The Free Market Society

0:00Our society is a society on account of the fact that the various members, the various individuals are not living their own lives without any reference and without any connection with the lives of other individuals, that thanks to the division of labor, we are connected by working for others and receiving and consuming what others have produced for us.

0:50We have an exchange economy. We have an economy that consists in the cooperation of the individuals. Everybody produces not only for himself, but for other people in the expectation that these other people will produce for him. This system requires acts of exchange, and these acts of exchange must be such that everybody receives and gives at the same time.

1:41And as the value, the meaning of the things which are given away and which are received are not as equal, it is necessary, I can only sketch it in a very short way, it is necessary to have what is called indirect exchange. That means that people are producing something for other people and exchanging it at something which they have to get from other people. But as the quantity and the value of the things given and the things received does not coincide, it is necessary to use for this purpose a medium of exchange.

2:34I assume that you are all familiar with the fact I think that it would be impossible to produce for other people and to expect to consume what other people have produced in exchange for the things which we are giving to them if the quantities given away and received their identity in not only in size, but what's more important in the period in which this exchange has to be done.

3:19Therefore, the production and the exchange of the produced things against other things requires a medium of exchange, something which is not received and not given away for direct in Consumption, but for indirect consumption, that means for giving it to other people in order to receive from other people. We have therefore, leaving aside all details, we have therefore a money economy.

4:04We have media of exchange, we have something which is received and given away, not for the purpose of consumption, but for the purpose of being exchanged in a later act of exchange against something else, and finally only to bring to the originator of the exchange act full satisfactions, that means those things which he himself wants to consume. As a medium of exchange, there were used various advocates and various commodities.

4:56But finally, in the course of the centuries, they developed what we call today money and money exchange. In the historical development of the exchange function and the exchange acts, finally there was a restriction of the number of commodities were used as media of exchange, not acquired for the purpose of being consumed, but only acquired with the purpose of being used in a further act of exchange as payment for something else which one expected to receive.

6:01We have to say, in the course of the historic revolution, about which we cannot say more in such a lecture, there are developed finally a few articles which were used as media of exchange, and leaving aside all historical details, for our time there developed only one such thing and this was the metal gold. People have criticized this from various points of view and they have made jokes about the uselessness of gold And you know all the stories people were using about the uselessness of gold for direct consumption and similar things.

7:05But this is all of inferior or, let us say, of very small importance. The most important thing is that without any interference on the part of a central authority, people developed an exchange system, a system of indirect exchange in which the precious metals, gold and silver, were used as media of exchange. And finally, in a process that is very well known to most of our contemporaries, because it was only a process of the last century, one article remained as a general use medium of exchange, the metal gold.

8:09Now you can criticize this from various points of view, without any reference to the real problems implied. What we had developed in the 19th century and in the 20th century in the civilized countries was a system in which the precious metal gold was used as the medium of exchange. And this system was functioning by and large very well. All the criticisms which were applied in this regard are of very little importance when compared with the problems which are created by the substitution of gold, for gold, by something else.

9:17We may say that it is ridiculous that such a useless metal, which can only be used for very unimportant things, is serving as a medium of exchange. But we could not, we cannot deny that it functions to some extent satisfactorily in this regard. We could have, we would have today, if one had not interfered with the monetary system, we would have today a market in which gold alone would be used as medium of exchange and the people were to buy and to sell as against the precious metal and gold.

10:21One can criticize this from various point of view, but what one could not bring about was a system in which in which such production could be satisfactorily operated in the way in which it could theoretically at least operate with the pure gold standard. If gold is useless, because if you do not think that to have jewelry out of gold is very important, if gold is considered as useless for all other purposes, it could and did serve very well as money.

11:22But, this system, the market operated by indirect exchange between the mediary of a precious metal, first of gold and silver and then of gold alone, was destroyed. It is destroyed again and again, not by something that is inherent in this market system, but precisely by the governments that want to spend more than they could spend in a market which is not operated by the government substitutes for the precious metals.

12:29That means we could have a system in which gold alone is for substitutes of gold. That means claims for gold which are available, which are falling due, immediately could be used as a medium of exchange. We could have a gold standard all over the world. If we had such a gold standard all over the world, then gold or some claims against the quantity of gold falling due immediately could be used as money.

