WEBVTT NOTE Can We Still Avoid Inflation? 1 00:00:00.000 --> 00:00:05.840 Can We Still Avoid Inflation by Friedrich A. Hayek 2 00:00:05.840 --> 00:00:12.840 In one sense, the question asked in the title of this lecture is purely rhetorical. 3 00:00:12.840 --> 00:00:18.280 I hope none of you has suspected me of doubting even for a moment that technically there is 4 00:00:18.280 --> 00:00:21.520 no problem in stopping inflation. 5 00:00:21.520 --> 00:00:27.520 If the monetary authorities really want to and are prepared to accept the consequences, 6 00:00:27.520 --> 00:00:33.240 They can always do so, practically overnight. They fully control the base of the pyramid 7 00:00:33.240 --> 00:00:39.040 of credit, and a credible announcement that they will not increase the quantity of banknotes 8 00:00:39.040 --> 00:00:46.240 in circulation and bank deposits, and if necessary even decrease them, will do the trick. 9 00:00:46.240 --> 00:00:53.080 About this, there is no doubt among economists. What I am concerned about is not the technical, 10 00:00:53.080 --> 00:00:59.400 but the political possibilities. Here, indeed, we face a task so difficult that more and 11 00:00:59.400 --> 00:01:06.240 more people, including highly competent people, have resigned themselves to the inevitability 12 00:01:06.240 --> 00:01:12.280 of indefinitely continued inflation. I know, in fact, of no serious attempt to show how 13 00:01:12.280 --> 00:01:17.880 we can overcome these obstacles, which lie not in the monetary, but in the political 14 00:01:17.880 --> 00:01:27.880 and I cannot myself claim to have a patent medicine which I am sure is applicable and effective in the prevailing conditions. 15 00:01:27.880 --> 00:01:36.880 But I do not regard it as a task beyond the scope of human ingenuity, once the urgency of the problem is generally understood. 16 00:01:36.880 --> 00:01:46.880 My main aim tonight is to bring out clearly why we must stop inflation if we are to preserve a viable society of free men. 17 00:01:46.880 --> 00:02:04.880 Once this urgent necessity is fully understood, I hope people will also gather the courage to grasp the hot irons which must be tackled if the political obstacles are to be removed and we are to have a chance of restoring a functioning market economy. 18 00:02:04.880 --> 00:02:34.880 In the elementary textbook accounts, and probably also in the public mind generally, only one harmful effect of inflation is seriously considered, that on the relations between debtors and creditors, of course, an unforeseen depreciation of the value of money harms creditors and benefits debtors. This is important, but by no means the most important effect of inflation. And since it is the creditors who are harmed, and the debtors who benefit, most people do not particularly mind. 19 00:02:34.880 --> 00:02:39.380 at least until they realize that in modern society the most important and 20 00:02:39.380 --> 00:02:44.440 numerous class of creditors are the wage and salary earners and the small savers 21 00:02:44.440 --> 00:02:48.800 and the representative group of debtors who profit in the first instance are the 22 00:02:48.800 --> 00:02:55.520 enterprises and credit institutions but I do not want to dwell too long on this 23 00:02:55.520 --> 00:02:59.600 most familiar effect of inflation which is also the one which most readily 24 00:02:59.600 --> 00:03:13.600 20 years ago, I still had some difficulty to make my students believe that if an annual rate of price increase of 5% were generally expected, we should have rates of interest of 9-10% or more. 25 00:03:13.600 --> 00:03:21.600 There still seem to be a few people who have not yet understood that rates of this sort are bound to last so long as inflation continues. 26 00:03:21.600 --> 00:03:28.120 continues, yet, so long as this is the case, and the creditors understand that only part 27 00:03:28.120 --> 00:03:33.360 of their gross return is net return, at least short-term lenders have comparatively little 28 00:03:33.360 --> 00:03:38.720 ground for complaint, even though long-term creditors, such as the owners of government 29 00:03:38.720 --> 00:03:43.440 loans and other debentures, are partly expropriated. 30 00:03:43.440 --> 00:03:48.680 There is, however, another more devious aspect of this process, which I must at least briefly 31 00:03:48.680 --> 00:04:00.680 It is that it upsets the reliability of all accounting practices and is bound to show spurious profits much in excess of true gains. 32 00:04:00.680 --> 00:04:14.680 Of course, a wise manager could allow for this also, at least in a general way, and treat his profits only what remains after he has taken into account the depreciation of money as affecting the replacement costs of his capital. 