?
If the government, if it depends on the quantity concerns,
that means if the government needs money in order to spend more,
a little bit more or so on, then it can tax the citizens
or it can borrow from the citizens,
Provided this is within the limits, within the quantity limits of everything that regular human life and national life requires.
But if there comes something of this great catastrophe,
then these solutions are without any meaning.
You cannot transfer your ideas from your everyday affairs
to the great historical catastrophes which occur.
Let us say the German or the Central European conditions
were by and large in a good, considerable, or at least tolerable state of affairs
at the beginning of the 17th century.
Then came these catastrophes, on the one hand,
and the necessity to fight with the invasions of the Turks and the other Asiatic peoples
and on the other side, the great religious conflicts in Europe itself, the war of thirty
years in Germany and all the effects which it had on the other countries.
I think what you would have done before would have made it impossible,
would have made it disappear, this catastrophe, you know.
You cannot, you can say the same about the old Roman Empire.
Nothing that the Roman Empire, the Roman Senate and the Roman people could do
would have prevented the problem which they had to solve
when then came the great invasions from Central and Northern Europe
and Eastern Europe and Asia in the later centuries.
You can provide against those accidents, catastrophes and so on, that happen in the regular course
of Affairs from time to time that can therefore be provided for by some measures taken in advance.
But you cannot provide for the great changes in history.
Whatever the Roman Empire would have done, it wouldn't have prevented the catastrophes
which followed and led to the disintegration of the Roman Empire, to disappearance of the
to the ancient civilization and to the emergence of the conditions which we call the rather
unsatisfactory conditions of the Middle Ages.
I have said a few things about those problems which I found in this very interesting paper
given to me by Miss Bean, but you cannot do more. You cannot do more because you would
could not have to provide for a number of catastrophes or events, simply, which would have happened
that could not happen at the same time or which would have emerged even if everything
had to be done or has been done in order to prevent it.
You cannot make the future history a history of simple affairs, regular affairs of every day.
You cannot make it because history doesn't go this way.
Now, I know you don't have very much more time, these boys have lunch and I hope you're staying with us too, but you're not staying for lunch?
Oh, not yet.
Well, you can decide later.
But anyway, that's not one question you have to ask now.
But I have enough questions here to keep you busy for a long, long time, and I don't know how many you want to answer.
There are some that ask about the quantity of money increasing in order to permit production to rise.
That's one of them. There's some that asked about labor unions, wages, and one about the causes of the depression, and one about deflation.
Now, you want to take one of these?
Yes, I could, if you think I can talk now, an hour longer.
Well, here are two about the increase in the money supply.
One asks, does textbooks frequently advocate an increase in the money supply to keep up with productivity?
And the other one asks, you can answer the two together probably,
would it be possible to increase the money at a steady rate each year, 2 to 3%, for government expenditure?
One for production and government expenditure.
Increasing the quantity of money, without any regard to the question what happens in the other world, would be absolutely useless.
There is no reason why one should increase the quantity of money when the conditions become such that it is possible to render the same quantity of services with a smaller quantity as before.
The people need money in order to bring about the transactions which result out of what is happening in the markets.
But this is not a fixed rate, and therefore to say something simply, we want to determine the quantity by which the quantity of money should increase from year to year without any regard to the other conditions which exist.
This would mean, sir, simply operating in a world of, let us say, in a world of assumptions
that are not those that are not coincide with the situation as it really exists in the world.
Therefore, to say the quantity of money should have nearly an increase of 2 to 3 percent
or to 5 or to 10 percent without any regard
Do you want to say something about the effects of deflation?
You see, deflation, we are living still in a world
in which the quantity of production and many other things are increasing from year to year.
Whether this requires an increase in the quantity of money
or whether it could be done without such an increase depends on the conditions.
But it is certainly true that a restriction of the quantity of money
would bring about a bad situation, a situation in which some people would suffer
and therefore there would be a widespread dissatisfaction.
Would you like to comment on the causes of the depression, the 1929 crash and the depression of the 30s?
You can't say very much.
A part of this depression was due to the fact that when people had suffered from an expansion of currency,
from inflation and therefore from the general tendency of prices to higher points,
that then they believe that the opposite would be very good.
But the opposite is not good only on account of the fact that the other change is wrong.
What is needed is, and what has to be done is,
that the people should not interfere with the quantity of money and with the market
merely in order to satisfy some purely abstract schemes which they have developed.
that they should not say, one should, for instance, there were people who said every year there should be a general increase in the quantity of money of X percent, every year there should be an increase in the rise of prices of so on and so on, such general things are without any meaning.
What we have to wish is that every year or every time the improvements which could be done on account of the fact
Well, I think that's enough work for today. Do you have any final words before they leave for lunch, just this, no more?
If you have some special questions, I am prepared to answer them.
But you see, in this field there are so many questions that if you ask them,
And you must be prepared to answer one after the other in various fields of economic structure.
And this is, I think, not a very good method of dealing with the problems.
Can I ask a question? If the professor was speaking to President Nixon, what would he say?
If you were speaking to President Nixon, what word of advice would you give him?
I object to the question. I object to the question because you think you can simply ask, you cannot ask this a statesman, you cannot ask this a country, you cannot ask this an individual.
You cannot go to an individual and say,
if you want to be in a better position,
if you want to become a great man, tell me what you have to do.
You cannot simplify these things in a very simple way.
The great idea of many people is, they want to know a rule,
or a few rules, or a law, or something like that,
that can simply be put into effect,
and would solve all the problems of all the people.
Yes, this would be very good.
That means what they want is to live in the Garden of Eden.
Unfortunately, no longer open to everybody's access.