13:34It would be a system that could operate to some extent very satisfactorily. But the government of some countries, and following the example of these governments, Governments, even the governments of most or perfectly of all other countries, have destroyed this system. have destroyed this system by declaring that something else is also gold, in value, and could substitute gold in all respects in which it is necessary, We could have a system in which gold alone and, of course, claims against gold due immediately could be served as money.

15:01But this would be a system in which everybody could exchange what he wants to give away against gold and then use or against the claims for gold due immediately and it would operate to a certain extent. But what we have is something very different. And it developed out of the fact that if there emerges a conflict of opinions and a conflict of interest between people concerning the problem, whether they have to pay something or not, that such conflicts can only be settled by the government.

16:19That means we could, the reason why the governments have to interfere and do interfere with the problem of the market exchange, The reason is that people sometimes do not pay what they are, according to the opinion of other people, bound to pay. That there are differences concerning the problem whether you have to pay me ten ducats or not. Therefore, in society in which peace among the members of the society is the primary requirement of an organized state of affairs, in such a society it is the judge, the government that has to determine whether you are, whether you have to do something, whether you have to pay something, and what you have to pay.

17:39And the government interfered, practically, in declaring this man is bound, according to an agreement which he has made with other people, to pay ten due cuts. A due cut means a certain piece, a certain quantity of gold. But we, the government, we have to declare this, and we declare it must not precisely be gold. If you take a piece of paper and stamp of it Tanducats, this is also a payment.

18:31And this is the problem. The problem is that the government, as the government alone, has to prevent conflicts, armed conflicts, between individuals, by executing the decisions. Of course, concerning the obligation of a man to pay or not to pay, the governments have also the power, the right to declare what is money.

19:20These people have made a contract in which they clearly said that there is a certain role to be played by a definite quantity of gold. And the government says yes, but this quantity of gold can also be a printed piece of paper on which I, the government, have printed 10 ducats or 100 ducats or 10,000 ducats because it doesn't cost me more, it doesn't cost the government more to print the figure 10 than the figure 1.

20:07The market, the people on the market, the people in organizing the division of labor, in bringing about a system in which one man produces shoes and the other man produces coats, they have brought about a system in which coats can be a change against shoes, but only practically in account of the difference of the importance and the value and with the intermediary of money. But this, but the government interferes in this intermediary, in this medium of exchange.

20:57People have made an exchange under the assumption that one man has to pay to the other man five ducats. The government says, and what they had in mind was a ducat, a certain piece of gold, a certain quantity of gold. And the government interferes and says, this piece of paper is all yours, I am the government, and I have the right, I have the power, and this is the problem.

21:42That the government has, in fact, the opportunity to declare that you have said you want to receive, You have made an agreement according to which you are entitled to receive a certain quantity of gold. This is meant, when they say, to do cuts. And the government says, yes, but to do cuts can also be a printed piece of paper from which I, the government, have printed the words to do cuts.

22:35And unfortunately, it doesn't cost the government more to print two do cuts than to print one do cut. And here you have the problem. The monetary problem, and this is the fundamental problem, The exchange economy, the monetary, the role played by the monetary issues is decisive. This government, not one government, all governments, practically all governments, there were some virtuous governments who abstained from it, but you see, This is a very peculiar situation with regard to such problems, the bad ideas of governments who said that the Ducat should always be a piece of paper in which I have printed the words to the five Ducats.

23:46and these things made popular. What we have today is precisely, and in the whole world, is precisely the situation. There are some governments who are better than other governments, who are only slowly and with some, let us say, bad feelings for themselves, realizing very well that they are doing something which has some consequences which I'm not considering as beneficial, except for these things, if the fact is that we have a system in which the governments are supposed to spend only what they have collected as taxes from the citizens.

25:00And this collecting of taxes makes the government not very popular because people don't like to give away money, especially if, say, for somebody who spends it like the taxes are spent for things of which we do not agree. And then the government, because they don't want to restrict their expenditures, the governments declare what I have printed in my printing office, in my government printing office, and call it due cuts.

25:49That's all I want to talk about. This is the same as before, you know. These things started in the way that there were private banks to which the government gave privileges and so on. The whole story is very interesting and you know it because you find it in every textbook. But the problem that exists today is precisely this. The government, as far as the government, as a constitutional government, collects in its taxes only what the citizens are prepared to pay.

