Monetary Problems

0:00Human cooperation can be organized according to two different models. One is the model of absolute rule of one will only. It is a system in which everybody has to obey the orders of issue from one point of the system.

0:47There is nothing in it but what people who like the system call order and people who don't like the system call slavery. People have to obey the orders issued from a central authority. The system is very well known to everybody who has served in an army. It's for an army the only possible system. Therefore, if one criticizes it, and if one says something that in the eyes of the hearers seems to condemn this system.

1:47We must not forget that this is only an idea for a special purpose, for a special end, which is attained by these things. Let us simply look about the methods of the other system, of the system in which the individuals are operating out of their own ideas and out of their own aims which they have in mind.

2:34In this system, very well known to everybody and has not to be described, in this system there is an exchange that means people cooperate that they do not cooperate in the way in which one cooperates in an army, they cooperate in choosing for themselves the way in which they can render the most valuable services to other people in order to receive from these other people services which they value high enough.

3:24I have only a limited number of minutes for the interpretation of all these things and so I must simply say, we have this system of exchange in which everybody contributes something. Everybody chooses his own method of cooperation. And there is an exchange of these methods of cooperation between the various people. And this is the way which you know very well the method of market economy.

4:14In such a system in which people are not working according to the orders received from a commander-in-chief as in the army, In such a system, everybody contributes to the life of the whole group by rendering those services for which he has the best opportunity rendering those services which according to his ideas will give him the opportunity to serve others in order to be served by them.

5:11The system is not necessary to describe the system. We know it very well. It is the market system, the system in which everybody tries to serve other people in order to be served by them. And this system acquires exchange. It is exchange. I give something in order to receive something else. And as these contributions of the various people are not identical in size, it is necessary to use in exchanging them something which is merely a medium of exchange.

6:09I do not explain all these things because they are perfectly known to everybody. This medium of exchange is the great problem which we call the monetary problem, the exchange problem, the market problem. And we have, therefore, to deal with it when we are analyzing the way in which people cooperate. They do not cooperate on the market in the way in which one cooperates in a totalitarian system.

6:56And I want to say, if I use the term totalitarian system, I do not want to criticize or to reject it in general. I want only to point out that the difference is against, what the difference is against the market system. In the totalitarian system, the orders come from one central authority only. In the market system, everybody tries to place himself into the position in which he can best serve other people. He does not do it with the intention, with the plan, with the idea to serve best other people.

7:48He is not such an idealist. He enters himself into the system in order to get the best possible service from the part of other people by himself trying to satisfy their wishes in the best possible way. It is not necessary to enter into a more detailed interpretation of the system that everybody knows. And everybody knows also that such a system requires a medium of exchange. And this medium of exchange is popularly called money.

8:36We would have to explain much more. and more. One would have to write volumes in order to introduce the meaning of this institution, but it is known to everybody. Now, the great error and the great problem we have to deal

9:00with is the idea that you can improve the value of money and credit. The idea is that You can improve your own situation by getting more of this medium of exchange, by getting more of this money. That means the individual says, I would be much happier, I would be in a much better situation if I had more of this medium of exchange, if I would have more of the money. And from this point of view, I would be much in a much better situation if I had more money.

9:51People being friendly to everybody, not being driven by the idea that they alone should be in a good situation, say everybody should have more money. And there is a wonderful system to improve conditions in the world. Make more money. Oh yes, and we have governments to do it. We have governments to do it because it is very cheap to do it. People don't realize that the medium of exchange, if they need such a medium, which is obvious to everybody, such a medium of exchange must first of all be restricted in quantity.

10:52The increase from the individual point of view, from which the individual sees or thinks is, I want to have more money, and I have no objection against other people having more money because I have no hostile feelings, and this is precisely what bad governments, bad systems and so on are doing. They are increasing the quantity of the medium of exchange.

11:40They are not so much interested in increasing the quantity of the goods and services which people really need, which people want to have. And so we have the system of inflation. The system of inflation, it was the idea people once, or let us say today too, the simple-minded people said, what I need is more of this medium of exchange, is more money. And I am in favor of an increase in the quantity of money.