33 00:04:14.680 --> 00:04:22.560 But the tax inspector will not permit him to do so, and insist on taxing all the pseudo-profits. 34 00:04:22.560 --> 00:04:28.480 Such taxation is simply confiscation of some of the substance of capital, and in the case 35 00:04:28.480 --> 00:04:33.080 of a rapid inflation may become a very serious matter. 36 00:04:33.080 --> 00:04:38.520 But all this is familiar ground, matters of which I merely wanted to remind you, before 37 00:04:38.520 --> 00:04:45.040 for turning to the less conspicuous, but for that very reason, more dangerous effects of inflation. 38 00:04:45.040 --> 00:04:51.320 The whole conventional analysis, reproduced in most textbooks, proceeds as if a rise in 39 00:04:51.320 --> 00:04:59.180 average prices meant that all prices rise at the same time by more or less the same percentage, 40 00:04:59.180 --> 00:05:03.940 or that this at least was true of all prices determined currently on the market, leaving 41 00:05:03.940 --> 00:05:13.940 pointing out only a few prices fixed by decree or long-term contracts, such as public utility rates, rents, and various conventional fees. 42 00:05:13.940 --> 00:05:16.940 But this is not true or even possible. 43 00:05:16.940 --> 00:05:26.940 The crucial point is that so long as the flow of money expenditure continues to grow, and prices of commodities and services are driven up, 44 00:05:26.940 --> 00:05:56.680 This is a fundamental point, which the master of all of us, Ludwig von Mises, has never tired of 45 00:05:56.680 --> 00:06:26.680 It seems, nevertheless, necessary to dwell upon it at some length, since, as I recently discovered with some shock, it is not appreciated, and even explicitly denied, by one of the most distinguished living economists, that the order in which a continued increase in the money stream raises the different prices is crucial for an understanding of the effects of inflation on the economy. 46 00:06:26.680 --> 00:06:35.680 was clearly seen more than 200 years ago by David Hume and indeed before him by Richard Cantillon. 47 00:06:35.680 --> 00:06:42.680 It was in order deliberately to eliminate this effect that Hume assumed as a first approximation 48 00:06:42.680 --> 00:06:49.680 that one morning every citizen of a country woke up to find the stock of money in his possession miraculously doubled. 49 00:06:49.680 --> 00:06:54.680 Even this would not really lead to an immediate rise of all prices by the same percentage, 50 00:06:54.680 --> 00:07:00.320 percentage. But it is not whatever really happens. The influx of the additional money 51 00:07:00.320 --> 00:07:06.380 into the system always takes place at some particular point. There will always be some 52 00:07:06.380 --> 00:07:12.340 people who have more money to spend before the others. Who these people are will depend 53 00:07:12.340 --> 00:07:17.500 on the particular manner in which the increase in the money stream is being brought about. 54 00:07:17.500 --> 00:07:23.580 It may be spent in the first instance by government on public works or increased salaries, or 55 00:07:23.580 --> 00:07:29.780 It may be first spent by investors, mobilizing cash balances or borrowing for the purpose. 56 00:07:29.780 --> 00:07:35.700 It may be spent, in the first instance, on securities, on investment goods, on wages, 57 00:07:35.700 --> 00:07:37.500 or on consumers' goods. 58 00:07:37.500 --> 00:07:42.780 It will then, in turn, be spent on something else by the first recipients of the additional 59 00:07:42.780 --> 00:07:45.340 expenditure, and so on. 60 00:07:45.340 --> 00:07:50.580 The process will take very different forms according to the initial source or sources 61 00:07:50.580 --> 00:07:57.340 of the additional money stream, and all its ramifications will soon be so complex that 62 00:07:57.340 --> 00:08:03.100 nobody can trace them. But one thing all these different forms of the process will have in 63 00:08:03.100 --> 00:08:11.060 common, that the different prices will rise, not at the same time, but in succession, and 64 00:08:11.060 --> 00:08:17.660 that so long as the process continues, some prices will always be ahead of the others, 65 00:08:17.660 --> 00:08:23.380 and the whole structure of relative prices, therefore very different from what the pure 66 00:08:23.380 --> 00:08:27.720 theorist describes as an equilibrium position. 