26:34or which the government can consider as such, because the parliament, the representatives of the people have accepted these payments, everything is alright. The government wants to pay policemen. These policemen have to get salaries, they have to live, they need various things for doing all the things which they have to do. And the government collects these things by taxing the citizens, the citizens pay the taxes and the government spends the taxes, the money received in taxes.

27:26But the problem is that the government say, this is not enough. They don't say it, they think it only, you know. It's the only thing which the government can think of. We need more. And the simplest way to get more is to print it. This is forbidden to the citizens. If you have a citizen there to do it, then the story would look in a very different way. But the government is reduced to a very simple description.

28:16The government prints, sinks, prints pieces of paper which it declares to be equal in and practicing power to pieces of gold. And if you do not obey, then you have the problem that the government will force you to do. Now, the situation is this. We had a monetary system consisting of precious metals, gold and silver, and you have not to enter into this details.

29:13And the government interfered by declaring that these pieces of paper which the government has printed have the same purchasing power, the same value on the market as the pieces of gold. And if the government says this, then it increases the quantity of money. Wonderful. But what is the fact? If the government wants to hire additional servants, government servants, because this is for something, for some purpose which is good or bad is another question.

30:12And as they do not have enough money, gold or silver, they print an additional quantity of money. They increase the quantity of money. And what does this mean? This means that somebody who was yesterday in no way connected with the government's actions is now hired by the government as a policeman, as an additional policeman. And he gets a salary. He makes a living from spending this salary.

31:04And this salary consists in the creation of an additional quantity of money. Now, this man who got this additional quantity of money, this newly created quantity of money, appears on the market with money that didn't exist yesterday. And the quantity of commodities did not increase. Nothing changed with the commodities.

31:52Commodities, there was the only change that happened from yesterday was that there is now an additional quantity of money. And this additional quantity of money is spent for the same quantity of consumer's goods and producer's goods which existed yesterday. That means, that this man who comes with this additional quantity has, in order to get something, to offer a higher price for the things for which yesterday people used to pay a smaller price.

32:38Prices are going up. Prices are going up because there is an additional quantity of money, asking, searching for a non-increased quantity of commodities.

32:59And this means that prices are going up. And the newspapers or the theorists call this inflation. Inflation is new money into the market and this new money inflates prices. The government says, what happened? The government is very innocent. It doesn't know what happened. It didn't, because this happened in another department of the government.

33:44How should one man know, how should I, the man in the department of finance, know that this additional money is really spent and that the spending must raise prices because the quantity of goods did not increase. Now we have this problem. We have, you know, when the government wants to pay more for some purpose, let us say, if the government wants to raise the salaries of some government employees and collect this money by taxes from the citizens, The citizens who have paid taxes have to restrict their expenditures to the same extent to which the receivers of this money are now in a position to increase their expenditures.

34:49But this is not the case here. These people, nobody suffers, because the government does not tax more, does not collect more taxes. But there are now people who find in the morning in their pockets more money. He says it's very good. The government has finally raised the money, you know. It would be perfectly correct, all these things, if the government has collected this money from somebody else. Then somebody, Mr. A, would have been forced to restrict his expenditures because Mr. B is now in a position to spend these things.

35:42Now you have the inflation problem. And the governments try to find out somebody who is responsible, but not in the government. They consider as responsible the man who asks for higher prices. But he best ask for higher prices because there are now more people there. He has 100 units to sell, and there are now people to sell each at 5 pieces of money. And now there are Comte people, they have not 500 but 600 pieces of money in their pockets.

36:34And they must therefore in order to prevent the other men from getting to think they must be higher prices. Now we have the inflation. And there was once in the past, indeed, there were innocent people who discovered this wonderful thing. This wonderful thing for a government to increase the quantity of money and therefore to appear as benefactors on the market. How wonderful.

37:22I do not criticize the purposes for which the government uses the money, because this doesn't make any difference, whether the government uses it for the conduct of a war, for destroying cities, for killing people, or so on, or whether the government uses it for giving better food to innocent children, it doesn't make any difference. It doesn't make any difference with regard to the problem of the purchasing power of the monetary unit. The main thing with regard to money is the question how to restrict its quantity, how not to increase its quantity.