12:29What he forgets is that we don't eat money, we don't live on money, that money is a medium of exchange and not something that can render any services. And therefore the policy of increasing the quantity of money, this policy of inflation brings about higher prices, but these higher prices do not only increase the income of the sellers, They are also restricted. First of all, the income of the buyers make it more difficult to buy.

13:28People have chosen the precious metals, gold and silver, long, long ago as the most useful medium of exchange. The slater silver was dropped and gold alone remained. And they say today, you hear it again and again, and the simple man considers it correct. Why gold? Gold is useless. You have one wedding ring, it's enough. This would be very bad if people were to collect bad rings by the procedures that are leading to the exchange of bad rings.

14:21Now, the problem is very well known to everybody and doesn't have to be interpreted or explained in any way. The problem is not to increase the quantity of money. The problem is to increase the quantity of those things which can be bought by money. And if you are increasing the quantity of money, you are only increasing the prices which are paid for them, and the whole system becomes a system without any meaning, without any really possible methods of acting.

15:21What we have to realize is money is a medium of exchange. Increasing the medium of exchange does not improve the system and the general effect of the system for the individuals. What is needed is to increase production. What is needed is to increase the quantity of goods and services that are bought by money and not to increase the quantity of money.

16:06It seems very simple to this. Everybody must understand it. Nevertheless, we have, again and again, tendencies to improve conditions by increasing the quantity of money. And this is the policy of inflation. The policy of inflation, the government, under present-day conditions, it is, fortunately alone, Concentrated in a few hands is the assurance of additional money. We have a system in which, unfortunately, again and again people appear who believe that it is a good policy to increase the quantity of money.

17:10Our whole economic system is undermined, is demolished, is converted into a system that hurts people more than it serves them by the idea that an increase in the quantity of money is a good thing. For hundreds, and I would even say for more than thousands of years, people have criticized this doctrine in a very correct way.

17:58It is not a medium of exchange that has to be increased, that the quantity of those things which are bought and sold as against money. We have a system in which money is necessary as a medium of exchange but in the quantity of every individual good and service that is not limited, A quantity that is unlimited brings about a drop in the exchange ratio and exchange value of the things concerned.

19:04From this point of view, I want to answer some of those questions and objections which are mostly raised against the system of monetary exchanges. First of all, people say, why gold? And the answer to this question which they give is, it's ridiculous. Gold is absolutely useless. It is just heavy in weight, it is yellow, it is rare in quantity. Why gold? Now, the reason, the answer is this.

19:52Gold, because the increase in the quantity of gold, costs people who do it as much as they can get for the quantity produced. Therefore, there is no tendency, no possibility of making more money, more wealth, by producing an increase in the quantity of gold than by doing the same in some other commodities. That means whether you are mining gold or whether you are in any other business does not make a difference in expenditures because the quantity of gold is limited and because the production of additional quantities of gold requires precisely the amount of expenditure which is needed.

20:59in order to bring it into equilibrium with other commodities. Therefore, the production of gold cannot become so large that the quantity of, that it hinders the development of other quantities and other commodities. We have this system, we brought into a certain, let us say, tolerable frame, when the quantity of gold, the quantity of money, which was not gold, was almost eliminated or strictly limited.

22:11That means when the only real money, the only money which was used was the gold money or bills which gave you the right to get the quantity of money in order to operate in the field in which it belongs. That means, what we have to realize is that if the quantity of gold is increasing, then There is a drop in its purchasing power, possible or necessary, and the adjustments which are necessary in order to bring this in order are taking place.

23:23What we have to realize, and which can very nicely be described in fine theoretical ways, is that the governments in declaring that this is equal to, this which they are manufacturing, What is equal in purchasing power to a quantity of gold are making not only a mistake but are destroying the whole monetary system. If we want to deal with this problem, we are always told by people, but why gold? It is ridiculous. Why is gold the medium of exchange?

24:26World is the medium of exchange because you cannot increase it regularly at quantity of goods or services which is lower than it would be under the conditions of a free market.