67 00:08:27.720 --> 00:08:34.340 There will always exist what might be described as a prices gradient in favor of those commodities 68 00:08:34.340 --> 00:08:41.180 and services, which each increment of the money stream hits first, and to the disadvantage 69 00:08:41.180 --> 00:08:46.500 of the successive groups which it reaches only later, with the effect that what will 70 00:08:46.500 --> 00:08:52.360 will rise as a whole, will not be a level, but a sort of inclined plane, if we take as 71 00:08:52.360 --> 00:08:57.780 normal the system of prices which existed before inflation started, and which will approximately 72 00:08:57.780 --> 00:09:03.700 restore itself, sometime after it has stopped. To such a change of relative prices, if it 73 00:09:03.700 --> 00:09:09.700 has persisted for some time, and comes to be expected to continue, will of course correspond 74 00:09:09.700 --> 00:09:15.380 a similar change in the allocation of resources. Relatively more will be produced of the goods 75 00:09:15.380 --> 00:09:20.720 and Services whose prices are now comparatively higher, and relatively less of those whose 76 00:09:20.720 --> 00:09:23.140 prices are comparatively lower. 77 00:09:23.140 --> 00:09:28.780 This redistribution of the productive resources will evidently persist so long, but only so 78 00:09:28.780 --> 00:09:32.120 long as inflation continues at a given rate. 79 00:09:32.120 --> 00:09:37.000 We shall see that this inducement to activities, or a volume of some activities, which can 80 00:09:37.000 --> 00:09:43.260 be continued only if inflation is also continued, is one of the ways in which even a contemporary 81 00:09:43.260 --> 00:09:52.260 Inflation places us in a quandary because its discontinuance will necessarily destroy some of the jobs it has created. 82 00:09:52.260 --> 00:09:59.260 But before I turn to those consequences of an economy adjusting itself to a continuous process of inflation, 83 00:09:59.260 --> 00:10:05.260 I must deal with an argument that, though I do not know that it has anywhere been clearly stated, 84 00:10:05.260 --> 00:10:10.260 seems to lie at the root of the view which represents inflation as relatively harmless. 85 00:10:10.260 --> 00:10:25.260 It seems to be that if future prices are correctly foreseen, any set of prices expected in the future is compatible with an equilibrium position, because present prices will adjust themselves to expected future prices. 86 00:10:25.260 --> 00:10:37.260 For this it would, however, clearly not be sufficient that the general level of prices at various future dates be correctly foreseen, and these, as we have seen, will change in different degrees. 87 00:10:37.260 --> 00:11:07.260 The assumption that the future prices of particular commodities can be correctly foreseen during a period of inflation is probably an assumption which never can be true, because whatever future prices are foreseen, present prices do not by themselves adapt themselves to the expected higher prices of the future, but only through a present increase in the quantity of money with all the changes in the relative height of the different prices which such changes in the quantity 88 00:11:07.260 --> 00:11:21.260 more important, however, is the fact that if future prices were correctly foreseen, inflation would have none of the stimulating effects for which it is welcomed by so many people. 89 00:11:21.260 --> 00:11:32.260 Now, the chief effect of inflation, which makes it at first generally welcome to business, is precisely that prices of products turn out to be higher in general than foreseen. 90 00:12:02.260 --> 00:12:23.260 It is this seemingly blessed state in which there are more jobs than applicants, which Lord Beveridge defined as the state of full employment, never understanding that the shrinking value of his pension, of which he so bitterly complained in old age, was the inevitable consequence of his own recommendations having been followed. 91 00:12:23.260 --> 00:12:31.760 But, and this brings me to my next point, full employment, in his sense, requires not only continued inflation, but inflation at a growing rate. 92 00:12:31.760 --> 00:12:40.260 Because, as we have seen, it will have its immediate beneficial effect only so long as it, or at least its magnitude, is not foreseen. 93 00:12:40.260 --> 00:12:45.260 But once it has continued for some time, its further continuance comes to be expected. 94 00:12:45.260 --> 00:12:53.260 If prices have for some time been rising at 5% per annum, it comes to be expected that they will do the same in the future. 95 00:12:53.260 --> 00:13:00.260 Present prices of factors are driven up by the expectation of the higher prices for the product. 