38:17The question is, gold too can increase in quantity. There happened, you know, we had the gold standards to some extent in the world. It happened that one discovered new opportunities for the production of gold. And then, as the quantity of world increased, people could spend more and prices went up. But this was limited. It was limited because these opportunities are, thanks to the geological constitution of our planet, limited.

39:05It could happen, we could imagine, you know, if we have people who have a great, a lot of fantasy, can imagine that one day people will discover a method to increase the quantity of money in such a simple way in which we can increase today the quantity of, let us say, paper. I don't know whether this will happen, nobody knows whether it will happen, and nobody has to tell today, has to give an answer today to the problem, what will people do at the time? They will have to solve a new problem. Whether this will happen or will not happen, it will be a new problem and then they will have to do it.

39:57But as far as we see the conditions today, the increase in the quantity of production of gold is so limited that it makes the use of the precious metal of gold as money possible. People say, idiotic. Why gold? Why is this useless metal? Because it is yellow. I hate the color. I hate everything. You can say this, but it is a solution. We have it. But we don't know what is really happening this way.

40:46And now we have the governments, and the governments are extremely naive. This is not the only point in which they are naive. There are many other things. Government philosophy is not always very first class. But we have not to deal with these problems. We have to deal with the problem that the governments try, or many governments, bad governments, let us say there are many good governments, I don't know where they are, but certainly they are in theory, that the governments are in a position to destroy the monetary system as it exists, if they go away from the fact, let us say, from the situation in which the increase in the quantity of monetary units is strictly limited.

41:59And now, you may write volumes over volumes on books on money and monetary problems, and so on. And, if you look in these books, you don't find the simple truth. That the increase in the quantity of money is a problem. That the quantity of money must be restricted in some way or other. It is not, people say that this is not from the theoretical point of view, this is not a satisfactory solution. The problem in world history and in human affairs is not, as I said, is satisfactory from the point of view of a definite theory.

42:55This is not the theory that rules the world, but it is the situation, the things which determine the effects which according to the laws of the theory must result. And this is the situation. What we can do is, in this regard, is to realize that the increase in the quantity of money must be strictly limited. That it is impossible to have a system in which you can increase the quantity of money.

43:41I do not want to omit the fact that there can emerge for certain governments and for certain conditions, situations in which the problem is much more complicated, you know, the northern states and the southern states. And if you were a statesman in the southern state, and there was already approaching to defeat, And somebody would have told you, don't you know that printing money, banknotes, more and more dollar bills of the subtle equality will destroy the system?

44:46This certain statesman would have answered, what? You are talking about money and now the problem is with our system, which is more important than everything in the world, this certain state should survive or not. And so he printed, you know, it's more and more. and until they were zero. There were other governments who did the same thing, you know.

45:28If you study, it's very interesting to read about it, it was not so interesting to live under these conditions, but reading about them in bed in the night, This may be for some people very nice, these governments printed as much money until the prices went up and up to a point about which they couldn't go higher. We have in the history of modern paper money, we have several instances of money that went to the zero point of purchasing power.

46:28What we have to realize, therefore, is that when we want to have a system of money that works and operates, One must not increase the quantity without realizing at every step that one is approaching a very dangerous point, the point at which the whole thing breaks down. You will say that this is something very general and what reference does it have to the problems of daily policies, monetary policies, it has a very important reference.

47:28The reference is that when you are operating with something that can be deadly poison, you must be very careful. You must be very careful not to reach, not to go to a certain point. This is also something in which I want to say that the problem of all these things that influence the nerves and the mind of people, all these medicines and so on.

48:22The doctor saves the lives of some people by giving them something in a quantity which he precisely determines and knows, and if the quantity were increased up to a certain point, It is impossible to answer the question, where does inflation start and where does it end?

49:10It starts as soon as you increase the quantity of money. And where the danger point begins, this is another problem. The people must realize that you cannot give a statesman advice. This is the point.

49:55Up to this point you may go and up beyond this point you may not go and so on. Life is not as simple as this, you know, but what we have to realize and what we have to know when we are dealing with money and monetary problems is always the same. We have to realize that the increase in the quantity of money, In the case of those things which have the power to be used for monetary purposes, this must be restricted very correctly. And we have now a solution.

50:42We have the practical solution from the theoretical point of view, The question cannot be answered, approved or rejected or drawn. We have the practical solution that as long as we are using as the medium of exchange the precious metal gold, we have under present day conditions no special problems to realize. But as soon as we are increasing this quantity, as soon as we say a little bit more, it doesn't matter and so on, then we are entering a field in which the problems become very different.