24:56A declaration of somebody, be it an individual or be it the most powerful government in the world that a certain piece of paper is equal in purchasing power to its definite quantity of gold. Such a declaration is absolutely useless if there is not an opportunity given for the individual, for every individual to make use of this so-called equality by exchanging one against the other, vote against the bills of paper and the piece of paper against all of them.

26:00If we are asking what is the use of money, we have to realize that it is necessary to have the opportunity to have some values of greater quantities of units to exchange against a number of values of smaller quantities, of smaller purchasing power. And therefore, what we have to realize if we want to deal with the thing from the practical way, we have to say this.

26:54Gold is certainly not an ideal money. Certainly not. There are no ideals in the world of reality. But we can use gold as a medium of exchange, because the quantity of gold is by and large limited, and the production of additional quantities requires expenditures that do not influence the purchasing power of the already existing world to a greater extent as such changes are occurring in everything, daily and again and again.

27:51We can therefore live, we can therefore exist with the system of gold money. There is no danger that a great revolution in prices will be brought about. In the last 200 years, it happened again and again that the discovery of new fields In which additional quantities of gold could be produced, brought about a slight drop in the purchasing power of the gold unit as against the purchasing power of the gold unit which would have remained in the absence of this new discovery.

28:54That means it happened, for instance, in the middle of the 19th century, that new world discoveries brought about what people considered at that time as a price revolution or something like that. But this was almost without any quantitative influence upon the great markets of the whole world. It is, in fact, we can say the production of additional money, gold money, is limited. It is limited as we see today. It could happen. It will probably not happen. Nobody thinks of it. It's not a problem for serious people.

29:48But it could happen, what some authors have described in books, that one day one would discover that gold can be produced in such a cheap way as paper can be produced. and then people will have to deal with a new problem and perhaps they will solve it, perhaps they will not solve it. We don't know it today. But it is useless today to speculate what will happen if this will happen. What will happen if you have sleepless nights and you have nothing else to think about? You could think, what will happen One day gold could be produced in such a cheap way as, let us say, paper.

30:44People say that it is not necessary about these things to speculate about such problems, and as we don't know anything about other conditions at that time, We can say, let us wait. Let us wait, wait really one day. The gold will be so abundant that it can no longer serve for the monetary purposes. Alright, but it can do it today. And we have to deal with the problems of life from present-day conditions and from present-day possibilities and outlooks.

31:29And therefore, we have to say it's not something that requires a great philosophical system. In order to bring it about, we can say we have a system in which the quantity of money is limited. In which we therefore can deal with money. We have today a system that works, but works only if one does not destroy it by laws that say a piece of paper is equal to a quantity of gold.

32:22And the piece of paper issued by the government can serve this purpose. And from this point of view, governments tried again to make what they considered as a nice system, but as a necessary system and so on, people who are less fanatically called inflation. And unfortunately, we are living in a period in which many governments say if we don't have enough money for something, And if we don't want to tax people, because the people don't want to pay for this purpose, then let us add a little bit, a little bit of paper money, not very much, a little bit.

33:32One could compare this, and people did it, with many things that happened in the field of the use of various drugs, in the same way in which when you have started to use certain drugs, you don't know when to stop and how to stop, in the same way it goes on with the government, with the banking of money. The first rule, or the only rule, which we have to teach to everybody in explaining the problems of money is An increase in the quantity of money brings about, for the group, for the people, for the society, for the king, for the emperor who does it, an improvement, a temporary improvement of the situation.

34:51But why to do it today and not repeat it tomorrow? This is the only question. This is the problem of inflation. The conduct of government affairs, public affairs, is not different from the conduct, from the financial and monetary conduct of private affairs. If the government wants In order to spend, it has to collect taxes. If the government increases only the quantity of money, in order to do this, then it brings about a catastrophe. A catastrophe which must not be described today, unfortunately must not be described today because people experienced There was a government operating according to the plans of people whom they called professors but whom they considered or agitated.