96 00:13:00.260 --> 00:13:13.260 Sometimes, where some of the cost elements are fixed, the flexible costs may be driven up even more than the expected rise of the price of the product, up to the point where there will be only a normal profit. 97 00:13:13.260 --> 00:13:20.100 and profit. But if prices do not rise then more than expected, no extra profits will 98 00:13:20.100 --> 00:13:25.340 be made. Although prices continue to rise at the former rate, this will no longer have 99 00:13:25.340 --> 00:13:30.900 the miraculous effect on sales and employment it had before. The artificial gains will disappear, 100 00:13:30.900 --> 00:13:36.060 there will again be losses, and some firms will find that prices will not even cover 101 00:13:36.060 --> 00:13:42.040 costs. To maintain the effect inflation had earlier, when its full extent was not anticipated, 102 00:13:42.040 --> 00:14:12.040 If, at first, an annual rate of price increase of 5% had been sufficient, once 5% comes to be expected, something like 7% or more will be necessary to have the same stimulating effect which a 5% rise had before, and since if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which the rate will have to be stronger than before. 103 00:14:12.040 --> 00:14:17.280 in which, in spite of rising prices, many firms will be making losses, and there may 104 00:14:17.280 --> 00:14:23.920 be a substantial unemployment. Depression, with rising prices, is a typical consequence 105 00:14:23.920 --> 00:14:28.500 of a mere breaking of the increase in the rate of inflation once the economy has become 106 00:14:28.500 --> 00:14:34.240 geared to a certain rate of inflation. All this means that unless we are prepared to 107 00:14:34.240 --> 00:14:39.500 accept constantly increasing rates of inflation, which in the end would have to exceed any 108 00:14:39.500 --> 00:14:46.580 any assignable limit, inflation can always give only a temporary Philip to the economy, 109 00:14:46.580 --> 00:14:52.000 but must not only cease to have a stimulating effect, but will always leave us with a legacy 110 00:14:52.000 --> 00:14:58.780 of postponed adjustments and new maladjustments which make our problem more difficult. Please 111 00:14:58.780 --> 00:15:05.540 note that I am not saying that once we embark on inflation, we are bound to be drawn into 112 00:15:05.540 --> 00:15:35.540 I do not believe this to be true. All I am contending is that if we wanted to perpetuate the peculiar prosperity and job-creating effects of inflation, we would have to progressively step it up, and must never stop increasing its rate, that this is so, has been empirically confirmed by the Great German Inflation of the early 1920s. So long as that increased at a geometrical rate, there was indeed, except towards the end, 113 00:15:35.540 --> 00:15:42.540 and practically no unemployment, but till then, every time merely the increase of the rate of inflation slowed down, 114 00:15:42.540 --> 00:15:46.540 unemployment rapidly assumed major proportions. 115 00:15:46.540 --> 00:15:52.540 I do not believe we shall follow that path, at least not so long as tolerably responsible people are at the helm, 116 00:15:52.540 --> 00:15:57.540 though I'm not quite so sure that a continuance of the monetary policies of the last decade 117 00:15:57.540 --> 00:16:03.540 may not sooner or later create a position in which less responsible people will be put into command. 118 00:16:03.540 --> 00:16:33.540 But this is not yet our problem. What we are experiencing is still only what in Britain is known as the stop-go policy, in which from time to time the authorities get alarmed and try to break, but only with the result that even before the rise of prices has been brought to a stop, unemployment begins to assume threatening proportions, and the authorities feel forced to resume expansion. This sort of thing may go on for quite some time, but I'm not sure that the effectiveness of relatively minor doses of 119 00:16:33.540 --> 00:16:38.040 The expectation in rekindling the boom is not rapidly decreasing. 120 00:16:38.040 --> 00:16:42.520 The one thing which I will admit has surprised me about the boom of the last 20 years is 121 00:16:42.520 --> 00:16:47.520 how long the effectiveness of resumed expansion in restarting the boom has lasted. 122 00:16:47.520 --> 00:16:52.320 My expectation was that this power of getting investment underway by a little more credit 123 00:16:52.320 --> 00:16:57.680 expansion would much sooner exhaust itself, and it may well be that we have now reached 124 00:16:57.680 --> 00:17:00.280 that point, but I am not sure. 125 00:17:00.280 --> 00:17:05.520 We may well have another ten years of stop-go policy ahead of us, probably with decreasing 126 00:17:05.520 --> 00:17:12.740 effectiveness of the ordinary measures of monetary policy, and longer intervals of recessions. 