51:38We can have today a rather satisfactory system of monetary payments when we accept the idea that gold can be used as a medium of exchange without any restrictions today. And we may say, theoretically, from the point of view of clear, fine theories, this is not very satisfactory, perhaps. But it is very satisfactory from the point of view of the operation of a monetary system and a market.

52:29And this is what counts.

52:35Thank you, Professor Mises. Now I'd like to collect those questions that we talked about earlier.

52:59When you are choosing, I think you have at least ten questions already. In a free society, to whom should the coining of money be delegated? The coining of money could also be done by private citizens or corporations if the moral standards of this country give us the expectation that they will not misuse the situation.

53:58We have this situation with regard, for instance, with regard to deadly poisons, we have, we assume this, that the pharmacies will not misuse it, because there is no reason for the pharmacy, no to misuse it. In an economy based on the gold standard, as the quantity of commodities increases, should the quantity of money be increased, or should prices be allowed to drop?

54:44There is no reason why a definite height of prices, as if one existed, should be retained for all the future. Prices must drop and prices must go up because this is what the market means. The market can only function if it adjusts prices to those problems which consumption and production require. This is something related to that last question. With the very limited amount of gold, is it practical to use the medal itself, or would gold notes be used, or would letters of credit be used as restricted currency?

55:32If the letter of credit or the notes are redeemable in the world, then there is no difference. Really redeemable. But if you make a difference, this is precisely what we did. We started, one started into history in issuing banknotes that were redeemable immediately For everybody, at every instant in gold, this would work in the same way as the pure gold standard. But as soon as you begin to say that there should be a difference with regard to the redemption of these notes, then you begin to inflate.

56:25This is close to that too. What would be wrong with a system using paper money not backed by gold and which inflation was not employed? How much should the quantity be? The question is the quantity. When we say gold, we say all the quantity that you can produce and you can have. There is no serious problem for the present-day gold standard if some increase or decrease in the yearly production of gold results.

57:14Results, then there will be some smaller things. But if one enters the field of government produced also on paper money, then all these limits are useless. Is it possible to forecast the fate of the US monetary system at this time? Have we reached the point of no return? Is a crack-up inevitable? No. You see, it depends on who the people will be, what the people will decide in voting in the future.

58:03The great danger is that people will succeed in making inflationary spending popular. It could happen. But this is the reason why we have to talk about these things, why we have to study these things, why we have never to forget these things. The monetary system is not something that drops from heaven and can be simply used. It depends on the wise policy of the government and of the individuals.

58:51And therefore the danger is very great that a government that suppresses every manifestation of opinion on the part of the citizens, such a government will very easily end in inflationary measures. And this is the reason why I would not be prepared to recommend as an investment Russian rubles, for instance, or some other such monetary things.

59:39I would say the gold standard may, from the theoretical point of view, look as rather funny. But from the practical point of view, it is today, and as far as we can see, for still very, very long ages to come, no other solution. Well, that's the last of the questions that people have handed up. I'm sure Dr. Mises would be glad to sign, autograph any of his books that you folks might have. I'd like to ask one question. You could talk for a semester or a year on it, I'm sure, but you've been talking about an increase in the money supply by the government.

1:00:30How about the effects of expansion of credit through bank loans and through the banking system? Does that have similar effects? When it's only the banking system, then you are free to get your claim, paid by the banks, private banks, private institutions, cannot force you to accept this. What is the characteristic of the monetary system is that if you have made an agreement to sell something and the payment is postponed, you have to receive it later, then nobody can interfere but the government.

1:01:34and the government interferes in favor of its own situation. Governments believe that they have the right to take away everything else from the market, from the citizens. We have another question coming up here.

1:02:04I can ask many questions because I have preferred to explain the problems in a simple way than to enter into analysis of the various details which are of smaller importance. The most important problem is do not increase the quantity of money. Is there any way to control the issue of money by the Federal Reserve Bank? The Federal Reserve Bank is an institution of the American government. And every institution of the American government can operate by the American government.

1:02:49And therefore, as you don't know, what the people who are forming the government will see tomorrow, Well, I guess we'll call it a day and Dr. Mises will be willing to autograph books if you want in the library or probably in the library.