36:40The way in which so many systems of non-metallic money broke down in many countries again and again. And if you want to avoid the system, if you want to have a system in which the work of people If money operates quietly, then you have to avoid inflation. There is no such thing that prevents people from inflating in the same way in which there is no system that prevents individuals from becoming drug addicts.

37:33There is really some parallelism in these two things. But what we must realize is that there is no such thing as having something and spending something and having it in spite of the fact that you spend it. And this is precisely the thing which the paper money, if I should use this term, conceals. What is needed is the problems of monetary theory are rather complicated if they are are pointed out in a principled and correct way, but the methods of monetary policy are rather simple, simple enough to be explained to not only to philosophers and to statesmen and to people who have great experience in dealing with special problems of money, but simply enough and clear enough to be explained to everybody.

39:10If you increase, it is very simple, very easy to increase the quantity of money, whatever the kind of money is. If it is not a good, it cannot be increased at lower cost than the market purchasing power it commands. And this is the whole problem. Do not spend more, one says to the individual, don't spend more than you have. And the individual cannot even spend more. He can only spend more if some institutions do not do all those things which they ought to do.

40:15You can only spend what you have. And the system of credit, the system of the market requires only one idea. If you want to spend something which you don't have already, then you must first acquire it. Everything else brings about a system which in the last 50 years had almost all countries of the world, again and again, depicted as countries of people who do not know what they are doing.

41:15And therefore, it is today simpler to explain these problems politically, because in every In any country, you have only to refer to historical facts of modern, very recent history that happened in these countries. Therefore, one should assume that people will never again have to pass through the same experiences which happened in the last 50 years in most of the countries of the world.

42:21It's not necessary to remind me that we have finished our talk and that now the time of discussion may begin. Thank you. I'm the official gatherer of questions, so let me know where they are. They are a piece of paper. Oh, a piece of paper.

43:05Looks like a good question. Would it be better if labor unions were to demand reductions in the price of articles produced, instead of demanding increase in wages? You see, we are talking about labor unions. We are not talking about demand. We are talking about the fact that the unions interfere with the market. with the direct of violets, unions are therefore using the same methods, which the governments are using, the governments say, you must not do this, I will hinder you from doing it.

44:13And if this is done in the service of a good policy, then it's good, if it's in the service of a bad policy, it's bad. But the question which this, the problem which this question wants to have discussed is the question, ... such that these sound principles are really working. You can't have artificial things, you can't have to hinder you. What is the motivation of those who blame inflation on the raising of prices and wages rather than upon the dilution of the money supply?

45:10The dilution, the increase in the money supply. The increase of the money supply. Of course, the money supply is this inflation, the motivation of those who blame it. Inflation consists in the increase in the money supply. We have, by and large, if we would have had not an artificial increase in the money supply, that means that the government may increase, there would be a slow increase in the population figures and a slow increase in the quantity of money which goes on.

45:58The inflation is a conscious policy of governments increasing the quantity of money because they believe that this is a better system for themselves, for the governments, and for the whole of the nation. Well, can you say something about why they shift the blame to higher prices rather than... Why do they shift the blame? Why do they blame higher prices rather than the increase in the money supply? Because they blame the effects and not the causes. Because a man complains about disease, about the pain such as disease produces in him, and not about the fact that something which he knows only from books, a germ, entered into his body.

47:02He doesn't know anything about the germ directly, he knows only about the effects of the germ. And this is the reason why we do it in the same way with money.

47:19Nixon seems to have no grasp of the cause and cure. As a fact, you agree. Now, what would you do if you were president? What would you do if you were president? Would there be a violent initial reaction, I suppose he means to... I don't want to talk about the personality of that. If the government, let us assume there is at the head of the government, a group of people who are absolutely against every kind of inflation. And they do not increase the quantity of money. Then there will not be any increase in the quantity of money.

48:08But there is another party and this other party says, how stupid are these people, you could get increasing the quantity of money, imagine this, you are making now $5 for this, you could make $6 or $7 or $8. What is needed to do is only another policy, you can't substitute for some policies, a policy that is only sound in the eyes of a superman and is considered stupid by the masses. People say, why should the government not do this?