127 00:17:12.740 --> 00:17:16.400 Within the political framework and the prevailing state of opinion, the present chairman of 128 00:17:16.400 --> 00:17:22.400 the Federal Reserve Board will probably do as well as can be expected by anybody. 129 00:17:22.400 --> 00:17:28.800 But the limitations imposed upon him by circumstances beyond his control, and to which I shall have 130 00:17:58.800 --> 00:18:07.800 is not only as bumpier and bumpier as one is dragged along, but also the prospective effects of letting go become more and more frightening as the tiger becomes more enraged. 131 00:18:07.800 --> 00:18:15.800 That one is soon placed in such a position is the central objection against allowing inflation to run on for some time. 132 00:18:15.800 --> 00:18:21.800 Another metaphor that has often been justly used in this connection is the effects of drug taking. 133 00:18:21.800 --> 00:18:28.640 The early pleasant effects, and the later necessity of a bitter choice, constitute indeed a similar dilemma. 134 00:18:28.640 --> 00:18:36.120 Once placed in this position, it is tempting to rely on palliatives and be content with overcoming short-term difficulties, 135 00:18:36.120 --> 00:18:43.720 without ever facing the basic trouble about which those solely responsible for monetary policy indeed can do little. 136 00:18:43.720 --> 00:18:50.680 Before I proceed with this main point, however, I must still say a few words about the alleged 137 00:18:50.680 --> 00:18:57.480 indispensability of inflation as a condition of rapid growth. We shall see that modern developments 138 00:18:57.480 --> 00:19:04.040 of labor union policies in the highly industrialized countries may there indeed have created a position 139 00:19:04.040 --> 00:19:10.120 in which both growth and a reasonably high and stable level of employment may, so long as those 140 00:19:10.120 --> 00:19:16.120 and how those policies continue make inflation the only effective means of overcoming the obstacles created by them. 141 00:19:16.120 --> 00:19:26.120 But this does not mean that inflation is in normal conditions and especially in less developed countries required or even favorable for growth. 142 00:19:26.120 --> 00:19:33.120 None of the great industrial powers of the modern world has reached its position in periods of depreciating money. 143 00:19:33.120 --> 00:19:39.120 British prices in 1914 were so far as meaningful comparisons can be made over such long periods 144 00:19:39.120 --> 00:19:45.720 just about where they had been 200 years before, and American prices in 1939 were also at about 145 00:19:45.720 --> 00:19:52.400 the same level as at the earliest point of time for which we have data, 1749. 146 00:19:52.400 --> 00:19:57.920 Though it is largely true that world history is a history of inflation, the few success 147 00:19:57.920 --> 00:20:02.760 stories we find are in the whole the stories of countries and periods which have preserved 148 00:20:02.760 --> 00:20:10.520 a stable currency, and in the past a deterioration of the value of money has usually gone hand 149 00:20:10.520 --> 00:20:13.600 in hand with economic decay. 150 00:20:13.600 --> 00:20:19.280 There is of course no doubt that temporarily the production of capital goods can be increased 151 00:20:19.280 --> 00:20:24.500 by what is called forced saving, that is, credit expansion can be used to direct a greater 152 00:20:24.500 --> 00:20:29.920 part of the current services of resources to the production of capital goods. 153 00:20:29.920 --> 00:20:34.080 At the end of such a period, the physical quantity of capital goods existing will be 154 00:20:34.080 --> 00:20:36.340 greater than it would otherwise have been. 155 00:20:36.340 --> 00:20:38.560 Some of this may be a lasting gain. 156 00:20:38.560 --> 00:20:42.720 People may get houses in return for what they were not allowed to consume. 157 00:20:42.720 --> 00:20:47.620 But I am not so sure that such a forced growth of the stock of industrial equipment always 158 00:20:47.620 --> 00:20:49.220 makes a country richer. 159 00:20:49.220 --> 00:20:54.780 That is, the value of its capital stock will afterwards be greater, or by its assistance, 160 00:20:54.780 --> 00:21:24.780 If investment was guided by the expectation of a higher rate of continued investment, or a lower rate of interest, or a higher rate of real wages, which all come to the same thing, in the future then in fact will exist, this higher rate of investment may have done less to enhance overall productivity than a lower rate of investment would have done if it had taken more appropriate forms. 161 00:21:24.780 --> 00:21:31.780 This I regard as a particularly serious danger for underdeveloped countries that rely on inflation to step up the rate of investment. 162 00:21:31.780 --> 00:21:46.780 The regular effect of this seems to me to be that a small fraction of the workers of such countries is equipped with an amount of capital per head much larger than it can hope within the foreseeable future to provide for all its workers, 163 00:21:46.780 --> 00:21:56.780 and that the investment of the larger total in consequence does less to raise the general standard of living than a smaller total more widely and evenly spread would have done. 164 00:21:56.780 --> 00:22:06.780 Those who counsel underdeveloped countries to speed up the rate of growth by inflation seem to be wholly irresponsible to an almost criminal degree. 165 00:22:06.780 --> 00:22:36.780 The one condition which on Keynesian assumptions makes inflation necessary to secure a full utilization of resources, namely the rigidity of wage rates determined by labor unions, is not present there, and nothing I have seen of the effects of such policies, be it in South America, Africa, or Asia, can change my conviction that in such countries inflation is entirely and exclusively damaging, producing a waste of resources and delaying the development of that spirit of rational calculation. 166 00:22:36.780 --> 00:22:43.980 Education, which is the indispensable condition of the growth of an efficient market economy. 167 00:22:43.980 --> 00:22:51.180 The whole Keynesian argument for an expansionist credit policy rests entirely and completely 168 00:22:51.180 --> 00:22:56.000 on the existence of that union-determined level of money wages, which is characteristic 169 00:22:56.000 --> 00:23:00.740 of the industrially advanced countries of the West, but is absent in underdeveloped 170 00:23:00.740 --> 00:23:06.340 countries and for different reasons less marked in countries like Japan and Germany. 171 00:23:06.340 --> 00:23:11.220 It is only for those countries where, as it is said, money wages are rigid downward and 172 00:23:11.220 --> 00:23:16.980 are constantly pushed up by union pressure that a plausible case can be made, that a 173 00:23:16.980 --> 00:23:21.340 high level of employment can be maintained only by continuous inflation. 174 00:23:21.340 --> 00:23:26.280 And I have no doubt that we will get this so long as those conditions persist. 175 00:23:26.280 --> 00:23:30.980 What has happened here at the end of the last war has been that principles of policy have 176 00:23:30.980 --> 00:23:36.420 have been adopted and often embodied in the law, which in effect release unions of all 177 00:23:36.420 --> 00:23:43.080 responsibility for the unemployment their wage policies may cause, and place all responsibility 178 00:23:43.080 --> 00:23:47.880 for the preservation of full employment on the monetary and fiscal authorities. 179 00:23:47.880 --> 00:23:52.860 The latter are in effect required to provide enough money so that the supply of labor at 180 00:23:52.860 --> 00:23:58.800 the wages fixed by the unions can be taken off the market, and since it cannot be denied 181 00:23:58.800 --> 00:24:04.880 that at least for a period of years the monetary authorities have the power by sufficient inflation 182 00:24:04.880 --> 00:24:10.680 to secure a high level of employment they will be forced by public opinion to use that 183 00:24:10.680 --> 00:24:16.520 instrument this is the sole cause of the inflationary developments of the last 25 years and it will 184 00:24:16.520 --> 00:24:21.880 continue to operate as long as we allow on the one hand the unions to drive up money 185 00:24:21.880 --> 00:24:26.780 wages to whatever level they can get employers to consent to and these employers consent 186 00:24:26.780 --> 00:24:31.100 Money Wages with a present buying power which they can accept only because they 187 00:24:31.100 --> 00:24:35.280 know the monetary authorities will partly undo the harm by lowering the 188 00:24:35.280 --> 00:24:40.180 purchasing power of money and thereby also the real equivalent of the agreed 189 00:24:40.180 --> 00:24:44.700 money wages. This is the political fact which for the present makes continued 190 00:24:44.700 --> 00:24:48.980 inflation inevitable and which can be altered not by any changes in monetary 191 00:24:48.980 --> 00:24:55.420 but only by changes in wage policy. Nobody should have any illusion about 192 00:24:55.420 --> 00:25:25.420 About the fact that so