48:55So it's so simple, a little bit more money and we can print it. And we have printing offices. Would selling government properties help reduce the inflation? Would selling government properties help at all in solving the inflation problem? If the government property would not, if the government has a debt of one million, and in order to pay back this debt, Sells the property of one million, then there is no change in general.

49:52But the thing is that without increasing the government property, the government increases the quantity of money again and again. That means that the government, let the state think that the government is perfectly out of any, let us say, responsibility, moral responsibility. There comes a barbarian country invades our country and we must fight and this fighting against them requires a lot of money and in order to get this money, the government can only increase the quantity.

50:51of paper money, inflation, or it can sell government later, government property and so on. There is no such, what you have to realize is for, if you want to spend something, you must have it. If you want to live continually, you must work in order to produce continuously. There are no financial miracles. This is the most important factor. People think that it is possible by some kind of manipulation with paper money and so on, and so on, to have quantities available for additional spending.

51:47This is not the fact. If you want to spend more, you have to make more, you have to earn more. What properties are necessary for an ideal medium of exchange? An ideal, I don't know what an ideal medium of exchange is. You said gold was not ideal. No, because there are no ideals in human life. It is not ideal, but because it would be much better if the production of gold were not subject to such changes as it had to go through in the last hundred years, let us say.

52:49Therefore we could say it would have been better if there hadn't been these things and so on. But I don't know what ideal in this regard means. From the point of view of the conditions, social conditions, the ideal is that people should work and save Would it be necessary for the government to issue money in a free society, or could privately owned mints find money?

53:39This is a purely administrative problem. If the administration is well organized, it could theoretically be left all these things to private duty. It is not necessary, absolutely necessary that the government alone should coin the money. And there were countries in the Middle Ages in which the conditions, monetary conditions, were rather satisfactory in spite of the fact that the coinage of money was in the hands of private money.

54:27The main thing is that one does not increase the quantity of money. The great danger practically, I would say this, if a statesman were to come and say, I would say, give me some advice, what to do, I would say, never accept any excuse for creating more money, substitutes for money, what you have to do is, work more, work with more intelligence, spend less, and so on.

55:14I have a question here, I don't know whether you want to comment on Hayek and Friedman's theory of money. What concerns Hayek, I hope, by enlarging agreement with differences on terminology, and what concerns Friedman, I must give it to, this would require a great discussion of several hours. How about telling them to read your Critique of Fisher, how about Irving Fisher, would your Critique of Irving Fisher serve, your Critique of Irving Fisher, and substitute Friedman's name, in the Money Book.

56:09This is a problem of intellectual understanding, you can't give, you can't say three months, It depends when do people discover that inflation will go on. Inflation can only operate as long as people don't realize that the government considers inflating as a method, as an accepted method of inflation.

57:08Providing Funds, and as long as this goes on, as long as people take the money, then they will do it. And now I would say, in the last 50 years, the nations and the individuals have learned a lot about inflation, And they are today, in this regard, more nervous, and therefore today we may expect that even a smaller amount of inflation will make the people very suspicious of the plans of the government, and the breakdown will come sooner than it would have come without this situation.

58:04Do you approve of the expansion of money by banks that goes more than the original reserves, you know, money expansion by banks? Every kind of expansion of the quantity of money brings about a tendency toward lower purchasing power of the monetary unit and higher prices.

58:49If you stop in time such a movement, then its effects are limited. If you don't stop it in time, then ask the historians what happened to Germany not so long ago, and what happened to other countries and so on. You have again and again, especially for doctoral dissertations, I recommend what happened in various countries of Asia and Africa in the last 50 years and then you will have a sufficient quantity of material to study this problem.

59:43This is something that depends on the expectations of people about future policies. If the people once discover that their government has not the intention to stop increasing the quantity of paper money more and more, then they will say, why should I wait until the whole thing breaks down? I will behave already today as if this end had been reached and then the end will be there because everybody behaves in this way.

1:00:36Well, I think he's worked hard enough for his money. Earn your money.