long as the present position on the labor market lasts, we are bound to have continued inflation, yet we cannot afford this, not only because inflation becomes less and less effective even in preventing unemployment, but because after it has lasted for some time and comes to operate at a high rate, it begins progressively to disorganize the economy and to create strong pressure for the imposition of all kinds of controls. Open inflation is bad enough, 193 00:25:25.420 --> 00:25:41.420 But inflation repressed by controls is even worse. It is the real end of the market economy. The hot iron, which we must grasp if we are to preserve the enterprise system and the free market, is therefore the power of the unions over wages. 194 00:25:41.420 --> 00:25:56.020 Unless wages, and particularly the relative wages in the different industries, are again subjected to the forces of the market, and become truly flexible, in particular groups downwards as well as upwards, there is no possibility for a non-inflationary policy. 195 00:25:56.020 --> 00:26:12.020 A very simple consideration shows that if no wage is allowed to fall, all the changes in relative wages which become necessary must be brought about by all the wages, except those who tend to fall relatively most being adjusted upwards. 196 00:26:12.020 --> 00:26:19.020 This means that practically all money wages must rise if any change in the wage structure is to be brought about. 197 00:26:19.020 --> 00:26:25.020 Yet a labor union conceding a reduction of the wages of its members appears today to be an impossibility. 198 00:26:25.020 --> 00:26:35.020 Nobody, of course, gains from this situation, since the rise in money wages must be offset by a depreciation of the value of money if no unemployment is to be caused. 199 00:26:35.020 --> 00:26:44.020 It seems, however, a built-in necessity of that determination of wages by collective bargaining by industrial or craft unions, plus a full employment policy. 200 00:26:44.020 --> 00:26:52.020 I believe that so long as this fundamental issue is not resolved, there is little to be hoped from any improvement of the machinery of monetary control. 201 00:26:52.020 --> 00:27:06.020 But this does not mean that the existing arrangements are satisfactory. They have been designed precisely to make it easier to give in to the necessities determined by the wage problem, i.e. to make it easier for each country to inflate. 202 00:27:06.020 --> 00:27:21.020 The gold standard has been destroyed chiefly because it was an obstacle to inflation. When in 1931, a few days after the suspension of the gold standard in Great Britain, Lord Keynes wrote in a London newspaper that there are few Englishmen who do not rejoice at the breaking of our gold fetters, 203 00:27:21.020 --> 00:27:51.020 and 15 years later could assure us that Bretton Woods arrangements were the opposite of the gold standard all this was directed against the very feature of the gold standard by which it made impossible any prolonged inflationary policy of any one country and though I'm not sure that the gold standard is the best conceivable arrangement for that purpose it has been the only one that has been fairly successful in doing so it probably has many defects but the reason for which it has been destroyed was not one of them what has been put 204 00:27:51.020 --> 00:28:21.020 into its place is no improvement. If, as I have recently heard it explained by one of the members of the original Bretton Woods group, their aim was to place the burden of adjustment of international balances exclusively on the surplus countries, it seems to me the result of this must be continued international inflation. But I only mention this in conclusion to show that if we are to avoid continued worldwide inflation, we also need a different international monetary system. Yet the time when we can 205 00:28:21.020 --> 00:28:27.020 The only time I can profitably think about this will be only after the leading countries have solved their internal problems. 206 00:28:27.020 --> 00:28:37.020 Till then, we probably have to be satisfied with makeshifts, and it seems to me that at the present time, and so long as the fundamental difficulties I have considered continue to be present, 207 00:28:37.020 --> 00:28:45.020 there is no chance of meeting the problem of international inflation by restoring an international gold standard, even if this were practical policy. 208 00:28:45.020 --> 00:28:50.340 The central problem which must be solved before we can hope for a satisfactory monetary order 209 00:28:50.340 --> 00:28:52.740 is the problem of wage determination.